Monetary policy can’t force people to spend money

Every time I hear the thoughts of Chairman Yellen, as it was with Ben Bernanke, I cringe at the horrors they have visited on the world. But then there’s our own RBA Governor, an entirely different story:

THE Reserve Bank has an open mind on reducing the cash rate further but monetary policy can’t force people to spend money, a parliamentary committee has heard.

‘Monetary policy can’t force spending to occur,’ RBA governor Glenn Stevens told a parliamentary committee.

As if spending money is what drives an economy. But it’s even better than that. Listen again:

‘In the end, though, firms and individuals have to have the confidence to take advantage of that situation.

‘They have to be willing to take a risk – on a new project, a new product, a new market, a new worker.’

What you have seen here is something you almost never see and it was as natural as sunlight. In the first passage, Glenn Stevents is referring to the spending of money. In the second, he is discussing the employment of real assets. It is, of course, the second that matters if we are talking about making the economy grow. And for that, the RBA is almost impotent. It is creating an environment in which businesses feel confident enough to commence new projects and expand existing ones. Nothing will happen overnight. But at least the RBA is not about to drop rates in a panic and is willing to wait on events.

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24 Responses to Monetary policy can’t force people to spend money

  1. James B

    Lol, you still believe in central banking mate?

    Central banking is socialist central planning, nothing more. Fractional reserve banking needs to be outlawed, and we need to go back to a system of competing currencies, and no state intervention in the currency markets.

  2. .

    Fractional reserve banking needs to be outlawed

    There is no need for that if inflation is kept at zero. What Rothbard said wouldn’t apply.

    The solution is free banking, with no reserve limits – stable and credible reserve banking with very low inflation like in Sweden or Switzerland will only ever mimic free banking – which has up and downside pressure to basically move to zero inflation and cover liquidity as it is needed.

    Steve is critical of vulgar market monetarism. This means he rejects QE nearly entirely.

    He is at least two steps towards our position and has only one or two left.

    He is on the side of the angels.

  3. James B

    Zero-inflation targeting doesn’t necessarily mimic free banking. Free banking is far more dynamic. The definition of inflation used by the RBA is price inflation, which can come from lots of sources. Targeting zero inflation in cases where the market wants price inflation or price deflation has all sorts of problems.

    Price inflation is just a symptom of the wider problem: money inflation.

  4. Spiro

    Its true its something that you never see, and that is a central banker claiming that the business cycle can be driven by factors other than expenditure.

  5. JohnA

    . #1116442, posted on December 19, 2013 at 12:34 am

    Fractional reserve banking needs to be outlawed

    There is no need for that if inflation is kept at zero. What Rothbard said wouldn’t apply.

    But isn’t fractional reserve banking the cause of inflation (he asked innocently)?

    If the RBA Board had a Damascene conversion to sound banking policy, they could lift the reserve ratio progressively towards 100%* and strangle inflation properly.

    * That is, banks would be required to hold cash & liquid assets equal to the value of the deposits at call and maturing within the next month.

    If you want to make it palatable to aggressive bankers, call it strict asset / liability matching.

  6. Tel

    Monetary policy cannot force people to spend, but it can destroy their ability to save. The question is whether that’s a good idea.

    People who know they cannot save using the banking system will search for other avenues, or just give up trying. Thus we get crazy house price expansion, buying gold and hoping to avoid Capital Gains Tax, and then ever more intrusive crackdowns.

  7. Rabz

    This post of Steve’s is crying out for a contribution from the Avian.

  8. Peter OBrien

    On the subject of the Reserrve Bank can somebody answer my question. What is the $8 billion given by the government to the Reserve Bank for? Is it to redeem government bonds? If so why would it be counted as new debt? Why not an off budget item?

  9. .

    Zero-inflation targeting doesn’t necessarily mimic free banking. Free banking is far more dynamic. The definition of inflation used by the RBA is price inflation, which can come from lots of sources. Targeting zero inflation in cases where the market wants price inflation or price deflation has all sorts of problems.

    Of course. Free banking can and did respond to liquidity and money demand more responsively.

    The idea of reducing puchasing power to compensate for hedonic quality improvements or simply higher productivity is not of a sound basis.

    If money supply equals money demand and money supply growth is equal to output growth…then you basically have optimal MP. The price of credit, currency and size of the CAR can all float. Free banking does it better.

  10. Mantaray

    Can someone explain what they have against fractional reserve banking?

  11. .

    Rothbard suggested that until we had a sound currency, that banks ought to have a 100% reserve ratio to stem inflation, and also noted that banks profited immensely from inflation (although I’d add that in itself entails risk for their bond portfolio and asset-liability management etc).

    Those who have never read Rothbard in detail assumes he means we ought to stop banks operating on a CAR of less then 100% under all circusmtances. This view however is oncorrect.

  12. Ripper

    Can someone explain what they have against fractional reserve banking?

    It is essentially a fraud as a loan is treated as a deposit as well.

    Steve keen explains it well at the following link

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

  13. .

    It is essentially a fraud as a loan is treated as a deposit as well.

    Nonsense.

    You don’t understand economics, or finance or banking at all, or insurance.

    You have unwittingly implied that insurance is entirely fraudulent. Why don’t you sue the bastards?

    It has been found in Hill v Foley that double entry bookkeeping for lenders isn’t fraudulent. Your summation of what happens to monies financed is glib and simplistic to the point of being deceptive.

