I’m trying to understand the mechanics of how the Reserve Bank of Australia monetizes government debt by “printing money out of thin air”. Dr. Robert Murphy has written a clear and simple explanation about the Federal Reserve, but can someone tell me if Murphy’s explanation applies to the Australian context?
The key elements of Murphy’s explanation are:
- The central bank buys Treasury bonds from private dealers.
- The central bank pays for these Treasuries using cheques drawn on itself (it’s here that it allegedly creates the money out of nothing).
- The central bank remits interest payments on the bonds to the Treasury.
- The central bank “rolls over” government debt so that the government never really has to pay back the principal.
It’s evident that the RBA buys Treasury bonds from the public, e.g. the Commonwealth Bank of Australia, predecessor of the RBA, was involved in financing the World Wars. But does the Australian central bank create the money it uses to pay for these bonds out of nothing?
Update: The answer appears to be ‘yes’. See page 223 of The Evil Princes of Martin Place –
Let’s say that the central bank decides to buy a house and that the owner of a particular house agrees to sell it for $100,000. To pay for it, the central bank writes a cheque and gives it to the seller. Where does it get the money? It simply conjures the money ex nihilo – that’s Latin for “out of thin air and the clear blue sky”.