The RBA is run by incompetents

Really beyond stupid. Purely destructive, but I suppose you can’t expect them to know any better since they are all students of modern macro: RBA cuts official cash rate to 0.75pc at October meeting. They continue with all of their economic insanity expecting that the next time it will work out. Pathetic.

I am running a seminar tomorrow here at the University about which I have sent a note to the History of Economics discussion thread in response to a book review just published praising some tract commemorating the 80th anniversary of the publication of Keynes’s General Theory. Let me firstly just remind you that Keynes was the source of this stupidity that lower rates will stimulate growth. No classical economist ever believed anything so nonsensical This is what I sent.

I hope I will be forgiven for buying into this but it does astonish me that with an unbroken record of failure going back to the 1920s that Keynesian economics continues to hold such allegiance among economists. Is there no one who will rid us of this turbulent presence? And perhaps it is only because I am about to present a seminar to our own School here in Melbourne that I find myself once again so irritated by reading of yet another volume of praise heaped on Keynesian theory, now refined into post-Keynesian, but Keynesian all the same. Let me just add these to the discussion.

First, it’s not as if pubic spending didn’t have a constituency before Keynes, and yet, when it was tried, it turns out that the “Treasury View” was absolutely correct, and has been every time “fiscal stimulation” has been tried – see the GFC for the latest example. Winston Churchill was the British Chancellor of the Exchequer and this is from 1929, from well before the stock market crash in October.

“Churchill pointed to recent government expenditure on public works such as housing, roads, telephones, electricity supply, and agricultural development, and concluded that, although expenditure for these purposes had been justified:

‘For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.’” (Peden 1996: 69-70)

There is then this not-very-well-known quote from Keynes’s post-humus article in The Economic Journal from 1946, at least not well-known enough. That he was said to have stated that “I am not a Keynesian” is easy to believe when you see that he wrote the following.

“I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past’.”

This is the note I sent out to the School to see if I can get anyone to come along.

I am all too aware of how uninterested a modern economist is in the classical economics of 150 years ago. Nothing must seem more remote from the economic needs of the twenty-first century. So I will just say this.

  1. Classical economic theory provides a much better understanding of how an economy works than anything found in a modern text.
  2. Classical economic theory has infinitely more insight into how to create growth in a less developed economy than does modern economic theory.
  3. Both the Marginal and especially the Keynesian Revolutions have made economic theory less insightful. There is almost nothing worth knowing, beyond the absolutely obvious, from marginal theory, while Keynesian theory is just plain wrong. Almost none of it will help anyone make sense of the operation of a modern economy.
  4. Even if none of that were true – although all of it is true – if you wish to be a completely well-rounded economist, you should at least know something about the economic theories of the classical economists. This presentation will explain things to you that almost no one any longer has even the remotest idea of.
  5. The attachment [not provided here] is made of up a series of quotes taken directly from Denis O’Brien’s Classical Economics Revisited (1975, updated 2002). All of what he writes is accurate. None of it is any longer taught to anyone.
This entry was posted in Classical Economics, Economics and economy. Bookmark the permalink.

90 Responses to The RBA is run by incompetents

  1. stackja

    Terry McCrann: Reserve Bank likely to cut rate even further

    Today’s interest rate cut could just be the beginning — the rate’s now at a mind-boggling all-but zero 0.75 per cent and could conceivably go to zero, writes Terry McCrann.
    Terry McCrann, Herald Sun
    Subscriber only

    October 1, 2019 3:19pm

    RBA governor Philip Lowe’s words were unambiguously clear and unusually blunt.

    He noted a — true, ‘gentle’ — turning point in the June half-year.

    That poses a big, big question: what if he’s wrong? What if the sky falls in? Back in 2008 when the GFC hit, the RBA rate was at 7.25 per cent. It was able to and did cut, cut, and indeed slash.

  2. JC

    Steve:

    I’m not sure what Keynes said about high or even low interest rates.

    However, the monetarists led by Milton Friedman always argued that interests levels was not the issue, but the status of monetary policy was. Is it loose or tight.

    Since 2016, the RBA has been unable to achieve its target inflation rate, which is its remit. The only way it can achieve this is through looser policy.

    As Friedman said, low nominal rates are a sign of previous tightness, while high nominal rates re a sign of previous looseness.

    It is appropriate for the RBA to run a loose monetary policy at this point in time.

  3. Frank Walker from National Tiles

    Ponzi or not, I see a bright future for savers who wait and then load up on debt as we enter real negative interest rates.

    Good savers in the early 1980s often paid off their home loans in really short times.

    They had no idea how good they got it.

