Understanding creation of money and credit.

[Mandy Mac]

Fractional Banking IS easy to understand. It's when you try to understand all the new financial products, and their role in the economy that it becomes complicated.

Actually they are broke. They are a Ponzi scheme, if depositors want their money, it's not there.

I wouldn't describe it as a Ponzi scheme as Ponzi has immoral, destined to fail, characteristics. Yes, a bank would not be able to pay out all its depositors if there was a run but that would only happen if there was panic. Luckily for us, we have a benevelent govt and central bank who'll look after the economy for us so that we don't have panic. (insert a sarcastic smilie thing here)

 

[Sunfish]

Here's an interesting para from a piece I'm reading from 321Gold:

If you think about it, as long as two people agree something is money or can be used as money, it is money. That includes gold, silver, paper, plastic, big rocks with holes in them, salt, shells, beads, cattle and I suppose, good-looking women. But when one party no longer thinks of something as money, you can be standing tall, with a pocket filled with big rocks with holes in them [and a house full of luscious red-headed wenches] and be as poor as a church mouse.

 

[WinstonWolfe]

Australian Bank Funding

Some info on the breakdown of Australian Bank funding.
Source Australian Bankers Association February 2010.
This doesn't go into how the funds are used to expand credit. It is just an exploration of how banks source their funds.


"In order to support their lending, banks source their funds from:

1. retail market (household and business deposits)
2. wholesale markets (domestic and international - one name paper, bills of exchange, bonds)

Wholesale funds can be divided into short (<12mths) and long term (>12mth) funding."

Total funding at Sept 2009 is $1.4T and is split thus:

- From my understanding, the retail deposit total of 227+507= 734 includes the funding expansion due to fractional reserve lending.
i.e.
an original deposit of $1000 at a 10% fractional reserve can generate a total of $9,000 in loans. These loans increase bank funding when they come back to banks as deposits.

- I find Australia's fractional reserve banking confusing because there's a lack of clear explanation, and the nomenclature and rules have changed with deregulation. I understand the fractional reserve used to be referred to as liquid assets and govt securities (LGS), but since 1985 is called the Prime Assets Requirement or Ratio (PAR).


One name paper = promissory notes, treasury notes and certificate of deposits issued by banks.

Bill of exchange = a negotiable instrument, similar to a post-dated cheque, which is usually sold at a discount. The person holding it has proof of debt. A bill is an unconditional order in writing, addressed by the drawer to the drawee, requiring the drawee to pay a sum of money on demand or at a specified future time to the payee (who might be the drawer or another party) or to the bearer.

Bank Bonds or Corporate bonds = fixed term deposits that attract fixed interest. Bond funds cannot be withdrawn prior to maturity, but they can be traded on the secondary market.



Rise in Foreign Funding

Of interest is the uptrend in foreign funding. The RBA rationalizes some of the causes thus:

- The intro of compulsory super attracted retail deposits away from banks and into super funds which invest in equities (80% local, 20% international). To counter the flow, Aussie banks need to fund loans by issuing bonds competitive enough to attract foreign investors.

- To run a current account deficit, net offshore funding is required.

 

[tom32]

There are two kind of reserves.

Capital Reserve:

This is the banks own capital. In Australia this is divided into different classes depending on quality, you will have heard of tier 1 capital etc. In essence this is the money depositors can get at after all the loan assets are sold or used up and there is a short fall in the depositors funds.

This is raised initially through shareholder equity but over time will be retained profits etc seeing bank capital grow.

This is not explained by the multiplier effect. Basically this is simple to understand if a bank has 10million of capital i.e. assets after liabilities and it has a 10% capital reserve requirement it can take 100million in deposits and loan the lot out.

This is PAR as described above by WW.

Liquidity Reserve:

The effect of this is explained by the multiplier effect as explained by others above.

If you have a 10% liquidity reserve requirement (we don't in Australia) and you take a deposit of 1million than you can loan out 900k of this and retain the other 100k as a liquid reserve, this allows the bank to make good on demand for deposits.

