I woz wrong at Catallaxy Files

I woz wrong

46 comments

Contrary to my expectations the RBA did not raise interest rates this afternoon.

Written by Sinclair Davidson

February 2nd, 2010 at 3:18 pm

Posted in Uncategorized

46 Responses to 'I woz wrong'

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Obviously, in keeping with precedent they’ll wait until the election campaign is well underway and then ramp them up.

Infidel Tiger

2 Feb 10 at 3:22 pm
LoL. They could, but I’d hope not. To be quite honest I struggle with the idea that the RBA should be increasing interest rates during an election campaign. On the plus side, there is bipartisan support for an operationally independent RBA. On balance, this is good policy. But, on the other hand, the RBA can be over-ruled by the government, but I don’t think that mechanism can operate during an election. – Mind you I wouldn’t ever want that mechanism to be used by government, and certainly not during an election, but nonetheless there is a governance gap that makes me uncomfortable.

Sinclair Davidson

2 Feb 10 at 3:26 pm
Good point. The RBA should wait until the election is called and then start ramping.

At the same time I’d also expect Ken Henry to make a super secret speech to 300 of his closest work colleagues critical of government policy and cry crocodile tears on how the speech was leaked.

JC

2 Feb 10 at 3:59 pm
well it is consistent with what rick Battellino was saying.

If inflation is rising then it is perfectly acceptable for a Central Bank to raise rates as Glenn testified during 2007.

Butterfield, Bloomfield & Bishop

2 Feb 10 at 3:59 pm
Wasn’t it the other day when you mentioned The RBA’s new policy was to watch final demand and not core inflation? Or was that just so last week, Homer?

JC

2 Feb 10 at 4:01 pm
excuse my ignorance, but why does the government, or a government appointed authority, have to set interest rates? Why not let the market do that?
I understand that they do it to control the economy from overheating or underperforming or inflating or whatever, but isn’t this just old-style interventionism? What would happen if they left it alone?

daddy dave

2 Feb 10 at 4:05 pm
The RBA does not set all interest rates, it merely specifies the price of overnight money that it will pay on deposit. This then serves as a anchor at the very short end of the yield curve.

Sinclair Davidson

2 Feb 10 at 4:10 pm
Sinclair – that’s rubbish. The RBA set interest rates primarily via open market operations. The price they will pay on overnight money that they lend isn’t terribly material because most parties don’t borrow from the RBA (except in a crisis). The rate at which banks lend to eachother is material and it is regulated by the RBA through currency liquidity adjustments (open market operations). Also the government can not over rule the RBA as you infer, only parliament can do that. Sometimes you worry me.

Daddy Dave – in short we should float interest rates and anchor the value of the currency via other means. The setting of interest rates by a central bank is often pro-cyclical and ultimately works against the objective of economic stablity. An independent central bank is better than a political one but generally worse than having no central bank at all.

TerjeP

2 Feb 10 at 4:20 pm
No Forrest you twit I said it attacked inflation via demand.
it does this by targeting RETAIL rates.
The higher they are the more demand falls and so with a lag does inflation.

wow

Butterfield, Bloomfield & Bishop

2 Feb 10 at 4:47 pm
No Forrest you twit I said it attacked inflation via demand.
it does this by targeting RETAIL rates.
The higher they are the more demand falls and so with a lag does inflation.
.
yes, even the non-economists among us understand that much. The idea is that they raise rates, stop the economy from overheating, and thus avert inflation. What’s your point?

daddy dave

2 Feb 10 at 4:51 pm
Take heart, Mr Davidson, you are far from alone in having made the wrong prediction. Given the discussion in comments so far about the RB’s role, I wanted to ask, what is the next thing that should be taken out of the hands of Government and handed to the market/an independent authority? We have floated the exchange rate, and given the RB control over interest rates, and both moves seem to have worked well. What do we get Government out of next? What would be the economists’ prescription for the next thing to go?

Mind you, I don’t expect any such move from the incumbent Government any time soon, not while we have a PM whose belief in the breadth of the role of Government is matched only by his delusions of competence.

