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The Forum > General Discussion > The RBA's Scortched Earth Policy = Bad Economics

The RBA's Scortched Earth Policy = Bad Economics

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The board of the RBA is predominately made up of people who were directors or chair persons of large corporations.There is only one woman on the board and a single Govt representive.The board over several yrs is determined by the treasurer of the day.

Wayne Swan has moved even further to make the RBA Board more independant of Govt influence.

All economists acknowledge that monetary policy of just increasing interest rates is a very blunt instrument which destroys both good and bad industry,but no attempt has been made to find obivious alternatives.There are other ways of selectively taking monoey from the economy rather than just punishing individuals who can least afford it.Nearly all of us pay into super,so why not take extra super from people's wages to slow the economy rather than giving it to greedy banks and the RBA?This money can be then directed into infrastructure projects to further enhance productivity.

The real bogey the RBA is trying to address is the balance of payments deficit.It is now $620 billion or nearly $60,000.00 for every working person.We have had a more aggressive tarrif reduction regieme than most and are now suffering the consequences.Surely it makes sense that every country like every household is allowed to balance imports with exports so we can offset higher interest rates.

Already the USA is in recession and we will follow suit if the RBA does not deviate from their singular obsession of just raising rates.
Posted by Arjay, Saturday, 15 March 2008 6:40:22 PM
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Arjay – Taking more out of your super is not an obvious alternative as you put it. Interest rates are going up because of inflation due to rising oil prices and the associated effects it has on industries such as transport who have to pay more for fuel. So they then pass on the cost to anybody who uses their services!

Interest rates are put up so people borrow less and thus spend less and thus reduce pressure on prices and inflation.

Taking money out of super will not do anything as far as I know! If you could expand on your revolutionary idea I would be very interested to hear it! There might even be a Nobel prize for economics in it for you.
Posted by EasyTimes, Saturday, 15 March 2008 9:03:16 PM
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Easytimes,I'm talking about putting more money into super.When the RBA takes money from the economy,most of it just ends up in limbo while a percentage goes to the Govt as dividend.Rather than increasing rates just increase the contribution to super by employees and have less of a rate increase.It has a two fold positive effect.It reduces inflation and increases future savings for investment like things for infrastructure.

In a previous post I've postulated that the same can be done with Govt surpluses from the mineral boom.Put the money into super for everyone so it cannot be spent immediately thus adding to inflation,but can be used for infrastructure bonds that people can cash in as they retire.

It won't happen because Govts and the Multi-Nationals are just too damn egocentic and greedy.

Another recession will see thousands of lives destroyed and incentive for the innovators to build businesses.It will take another 10 yrs for us to recover and in the meanwhile China will buy up our weakened enterprises.
Posted by Arjay, Saturday, 15 March 2008 9:38:20 PM
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please help...the current interest rate rises seem like bulldozing a house to save it from a bush fire. The economy is running two tiered so why not increase costs on mining and leave the rest of the economy alone. Unlike interest rates this will not put upward pressure on wages.
Another anti-inflation measure would be to stop using our very scarce resource (water) on rice & cotton, thus reducing the effect of the drought on food prices, perhaps free up more labour for the mining industry
Not an economics student, so be gentle on the answers
Posted by Earll11, Sunday, 16 March 2008 8:10:30 AM
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Economics= the justification for too little intelligence in chasing too much profit
Posted by HenryVIII, Sunday, 16 March 2008 11:53:08 AM
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i think economists are like the weatherman....accurate only when it's the bleeding obvious to everyone and useless otherwise
Posted by Steel, Sunday, 16 March 2008 6:11:36 PM
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I don't see the point of the comment that the RBA has only one woman on the board; Maggie Thatcher was one too many female Prime Ministers and proved conclusively that women are just as stupid and vicious as men when it comes to economic policy.
Posted by HenryVIII, Sunday, 16 March 2008 6:54:12 PM
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Interest rates really only hurt if you are borrowing. If you're a saver well it's all to the good. After learning about the rise of Toyota I'm a firm believer in self financing expansion.

The problem is with most businesses boom times means no efforts to control costs whatsoever. This is the time for trimming fat. When high interest rates hit and companies have to cut back what often gets cut is muscle, not fat. Most organizations find they're trying to work harder while having a tight arm around their windpipe. That's not a recipe for success.