This was LGS as described above by WW.


Then whats the problem:

In my opinion the problem is that banks by loaning out their capital reserve to other banks basically put the buffer back into the system. This means there is very little buffer and the M3 of this country is at stupid levels compared to base money. By banks loaning out their capital reserve nearly every cent of money in this economy is being used to create vast amounts of deposits / credit.

The weakness this presents is that if we got a shock then the demands on deposits will not easily be met. The unwinding of the debt takes time and you know what that means, it's credit crunch time.


The upshot of all of this is banks need funds to loan out money. The creation of money is the reuse of base money to create deposits (M3) and credit at each recycling. You can consider deposits money in that they are money to the people that have deposits but the rub is there is only so much base money and if we all went to use our deposits to buy stuff at the same time then we would soon find it is not actually money at all.

It is the repeated use of the same money for the most part, which is why I prefer to consider M3 relating to the velocity of money rather than a qty measure which means money creation is not really creation at all more "efficient use" of existing money. I know however most consider M3 in quantity terms, but to an engineer (not that it matters I suppose what an engineer thinks of economics!) it does not appear to be a quantity at all, it appears to be the velocity of the base money which is reflected in M3. i.e. the amount of times the base money is being used in the system.


The difference with the Goldsmith:

The difference here is the goldsmith is creating an alternate money. What this means is people re-use the certificates in trade.

This would be like writing a cash cheque on yourself and it never getting banked. People just re-use it so you have "created money". This is closer to creation of money than what our banks can do in my opinion and quite different as banks basically hunt for deposit liabilities to create loan assets. The hunt for deposit liabilities (funding) is not automatic, so in my opinion if anyone in an economy is creating money it is depositors putting their assets up for sale, banks just take this as a deposit and create another loan asset out of the borrower for the asset.

Of course apart from raising deposits banks can instead sell loan assets to find fund and re-loan this creating a new loan book to sell. This is basically RMBS in action, banks selling their loan assets so that they can create new loans rather than having too big a deposit base relative to their capital reserve. i.e. by selling loan assets more loans can be created as opposed to being constrained by bank capital.

 

[HiEquity]

I understand all about fractional banking, it explains things nice and easily until you look deeper. A million dollars deposited works its way around the system that has a 10% reserve until it becomes 10 million, but that's it. New money must be created to become more than the $10m.

I find this a disturbing way to look at it. No new money is created "out of thin air" here. It's just the bank writes loans (and accepts deposits in turn) for 10X the amount it can actually cover through the fractional reserve process. If all 10 depositors in the previous example of Mandy's all wanted their money at the same time, they would only find 1/10th of it available - the orginal amount of money is all there ever was. The rest is just about trust in the bank not causing a run. If a run occurs without a govt guarantee in place then we all find 90% of the money was never there.

I find it analogous to the real estate market. If all the real estate owners in Australia decided to sell up tomorrow, then we would find there isn't enough money available for anyone to get anywhere near today's market value. Prices are set on the low volume of transactions that currently occur, combined with the availability of money for that volume of transactions. Both real estate prices and the supply of money itself is set at the margins.

Foreign borrowings just don't cut it. If ANZ goes and borrows $US10b from the US banks they have $US10b, not $A11b. If this just sits on their books as $US, where do the $A100b that they lend out come from. If it is only $A11b lent out where does it come from?? If it is exchanged for $A from another source, then that is existing money and not newly created money.

There is a lot more to this money creation than is explained in economics 101.

bye

Agreed. I think some of us may be missing something really basic here. The RBA sets the supply of AUD in the market through the mechanism of the overnight cash rate (OCR). From wiki:

The Official Cash Rate (OCR) is the interest rate paid by banks in the overnight money market in Australia and New Zealand. Through the regulated use of Exchange Settlement Accounts, a central bank is able to adjust the interest rates of a nation's economy. The OCR cannot be changed by transactions between financial institutions as this does not change the supply of money, only its location. Only transfers between the central bank and an institution can affect the cash rate.

