We strive to keep you informed with our Frequently Asked Questions. If you have a question that isn’t listed here, please feel free to email us.
Where does money come from, and who creates it?
The overwhelming part of the money supply is credit money created by commercial banks. Currency (coins, notes) created by the central government make up only 3% of the money supply. Bank deposits in the central bank are another form of credit money, but this is inaccessible to the public.
How does the creation of bank credit money affect the economy?
Banking, and the creation of new money by banks, matter because they contribute to the public's purchasing power and to the private sector's economic performance.
Is the ability of a commercial bank to lend to its retail customers governed by the quantity of reserves that it holds?
The ability of a commercial bank to lend is largely determined by its net worth (equity capital) in relation to its risk-weighted financial assets, and not by its reserves. This assumes that the bank is willing to lend and the public are willing to borrow. In practice banks lend first, and look for the regulatory reserves they need later (if necessary by borrowing reserves from other banks or from the central bank).
When a nonbank makes a creditary payment to a bank, what happens to the credit money?
Any bank credit money involved in such a payment is simply removed from the money supply (i.e. it is destroyed). The financial system as a whole is engaged in an ongoing process of creating and destroying credit money. In payment transactions of this type, only the reserves which tag along with the bank credit money are retained within the financial system.
What caused the global financial crisis?
Governments allowed and effectively encouraged asset bubbles to develop, particularly those associated with private housing, and banks were permitted to lend without adequate credit checks to those unable to service those loans. Such asset bubbles eventually burst, followed by debt deleveraging and economic contraction.
Is government spending inflationary?
Only if misused. In a normal situation, if there is low consumer demand, high unemployment or under-utilisation of people and resources, then an increase in government spending will improve the economy and will not be inflationary.
Does cutting government spending create jobs?
No. On the contrary, increased government spending generates private sector income, which in turn generates employment.
Is a government budget deficit bad for the economy?
No. Federal government deficit budgeting is good for the economy because it adds to private sector savings and to private investment. On the other hand, a federal government surplus is bad for the economy because it withdraws purchasing power from the private sector.
Would our federal government be bankrupted if it attempted to fund such things as free universal health care, adequate social security, free education at all levels for those qualified to undertake it, environmental conservation, and measures for combating climate change?
Emphatically not. If a country issues its own currency and operates its own central bank then it can't EVER run out of money and can never go bankrupt. Not a theory, a childishly simple fact.
Do public debts (aka budget deficits) lead to recessions, high interest rates and unemployment?
Those who think this happens are standing truth on its head, as the truth is the exact opposite. Budget deficits usually arise as a counter to recessions, high interest rates and high unemployment. Some mainstream economists have asserted that government borrowing leads to higher interest rates because it tends to "crowd out" private sector borrowing. However there is ample evidence that a crowding out effect does not apply to most government borrowing.
Should government services be privatised?
Not necessarily, as independent government services are necessary to provide a dispassionate and equitable basis for the functioning of society, including essential social services and business activities (including legal frameworks, quality standards, public health, rules of engagement, etc.). Moreover, there is a case for taking some private operations, including "too-big-to-fail" companies, into public hands - in order that they will not act as self-interested cartels, inflicting damage on the rest of society.
Are private enterprises more efficient than government ones?
Only if the government entities are prevented from acting efficiently by the political ideology of their Minister. The US consultant Peter Drucker introduced new corporate management strategies in the 1950s that were picked up by some government departments in Australia more quickly than by private enterprise. This was not recognised and subsequently ignored by the political class at the time and the perception that private enterprise was more efficient lingered on. Today, privatisations all too often lead to the outsourcing of the internal bureaucracy to the detriment of the customer with greatly increased costs.
Is foreign investment needed?
Not for the income. As foreign currency cannot generally be used in our economy, Australian dollars have to be created to match the foreign currency submitted. This internal money creation can be done without cost at any time, so the main financial advantage is the receipt of foreign currency reserves that can be used in the future. There is also an economic advantage of foreign investment -- the injection of foreign expertise that might otherwise have to purchased.