Higher interest rates are a blunt instrument. Economists point to econometrics as if its a science, but if its so scientific why does it not have predictive power? If those who suffered from economic theory could take out malpractice suits against economists I think there would be fewer economists. I think most people would agree that this would be a good thing.

Whilst I agree it is like a scorched earth campaign I would also suggest that individuals and companies should have more foresight than the market usually rewards. There's no excuse for myopia in business. Boom and bust is hardly a new phenomenon.
Posted by Ian in Tokyo, Sunday, 16 March 2008 8:00:05 PM
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Well let's go back to the functions of money,ie the medium of exchange,a store of wealth etc,but no one mentioned that money itself should become a commodity,that is allowed to distort the functioning of the real economy.

Money is only the oil that lubricates the economic engine,but now we have let the oil be the salient ingredient,hence we have the current market failures.It is the banks/money markets who are the gate keepers of liquidity and they manipulate the market to their own ends.

There are better ways than the repeated failures of recessions that ordinary folk suffer,while the money sharks make merry buying up bargains.
Posted by Arjay, Sunday, 16 March 2008 9:28:15 PM
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Newly elected, born again PM:07 Rudd and his shell-shocked Treasurer Winnie-the-poo Swan, have much swatting to do, preparing for the forthcoming May Budget. It will be a bottler. Razor's honed, the demonic slasher-gang have been canvassing every Government Dept and Ministry, to trim fat, weed out excess's and produce a credible balance sheet that would either make or break the dynamic duo. Defence spending, pensions, welfare, benefits, child care,maternity leave etc will undoubtedly be on the high end of the grim reaper's agenda !

Promised rebates, tax cut's for the wealthy and a measely $ 23 rise for the batttler,are going to offset some of the grandiose schemes Labor's back-room henchmen have been plotting and planning, nigh on eleven years in the Political wilderness.

The embattled Federal Reserve Bank has served Oz well. It's function, despite what Politician's and Government's of the Day would wish - is strictly INDEPENDENT. It's role - safeguarding our National Financial/ fiscal interest at home and abroad. Over the decades, the RBA have kept us on the straight and narrow, and despite Global upheavels, bust's in the Stock markets, recessions and precarious downturns, successive Governor's and Board of Dir, have steered us in the right direction, provide monetary security and ensured Aust's wealth and prosperity is intact, albeit expanding twofold !

The RBA is not only attuned to ructions in Timbucktoo - it has eye's and ear's in every State Capitol, regularly consults with G8 players and has exchange Officer's based in the IMF, OECD, World Bank and dozen's of Finiancial Institutions big and small. It's analyst, researcher's and economist's are the brightest Worldwide - we should be proud.

For those with short memories, Christmas 07 was a bonanza. Queenslander's splurged a record $ 8.6 billion on shopping alone. A record $ 63.5 billion was spent on Residential Property. Over 27 % was speculative.

The plastic-fantastic credit was the Royal-flush. Qld's economy out performed the rest of Oz by 5.25 %.What of the rest of the Nation ?Remember there was a Mining Boom and Rose Porteous Hancock ploughed her $30 million mansion into oblivion, and
Posted by shellback, Monday, 17 March 2008 3:36:54 PM
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quickly rebuilt a monumental sea-change Shangri-La on a double size canal block - much to the envy of Perth's Rich and Famous !!

Come July, the US sub-prime disaster struck. It spread World-wide, impinging on all the National Bank's and credit houses. Suddenly, hedging funds and speculative script became worthless. Who dived in with a rescue package - the maligned RBA!! It restored credibility, confidence and a full measure of the might of Federal resources, overlooked by many. It plugged Corporate, small business entrepreneurs, Mom/Dad speculators etc from insolvencies and bankruptcies. Insolvencies cost Oz economy $ 10-12 billion a year. A whopping 3-5 % of GDP.

For the past 15 years RBA has kept inflation at 2-3% target.This has inadvertenly protected people's savings and long term Superannuation from eroding in value - in real dollar terms. Higher inflation leads to wages, goods and services spiralling out of control like some South American economies. People collected their wages in wheeelbarrows. Crime and the Black market prospered in Foreign currencies. In the end it wasn't worth going to work unless one was paid in US dollars. Rebellion, followed Army dictatorships.