As banks are made to settle all inter-bank transfers overnight, the central bank can regulate the rate paid for cash by the sale or buy back of bonds and other government issued securities (these are known as domestic market operations). As the sale or purchase of bonds affects the supply of money, then the interest rate will change to reflect its availability. This system indirectly influences the term structure of interest rates in the whole economy. Changes to the official cash rate generally affect the rates on housing and other loans within a matter of days or weeks. Under the Australian system the Reserve Bank of Australia issues its dealing intentions at the start of each day, and banks and other financial institutions will act prior to the actual rate being achieved.

The current OCR is 4.5%. This means in the short term that banks can borrow an infinite amount of money from the RBA at this rate. If they need more, the RBA just prints more - that's how they regulate the supply of money - set a rate and see how much demand there is. Of course, if the RBA sees that this rate causes too much money supply into the economy (too much demand at their doors overnight) and the consequent threat of inflation, then it raises the rate to reduce that demand. If there's not enough people knocking on the Bank's doors every night and the consequent threat of deflation? Then drop the OCR to stimulate demand for money. We all know how this works - the RBA is the only body that can print AUD. That's why the OCR is so important. Banks only go overseas when they can get money cheaper, allowing for someone to take the exchange rate risk.

BTW we cannot import AUD from overseas! For everyone who exchanges USD for AUD, there is someone else doing the reverse. No money is created or destroyed. All the US dollars brought into the country have been exchanged for AU dollars going to the US. It's a zero sum game - they hold AUD and we hold USD.

Movements in the exchange rate reflect all of this - if overseas entities are investing heavily into Australia (in whatever form - equities, bank bonds, real estate etc), increasing our "overseas debt" then the demand for AUD is high and the exchange rate is high. If they turn around and stop doing this and just demand their money back on the payment plan then the exchange rate will drop accordingly. We saw this happen in the GFC when all the foreign investors were desperately trying to repatriate their funds. AUD sank like a stone. Great for our exporters when it happens...

If we have high net foreign debt, it is because Australia is seen as a good place to invest, despite a record high exchange rate ATM. If everything turns to custard again and the exchange rate drops then the losers will be the foreign investors, not us. Australians would effectively benefit from a huge wealth transfer from all those mugs who thought AUD looked good at the time. There is risk taken in both sides of the CAD (current account deficit) equation - the people converting USD/EU/RMB etc into AUD to invest in Australia are taking just as much risk as those taking the other side of the bet - it's a zero sum game, which is why you don't hear much about it out there.

If NFD (net foreign debt) keeps rising and rising to infinity, the exchange rate will keep rising with it, making the attractiveness of AUD to foreign investors less and less, so it can't continue indefinitely. However, the system can easily accomodate indefinitely the present situation where the AUD is in fashion and NFD is high. If the Fed keeps up with printing money (it can't get enough demand for USD any more even with near zero % interest rates to cause inflation), then expect the exchange rate to go even higher and our NFD increase even more.

Note none of this has any impact on the impacts of foreign ownership of national assets, which is a completely different proposition relating to the transfer of wealth in the future upside associated with those assets, not the trading of money.

I hope this clears a few things up?

 

[tom32]

I find this a disturbing way to look at it. No new money is created "out of thin air" here. It's just the bank writes loans (and accepts deposits in turn) for 10X the amount it can actually cover through the fractional reserve process. If all 10 depositors in the previous example of Mandy's all wanted their money at the same time, they would only find 1/10th of it available - the orginal amount of money is all there ever was. The rest is just about trust in the bank not causing a run. If a run occurs without a govt guarantee in place then we all find 90% of the money was never there.

Yes they cannot pay out depositors immediately but it is far from as bad as 90%.

Lets assume a bank has 10% capital reserve of 100million dollars, loan assets of 1000million and deposit liabilities of 1000million.

Now assume their is a bank run and the 1000million of deposits want to take flight and leave. Say their was a shock to confidence in the bank "Mary Poppins" style, "give me my tuppence back!".