  4. I_am_not_a_robot

    The RBA has cut Australia’s official cash rate below 1 per cent for the first time, saying it’s prepared for an extended period of low rates … (The Australian).

    “Insanity is doing the same thing over and over again and expecting a different result” (attributed to Einstein).

  5. JC

    “Insanity is doing the same thing over and over again and expecting a different result” (attributed to Einstein).

    Not it isn’t.

    Honest question. Do people actually understand the RBA has a mandated inflation rate that hasn’t seen the light of day since 2016? Do we appreciate what a mandate is?

  6. Y

    Asset prices, on the other hand, are inflating nicely.

  7. Mother Lode

    Just a comment on the note you you provided the school. Probably intentional, but I do so love seeing my name up in pixels!

    Each of the propositions is an disparagement of orthodoxy (and thereby all who hold it). It will attract the angrily fired up.

    Tantalising hints of the power of non-Keynesian thought – pithily showing how classical economics speaks loud and clear while Keynes is stumbling and mumbling.

    Something in the style of (but not content) “If circumstances are such that people are wary of spending their own sparse hard-earned, then why would you think that the people in a government splashing out money they will never have to earn is any wiser?”

    In conversation this would pre-dispose people to a particular topic – the indubitable brilliance of politicians and bureaucrats – but as taunting/teasing notes…

    But I may be wrong. I don’t really know how these things work.

    But I can poke my tongue out upside down. (My tongue, that is.)

  8. Tel

    Say goodbye to the AUD.

    Everything that Peter Schiff has been saying about the crash of the US dollar is wrong … because the Federal Reserve is willing to defend the US dollar. However Peter Schiff, has the theory exactly right with regards to the Australian dollar, because the RBA have made it completely clear that not only are they unwilling to defend our dollar and apparently positively want to destroy it.

    Where’s the bottom going to be? At this rate we could easily hit 60c US, or worse.

  9. JC

    Asset prices, on the other hand, are inflating nicely.

    Sure, certainly better than asset price deflation.

    I bet you wouldn’t be saying asset prices are deflating nicely, because if that was the case the country could likely be in a financial crisis.

  10. Alex Davidson

    Hazlitt summed up Keynes General Theory rather well when he said “What is original in the book is not true; and what is true is not original.” I would go further – what Keynes wrote was mainly nonsense, but written with just enough mystery and seeming authority to serve as justification for the key modus operandi of the political class – the use of force to achieve economic ends. What the rest of us would call theft.

  11. I_am_not_a_robot

    Good savers in the early 1980s often paid off their home loans in really short times.
    They had no idea how good they got it…

    It worked for me.

  12. Squirrel

    The RBA is dealing with a huge debt bubble, which they, and their fellow regulators, did precious little to stop – and quite a bit to facilitate.

    All but the silliest of the indebted are taking advantage of crisis interest rates to get their debts under control, and savers are cutting back on spending to compensate for negative real interest rates – and let’s not forget that savers includes younger people chasing after a once-again accelerating housing market. The media line that it’s only retirees who lose from crisis interest rates is bulldust.

    The hand-wringing about unemployment, under-employment, and slow income growth (outside the comfy bits of the public sector) is ludicrous in the absence of some forthright public comments from the RBA about the impact of very high levels and permanent and temporary immigration, and the failure of our increasingly expensive education system to meet the skills needs of the economy.

    We don’t need more public debt to fund job schemes dressed up as “congestion busting infrastructure” – we just need to face home truths and stop pretending that a continental-scale debt-funded ponzi scheme is a sustainable economic model.

  13. Roger

    I suppose it’s too late to go back to the gold standard and reduce the role of central banks accordingly?

    Tongue only partly in cheek.

  14. JC

    Squirrel

    What debt bubble is that eggsactly?

  15. Ƶĩppʯ (ȊꞪꞨV)

    Honest question. Do people actually understand the RBA has a mandated inflation rate that hasn’t seen the light of day since 2016? Do we appreciate what a mandate is?

    who says 2% is currently an appropriate level for inflation? nobody, it’s a random number plucked out of the air that felt good last century during a demographic boom. the problem most of the boomer years was keeping inflation down to 2%
    if you look at the data it did a particularly shit job of that as well

    https://www.abs.gov.au/websitedbs/D3310114.nsf/home/ABS+Chief+Economist+-+70+Years+of+Inflation+in+Australia/$File/CPI+70+Years.svg

  16. JC

    I suppose it’s too late to go back to the gold standard and reduce the role of central banks accordingly?

    No, it’s not. But firstly you have to define exactly what you mean by gold standard as there’s been several variations over the course of history.

    Secondly, you will have to ensure there is massive deregulation in the goods, services, investment sectors and labor markets. I mean truly massive, because if you’re going to essentially anchor the medium exchange, you will have to ensure massive flexibility in those markets in order for them to absorb shocks.

