The Reserve Bank of Australia ‘Answers’ Our Questions

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Speaking of central bankers losing control, we promised to let you know how the Reserve Bank of Australia responded to the questions I sent them regarding their handling of monetary policy. Specifically, I wanted to know how they juggled their mandates of fostering economic growth and maintaining financial stability.

I didn’t expect much in the way of a response, or for them to acknowledge my concerns at all. And they didn’t disappoint. What I got was a bit of cut and pasting from past speeches…speeches full of words and faux meaning, but nothing much of substance. Central banking 101.

You may be interested in the Governor of the Reserve Bank’s December 2012 speech, Challenges for Central Banking.  This speech provides an insight into the Bank’s views on balancing its monetary policy objectives and financial stability. For example, in this speech the Governor said:

Broader financial stability considerations have to be given due weight in monetary policy decisions. This is becoming fairly widely accepted. The challenge for central banks, though, is to incorporate into our frameworks all we have learned from the recent experience about financial stability, but without throwing away all that is good about those frameworks. We learned a lot about the importance of price stability, and how to achieve it, through the 1970s, 80s and 90s. We learned too about the importance of institutional design. We shouldn’t discard those lessons in our desire to do more to assure financial stability. We shouldn’t make the error of ignoring older lessons in the desire to heed new ones.

Rather, we have to keep both sets of objectives in mind. We will have to accept the occasional need to make a judgement about short-term trade-offs, but that is the nature of policymaking. And in any event, over the long run price stability and financial stability surely cannot be in conflict. To the extent that they have not managed to coexist properly within the frameworks in use, that has been, in my judgement, in no small measure because the policy time horizon was too short, and perhaps also because people became too ambitious about fine-tuning.

A whole bunch of words there. Do you have any idea what’s he’s trying to say? But wait, more confusion ahead.

In the context of the current economic environment, the Governor’s March 2014 Opening Statement to the House of Representatives Standing Committee on Economics provides a summary of the way in which the Bank acts to balance the objectives of growth, employment and financial stability. In this statement the Governor said of the Bank’s monetary policy:

On the whole, then, accommodative monetary policy is playing its part in supporting sustainable growth in demand, consistent with the inflation target.

Of course, the outlook contains many uncertainties, not least the ‘hand over’ from mining investment spending to sources of demand outside mining. In some important respects, the basis for such a handover is coming into place, as I have just described. The question then is: will the additional demand likely to be generated outside mining as a result of these trends be just the right amount to offset the large decline in mining investment spending, so keeping the economy near full employment?

No-one can answer that question with great confidence. Moreover, even if it were possible for forecasts to be much more accurate than experience could possibly lead us to hope, it could not be assumed that a shortfall in demand could necessarily be made good in short order by monetary policy. Monetary policy can have a powerful effect on the general environment, but it cannot hope to fine-tune the quarterly or even annual path of aggregate demand.

At the present time we judge monetary policy to be doing the things it can reasonably be expected to do in the circumstances we face. We have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate. As well as the low level of interest rates generally, a sense of stability should be of some help for businesses and households as they form their plans.

In other words, no one really knows anything (that’s actually true; see my initial comments) but we’ll have a crack and lower interest rates anyway.

The upshot of all this is that central bankers are all academic morons fixated on models that don’t work. They (naturally) rely on the only tool in the box — interest rates — and because it works in the short term they turn to it again and again…not understanding it’s the very tool that causes long term structural problems, societal tension and inequality.

Is gold finally sniffing out these problems, and thinking they’ll get much worse in the years ahead?

Regards,

Greg Canavan
for The Daily Reckoning Australia

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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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5 Comments on "The Reserve Bank of Australia ‘Answers’ Our Questions"

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Dean
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Well at least you gave it a shot Greg. I certainly held no high hopes of you receiving something like a one on one reply. Clearly the easiest route is the safest route, just fob you off with a generic (As you say) cut and paste. No help at all.

Harquebus
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Economics is not science, it is an art and the reserve bankers are the biggest bullshit artists around.
They have to talk crap, their equations are fatally flawed.

slewie the pi-rat
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from the CB: “And in any event, over the long run price stability and financial stability surely cannot be in conflict.”

damn! that is funny!
…and don’t call me Shirley!

Ross
Guest
The central bankers think of the phoney liquidity bubble (built of debt generated with smoke-for-collateral) as a million regular mouth blown party balloons. They think they can give each of them little nudges and keep them all in the air forever, even if a chain reaction explosion happens when any individual one of them lands exposing the want of a collateral base (including feasible future tax receipts). Meanwhile, the defence of the dollar bloc empire for which the central banker gangsters serve is leaking truths every which way. http://www.presstv.ir/detail/2014/06/20/367852/us-trained-isil-at-secret-jordan-base/ Yes they are our useful idiot terrorists…. we not only motivated… Read more »
Dean
Guest
Based on this, if I was appointed trustee over a bundle of property, including cash and cash based investments, or I declared myself trustee over my own property, including cash and cash based investments I had saved over the years for the benefit of my family, or even for a charity, then it seems any inquiries I was to make to the RBA regarding my concerns as to security and soundness of this property in the years to come, would go unanswered. It seems to me that no one can guarantee anything, especially not money ITSELF. I wonder how the… Read more »
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