Kiwi and the Justiceman

No.  This is not Spartacus’ play on the Travelling Wilbury’s song.  But ISHO, this reads better with the Wilbury’s in the background.

It’s not often that the subject of monetary policy and the role of central banks is discussed on the Cat.  But the role that central bankers play in our lives is sometimes greater than that played by out political overlords.  But unlike when our political overlords take money out of one group’s pockets and put it into another’s, when central banks do it, it is very rarely discussed.

Central banks, and in the case of Australia, the RBA are a government owned and operated price fixing and market manipulation operation; operations in Australia that have (to Spartacus’ knowledge) never been investigated by the ACCC or ASIC.  And the prices they fix flow through the economy like a union official chasing a kickback on a construction site – fast and everywhere.

Central banks manipulate and fix the price of money, interest rates, which then impacts the price of assets, real and financial.  This then washes its way into prices everywhere.  Everything else equal, a cut to interest rates increases the value of property which needs to be factored into the cost of producing widgets which then needs to be factored into the cost of selling widgets.

And much like the way that the tax system takes from one group of people the government think don’t need as much and gives to another group the government thinks is more worthy, central banks take from savers and give it to borrowers.

But the big difference between the government and the central bank, at least in Australia, is that citizens have an occasional vote and can change the government.  You can’t really do that with the RBA leadership.  And yes Spartacus does know that the RBA is also government, but because of the “independence” of the RBA, this is economically and politically difficult and poisonous.

In the mean time, Australia has an unelected and unaccountable neo-clergy of econocrats deciding who is worthy and who is not.  Talk about the deep administrative state.

And don’t forget that this independent RBA has meddled in elections and public policy debates well outside its mandate; something that would be utterly intolerable of any other public sector agency.

Deep within the bowels of the RBA is a particular model and economic framework that, according to the RBA itselfprovides an intellectual framework for the analysis of monetary policy.  And not just Australian monetary policy.  This model also infects the analysis and setting of monetary policy in other countries including US monetary policy.

And what is this intellectual framework you may ask?  It is known as the Phillips Curve and was invented/discovered by an economist over the dutch; New Zealander William Phillips.  The nub of this framework is that:

inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.

More importantly, it provides the rationale for economic meddlers to meddle in the economy.  Reduce interest rates – stimulate the economy – reduce unemployment.  But is asset price inflation really economic growth?  And does this theory really hold given the Phillips Curve relationship was disproved by the 1970s stagflation and the global financial crisis?  But eh.  Once a Department of Economic Meddling has been established, they are unlikely to present arguments for their own redundancy or a limitation on the powers they like to exercise.

In the mean time though, through interest rate manipulation, central banks quietly create asset price bubbles and then point fingers anywhere and everywhere else when these bubbles burst.

And in doing so, they also transfer wealth from people without assets to people with assets; you know in part explaining the acceleration in high net worth people’s wealth.  But you see, the wealth effect economic clap trap is easy to explain.

Now even though Spartacus does not accept the notion that income inequality in itself is a bad thing, perhaps before populists, that includes el-Presidente, World’s Greatest Treasurer and Social Justiceman, the Hon. Wayne Swan start blaming “business” and tax and the vibe, perhaps he should look at the agency he had direct oversight over including the appointment of many of its current board members.  Yes that Mecca in Martin Place, the Princes of Printing money, the Reserve Bank of Australia.

If anyone is to blame for income inequality in Australia, something that does not matter but still gets everyone excited envious, eyes should be cast at Kiwi and Justiceman.

And the walls came down
All the way to hell
Never saw them when they’re standing
Never saw them when they fell

Follow I Am Spartacus on Twitter at @Ey_am_Spartacus
Subscribe to the Sparta-Blog at eyamspartacus.wordpress.com

This entry was posted in Uncategorized. Bookmark the permalink.

22 Responses to Kiwi and the Justiceman

  1. iain russell

    Aaaah, ‘the dutch’. How I luuurve that Kiwi accent, but surely it should be ‘d⟨ə⟩tch’, seeing as how I try to be a Know All.

  2. Bruce of Newcastle

    Governments like inflation since the alternative is paying off all that inconvenient debt.
    But the RBA is supposed to target inflation with interest rate rises.
    Which skewer the Government as interest payments on the debt pile eat them alive.
    Look to the RBA finding all sorts of arcane reasons why raising rates isn’t appropriate just now.

  3. John Bayley

    The Phillips curve was comprehensively disproved in the 70s and yet, at least in the minds of the monetary voodoo priests, it has made a come back.
    This is why we keep getting fed the total BS about how a 2% annual increase in CPI is the holy grail, which will make it rain unicorns and rainbows – despite no empirical evidence whatsoever that this is actually the case.
    Just why we accept that the free market is best at allocating resources efficiently, and yet we uncritically accept that monetary central planning is an essential part of ‘managing’ an economy, is one of the many mysteries of this confused era.