    You will also have impose a debt ceiling on the government or if it they/it borrows, it will need to be asserted against an infrastructure asset like a bridge or road toll. No more borrowing to fund pension liabilities etc.

    In other words. entering a version of the gold standard as a small economy we need to have the economy very flexible to absorb shocks the monetary side/ gold standard can’t absorb any longer.

    It’s doable.

  17. Roger

    It’s doable.

    All sounds promising.

  18. Eyrie

    Abolish the Reserve bank. Who gives a rat’s about their “mandate”. I’m good with stringing up Lowe and the rest in Martin Place. They are thieves. Along with the rest of the Keynesians and neo Keynesians.
    How often do we have to try this shit before we decide it doesn’t work?
    WTF is so good about inflation, JC?

  19. Iampeter

    Not sure what the point of these posts are. You’re a nationalist, Steve.
    That means when it comes to politics you reject classic economics.
    Just like you can’t be a socialist and a capitalist.

    Can’t believe this needs to be explained…

  20. JC

    who says 2% is currently an appropriate level for inflation? nobody, it’s a random number plucked out of the air that felt good last century during a demographic boom. the problem most of the boomer years was keeping inflation down to 2%
    if you look at the data it did a particularly shit job of that as well

    Many people/economists did when the target level was set both here and more importantly around the world, where there was greater discussion. 2% was the level worked out because it would help with monetary stability and would be high enough to avoid heavy duty tools like QE if the inflation rate was well below the band.

    You DON’T want to the see the CB use QE because zero or close to zero interest rates in the long end are a sign of monetary policy failure and QE can cause distortions.

    Blame that idiot Philip Lowe for the reasons we’re down here and demand the government fire his fucking arse out the door. It about fucking time Public (non) servants were summarily fired for non performance of their duties.

  21. Iampeter

    Since 2016, the RBA has been unable to achieve its target inflation rate, which is its remit. The only way it can achieve this is through looser policy.

    AHahhahahaha. Oh this is bookmark worthy.

    What do you think “inflation” even means, JC?

  22. JC

    Peter

    Fuck off if you’re simply going to abuse people because they aren’t as pure as you. In any event, computer lock down time at the mental facility you reside is now past, so hand in your gadgets and head back to the padded cell.

  23. Iampeter

    “Insanity is doing the same thing over and over again and expecting a different result”

    JC – Not it isn’t.

    BAHAHAHAHAHAAHAHAHA!

    You couldn’t make this up!

    And that’s a second bookmark in just as many seconds. What a thread!

  24. Eyrie

    JC, I’m with you on firing Lowe. He’s an attention seeking egotist. Did you see the picture on the Australian Business review? The light of insanity truly shines out of his eyes.
    Even if we have to buy him out of his contract it will be money well spent, whatever it costs.

  25. Tel

    Do people actually understand the RBA has a mandated inflation rate that hasn’t seen the light of day since 2016? Do we appreciate what a mandate is?

    The meaning of a “mandate” is something an entity is obliged to do, either by law, or in a Democracy it might be by popular demand.

    Inflation is neither of those, they cooked up the idea themselves and 2% was the biggest number they thought they could get away with. There is no law requiring this, and constantly increasing prices are reasonably unpopular … livable but not wonderful.

  26. JC

    Abolish the Reserve bank.

    Okay

    But you also need to abolish the Fairwork, the ACCC, and pretty much all government departments. I agree with all this. However you can’t just abolish the RBA unless you would like to go to a US or Euro Currency board. This means the Aust Dollar would disappear.

    I’m fine with that, but you also have to define what you would replace the RBA with or follow the deregulation path I suggested.

    Who gives a rat’s about their “mandate”.

    The RBA clearly doesn’t. You don’t. However, it’s the law.

    I’m good with stringing up Lowe and the rest in Martin Place. They are thieves. Along with the rest of the Keynesians and neo Keynesians.

    Okay. You don’t need to hang Lowe. You just need to fire the useless fuck. He earns 1 million a year and he’s a complete failure.

    How often do we have to try this shit before we decide it doesn’t work?

    okay

    WTF is so good about inflation, JC?

    Nothing, unless you’re operating a constipated economy like ours in which case 2% is required in order to maintain stability.

  27. Ƶĩppʯ (ȊꞪꞨV)

    Many people/economists did when the target level was set both here and more importantly around the world, where there was greater discussion.

    based on the logic that deflation is evil so we want to be above zero a bit but not too far as that is evil as well. ie pure conjecture not based on anything real world. what exactly is wrong with inflation sitting at zero? who says deflation is always bad? economists, the usual suspects, that claim to see all and know all.

    well here we with large chunks of the 1st world sitting with negative rates and australia in hot pursuit. what could possibly go wrong…

  28. Neil

    I read somewhere the Governor of the Reserve Bank gets a salary of $1M/year. Other than setting interest rates once/month what does he actually do?