  14. Rabz

    It is essentially a fraud as a loan is treated as a deposit as well.

    Referred to, in rather benign terms, as “credit creation”.

  15. Rabz

    Dot – not that I have a view on it either way, but yes, the principles of double entry book keeping govern the theory.

  16. Ripper

    Dot, you are not helping your argument by bringing insurance into it. That is another “product” that cannot be delivered if there is a black swan event of sufficient magnitude.

  17. .

    If there is “a black swan event of sufficient magnitude”, then anything can happen.

    Dot, you are not helping your argument by bringing insurance into it.

    Yes I am. You need to get informed.

  18. Spiro

    I agree with the dot. If a bank cannot lend from their pool of deposits, then where the hell are they going to find money to lend?

    It is essentially a fraud as a loan is treated as a deposit as well.

    Ripper, been watching zeitgeist? Fractional reserve banking is not a conspiracy. We have had since the ancients.

  19. Mantaray

    OK. I’ll admit it; I’ve been a fractional banker myself…..

    One week I had a hundred bucks left over from my pay and my mate asked me to lend him $90 of it so’s he could get something he’d seen at the boating shop on special. He said he’d give me the $90 back on payday.

    However, when he got down to the shop they were out of stock and they told him he’d be able to get the gee-gaw next time at the special price. So he then on-lent $81 of the $90 (my $90 FFS) to his brother who wanted it for a concert ticket, but the concert was cancelled so the brother lent $73 of the $81 to his son who needed it for some new video game. The son works at Maccas.

    OK, so when I heard that my mate had not bought that thingy at BCF, I wanted to know WTF my mate had done with my $90. He said that he had $9 in his wallet; his brother had $8 in his wallet, and the son working at Maccas had a $73 video game ($9+$8+$73= $90, which looked about right). The son owed $73, and the brother owed $81 and my mate owed me $90, three separate debts adding up to $244 in total. See…I had created $244 by lending only $90, which shows what a Master of The Universe I was that week, eh? And a fraud. And a fractional-banker.

    Anyhow come Macca’s payday the kid gave his dad the $73 he’d borrowed, and a stubby as a thank-you (the interest), which the dad gave to his brother (after taking a swig) when he repaid the $81 to him. That guy (my mate) took a further swig, before handing the remainder of the stubby to me as he repaid the $90 he’d borrowed originally. I guzzled what was left.

    Was I naughty to have engaged in all that fractional-banking fraud? Was it bad that all we money-lenders had been creating credit and then drinking beer that the Maccas kid had paid for?

    C’mon. Tell me what a scoundrel I am. I can take it.

    BTW. After leafing through my latest edition of “Filthy Capitalists and Their Mealy Mouthed Definitions” I have discovered that some Parasitic Leeches in Greed-is-Good circles refer to Money as a “Medium of Exchange”. Can someone help me out as to what that could possibly mean, since I don’t believe in any of that seance and crystal-ball reading stuff. Aren’t mediums all frauds just preying on the gullible?

  20. Tel

    Can someone explain what they have against fractional reserve banking?

    There’s no problem if the bank note clearly denote on the note itself exactly what the note is backed by and at what percentage. For example, if you hold a note that is nominally redeemable for 1oz of gold but the bank only keeps 10% reserve then the note should make this clear. That’s not fraud because anyone accepting the note does so voluntarily.

    However, to offer such notes and not make the situation clear to the holder is fraud for obvious reasons.

  21. Tel

    On the subject of the Reserrve Bank can somebody answer my question. What is the $8 billion given by the government to the Reserve Bank for? Is it to redeem government bonds? If so why would it be counted as new debt? Why not an off budget item?

    Something clearly dodgy was happening in the months leading up to the election because government debt stopped rising, even though there was no corresponding cut in government spending, nor any miraculous burst of revenue coming in.

    I mentioned at the time that debt was being hidden somewhere, and some sort of QE was in operation. I’d love to get to the bottom of it, I’m sure Hockey knows more than he is saying.

    Let’s suppose some debt that been kept off the books somehow was now being brought back onto the balance sheet to clean up a shameful piece of trickery. Given that public outcry might quite likely demand to know who was responsible, and given that various Treasury staff want to keep their jobs, there is at least plausible motive for keeping things a bit obscure.

  22. JohnA

    Ripper #1116669, posted on December 19, 2013 at 9:12 am

    Can someone explain what they have against fractional reserve banking?

    It is essentially a fraud as a loan is treated as a deposit as well.

    Steve keen explains it well at the following link

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

    For book-length analysis see Chris Leithner “The Evil Princes of Martin Place”, which includes an example of a bank which did not lend any of its at call funds, ie. it kept transaction deposit accounts separate from investment accounts: call it strict asset/liability matching.

  23. .

    Spiro
    #1117145, posted on December 19, 2013 at 2:45 pm

    I agree with the dot. If a bank cannot lend from their pool of deposits, then where the hell are they going to find money to lend?

    Exactly. It is what banks do. The idea of banning lending against reserves in toto is nutty.

    Sure banks can operate like the bank Chris Leithner mentions. Most banks can too. Just call at call accounts an investment which has a risk of default and there is reconciliation.

    No doubt the bank mentioned in Leithner’s book would have their investment accounts treated as capital for their adequecy ratio.

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