ACTOldFart

2 Feb 10 at 4:51 pm
not my point it just that Forrest doen’t believe this but he is Forrest

Butterfield, Bloomfield & Bishop

2 Feb 10 at 4:52 pm
Terje – that is the KISS principle at work.

Sinclair Davidson

2 Feb 10 at 4:57 pm
so your strategy for defending interventionism is to simply assert that it works?

daddy dave

2 Feb 10 at 4:58 pm
Also the government can not over rule the RBA as you infer, only parliament can do that. Sometimes you worry me.

Terje – I draw your attention to section 11 of the RBA Act.
Cutting to the chase

(4) The Treasurer may then submit a recommendation to the Governor?General, and the Governor?General, acting with the advice of the Federal Executive Council, may, by order, determine the policy to be adopted by the Bank.

(5) The Treasurer shall inform the relevant Board of the policy so determined and shall, at the same time, inform the relevant Board that the Government accepts responsibility for the adoption by the Bank of that policy and will take such action (if any) within its powers as the Government considers to be necessary by reason of the adoption of that policy.

(6) The relevant Board shall thereupon ensure that effect is given to the policy determined by the order and shall, if the order so requires, continue to ensure that effect is given to that policy while the order remains in operation.

(7) The Treasurer shall cause to be laid before each House of the Parliament, within 15 sitting days of that House after the Treasurer has informed the relevant Board of the policy determined under subsection (4):

(a) a copy of the order determining the policy;

(b) a statement by the Government in relation to the matter in respect of which the difference of opinion arose; and

(c) a copy of the statement furnished to the Treasurer by the relevant Board under subsection (3).

Sinclair Davidson

2 Feb 10 at 5:01 pm
Sinclair – perhaps I woz wrong in terms of the power of the government in this arena.

In terms of KISS I don’t think it is helpful in the context of Daddy Daves question. You infer that the market is free to operate when in practice the interest rate policy of the central bank (and the associated liquidity adjustments) dominate the market price of interest rates. The market is nowhere near being free to find it’s own level. It is akin to suggesting that tariffs don’t effect prices or that agricultural subsidies are consistent with a free market. Central banking is the most prominant example today of central economic planning. I don’t think this issue should be trivialised, especially in the face of a direct question.

TerjeP

2 Feb 10 at 5:15 pm
DD is totally ignorant of the process (sorry DD) all he wants is a basic answer and I gave him the most basic I could. (I often get this same quaetion from students who seem to think that the government fixes the yield curve). On the evils of central banking we’re in some agreement on the policy outcome, but not the reason why.

Sinclair Davidson

2 Feb 10 at 5:26 pm
What do we get Government out of next? What would be the economists’ prescription for the next thing to go?

How about our lives.

Infidel Tiger

2 Feb 10 at 5:29 pm
Sinclair – Why do you assume that people who are ignorant want only a basic understanding. I think the explaination you offered is much worse than just basic. It is fundamentally wrong and misleading. And in terms of students who have a basic understanding of yield curves they certainly deserve a more accurate answer.

Feel free to ellaborate on where you differ with me on the reasons that central banking is “evil”. However please note that I never used the word evil. Within the right confines I think central banking can be quite benign but in practice it isn’t.

TerjeP

2 Feb 10 at 5:40 pm
For those with a spare 75 minutes the following podcast from EconTalk does a reasonable job of outlining some of the practical problem with central banking. It is very much focused on the US context and we don’t share all their governance issues but it is still worth a listen.

http://www.econtalk.org/archives/2010/01/belongia_on_the.html

TerjeP

2 Feb 10 at 5:43 pm
Okay Terje I’ll defer to your better judgement in this manner.

Sinclair Davidson

2 Feb 10 at 8:16 pm
Terje:’

What anchor would you propose?

Gold?

Would you suggest a gold target for Australia as a unilateral act?

JC

2 Feb 10 at 9:00 pm
Further to Terje’s suggestion, I’d recommend the EconTalk podcasts to anyone and everyone. Lots to chew on, figuratively speaking, and covering a reasonable breadth of issues. If you’ve got an hour’s commute, or a some lazy time after mowing on the weekend, have a listen and thank me later.

Jarrah

2 Feb 10 at 9:14 pm
Jarrah.

Rog recommends Zooweekly.com for economics and general high quality and up-to-date-news. The pics are also much better than than that boring EconTalk you’re peddling

JC

2 Feb 10 at 9:23 pm
JC – I think gold would be reasonable however the fix price and the timing matters a lot. Fixing to a commodity basket (like Keynes bancor) is probably more politically feasible. Perhaps even a basket containing Yen, Euro, Greenbacks and Gold in some fixed proportion.