  29. JC

    The meaning of a “mandate” is something an entity is obliged to do, either by law, or in a Democracy it might be by popular demand.

    Tel…

    Lets not complicate this. The RBA has an express mandate to maintain the inflation measure at 2% plus over the medium term.

    The four-eyed fuck, Philip, Lowe who is always mouthing off, telling the govt they should spend much more, earns a million bucks a year and hasn’t reached target since 2016! Like it not, that was a huge part of the prick’s job. He needs to go and go quickly. It’s about fucking time these taxeating parasites were kept to their employment contract. That he signed!

  30. Sean

    Doesn’t classical economics predict that fiddling with interest rates will lead to mal-investment and just increase the size of the bust when it all unwinds?

    Not really sure where growth in the economy will come from but it looks like with everyone getting into debt uoto their eyeballs consumption will be lower for a long time which is bad news for local retail businesses surely!

  31. JC

    Zipperhead.

    Read up on “sticky prices”. It explains why you need 2% in economies such as ours. Stop bumbling around with nothing to add and I say this in the nicest way. 🙂

  32. JC

    what does he actually do?

    This one, this four eyed git harps the government about spending more hoping that would increase the inflation rate. He’s trying to keep his job and demanding his employer do other shit that he was hired to do…. the other shit is borrow more.

    He should be fired immedaitely.

  33. JC

    What do you think “inflation” even means, JC?

    Peter, it means you should be handing in your gadgets to the mental facility coordinator and heading back to your padded sleeper… like right now!

  34. Frank Walker from National Tiles

    Inflation is used to create real prices that are market clearing, whereas mandated prices are not.

    Central banks are how socialism is sewn together like Frankenstein’s monster. You’d be correct to conclude that this “glue” comes at a steep cost.

    It is historically the putative cause of the business cycle besides extreme weather events, population bulges or technological cycles.

    The Austrian business cycle theory is correct. Inflation sees infra marginal products become profitable at the expense of other, truly profitable ones. Consumer goods are produced at the expense of capital goods, this is not sustainable and this eventually creates falling productivity and because capital is non-fungible, it results in write-downs that cannot be liquidated. Before this, the increase in prices sees a shift to fixed assets and this exacerbates the price signal to under-produce capital goods.

    Kydland and Prescott’s Real Business Cycle theory is a classical approximation of the ABCT.

  35. Empire 5:5

    OnlyTrueRightWinger®
    #3172577, posted on October 1, 2019 at 6:34 pm

    You couldn’t make this up!

    But you could.

  36. Frank Walker from National Tiles

    Sometimes I wonder if I Am Putrid is a follower of Owen Benjamin.

  37. candy

    This is very troubling for people working hard in ordinary jobs and trying to save and invest some money for the future to pass down to kids, or just retire neatly. Ordinary dreams, ordinary aspirations.

    Does the RBA chief know what this means? or does he think everyone is on 1 million dollar salary and a low interest rate of no consequence.

  38. JC

    The Austrian business cycle theory is correct.

    Yes, it is correct and so is there work on capital theory. However, if you want to go fully Austrian, you also need a very, very flexible economy in order to absorb shocks. The only things we have to absorb shocks is

    1. monetary policy directed by a bunch of people, who like Lowe have not much understanding in terms of what they are doing and

    2. a relatively free floating exchange rate.

    Do what Summer has consistently argued for… monetary policy based on nominal GDP which is essentially a marker to income and do way with idiots who think they know more than the market. All you need then are a bunch of reasonably well trained monkeys adjusting monetary policy to what the futures or betting markets forecast nominal GDP will be. Of course this is a constantly moving target.

  39. JC

    Candy

    You’re making an argument I’ve heard all afternoon and it’s really annoying.

    If there’s little inflation and also little long term inflation as forecast by long term interest rates, why are you bothered by what interest rate you receive? Low inflation means the price of goods and service are not going to change much. Relax and enjoy the spring. Also make sure that pert bottom of yours is in fine shape for the warmer weather.

  40. Neil

    You’re making an argument I’ve heard all afternoon and it’s really annoying.

    Lots of retired people live off interest they get on term deposits. I think interest rates are falling much faster than inflation is.

  41. Tel

    Lets not complicate this. The RBA has an express mandate to maintain the inflation measure at 2% plus over the medium term.

    No mandate … it’s a rule of thumb at best that they one day decided might make a good plan.

