Ah, the governments and banksters are up to their old tricks again.
What do I see?
The Australian Financial Review reports…
‘Banks will be directed by financial regulators to buy up to $240 billion of additional federal and state government debt to normalise emergency bank liquidity, in a regulatory move that will lower government borrowing costs and encourage stimulus spending on infrastructure and other programs.
‘The primary objective of the yet-to-be-announced shift by the Australian Prudential Regulation Authority and Reserve Bank of Australia will be to enhance bank stability in line with international rules so banks continue to withstand periods of financial stress.’
The ‘primary objective’ sounds like hogwash to me. The ‘consequence’ and ‘second order goal’ looks like the real one.
The banks become captive buyers of government debt!
For their liquidity, you see…not the fact that Australia’s politicians are running up the tab for all, everywhere.
How do the banks pay for this? Easy. They create the credit out of nothing! Then they balance the books using the RBA’s cheap funding.
All these accounting tricks and mirrors to obscure the fact our monetary is based on credit creation.
For example, currently the Australian banks can borrow from the RBA at 0.25%.
Then they can buy an Aussie 10-year government bond yielding at 0.95%.
The spread between these two figures is a nice little earner for doing…absolutely nothing!
Oops. Too bad for the Aussie taxpayer. Why are we paying 0.95% interest on debt when the RBA gives it to the banks for less?
Why are we paying interest at all?
Idiotic. But it’s been like this for so long there’s no vision of an alternative.
At least until Modern Monetary Theory appeared…but that has its flaws and ridiculous pretensions too.
Alas…there’s no profit in bellyaching. What can we deduce from the above?
Clearly the RBA and the government are doing everything they can to prop up the banks while they work through their distressed borrowers.
Notice something else…the call is on for the governments to use this debt financing to invest in infrastructure and help the economy and create jobs.
Nothing wrong with that. But the benefits of this investment will be caught in the real estate wherever it goes in.
That in turn helps the banks by stopping the property market from deflating. Those property loans they made look a little better if that’s the case.
Oh, what a web we weave.
All these shenanigans should see the Aussie financial system hold together for the foreseeable future. The tab goes to Australia’s ‘national’ debt.
But we seem to be on the American road. I doubt Australia will find itself with a balanced set of books anytime soon.
Goodness knows Western Australia and Queensland are lugging debts around despite a raging natural resource market over the last 20 years.
And Victoria…well…the appeal of this place is dropping like a stone every day.
All this brings us back to where we’ve been before in these pages.
Where hither for the Australian banks?
I cannot get excited about these. I still think they’re a value trap more than a compelling long-term buy at the low.
It’s not the COVID issues. It’s the march to central bank digital currencies.
It’s not clear to me how traditional banks fit into this world.
There’s a sense of Exxon about them. Go back 15 years or so.
Exxon was the most profitable stock in the world. It’d been up there for decades. Oil seemed vital.
Exxon just got booted from the Dow Jones Index. It’s not as profitable as it once was. Now all of its oil leases are bordering on a liability as the world turns away from fossil fuels.
All these are to say that companies that once seemed impregnable and immutable are anything but.
The Aussie government can prop up the banks, but it cannot stop the march of innovation.
Editor, Profit Watch