Your previous objection to gold has been that if we fixed at date x in the past our exchange rate now would be untenble. Whilst I think there is some truth in this argument I think it also entails some confusion about the optimal fix price. For instance if we fixed today I think the current market price would not be the correct one. We would need to fix at some average of the market price over the previous 3 to 10 years.

If we did fix to gold the interest rate we would get would essentially be the gold lease rate plus a modest risk premium.

In an ideal world the unit of account would be purely a function of market dynamics. However that world is a long way off.

TerjeP (say Tay-a)

2 Feb 10 at 10:29 pm
JC – if we fixed to gold our general interest rate would be something like the current gold leasing rate plus a modest risk premium. Commodity exporters would in general experience a greater degree of price stability for their exports. Importers may or may not suffer greater volatility. I think the domestic economy would be fine.

Obviously the fix price matters. The prevailing market price is not the correct choice. The fix price would be some averge of the 3 to 10 year historical price.

Would it work as a unilateral initative? Quite possibly in my view but obviously a lot of opponents would line up against it. Although I also suspect a lot more foreigners would be keen to hold our currency and bonds. Politically it is probably more palitable to fix to a broader commodity price basket.

TerjeP (say Tay-a)

2 Feb 10 at 10:48 pm
Terje:

We’ve been through this numerous times. In fact you and Bird are on the same side of the page on this one. Trust me when I say you don’t want to be ?

It is impossible for a small country to go on a gold standard or a gold target unilaterally as it simply would be unworkable and very likely send the place into a tailspin that in a short time would have us resemble those dusty South American villages with chickens flying around.

You can’t choose your price Terje and suggest this isn’t a good level to fix to gold, as that’s not the way to ever go about things. You don’t know if gold is going up or down, as you don’t have a crystal ball.

I keep repeating that if we fixed to gold a decade ago when the price was US$360 and the aussie was 50 odd cents we would now have an exchange rate of A$1.76. It would be untenable. We’d be broke.

Here:

360/.50= $720 , 1118/.8820=1267, 1267/720=1.76

As for the Bancor?

There is a Bancor of sorts called the SDR (Special Drawing Rights) potentially issued by the IMF, which was created in direct response to Keynes’ proposal. No one uses it because it’s has little utility. Even during these times, when the Russians and the Chinese have been scrambling to find an alternative to the Dollar, they haven’t gone near the SDR and prefer to move some of their reserves into Euro, Yen and Aussie.

Here’s a good piece about the Dollar.

http://www.institutional-economics.com/index.php/section/comments/the_future_of_the_us_dollar/

As for gold… no one is stopping you from transacting in gold coins if you want. And no one is stopping you from buying gold and storing it.

JC

2 Feb 10 at 10:56 pm
JC – I have looked at your fix senerio previously and I think you are simply choosing the worst case point in time to fix and assuming the fix price should be the market price that was prevaling. I have always said the fix price matters a lot. As a rough rule of thumb based on historical experience I think the fix price should be between the 3 year average and the 5 year average. Choose a date in time and I’m happy to run the numbers.

Having said that I think the Aussie dollar would now be a lot stronger. However if that occured over a decade most of it could be accounted for via lower domestic inflation. In short nobody would really care.

I think a lot of economies would struggle with a unilateral gold standard. I think Australia is one that wouldn’t. Our key exports are commodities.

TerjeP (say Tay-a)

3 Feb 10 at 9:56 am
Terje why exactly do you want to do this?

“Fixing the price of credit” (not entirely true) is the cost of having an external mechanism that dampens fluctuations in the economy.

Semi Regular Libertarian

3 Feb 10 at 10:21 am
I have the option of choosing, Terje. You don’t as your decision to fix is random.

Even if we went with your three to five year average you would also get pretty close to the same result.

At the exchange rate of 1.60 to 1.76 we would be broke.

I am also choosing thee posits that would highlight what could happen if we with gold.

