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Sunday, April 14, 2024

Is Australia Bankrupt?

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Australia’s Reserve Bank has just reported a loss of A$37 billion (US$24.1 billion), the biggest in its history, and it says it will be unable to pay the government dividends for some time.

The announcement followed a review of its bond-buying program, one of the most important ways it supported the economy during the first two years of the pandemic.

In order to borrow to fund programs such as JobKeeper, the government borrowed on the bond market, issuing bonds on the money market that the Reserve Bank later bought with newly created money. That meant the Reserve Bank was, indirectly, the largest financier of the expanded budget deficit.

The review concluded the bond-buying program worked relatively well. By aggressively buying A$281 billion of bonds, the Reserve Bank was able to not only make sure government programs were funded but also lower the general level of interest rates in the bond market, supporting the economy.

How did buying bonds help?

The review found buying bonds on the money market

  • encouraged traders to put their money into other parts of the economy, such as investing in Australian firms
  • sent a signal to the market that interest rates would be low for a long time, encouraging firms to invest, confident they will be able to borrow cheaply for years to come
  • gave investors confidence that, if they bought bonds, they could sell them later to the bank if needed.

The report suggests the A$281 billion dollars of bond purchases lowered long-term bond rates by around 0.3 percentage points.

This in turn helped lower the value of the Australian dollar by 1-2%, supported business investment, and encouraged consumers to spend, and boosted gross domestic product by a cumulative A$25 billion.

What about the downsides?

The report found the Reserve Bank made a substantial loss on the bond-buying program, estimated to be as high as A$54 billion. Its overall loss this financial year will approach A$37 billion.






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