  4. Infidel Tiger

    Going off the gold standard and replacing it with unsound money has been a disaster.

  5. Howard Hill

    Going off the gold standard and replacing it with unsound money has been a disaster.

    Not for the parasitic, money shufflers and their mates in .gov!
    A bigger con than,Globull Warming Climate Change.

  6. .

    Rational expectations actually goes back to Muth (1960) and arguably Friedman (1955 IIRC).

    We’ve had post-Keynesian economics for almost 60 years. The left really needs to shut up, Prescott and Kydland’s modelling of the RBC won them a nobel.

    The RBA should try to match the money supply to GDP growth and also build up gold reserves accordingly. They should be aiming for zero inflation over the cycle with allowance for some inflation and deflation in the short run.

    This is obvious for anyone who has not drunk the cool aid and realises that inflationism is just more magic pudding economics based on the need to decrease regulated wages to actually clear the market without overtly telling the unions.

  7. JC

    Infidel Tiger
    #2779309, posted on August 2, 2018 at 8:22 pm

    Going off the gold standard and replacing it with unsound money has been a disaster.

    Artie, Bird’s stolen you blogname.

    It depends. It most certainly depends on what sort of economic system you’re running. The gold standard, the pure gold standard, where you could redeem currency for gold at the CB window is a very tight corset around the economic system. It’s very rigid but also workable if and only if, your labor and goods markets are extremely flexible. People would have to live with wage rates tapering down and goods prices falling as well as rising.

    Given the stickiness of our markets these days, a floating regime and floating exchange rate is optimum.

  8. .

    It’s very rigid but also workable if and only if, your labor and goods markets are extremely flexible. People would have to live with wage rates tapering down and goods prices falling as well as rising.

    It worked remarkably well though.

    Given the stickiness of our markets these days, a floating regime and floating exchange rate is optimum.

    I’m not too sure about this. We’re going to see the same movement in tradeables as we saw in the price inflation mechanism with gold as more specie flowed inwards. Employers only care about real prices; the nominal price matters to those priced out of a job.

  9. John Bayley

    Seeing that ‘CPI’ inflation is a nonsense metric right up there with ‘global average temperature’, I would go one better and propose the abolition of the central bank and ‘legal tender’ laws, accompanied with free banking and free market for money.
    That would solve the problem in short order.
    But of course, it would also mean an awful lot of ‘experts’ out of a job, a cap on government’s ability to spend what it does not have and an end of inflation-driven redistribution of wealth.
    Which is why it will not happen until the current system collapses.

  10. JC

    Excellent post Spart… The RBA has been by far the most successful CB in the modern age and is now accused of price fixing and behaving badly. Possibly the only institution that’s worked reasonably well. But this the Cat these days.

    Central banks, and in the case of Australia, the RBA are a government owned and operated price fixing and market manipulation operation; operations in Australia that have (to Spartacus’ knowledge) never been investigated by the ACCC or ASIC. And the prices they fix flow through the economy like a union official chasing a kickback on a construction site – fast and everywhere.

    Central banks manipulate and fix the price of money, interest rates, which then impacts the price of assets, real and financial. This then washes its way into prices everywhere. Everything else equal, a cut to interest rates increases the value of property which needs to be factored into the cost of producing widgets which then needs to be factored into the cost of selling widgets.

    Bullshit. The purview of the central bank is to conduct monetary policy to meet the objectives/rules set by the parliament. It fixes nothing and merely guides the overnight rate to to level it believes is optimum for the economy at the time. It also guides monetary policy by offering forward guidance, which is far far more important than the 25 basis points it raises or lowers the o/n.

    And much like the way that the tax system takes from one group of people the government think don’t need as much and gives to another group the government thinks is more worthy, central banks take from savers and give it to borrowers.

    Bullshit. If interest rates levels are low, they are low for a reason and the reason is economic weakness just as Milt said. Long term interest rates are determined by market forces. here are very few people who invest in the long term in bank deposits anyway. If they did, they made the worst investment decision in the past 100 years.

    But the big difference between the government and the central bank, at least in Australia, is that citizens have an occasional vote and can change the government. You can’t really do that with the RBA leadership. And yes Spartacus does know that the RBA is also government, but because of the “independence” of the RBA, this is economically and politically difficult and poisonous.

    Bullshit. This can be changed in a moment’s time through an act of parliament.

    In the mean time, Australia has an unelected and unaccountable neo-clergy of econocrats deciding who is worthy and who is not. Talk about the deep administrative state.

    If markets disagreed with the CB actions you would see that repudiation reflected across all asset markets. The shape of the yield curve would also offer clues.

  11. JC

    It worked remarkably well though.

    It did because there were almost no limits on the price signal as there is now. FFS, Dot we have the ACCC berating petrol stations for selling petrol too cheaply.