JC

3 Feb 10 at 10:24 am
Lastly we wouldn’t have any concern about exports as no one would be buying them.

JC

3 Feb 10 at 10:25 am
I really don’t understand why Terje persists in dying in the ditch over this 20th order monetary issue. It’s not as if we are constantly facing high inflation.

jtfsoon

3 Feb 10 at 10:31 am
oops

I am also choosing these points as that would highlight what could happen if we pegged to gold, as there is no right or wrong time.

JC

3 Feb 10 at 10:40 am
Oops – I meant somewhere between the 3 year average and the 10 year average. For the sake of debate I’m happy to say the midpoint (ie the average of the averages).

Jason – I’m not dieing and there is no ditch so what are you on about?

TerjeP (say Tay-a)

3 Feb 10 at 10:45 am
I’ve tried posting long answers here several times and they all disappear. Annoying!!

TerjeP (say Tay-a)

3 Feb 10 at 11:10 am
Testing

[Terje - I can't see anything in the spam filter or moderation queue. sorry. Sinc]

TerjeP (say Tay-a)

3 Feb 10 at 11:18 am
JC – according to my data series the gold price never punched AUD720 until January 2006. So I think maybe you’re playing with some dodgy data.

In any case I’ve had another look at the price data that I do have and I agree that a gold fix in the last decade (even with an account of historical averages) would generally cause our dollar today to be too strong. I accept that this doesn’t bode well for a unilateral fix. Certainly since the GFC we have seen something of a flight to gold which has pushed up it’s value substantially relative to the major currencies.

TerjeP

3 Feb 10 at 2:40 pm
Terje,

Hayek favoured free banking, i.e. give consumers and producers the freedom to choose their own currencies. Yes, that could include gold, but also Swiss francs, the Yen, USD, or currencies issued by banks. Zimbabwe has (to a degree) introduced free banking by allowing people to trade with USD.

Is there anything wrong with that idea?

Capitalist Piggy

3 Feb 10 at 3:55 pm
Piggy – freedom is a good thing. However in any given region one currency will generally dominate trade just as one language will typically dominate communication and one system of weights and measure will dominate commerce and industry. If the region in question is an anarchy where tax is absent then I’m happy to simply leave it to the market. However so long as there is government and it’s measure of incomes, tax liabilities and other dues are denominated by some government chosen unit of account then that unit of account will generally displace competing currencies irrespective of how free we are to use those alternatives. As such I think the selection and management of the governments unit of account is somewhat vital.

TerjeP (say Tay-a)

3 Feb 10 at 4:41 pm
“Zimbabwe has (to a degree) introduced free banking by allowing people to trade with USD.”

I hope that’s not a swipe at free banking.

“As such I think the selection and management of the governments unit of account is somewhat vital.”

I’m not so sure. The ATO thinks they can tax things like GP in Warcrack.

Semi Regular Libertarian

3 Feb 10 at 4:51 pm
SRL – and I’m sure the ATO expects the liability to be settled using Australian dollars.

TerjeP (say Tay-a)

3 Feb 10 at 5:15 pm
Terje,

As long as the govt is sensible, then its currency may well dominate, but if they devalue it, people will inevitably turn to gold or other currencies.

In a 1977 interview, Hayek explains why the Gold Standard will not work today:

The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That’s what no government can do–they’d rather go off the gold standard. In fact, I’m convinced that if we restored the gold standard now, within six months the first country would be off it and, within three years, it would completely disappear.

The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. Its largely as a result of this that I have been thinking of alternatives.

SRL – no, it wasn’t.

Capitalist Piggy

3 Feb 10 at 5:52 pm
Piggy – I’m not persuaded.

TerjeP (say Tay-a)

3 Feb 10 at 8:25 pm
Terje,

How could you keep the gold standard? Make the independent RBA manage it, free from Government interference? You may be onto something…

Semi Regular Libertarian

3 Feb 10 at 8:33 pm
SRL – leaving aside the question of whether a gold standard is a good idea or not the way to achieve one is technically simple. Just amend relevant law so that the mandate of the RBA is to keep the price of gold stable within some specified narrow range. So instead of applying open market operations to hit a target interest rate they would use open market operations to hit a target gold price.

TerjeP (say Tay-a)

3 Feb 10 at 9:11 pm
I really don’t see what the difference would be.

Semi Regular Libertarian

4 Feb 10 at 12:16 pm

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