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The Forum > Article Comments > Relying on the Reserve Bank > Comments

Relying on the Reserve Bank : Comments

By Harold Levien, published 24/9/2008

Fighting inflation: a rise in interest rates is a blunt and unpredictable instrument.

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I agree almost entirely with the thrust of this article.
Since shortly after "the recession we had to have" the banking system has been increasing the money supply by at least 12% compound per annum. With the wages of those less well off in society largely restrained to productivity growth the excess money was put towards asset speculation in the housing and share markets by those executives and professionals whose incomes were not so constrained. This was a sure recipe for bubbles and consequent bubble bursts.
How much better off we might have been had we restricted the growth in the money supply to somewhere near the rate of growth of the productive economy and/or had soaked up any surplus cash to finance necessary capital infrastructure such as intercity fast rail for both passengers and freight, intra city public transport, hospitals and our public schools.
I wrote to the Federal Government, and others, pointing out where the system was headed as early as 1998.
Instead the government toadied to the big end of town, and others on high incomes, with tax cuts which simply added fuel to the speculative fires.
Posted by Foyle, Wednesday, 24 September 2008 10:02:17 AM
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The current financial crisis has demonstrated forcefully how stupid it was for interest rates to be lowered so much a few years ago, as this led to the tremendous housing bubble we have just seen. Nevertheless, the left of politics remains wedded to its mantra of borrow and spend, and keeps pushing the line that interest rates can never be too low. The inconvenient fact that mortgages today are largely financed from overseas, and that the increased rates our banks will have to pay to maintain overseas borrowings (if they can get them) means that they may well have to put up rates even when the Reserve is cutting its.

I think I can fairly say that I have NEVER seen anyone in the media advocating increased interest rates.

The comment that Australia should heed at present is Napoleon's, who said:

"You don't worry about the stables when the house is on fire".

What a better position we would have been in if we had followed the example of Norway, who now has a $US500 billion investment fund, instead of our $US500 billion debt!

We run a great risk in the near future of having our debt called in.

In this time of crisis we should cut the standard of living without increasing unemployment by:

(a) having the Federal government increase the tax on petrol to european levels.

(b) have the Reserve Bank set its base rate at inflation + 5%

(c) have state governments increase public transport fares, electricity charges, etc. to the level that not only breaks even but gives a good return on capital.

(d) use the resulting revenue to improve infrastructure out of current earnings.

(e) have the media celebrate a culture of saving, not spending, with celebrations of people discharging their mortgage, etc.

I am obviously a reactionary conservative, but I believe Mr Micawber said it all 150 years ago when he said:

"Annual income 20, annual expenditure 19/19/6, result happiness.

Annual income 20, annual expenditure 20/0/6, result misery".
Posted by plerdsus, Wednesday, 24 September 2008 12:49:02 PM
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Well written article.
A little known fact: The mathematical models that economic theory are based on are based on maximising "Utility" in an economy. "Utility" means "goodness" or "usefulness".
The conditions where utility is maximised is always when Profits are minimised. This is a mathematical identity and holds for all the classic (and Keynsian) models.
It makes sense when you consider the models assume fair, transparent competition. So when profits are low it is because efficiency is high and profiteering is low mening competition is effective. This model, when implemented puts the power of investment in people's hands, not centralised in institutions that operate as dictatorships. This is the argument that puts democracy on the theoretical high ground in economic terms.
For the last decade our politicians have been telling us the economy was going great because profits were up: Never mind that we had sold off most manufacturing instead of modernising or that all the "profits" in the housing arena were due to artifical scarcity and profiteering.
It is time to return to economic basics: Housing, water, food, medicine, education, transport.
First we have to own, build, grow in an efficient, home grown manner, then we'll actually have built some profit instead of just stealing from our kids.
Posted by Ozandy, Wednesday, 24 September 2008 3:51:04 PM
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