    The New Zealand Parliament imposed a mandate, by law, on their central bank to keep it UNDER 2% (and yes, 0% is indeed under 2%) at a time when inflation was going nuts. All the other central banks picked up that as a handy benchmark.

    You could say they have made a promise to the Australian people, but there has to be something going wrong with that as well. Consider this: the AUD is fully exchangeable with the USD and you can exchange as much as you want in either direction whenever you want. During the past few years the AUD went from right on parity with the USD down to around 70c and falling … and yet in Australia we claim to have 2% inflation, while in the USA they also claim to have 2% inflation.

    Hang on, how can one measure shrink by 2% and another measure also shrink by 2% but at the same time we get a 30% relative change between those two measures?

  42. JC

    Neil

    Interest rates are not set in stone forever. If these people wanted a fixed rate they could have bought long dates bonds or gone to Challenger and bought annuities. Life is tough at times. If inflation doesn’t exist to a large extent, they should then dip into their capital if rates are too low for income. Why not?

  43. Tel

    2. a relatively free floating exchange rate.

    3. A flexible marketplace where it’s easy to hire and fire people and things like wages and also mortgages are negotiated between private entities without state interference. Oh wait … yeah sorry this is Australia. Errr forget about option 3, as you were.

  44. JC

    Hang on, how can one measure shrink by 2% and another measure also shrink by 2% but at the same time we get a 30% relative change between those two measures?

    Because they are two, not one separately functioning economies. It’s not hard to figure that one , tell – even for a software engineer like you. 🙂

  45. JC

    3. A flexible marketplace where it’s easy to hire and fire people and things like wages and also mortgages are negotiated between private entities without state interference. Oh wait … yeah sorry this is Australia. Errr forget about option 3, as you were.

    Great point three. 🙂

  46. Neil

    If a retired person had $100K in a bank term deposit years ago he may have got 5% interest meaning $5K/year to pay rates, electricity, water etc.

    Now that person would be lucky to get $2K/year in a term deposit and that would not be enough to pay rates, electricity, water, etc

  47. JC

    Neil

    In that 5% interest there’s also an inflation component, so fucker isn’t earning 5% in real terms.

    In the new regime he earns 2K and reduces his capital balance by 3K..

  48. JC

    Neil

    I don’t whine to the newspapers when I suffer a capital loss in my stocks like pension-land is doing now. This is life.

  49. Tel

    Because they are two, not one separately functioning economies. It’s not hard to figure that one , tell – even for a software engineer like you.

    Meaning that neither the AUD nor the USD is actually a measure of any type of value.

    Let’s suppose you have two cotton shirts (starting out the same size) and you put them both in the wash together. When they come out of the wash they are each 2% smaller than they were before they went in, but then you notice that one shirt has become 30% smaller than the other … what kind of twisted world is that?

    Well, it’s how banking and international exchange works.

  50. JohnL

    For economic illiterate could somebody please explain “overnight cash rate”.

  51. calli

    On term deposits. The problem of lower interest only arises when the thing is rolled over.

  52. JC

    Meaning that neither the AUD nor the USD is actually a measure of any type of value.

    Correct. Currencies are NOT a store of value any more and haven’t been for decades. They are a medium of exchange and unit of account.

    Let’s suppose you have two cotton shirts (starting out the same size) and you put them both in the wash together. When they come out of the wash they are each 2% smaller than they were before they went in, but then you notice that one shirt has become 30% smaller than the other … what kind of twisted world is that?

    Twisted? You mean smaller, right?

    Well, it’s how banking and international exchange works.

    It works in terms of the economic system we have. It’s best for what we have but what we have is bullshit. The economic system we have is like a 95 year old in a nursing home who hasn’t had a shit for a week. The laxative is the the fiat currency/monetary system we operate under. Enjoy the laxative. 🙂

  53. Frank Walker from National Tiles

    Do what Summer has consistently argued for… monetary policy based on nominal GDP which is essentially a marker to income and do way with idiots who think they know more than the market. All you need then are a bunch of reasonably well trained monkeys adjusting monetary policy to what the futures or betting markets forecast nominal GDP will be. Of course this is a constantly moving target.

    I’d say that you want to keep the rates as stable as possible. You want a smooth graph of cash rates, not one with discontinuities UNLESS you’re starting a disinflation policy.

    The M3 channel of the banks can facilitate of lot of accommodation, as can the dollar.

    I’ve always agreed with you JC that we’d be stuffed with a fixed FX rate. We saw in 2008-2010 in Australia, how flexible labour markets, FX rates and a little monetary accommodation can smooth over declines in output and forecast output.