First thing the bank shuts its doors. Now the deposits that the bank has been taking they have used to create loan assets. These are assets which will be worth something. They are far from worthless, they are the mortgages etc in the system. I agree some portion may fold and not be able to pay, but how many? Lets say the Australian residential market falls by 40%.

First all the banks loan assets around properties which have LVR of 60% or better are worth the full amount listed on the banks asset sheet. i.e. they can be sold for at least full value if not more depending on what interest rates are offered on them etc.

Lets say worst case the remaining loans at LVR greater than 60% are worth half what they were. Some with an LVR of 100% will still go on being paid or other secured assets of the borrowers can be used to make good on the particular asset.

So we have 60% of the loans assets worth 100% of what they were and 40% being worth 50% of what they were. i.e. the banks assets have been written down by 20%.

Now the depositors in this wrap up are entitled to the banks own capital of about 10% of the deposit liabilities. So the depositors have recall to the entire 80% of the loan assets plus the 10% capital reserve.

i.e. they will get back 90c in the dollar. The trouble is they will be waiting a long time to get at it!

The tier one assets too can be gotten at by depositors regardless of the debt at the other institution of this bank. It is one of the key things about tier 1 assets, they are available to depositors, the bank holding this deposit and paying interest to the bank which has gone Mary Poppins cannot say, I am keeping because you owe me 100million, they must give it up to the depositors. i.e. There is no right to an equitable set off to the deposit taking institution.

 

[HiEquity]

Yes they cannot pay out depositors immediately but it is far from as bad as 90%.

Agreed. I was just running with the ball kicked along by Mandy Mac and sticking with the example. Going into the exact capital adequacy requirements of our Banks probably won't add a lot to the discussion I suspect.

Although in the event of systemic risk across the financial system a la subprime / GFC, property prices can drop 80-90% in particular areas, potentially leaving depositors with significantly less than your excellent example. But that's when govts step in... so it's all rather hypothetical really.

 

[Bill.L]

Hi all,

Sunfish,

a house full of luscious red-headed wenches] and be as poor as a church mouse.

....and exactly how would being poor in this case matter?? Actually, I dispute this one, as it is like comparing living standards to number of dollars, when clearly in the house full of luscious red-haired wenches you are richer than in a house with none. I'd even find it acceptable to have blondes and brunettes as substitutes.

WW,

The intro of compulsory super attracted retail deposits away from banks and into super funds which invest in equities (80% local, 20% international).

The sellers of those equities (the Australian ones) then had the money and deposited it straight back into a bank, so only the 20% that went off-shore needed to be replaced, or did it? The money had to be exchanged into a foreign currency to go/be used overseas, it went to a bank who gave some other currency in exchange for it, so where did the $Aus go from there?? The $Aus are still in existence back at a bank.

bye

 

[tom32]

Agreed. I was just running with the ball kicked along by Mandy Mac and sticking with the example. Going into the exact capital adequacy requirements of our Banks probably won't add a lot to the discussion I suspect.

Although in the event of systemic risk across the financial system a la subprime / GFC, property prices can drop 80-90% in particular areas, potentially leaving depositors with significantly less than your excellent example. But that's when govts step in... so it's all rather hypothetical really.

I am just thinking now when banks say the average LVR is 60% on their loan book is that the average LVR of each loan i.e. one loan at 50% LVR and one at 100% LVR average LVR = 0.75, irrespective of the value of the two loans? Just realised if it is this then it is likely the exposure of the funds is far worse than it might appear because it is likely the value of the loan assets at greater LVR's is higher. i.e. the average loan at LVR 100% is going to be bigger than loans at 10% LVR.

