Since 2019 the RBA created $508 billion out of thin air through electric journal entries. I have been warning the RBA directly that this money printing will contribute to the inflation we are experiencing.

What did Governor Phillip Lowe say? He acknowledged I warned about creating money, he acknowledged it was a mistake and he also said nation building projects like Iron Boomerang would help fix inflation.

Transcript

Senator ROBERTS : Thank you both for being here. Dr Lowe, in 2016, I had my first Senate estimates session. I asked the Treasury secretary, who at the time was John Fraser, a question about the huge increase in money supply. He pretty much dismissed me and said, ‘No, don’t worry about it.’ At the next Senate estimates session, he said yes; he acknowledged it. In the third one, he said, ‘Yes. The theory is that it will lead to inflation, you’re correct, but we haven’t seen it yet and we don’t know why.’ So I understand that it’s a vexing problem. You said that one of the solutions is to make the pie bigger. You are saying that the answer to the government’s funding dilemma is to grow the economy and, as a result, the tax base. Have you heard of the project Iron Boomerang? We’ve got the world’s best metallurgical coal for making steel in the east coast and the best iron ore in the west coast. It would build a railway line fully funded. The investors are ready to go. There is a Senate inquiry taking off on it pretty soon. It would take coal to the west and iron ore to the east. There would be massive steelmaking complexes both in the east coast and the west coast. It would remove shipping and road transport. It would be a huge investment. It would add $100 billion to our GDP, which is five per cent. It would open up the north and all of central Australia for the Indigenous living there and rural communities and agriculture. Is that something that we should be thinking about?

Mr Lowe : If the rate of return on that investment is as you describe it and both the financial and social returns are as you describe them, it is something to think about. There may be other projects that have better returns. I don’t want to endorse it, because I don’t know anything about it. But, in principle, we should be looking at the financial and social returns we get from these projects. If they are greater than the cost of funding and the economy has enough resources to do it, then certainly we should be thinking about it.

Senator ROBERTS: We’ve got investors, we’re told, from overseas lining up and also from within. I will come back to the formal questions I had. The Reserve Bank spent the COVID years increasing the money supply, as Deputy Governor Debelle said at the time, by electronic journal entry; they are his words. It is commonly called printing money. At an earlier estimates, I was given a figure of $508 billion as the total for electronic journal entries since 2019. Can you update that figure, please?

Mr Lowe : That’s still roughly the same. I think our balance sheet is a bit over $600 billion at the moment.

Ms Bullock: It is about $600 billion. Exchange settlement account balances are probably around $450 billion or something like that.

Mr Lowe : Our balance sheet has roughly $100 billion of banknotes on it. That is still $100 billion of banknotes. That is $4,000 for every person in the country, which I find extraordinary. That is one of the elements on our balance sheet. We have these exchange settlement balances, which is the electronic money that you talked about.

Senator ROBERTS: Thank you. So inflation has gone from not a problem to a 30-year high, 7.8 per cent in the December quarter. On 2 February 2022, Dr Lowe, you said that inflation had surprised on the upside. In March 2022, you predicted inflation would peak at 4.2 per cent. That was at the ABA, Australian Banking Association, conference that we both attended. Why were you surprised, Dr Lowe, when many, including myself, had spent 2020 and 2021 warning the Reserve Bank and the government, including at Senate estimates, that the sheer volume of this money expansion would inevitably cause significant inflation?

Mr Lowe : You were one of these people who were making the argument that the money supply expansion was ultimately going to be inflationary. That has played a role. As we were talking about before, at least half, maybe three-quarters, of the increase in inflation is due to what went on in Europe and the supply-side disruptions. The expansion of money supply, the low interest rates and, I would say, the government support during the pandemic have driven inflation. But it’s not the full story.

Senator ROBERTS: Is 7.8 per cent inflation the price the public is paying for the Reserve Bank supporting the government’s wasteful mismanagement of COVID using lockdowns and other restrictions, leading to JobSeeker, JobKeeper and mismanagement that the government caused, which is what necessitated the money creation? Did you even consider saying to the government, ‘No, I’m not going to print the massive amount of money, so perhaps reconsider your COVID strategy’?

Mr Lowe : No. We did not do—I want to be very clear about this—the money creation at the request of the government. The nine people who sit on the board of the Reserve Bank decided to do this. We had meetings with the government and we understood—

Senator ROBERTS: Was it because the government had put in place so many onerous restrictions?

Mr Lowe : No. It is easy to forget this now. In early 2020, we were being told by the health people that tens of thousands of Australians would be dead within months. Remember that there were preparations for, including in the Reserve Bank, temporary morgues in our cities. Our borders were closed. We were told the vaccine was maybe three years or longer away. This was going to be something that would take the society a long time to get over. That is what we were being told. That was the information—

Ms Bullock: And we were observing what was happening overseas.

Mr Lowe : And we were seeing what was going on in New York and Italy. It was really terrible and scary. People were locked in their homes. That was the base upon which we made the decision to go on this route. It turns out that the scientists developed a vaccine much more quickly and the economy was more resilient and we did too much. But we didn’t do too much because the government told us to or we wanted to; we thought it was the right thing to do given the information we had at the time.

CHAIR: We’re out of time for this line; sorry, Senator Roberts.