    We had unemployment under 4% in 2008 with “high” nominal interest rates and little debt, along with a flexible FX rate. In 2010, there were far fewer job losses than there otherwise would have been because of the export growth under accommodation and how labour costs were cut with falling hours, not unemployment.

    We are now heavily indebted, nearing the scoundrel territory of negative interest rates and have a pre-AWA era labour market policy.

  54. JC

    “overnight cash rate”.

    Inter-bank lending rate. CBA is in surplus today and Westpac is in deficit of an equal amount. CBA, being a prime borrower bids the cash from Wetpatch at .75%. The deal goes through. Say both are in deficit next day. The RBA comes in and does a overnight loan ( call it a loan for ease of understanding the point) to both banks at .75%

  55. JC

    I’ve always agreed with you JC that we’d be stuffed with a fixed FX rate. We saw in 2008-2010 in Australia, how flexible labour markets, FX rates and a little monetary accommodation can smooth over declines in output and forecast output.

    We had unemployment under 4% in 2008 with “high” nominal interest rates and little debt, along with a flexible FX rate. In 2010, there were far fewer job losses than there otherwise would have been because of the export growth under accommodation and how labour costs were cut with falling hours, not unemployment.

    It was incredible, Frank. And only few people understood the magic and then it was gonsky.

  56. candy

    JC
    It’s a rough situation with wage stagnation and one almost having to pay the bank to keep one’s savings.

    I can’t see why anything thinks this is a fine economy, when it is so discouraging to workers.

    And what inflation? the price of groceries is not changing much though beef is always too expensive for country like Australia. It is energy bills, health insurance etc that is dragging things down given wage stagnation, and just generally having savings for any emergency.

  57. Tel

    For economic illiterate could somebody please explain “overnight cash rate”.

    If you have only one bank in the entire country, then no “overnight rate” exists, because all money comes back to that single bank.

    However, suppose there’s two banks, each with approximately half of the banking business in a country. During a typical business day, there are transfers from bank A to bank B and also transfers from bank B to bank A and on most days these come out approximately the same. However, not exactly the same, so at the end of the day those two banks settle up between each other with hard currency (whatever that might be, let’s make it simple and presume they settle with real silver coins because long ago they did). However, what if one of the banks can’t settle because they are all out of silver coins? On problem, they can borrow the difference from the other bank and pay back tomorrow since more coins will change hands the next day.

    Now consider four banks instead of two, so all four get together at the end of every day and settle their differences. Any bank that’s short for the day will borrow from the cheapest of the three others. Generally they will organize a thing called a “Banker’s Clearing House” for this purpose, which is an agreement between those banks. Australia had one of those running privately before the Commonwealth Bank came along. The “overnight rate” inside the clearing house is that rate which banks are willing to lend to one another.

    Now go to the modern day, the government has taken over the payment system and the RBA runs what is effectively a modern clearing house, but they don’t call it that. The RBA issues electronic accounts to all the other banks, and they settle amongst each other. The RBA decides what the overnight rate should be, and either puts more money in or takes some out until it comes up about right. That means in effect if banks don’t seem enthusiastic about lending to each other, the RBA simply lends anyway. It means that settlement will always happen, because the RBA can’t run out of money, and that’s because the modern clearing house doesn’t use anything real (like silver coins) so it can’t run out of anything. Tax payments must come out of these clearing accounts, and tax return cheques get issued by the Reserve Bank (not by the Commonwealth itself). Those tax payments are the “pump” that forces these otherwise worthless tokens to circulate.

    Oh, and you cannot borrow at the overnight rate, because neither any of the banks nor the RBA itself would lend to you at that rate. It’s like one of those parties where normal people don’t get an invite. You could almost call it some sort of cartel … hmmm.

  58. Tel

    … though beef is always too expensive for country like Australia …

    Try buying lamb chops without three forms of ID and a letter of reference.

  59. JC

    Try buying lamb chops without three forms of ID and a letter of reference.

    Aged wagu at the Prahran market is $390 a kilo. Candy is right, wagu is damned expensive. -:)

  60. JC

    I don’t think I’ve ever had a barbecued wagu steak. Is it any good. Am I missing something?

  61. Alan

    Incompetent? Maybe … but I think they know precisely what they are aiming for.
    The New Global Push for Negative Nominal Interest Rates
    Global socialism: When government controls the means of production.

  62. Helen

    So what if the banks ignore RBA and raised interest rates. What would happen?

  63. JC

    Very good question, Helen.

    The RBA doesn’t just act in the very short term , it can also action longer out through open market operations where it buys and sells bonds depending on its objective.

    The bank can do repos or reverse repos all along the yield curve to impact the price of credit. Ultimately it will win because he has the monopoly on the currency.