Maybe I am wrong above where I think my deposits are relatively safe! They might be more exposed than we are led to believe. Anyway I am bearish on residential property but I am not so bearish as to have taken my savings out of U bank. As you point out the government guarantee comes into play as well if you start losing your deposits, and even in an extreme event it is likely you will get much of your savings back and in this same event there is likely to be some good buying opportunities to have with your savings even if you have only got back 60c or less in the dollar (assuming you can get it out of the bank at all??? i.e. having your money in a bank is probably as good a place for it as any in this scenario, as shares and property will all be smashed assuming a credit crunch scenario in Australia. Anyway what else can you do; gold and cash? I suppose thats what a deflationary spiral is all about people moving to cash!

 

[WinstonWolfe]

The sellers of those equities (the Australian ones) then had the money and deposited it straight back into a bank, so only the 20% that went off-shore needed to be replaced, or did it? The money had to be exchanged into a foreign currency to go/be used overseas, it went to a bank who gave some other currency in exchange for it, so where did the $Aus go from there?? The $Aus are still in existence back at a bank.bye

When the expansion of AUD credit contracted from 15%pa to 3%pa from 2008 to now, what happened to growth in the number of AUDs?

If credit growth goes negative, what happens to the number of AUDs?

Consider a UK investment bank buys 100b of new Aussie bank 3 year bonds. What happens to that 100b aud at bond maturity?

 

[Token Funder]

*snip*
The current OCR is 4.5%. This means in the short term that banks can borrow an infinite amount of money from the RBA at this rate. If they need more, the RBA just prints more - that's how they regulate the supply of money - set a rate and see how much demand there is. Of course, if the RBA sees that this rate causes too much money supply into the economy (too much demand at their doors overnight) and the consequent threat of inflation, then it raises the rate to reduce that demand. If there's not enough people knocking on the Bank's doors every night and the consequent threat of deflation? Then drop the OCR to stimulate demand for money. We all know how this works - the RBA is the only body that can print AUD. That's why the OCR is so important. Banks only go overseas when they can get money cheaper, allowing for someone to take the exchange rate risk.

*snip*

I hope this clears a few things up?

Not infinite nor are you borrowing at the OCR.

The OCR is that the RBA pays banks for the money held in their settlement accounts from which inner-bank transactions are settled.

As far as the RBA liquidity operations, you are simply either selling outright or under a repurchase arrangment assets you already have. In other words, you can't borrow an infinite amount from the RBA. What you can do is sell certain asset classes to them, thereby limiting what you can get from them to a figure that is very finite indeed.

 

[HiEquity]

When the expansion of AUD credit contracted from 15%pa to 3%pa from 2008 to now, what happened to growth in the number of AUDs?

The concepts are quite independent. It's like trying to guess whether the property market went up or down when the number of transactions in a month went down a lot. There are situations where prices could move up, down or go sideways in that event. The same if the number of transactions went up a lot in a month. You can increase the velocity of money through the economy through credit expansion without increasing the supply of money. Or decrease it...

As to what actually happened in that time, I seem to recollect M3 went up but it was all so long ago now! Each year merges into the next...

If credit growth goes negative, what happens to the number of AUDs?

They could go up, down or sideways. If the RBA took the view that such an outcome was a deflation risk, then it would increase the number of AUDs in circulation to counter that.

Consider a UK investment bank buys 100b of new Aussie bank 3 year bonds. What happens to that 100b aud at bond maturity?

It gets paid back to the bank with interest. The UK bank swapped 100bn pounds equivalent for AUD to buy the bonds in the first place. At the end it would presumably swap with someone else the (100bn + interest AUD) for pounds, unless it wanted to retain the forex risk. Depending on how the exchange rate moved in the meantime it might only get its original amount of pounds back without any interest if it bought the bonds at a time when AUD was fashionable (like now) and sold them at a time when it was unfashionable (like when we were 3:1 with the pound). It should be noted the more foreigners buy Aussie bonds (or other assets - ie the greater the level of NFD), the greater the likelihood this wealth destruction will occur to them. Like buying any asset high and selling low by following the crowd. Arguably now is the time to be buying foreign assets, not the other way around but who are we to complain if foreigners want to keep taking this bet right now? Just watch the exchange rate move when they all want their money back...

Not infinite nor are you borrowing at the OCR.

