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The RBA created $160 billion out of thin air: What it means for you

·Contributing Editor
·4-min read
Color image of the prominent Edward Street in Brisbane
Image: Getty

The Reserve Bank is perhaps the only Australian institution that can perform a magic trick.

At its discretion, which governor Philip Lowe reminded the National Press Club last week he takes very seriously, the RBA can create money out of thin air.

As the coronavirus pandemic reached a climax, and the economy went into a deep recession, it became clear extraordinary monetary policy would be needed.

The central bank took the decision to print money.

But long gone are the days when the bank would haul freshly minted cash into its bank vaults.

No, the bank now simply adds extra digits to the commercial banks’ exchange settlement funds (deposit accounts) held with the bank.

A transaction takes place: the bank buys a government bond from the NAB, for example, and then credits the NAB’s RBA bank account (without the NAB having to lift a finger).

Hey presto, new money is created.

Where’s all this money going?

The whole process of money printing (quantitative easing) is designed to spur economic activity, drive inflation higher and lead to more money in your pocket (via higher wages).

Spoiler alert: despite the RBA’s first round of quantitative easing ($100 billion) coming to a close shortly, this hasn’t happened.

The economy has picked up, but it hasn’t led to higher inflation or wage growth.

Indeed the latest analysis from consulting firm, EY, shows if you take inflation into account (despite its low level), your take-home pay is expected to go backwards over the next couple of years (inflation/cost of living is higher than wage growth).

What we also know, according to property research from CoreLogic, is that national property prices are at their highest ever levels.

Now, admittedly, that’s partly due to rapid regional price rises, but it doesn’t change the basic fact: record low interest rates have led to another run-up in the property market.

RBC Capital Markets chief economist, Su-Lin Ong, has confirmed this.

In addition, last Friday, the stock market finished up over 1 per cent, capping off its best week in three months and closing at an 11-month high.

Where’s the money going? It’s helping drive asset prices higher.

Why am I not seeing a penny?

The Reserve Bank says your pay packet will rise when bosses find it harder to attract good help – or put another way, when the labour market tightens.

This happens when firms, confident in the future, decide to expand their businesses, which means spending money on new projects and hiring more workers to help complete those projects.

The more projects they undertake, the harder it will be to find good quality workers, and the better position those workers will be in to bargain for higher pay.

Shoppers are back at the stores, and cash flow, according to the National Australia Bank, is improving, and bosses are keen to hire more staff, but they’re unlikely to offer permanent full-time roles with regular pay increases.

Why? Well because COVID remains a threat.

As we saw last week, each state and territory is at risk of going into a hard lockdown at a moment’s notice. Bosses can’t run the risk of having to pay out large redundancies all in one hit.

Instead, they’re choosing to take on workers in a part-time or flexible capacity. That’s why the underutilisation rate (which includes the unemployed and the underemployed) is stuck at 15 per cent).

So, yes, the stimulus is there, and it’s generating economic activity, but it’s not translating into higher wages.

Is there anything we can do about this?

Unions are now lobbying crossbench senators to reject the Morrison government's industrial relations omnibus bill they say will lock workers into an eight-year wage freeze.

Industrial Relations Minister Christian Porter said earlier this week the claims in the campaign were factually inaccurate as well as insensitive.

But of course the economy can help too.

EY’s Jo Masters says real wage growth could also be achieved if the official unemployment rate falls to 4.5 per cent and the underutilisation rate drops below 12 per cent.

Then there’s actually dabbling in the share market.

Commsec reports a record number of accounts opening in the second half of last year.

Judging by the investor interest in GameStop both here in Australia, and in the US, many more people are having a look at the share market.

The property market’s a bit harder to tackle if you’re short of cash.

If you can’t beat ‘em …

The bottom line is that it’s clear there’s more stimulus to come.

The Reserve Bank will engage in another $100 billion quantitative easing program from April, and interest rates are expected to stay at record lows until 2024.

The money will keep pumping out.

With wage growth set to stay low and sticky for years, the smart money is moving into asset markets.

Tragically, and I really mean that, it means millions of Australians won’t see any of the benefits of major institutional stimulus.

But hey, as long as you have a job, right?


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