    More later. I’m watch The Affair.

  64. John Constantine

    As the old joke goes, the State has to make the proles borrow money they can’t afford, to buy stuff they don’t need to impress people they can’t stand.

    Or the whole Ponxi scheme collapses.

    Once They dispose of cash and go negative interest rates, what is the limit?.

    Negative five percent?. Negative ten percent?.

    What if your ration of Soma depends upon being a citizen in good standing?. What if you have to present a certain amount of reciepts to prove you are spending a State mandated percentage of your wealth, or your social credit rating goes down?.

    The end of cash, the chicom secret police social credit rating system, negative interest rates, open borders Big Australia and State death squads.

    Cheerful Squalor.

    [ the Tyrant is using live ammunition in Hong Kong now, so dissent is out of the question.]

    Comrades.

  65. sfw

    Helen, I have a feeling that banks don’t care much about the Reserve rates. do you know anyone who can borrow at rates even double the reserve rate? I don’t, most Aussies pay market rates, these can be lower than the market would demand without a reserve bank but much higher than what the reserve charges. The reserve bank is just trying to inflate away gov debt. The other winners are the big end of town who get their hands on the reserve money first and doing so increase asset prices. The ordinary people can go to hell. Sometime in the future we will be seen as living in a time of elites gouging the ordinary people. So history as normal.

  66. feelthebern

    Footage of the RBA board meeting.

  67. Helen

    No, I expect around 3.8 next negotiation, this month. Last was 4.7. On bank bills. Crazy stuff. Their margin is way more than the .95 above of olden days. It’s gonna be more than 3 in am real terms.

    So why don’t they also offer higher interest on deposits and get all the money?

  68. JohnL

    Oh, and you cannot borrow at the overnight rate, because neither any of the banks nor the RBA itself would lend to you at that rate. It’s like one of those parties where normal people don’t get an invite. You could almost call it some sort of cartel … hmmm.

    Tel,
    do they have to say hokus/pokus or abracadabra? I thought it was compulsory with 3 card trick.

  69. Empire 5:5

    It was incredible, Frank. And only few people understood the magic and then it was gonsky.

    We could have motored out the other side in tippy-top shape, but the Chief Library Monitor fucked up labour market reform and shot the goose.

    The result was the biggest heist in the history of this country.

  70. JC

    Helen

    The RBA performs open market operations through an auction and reverse auction process. There are always bids and offers. I think I can only recall one time the RBA had an auction and there were no bids. It was at the height of the GFC. After that the RBA was on the side of providing massive liquidity to the banking system.

  71. Ƶĩppʯ (ȊꞪꞨV)

    The problem with business cycle economic theory is that its’ a theory to solve issues in supply and demand, however we are not really suffering from supply and demand business cycle issues economy wide, we are suffering a demographic cycle issue.

    No amount of economic stimulus by driving rates negative or other forms of easing will resolve the issue of deflation in the long term. Sure you can kick it short term but the headwinds will overtake you sooner rather than later.

    first there was the 50 year boom, now there is the 100 year bust.

    the only valid response is to replace the ageing, retiring and dying workforce. importing 3rd world voteherds isn’t cutting it and never will. the only workable solution is to get the birthrate back to replacement and above, seems only hungary is working on it.

    that however will take two decades to reap benefits, long past the retirement of any of our useless politicians.

  72. max

    Gold and Economic Freedom by Alan Greenspan
    before he change side:

    gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
    When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade.
    Credit, interest rates, and prices tend to follow similar patterns in all countries.
    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.
    The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
    Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

  73. JC

    Max<

    Again (asked someone else), what do you mean by the gold standard. You have to define it as there have been several permutations.

  74. John A

    Tel #3172540, posted on October 1, 2019 at 5:57 pm

    Say goodbye to the AUD.

    Everything that Peter Schiff has been saying about the crash of the US dollar is wrong … because the Federal Reserve is willing to defend the US dollar. However Peter Schiff, has the theory exactly right with regards to the Australian dollar, because the RBA have made it completely clear that not only are they unwilling to defend our dollar and apparently positively want to destroy it.

    Where’s the bottom going to be? At this rate we could easily hit 60c US, or worse.

    EXACTLY!

    And what the hell will that do to the price of petrol for instance?

    The RBA is failing in one of its core objectives – defence of the currency.

    The whole Executive Team needs to be exported, or something worse.

  75. max

    Here are the characteristic features of a free market gold standard:

    1. Private property
    2. The right of contract
    3. The enforcement of contracts by the government
    4. No government licensing of banks
    5. Open entry in coin production
    6. No government mint
    7. No government currency or coins
    8. Therefore, no legal tender laws
    The legal framework begins with private property. The monetary system develops out of this. If the monetary system does not begin with private property and the right of contract, then it is just one more government substitute for liberty. It will fail to bring liberty or maintain it.

