RBA Makes the Case for Gold

RBA Makes the Case for Gold

Let’s get ready to ruuuuummmmbbbblle…

In the red corner, we have the Reserve Bank of Australia.

They’re quiet, but fast. The only problem is their punch lacks power. However, they know how to body block, and should be able to fend off most of the body blows.

In the blue corner, we have the government.

They’re loudly heckling the RBA. Taunting the central bank even….

…warning them about their strength and the damage they’re about to inflict.

Watch out for the jabs from the government, because two quick pokes really mean they’re about to sink a mean right hook into ‘em.

But the government lacks the stamina needed to get to the end of the fight. Meaning it could be anyone’s.

On the outskirts of the ring are the banks taking bets.

But count any winnings…because chances are these bookies won’t pay out in full.

So who will be the winner in this economic battle of the decade?

Neither.

Both will lose the fight on points.

But believe or not, you as the spectator will be the loser…

Looking for someone to blame

There’s a lot of noise in the papers at the moment.

We’ve got Treasurer Josh Frydenberg telling the banks off for not passing on the full rate.

Then there’s the Reserve Bank of Australia lowering rates, but insisting they can’t do all the ‘heavy lifting’ on their own.

Of which, the Aussie government has shot back and said not a chance, a surplus is more important, so ner!

Oh won’t someone stimulate the economy.

It’s exhausting watching this ‘it’s your job, not my job’ spectacle play out.

What’s worse through all of this perhaps, is how misleading it all is.

The Liberal’s government is insisting they’ll give Australians a ‘surplus’. Simple sentences might be easier for the Treasurer to remember, but the sound bites don’t tell the full story.

For starters, the budget in the black is a fluke. It’s got nothing to do with ‘economic management’.

A weak Aussie dollar, higher commodities prices and a major Brazilian iron ore mine being out of action for most of the year — all completely beyond the government’s control — boosted the government coffers this year.

Most people call it dumb luck. But sure dudes, take the credit.

Sticking with this mantra is more about making sure they look good in a couple of years from now…

…before our pollies start talking about absurd spending programs to increase economic growth.

The flip side to this is the Reserve Bank of Australia trying to avoid high unemployment and increasing the price of goods and services.

They’ve had an inflation targeting policy in place since 1993, and its purpose was simple.1 To maintain and increase ‘stable’ economic growth through a set inflation rate.

Ultimately this policy was created to smooth out economic cycles. In other words, central bankers reckon they can get rid the market of boom and bust phases.

The biggest problem here isn’t the paper surplus from the government, or the RBA lowering rates to emergency levels without the economic emergency.

It’s what happens to you and your wealth through idiotic policies.

Delusions of power

I’m half way through a book called Banking Bad, by Adele Ferguson. A 370-page list of outright banking greed and corruption.

All things that were allowed to flourish under the government’s, RBA’s and our regulators’ noses.

Stupidly, I picked up this book straight after I finished reading The People vs The Banks. A neat recap of last year’s Banking Royal Commission.

Another book that delves into the rampant exploitation that was swept under the rug by the very people meant to stop it.

So, my distaste for banks is at an all-time high.

Nonetheless, our Treasurer Josh Frydenberg has no right to bully the banks into passing on a rate cut. Same goes with calls from the Reserve Bank of Australia begging the banks to lend.

No amount of rate cuts or intimidation from the Treasurer should sway non-government companies into doing things they don’t want to do.

All of this noise from both the government and the central bank continue to dominate headlines.

I have no doubt this tit-for-tat economic growth blame will last for a while too.

And investors need to know it’s misleading.

In spite of pretending that they neither can control the economy.

Governments and the RBA have had the illusion of control for almost three decades.

Banking deregulation to allow easier access to credit. China’s consumed unpredictable amounts of our commodities. This was then coupled with very high immigration numbers…all of which allowed the Aussie economy to flourish.

Economically speaking, Australia’s defied the odds every step of the way. It didn’t matter which political party was in charge or who the head of the RBA was.

The problem is these 30-odd years of non-stop growth has left them with delusions of power.

And they’ll continue to desperately attempt to ‘manage’ the Aussie economy into a certain direction.

While our government and the central bank push ahead for economic financial stability at all costs…that desire for a centrally managed economy makes you poorer in the long run.

This squawking and squealing from both of them is perhaps a timely warning for investors.

Lowering the interest rate reduces the value of the Aussie dollar…which in turn makes goods more expensive. In simple terms, that means your dollar buys you less and less.

By aiming for wealth erosion policies, they accidently make the case for owning gold.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

1 ‘https://www.rba.gov.au/speeches/2018/sp-dg-2018-04-12.html’