Articles
How the RBA creates money out of thin air
Dr Philip Lowe, Governor of the Reserve Bank of Australia
Senate Select Committee on COVID-19 - May 28th, 2020
Senator PATRICK: Just to help me with a bit of 101 monetary policy: you said that you have borrowed $50 billion from government through the bond market and, I think, $19 billion through the international market. Is that what you said?
Dr Lowe: No. The Reserve Bank doesn't borrow money. We bought, in the secondary market, $50 billion of government bonds, issued by both the states and territories and the federal government. To date, we've lent $5 billion to the banks. We're prepared to lend the banks up to $100 billion. So the Reserve Bank hasn't borrowed from anyone; we're the ones buying and lending.
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Senator PATRICK: In terms of the government making money available for things like the JobKeeper program, that's a separate activity to what the Reserve Bank is doing. You're trying to provide liquidity to the financial system. The source of your money to do that is what?
Dr Lowe: The source of the Reserve Bank's money—this is the beauty of central banking: central banks are unique entities in that they can create money. When we want to buy a government bond from a pension fund, the way we pay for that is credit—if you buy it from a bank—at the bank's account at the Reserve Bank. We are the one entity in the country that can create money just out of nothing. That's why it's incredibly important that the governance around that process is very strong, and that, as I said in response to Senator Whish-Wilson's question, the separation of monetary and fiscal policy is kept. We have seen, where that has not been maintained, that it can be abused—creating money out of thin air and financing government expenditure without checks and balances.
Source: https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommsen%2Fa3af0917-dc51-4d01-a86f-69153eb93040%2F0001;query=Id%3A%22committees%2Fcommsen%2Fa3af0917-dc51-4d01-a86f-69153eb93040%2F0001%22
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Spending
It is important to understand that every dollar of spending by the Australian Government is a new dollar created in the manner Dr Lowe describes above. Every dollar of taxation is destroyed in the reverse way - by deducting the dollar from the bank's reserve account. Neither Taxation nor Borrowing is a prerequisite for spending. See the Intro to MMT and Finding the Money videos here for more detail about how it all works.