Fair enough TF. Over simplification to the point of being downright wrong. I guess the point I was trying to make is the RBA uses the OCR as a means to control the supply of money and consequently inflation. It can choose to print money to meet it OCR obligations if it wishes. I'm yet to be shown how anyone else increases the global supply of AUD out there.

 

[Deltaberry]

Just thinking out loud, there's nothing wrong with asset inflation funded by debt if cost of debt is serviceable and credit was obtained at ease. That is,if all the houses were $100m and we could all borrow $100m and pay nil interest rate, why would the $100m house prices crash? Where's the catalyst?

So I think the answer of whether things are inflated and will burst lie more towards interest rate risk and credit shocks, rather than measuring the general inflation ofasset prices and looking at whether it's justified by the yield or not. Many asset bubbles experience a period of low borrowing costs followed by high borrowing costs + a abrupt tightening of credit (eg 1991).

 

[kotim]

All you need to understand is that if you count the cost of inflation plus add the personal taxations rates on a compounding basis to peoples pay over the last 20-30 years then you will find that the vast majority of people are earning substantially less on a level for level basis.

In other words everyone is being ripped off and then the RBa or some other organisation pulls out a specific period of time where they can manipulate the figures and make it look like all is fantastic.

 

[Crabnet]

With respect to Australian banks overseas borrowing it's worth pointing out that according to

http://www.rba.gov.au/publications/bulletin/2010/mar/5.html

Bonds account for almost one-quarter of Australian banks’ total funding, with around three-quarters of the stock of bonds outstanding issued offshore.
The Australian banks hedge almost all of their foreign currency bond issuance back into Australian dollars by undertaking interest rate and cross-currency swaps at the time of issuance, effectively raising Australian dollar funds.
The Australian banks tend to issue in markets where it is cheapest to borrow Australian dollar equivalent funds at that time. In this way, they take advantage of pricing differentials between alternative funding markets, using derivatives to manage the associated exchange rate risks.

I suppose that leaves the Australian banks exposed to the risk of whichever overseas institution they have the swaps with failing.

 

[kotim]

meant to add the following link, it is modern money mechanics printed (now out of print because it caused a furore) by Chigaco Federal reserve in the good old USA

www.rayservers.com/images/ModernMoneyMechanics.pdf

 

[WinstonWolfe]

They could go up, down or sideways. If the RBA took the view that such an outcome was a deflation risk, then it would increase the number of AUDs in circulation to counter that.

How? The RBA can only increase aud's via a lower cash rate or lowering reserve requirements. And I am fuzzy on how the RBA manipulates reserve requirements today....I need to read up on Basel II Tier 1 and 2 capital and leverage ratios to grasp the mechanics.

Once the cash rate bottoms out, credit/aud expansion depends on private sector lending and borrowing appetite, and increasingly moreso the availability of foreign creditors.

The only other avenue to expand aud is via govt fiscal policy, which is not a RBA decision.


It gets paid back to the bank with interest. The UK bank swapped 100bn pounds equivalent for AUD to buy the bonds in the first place..

So the bond issue creates a base of 100b of aud that didn't exist before, and at maturity the aud's disappear (ignoring whether they are rolled into a new issuance). And the 100b can expand credit via whatever multiple the reserve rate permits.

 

[HiEquity]

So the bond issue creates a base of 100b of aud that didn't exist before, and at maturity the aud's disappear (ignoring whether they are rolled into a new issuance). And the 100b can expand credit via whatever multiple the reserve rate permits.

Hi WW

No it doesn't. Someone (or more accurately a whole lot of people) who already had $100bn AUD swapped them for $100bn equivalent of British pounds with the UK Bank. The UK Bank now owns $100bn of AUD and uses it to buy AU bank bonds. A whole lot of people in Australia now own, between them, $100bn equivalent of British pounds. The $100bn of AUD already existed and still exists, now sitting in the balance sheet of the AU bank, who can multiply it accordingly through the fractional reserve system, as already discussed in this thread. For everyone who wants to buy AUD with foreign cash, there has to be someone else prepared to buy foreign cash with AUD. All reflected in the exchange rate which, because it is floating, perfectly represents our balance of payments with the rest of the world. And all thanks to Paul Keating and Bob Hawke!