    Here was what Mises advocated: free banking, no bank regulations beyond the general enforcement of contracts, and no central bank supported by the government.

    Out of this legal framework will develop a free market gold coin standard, a free market silver coin standard, and maybe other standards. The various currencies would fluctuate in price, just as all other commodities fluctuate in price. These would be parallel currencies, not price-controlled currencies. There would be no government-enforced price controls that set the price of silver in terms of the price of gold.

    The government would specify the form of acceptable currency for the payment of taxes — nothing else. It would not issue coins or currency of its own. It would not enter the money business. Whenever governments enter the money business, the public should expect monkey business.

  76. DaveR

    The RBA mandate to maintain inflation should have only been valid down to, say 3% cash rate, below which it no longer applied.

    But they are going to zealously continue to lower interest rates to try and kick start inflation, in the belief that interest rates matter when that lever lost its effectiveness some time ago. Exorbitant energy prices, which will move even higher, now have more impact on household spending than interest rates.

    And the casualty from all this will be the currency, with dire long term consequences. The result is going to be a local economy where exporters have an earnings explosion as foreign revenues rise and local costs remain the same. Imports (now a lot of what we buy) will rise significantly in price, making them unaffordable for many.

    The major problem will be further increases in local assets like property and at first shares (before they collapse for all except exporters). Totally contrary to stated government goals. A generation frozen out of home ownership because of the uncontrolled egos at the head of the RBA. What a disaster.

  77. mh

    Housing Debt $2, 052, 263, 451, 297 AUD

    Total of Australian household mortgage debt for housing (owner-occupied and investor).

    Mortgage debt on housing has been the largest expansionary category of debt in the Australian economy over the last 20 years. The expansion of this debt has been the dominant factor for increasing broader money in terms of all deposits held with Australian Financial Institutions (AFIs). Without this mortgage debt a large portion of money held by households within AFIs simply would not exist.

  78. Iampeter

    Fuck off if you’re simply going to abuse people because they aren’t as pure as you.

    Abuse? You’re one of the most abusive idiots here. You post ignorant nonsense and abuse people.
    Oh and cry about being abused.

    I’m just laughing at you because you have no idea what you’re talking about.

  79. Iampeter

    Sometimes I wonder if I Am Putrid is a follower of Owen Benjamin.

    Yea but you’re a mental person that everyone here politely ignores.
    Your “wonderings” are about as useful as that of drying dirt.
    Even the other crazies mostly ignore you.

    Speaking of which…bye now.

  80. Iampeter

    Nothing, unless you’re operating a constipated economy like ours in which case 2% is required in order to maintain stability.

    Comments like this and many others here make no sense.
    You don’t know what inflation is or what it does to an economy.

    But you also need to abolish the Fairwork, the ACCC, and pretty much all government departments. I agree with all this.

    You’re a nationalist and a statist, why would you agree with such a deregulatory agenda?

    Like Kates, these positions are a self-contradictory mess.

  81. NuThink

    First, it’s not as if pubic spending didn’t have a constituency before Keynes,

    Steve it would have been good to check your spelling of the type of spending before sending it.

  82. yarpos

    Meh, Economists. They are all just guessing in any case.

  83. Destroyer D69

    The RBA, the Tim Flannery of economics with the same rate of successful predictions based on their directives……….

  84. mh

    Lets not complicate this. The RBA has an express mandate to maintain the inflation measure at 2% plus over the medium term.

    JC,
    When did it become an ‘express’ mandate? Is this more legit than a regular mandate?

  85. Crossie

    They are just following the Europeans’ lead.

  86. Crossie

    Where’s the bottom going to be? At this rate we could easily hit 60c US, or worse.

    I believe the AUD sank below 60c US at the start of the Hawke/Keating government when the MX missiles kerfuffle happened.

  87. max

    Crossie
    #3172997, posted on October 2, 2019 at 9:29 am
    Where’s the bottom going to be? At this rate we could easily hit 60c US, or worse.

    in April of 2001 AUD was less than 50c US.

    If China implode AUD dollar is going to be hit hard.

  88. Tator

    JC,
    Best way to have a Waygu steak is to reverse sear it on a smoker. This means hot smoking it at around 100 to 120 degrees celsius until it is cooked to temperature for whatever doneness you want, rested for 15 minutes and then thrown on a hot grill for a minute or 2 to sear the outside. Melt in your mouth steaks using that method. Best cuts are Tomahawk, Bone in Ribeye, Rump, Scotch fillet, Porterhouse.

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