    I’m not too sure about this. We’re going to see the same movement in tradeables as we saw in the price inflation mechanism with gold as more specie flowed inwards. Employers only care about real prices; the nominal price matters to those priced out of a job.

    Nominal is very important. It was the avoidance of understanding the importance of nominal prices that caused the GFC through CB negligence.

  12. .

    Perhaps the most successful central bank is to have none at all:

    https://mises.org/library/panama-has-no-central-bank

    The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the US dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services; it cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well: 1986, 1989, and 2003.

    Very good!

  13. .

    Nominal is very important. It was the avoidance of understanding the importance of nominal prices that caused the GFC through CB negligence.

    I think that is just the way you are conceptualising it, and that relates more to the asset markets that saw massive capital losses.

    What I think happened in the most general of terms was a change in the inflationary environment, as what happened in the S&L crisis. Banks could no longer truly engage in maturity transformation.

    I’m not saying you’re wrong. I’m looking at it in terms of bank asset & liability management in aggregate.

  14. JC

    The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the US dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services; it cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well: 1986, 1989, and 2003.

    Very good!

    It’s not really similar. It’s just that Panama has delegated its monetary policy to the United States. It sounds like their goods and labor markets are freer too – like HK who run a peg.

  15. .

    That record is excellent though.

    Their inflation was significant though post-GFC.

    Think of it in terms of NGDP and J curves:

    https://tradingeconomics.com/panama/inflation-cpi

    If you look at their real GDP growth, if we want to say “outcome based policy” it speaks for itself.

  16. JC

    That record is excellent though.

    Their inflation was significant though post-GFC.

    That’s true.

    Think of it in terms of NGDP and J curves:

    https://tradingeconomics.com/panama/inflation-cpi

    If you look at their real GDP growth, if we want to say “outcome based policy” it speaks for itself.

    I’m not suggesting its a bad policy, but they seem to have done well. Puerto Rico uses the US dollar too.
    Puerto Rico went bust.

    When you’re using another currency, you really have to be careful with fiscal policy, as there’s no second chance. Obviously, Panama has done a better job.

  17. max

    By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency.

    there is a federal agency that tops the others in secrecy by a country mile. The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation’s vital monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.

    https://www.lewrockwell.com/2018/07/murray-n-rothbard/the-myth-of-fed-independence/

  18. max

    The Myth of central-bank independence
    The notion of central-bank independence is one of the great myths of the modern age.

    For those who believe this sort of nonsense — or are under the impression that political leaders and the posses surrounding them are wise, thoughtful, and have the best interests of the country at heart

    Arthur Burns:
    The story goes that he was asked by a German reporter why he pursued such a reckless policy. His reply? A Fed chairman has to do what the president wants or else “the central bank would lose its independence.”

    https://mises.org/library/burns-diary-exposes-myth-fed-independence

  19. max

    The Official Counterfeiter (1969): A Classic Cartoon Booklet on The Federal Reserve System Is Now Online
    Gary North
    Printer-Friendly Format

    Jan. 31, 2012

    Back in 1969, Vic Lockman published a cartoon booklet exposing the Federal Reserve System. Lockman was a cartoonist for Disney. He did not do the final cartoons. He wrote the story lines and provided accompanying cartoons. Then the in-house Disney cartoonists re-drew them.

    Lockman had been reading my essays on the Federal Reserve. He created The Official Counterfeiter as an easy-to-grasp explanation of fractional reserve banking. He updated it in 1974.

    Unlike virtually all popular criticisms of the Federal Reserve, this booklet reported that the FED returns to the Treasury most of money it makes from interest paid the interest it earns.

    Look at the figures in 1974: $7.8 billion. For 2011, it was $77 billion. The debt was $140 billion. Today, it is $2.9 trillion.

    You can download the booklet. Click here

    https://www.garynorth.com/public/9035.cfm

  20. JC

    Max

    Those sorts of conspiracy theories invariably end up at the Learned Elders of Zion websites. Be careful as quite a few brains have been destroyed as a result.

  21. John Bayley

    Bullshit. The purview of the central bank is to conduct monetary policy to meet the objectives/rules set by the parliament. It fixes nothing and merely guides the overnight rate to to level it believes is optimum for the economy at the time.

    Yeah, right. So the BoJ essentially owning the JGB market outright, and about 50% of the Nikkei by now to boot, which they have been buying by truckloads of confetti money, is not price fixing?
    The SNB being one of the top 10 shareholders in Apple is not price fixing? A buyer of unlimited resources, courtesy of the printing press?
    I would not have pegged you for a statist, but clearly I was very wrong.

  22. John Bayley

    If markets disagreed with the CB actions you would see that repudiation reflected across all asset markets.

    Yeah, like the ‘don’t fight the Fed’ trade?

    You said it. Bullshit indeed.

Comments are closed.