BTW APRA regulates bank reserve ratios in Oz, not the RBA. It's confusing because the Fed does it in the US. Once the cash rate bottoms out the RBA can buy Australian treasuries, with money it just invented, if it wishes to further increase the monetary base of the economy. Just like the Fed.

I highly recommend reading this and this. Read them a couple of times, then go back again in a couple of days and read them a couple of times again! Well, I had to anyway...

 

[WinstonWolfe]

Hi WW

No it doesn't. Someone (or more accurately a whole lot of people) who already had $100bn AUD swapped them for $100bn equivalent of British pounds with the UK Bank. The UK Bank now owns $100bn of AUD and uses it to buy AU bank bonds. A whole lot of people in Australia now own, between them, $100bn equivalent of British pounds. The $100bn of AUD already existed and still exists, now sitting in the balance sheet of the AU bank, who can multiply it accordingly through the fractional reserve system, as already discussed in this thread. For everyone who wants to buy AUD with foreign cash, there has to be someone else prepared to buy foreign cash with AUD. All reflected in the exchange rate which, because it is floating, perfectly represents our balance of payments with the rest of the world. And all thanks to Paul Keating and Bob Hawke!

I will have to brush up on the floating exchange rate later. In some instances I understand it and others I don't.

BTW APRA regulates bank reserve ratios in Oz, not the RBA.

Yes was aware of that, but need to make myself some notes to crystallize.
I understand they also are responsible for negotiating with each bank individually their capital requirements after assessing risk. So each bank has a different capacity to leverage off their capital, based on the capital requirement imposed by APRA.

It's confusing because the Fed does it in the US. Once the cash rate bottoms out the RBA can buy Australian treasuries, with money it just invented, if it wishes to further increase the monetary base of the economy. Just like the Fed.

I highly recommend reading this and this. Read them a couple of times, then go back again in a couple of days and read them a couple of times again! Well, I had to anyway...

have already read those articles many times in the last 2 years, and need a better explanation of the Australian system and its mechanics.

have been delving into the RBAs and APRA's offerings, but haven't found clear overviews.
This wiki on Capital Requirement was helpful.

 

[tom32]

I'm yet to be shown how anyone else increases the global supply of AUD out there.

EDIT: please see my post edit, now realised I have answered a question you have not asked...

A historic example was the post WW1 Wiemar Republic printing cash to pay off their war debt. Because the war debt was denominated in foreign currency this meant the currency came right back into their economy and caused hyperinflation so a vicious cycle of printing and printing more and more to meet interest repayments ensued. Really what else did one expect Germany to do other than create a despot when they were put in that position? I think that was a lesson learnt maybe it's not so good to "squeeze until the pips squeak" but nonetheless completely off topic...

In Australia's case there are lots of ways other than through banks that the government can quantitatively ease some less inflationary than others.

I think it was Keynes who pointed out if the government can spend on things that iincrease productivity of the country by the amount of spending or more (I suggest most infrastructure fits this) then they can print dollars pay the contractors and due to the increase in production you do not get inflation as a result.

Alternately they can send everyone a $1000.00 cheque in the mail and as people deposit these cheques and the banks draw down AUD from the government new money again enters the system.

So governments can borrow to spend which is not as inflationary as printing to spend which is why most gov's adopt this policy. Or they can print to spend.

EDIT: Apologies I just realised you meant who other than the gov can make more AUD, not how other than through OCR can the government get AUD out there... And for this I agree, no one other than the gov and counterfeiters can create AUD.

They can create money however, but it is not AUD and it is really on the peripheries but I know someone will call me if I say only the gov has the ability to create money. Some examples of alternate money: travelers cheques, gift vouchers etc etc... These are more like the goldsmiths certificates than deposit accounts.