Calling Central Bankers to Account

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So, just what should the price of money be in the Australian economy?

Any ideas? No?

That’s okay – we don’t think Reserve Bank boss, Glenn Stevens does either.

Yesterday’s inflation figures came out much worse than expected. In reaction, everyone turned to Glenn Stevens and monetary policy to do something about it.

‘Price spike spreads rates pain’, says the front-page headline in The Australian.

The Financial Review leads with ‘Inflation rise fuels fears of rate increase’.

We’re grown to believe that monetary policy is the answer to all our economic ills. If inflation is getting a little out of hand, just nudge interest rates higher. If the economy needs a bit of a push, lowering interest rates should do the trick.

But if you really think about it, monetary policy is the cause of all our economic ills. That’s because it’s basically a few blokes sitting in a room each month deciding what the price of money will be.

And it’s a decision they will NEVER get right. Their mistakes won’t be apparent immediately, but over a period of years it should be clear for all to see.

That’s the problem with the state of economic debate in this country though. No one ever questions the ability of the RBA. Actually, that’s not right. People, generally referred to as ‘economists’, do question the RBA’s ability. But they do so to push their own agenda. They think they know better.

No one questions the existence of the RBA. No one asks why Australia should rely on the RBA to set the price of money for a complex, trade exposed economy…and be expected to get it right.

So today, we’re asking the question. Just what is the RBA good for? Discuss.

Back to the inflation question…rising inflation in Australia today is the result of a few different factors, one domestic and one international.

On the domestic front, years of easy money in the early 2000s, combined with a fiscal policy that promoted property ownership and investment over productivity enhancing business investment, led to an historic housing boom.

Channelling much of the country’s investment into a property boom has been none too good for generating long-term productivity gains. Add to that a lack of microeconomic reform and you have a recipe for inflation years down the track. So here we are…the RBA’s past easy money has contributed to today’s inflation problem. And we expect them to fix it?

The international factor in the inflation mix makes the RBA even more impotent. Most of the developed world is pursuing ultra loose monetary policy. And in the developing world, China is pushing for world champ status in easy money.

Because China is Australia’s largest trading partner, we are importing some of China’s inflation via a massive boost to our terms of trade. Our nominal income, or national income in current dollars, is rising much faster than real GDP growth because of this terms of trade boost.

So if Glenn Stevens responds by increasing interest rates, will it have an impact? We doubt it. The resource sector, the prime beneficiary of the terms of trade boost, is not very sensitive to the level of Australian interest rates. International liquidity conditions matter more. And thanks to other blokes around the world setting the price of money way too low, international liquidity is abundant at the moment.

So, we have international inflation washing up on Australia’s shore – which is out of the RBA’s hands – combined with domestic inflation, which is the result of poor policy judgments in the past.

And still no one has stopped to think that the problem might be the arbitrary interest rate setters around the world?

Australia’s problem is that we are a relatively well-managed economy with lots of natural resources. Because the world’s major economies are run by a bunch of egotistical lunatics beholden to the banker class, international capital is fleeing those markets and flowing into Australia, pushing the dollar up to incredible levels.

We’re an economy on the edge of global monetary madness and we’re suffering the consequences. There’s not a lot the RBA can do.

The monetary madness is a boon for the rating agencies though. They’ve never been busier. Moody’s has just downgraded Cyprus’ bonds to two notches above junk. The yield on 10-year bonds has jumped to over 10 per cent, higher than the borrowing rate that led to the bailout of Greece, Ireland and Portugal.

And yields on Spanish and Italian bonds are beginning to creep back up again, as investors grapple with the enormity of the problems facing the eurozone. Last week’s bailout looks like it has bought just enough time for the Eurocrats to take a summer holiday. It could be short one though.

We haven’t even mentioned the problems facing the US…we’ll spare you that fate today. Suffice it to say, the world’s problems, as complex as they are, can be summed up as follows:

We are suffering from too much debt. This is primarily the result of believing that a few individuals around the world know what the price of money should be at any give time. They don’t. It’s time to call the central bankers to account.

Regards,

Greg Canavan
Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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7 Comments on "Calling Central Bankers to Account"

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DavidB
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Greg, your start to this article was great. It’s about time someone questioned the fallibility of Glenn Stevens whose prognostications are nothing short of crapola. That people defer to this overpaid clown to set the price of money in our economy and to actually solve its problems by centralised control of interest rates truly amazes me. You are spot on – any interest rate rise will screw the tortoise partner in the so called “two speed” economy while the rabbit that causes the problem skips away unaffected. You didn’t conclude the article with the obvious however. The next government should… Read more »
Scott
Guest
DavidB, I agree with you in regards to abolishing the RBA. In my view Glenn Stevens lost control of the economy at the beginning of the GFC when he started reducing interest rates merely because other countries were also reducing rates. At the same time inferring that Australia would not be as bad as the US. Anyway, any Government that abolishes the RBA will have some major obstacles to overcome. (1) How would the market set rates? (2) Strong arguments that the Govts independence of rates will no longer be independent (whether right or wrong) (3) There would be a… Read more »
brent
Guest

it realy dosent matter what we all say anyway,they the highflyers will rape and pillage us to get what they want.i personally love that you have the balls to say what you want.yes gone are the days of 17% interest rates when mum and dad were fighting for there house. my brother in law and his missus have to live with us because they cant find a job.rate hikes should not be governed by pollies or the reserve bank. but by who

nv
Guest

Glen Stevens does what he’s told, so do the politicians, period.

The high aussie dollar is good for only two types of people; i) the outbound aussie tourist, and ii) most importantly and never mentioned because “we would not be amused”, the shareholders (majority are not australian therefore majority of profits exit aussie shores) of those resource companies over yonder in de west who are getting a great bang for their aussie buck in fx markets.

The plutocrats and fiat engineers are literally ‘laughing all the way to their bank’.

nic
Guest

You mean the price of credit…… last time i looked the price of money was about $1600us an oz

michael lehmann
Guest

a lot of money was printed as stimulus for the government took over the economy with pink bats ,school halls etc,also a helecopter drop of cash to everyone,all this causes inflation the government and banks love it ,they create this together to pay their defecits and make banks money,fractional reserve banking is a ponzi scheme the taxpayer always looses and gets poorer

David Aubrey
Guest
Stevens has one big lever nothing else That is why he attempts to hoodwink the public with his stream of consciousness claptrap. The RBA should go back to what it was designed for analysis,reporting and bean counting It has no relevence in a fluid dynamic world economy It is a blast from the past and well past its use by date In fact Stevens makes more problems than he solves. If you really think about it: its impossible for him to get it right Why govenments listen to him I dont know – OH yes I do so -somebody else… Read more »
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