Current Account Balance's must be looked at in perspective. It isn't all bad news - imports of Aircraft, machinery, computers, high tech medical equipment are long term and leading edge. Broadly, Oz must stay competitive.

Compared with OECD Countries, our economic growth is better than most European, UK and NZ. We're lagging behind the robust Asian tigers.

Whinging about the Bank's is retrograde. Without Bank mortgages, ATM's, credit cards, security, other facilities, you'll be paying higher Brokerage fees, managerial fees, Insurance and still be hiding your funds under the bed ??

Finally, we are now paying for the gross exuberances. You cant spend money you haven't got.

Dont despair, where there's pain, there's GAIN ??
Posted by shellback, Monday, 17 March 2008 4:05:50 PM
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Ian in Tokyo – “After learning about the rise of Toyota I'm a firm believer in self financing expansion.” Sure it would be great if we all had the Japanese business model of the Keiretsu which has a bank at its centre but many of these business models are more trouble then they are worth as we saw with financial problems in the late 90’s. Sure Toyota is a success but there are many other Keiretsu which have stumbled along due too the poor business model of buying off only your own members even when the products/services that were offered were of a poorer quality or more expensive then those offered by a competitor. Toyota is the acceptation not the norm.

Arjay – Sorry I misunderstood your question before.
I think a great way to avoid some of the problems people are facing with rising interest rates is teaching them basic financial planning. People who have not budgeted for a rising of a few % in interest rates are there own worse enemy. The best option I think for people who are not well versed in economics is too lock in there home loans at a long term fixed rate. This way they know exactly how much they are going to need to pay each month no matter what interest rates do.
Your idea for taking money out of wages and putting it into super is good but it does not tackle the business side only the individual side. It would also be a political hot potato because who would decided when to take extra money out of super? How much? And when do we reduce back to 9%? And then in low inflation and growth why not drop in below 9% to encourage spending? How does this effect the overall monitory and fiscal policies? Its too complicated and too much like hard work for the government and they leave themselves open to attacks from alsides and from all different groups
Posted by EasyTimes, Monday, 17 March 2008 4:30:51 PM
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Simple problem. Our inflation will increase as the price of oil and international price of wheat increase, and increase in oil and wheat prices are accelerating. Slamming people and small businesses with higher interest rates because of this will not be productive as it cannot reduce inflation as it won't change these prices, but will merely add to inflation. And the main banks jump on any old excuse to magnify their massive profits by increasing interest rates-this is inflation. And thus we head for recession.

Now short-term pain may lead to long-term gain, or a second Great Depression. But one thing is as sure as death and taxes. Short-term economic pain leads to expensive and inflationary social problems including crime, and this may not decrease once the pain has stopped, as young folk have learnt that crime can pay.

And finally; we have a mining boom. We export copper to China. we import the copper turned into copper wire, tubes and bath-taps. It means there is a net outflow of money DURING our economic boom. That too is inflationary. So how about a bit of down-stream processing going on in Oz? We would need tariffs as workers in China do it on $1 USD a day.
Posted by HenryVIII, Monday, 17 March 2008 5:58:32 PM
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*We have had a more aggressive tarrif reduction regieme than most and are now suffering the consequences*

Actually not so Arjay. Our trade balance is not too bad, its our
current account that is the problem. Australians are very bad
savers, compared to other nations. So our banks have to borrow
around 50% of their funds from overseas.

That was all well and good while international credit was plentifull
and cheap, but that is no longer the case. Even if the RBA put
interest rates down tomorrow, banks still have to pay more for that
50% on international money markets. Not only that, but they have
to cover the appr 7 billion of doubtfull debts that they have been
left with, as numerous Aussie companies have crashed. ( Centro,
Countrywide, Allco, ABC etc)

According to financial experts, the banks are losing money on
home loans, as they are not passing on the full cost of funding.
They won't do that for long, so unless costs are passed on, you'll
land up with a credit squeeze. In other words, try to buy a house,
then answer will be no. So housing values will drop.

The RBA is just one player in this. At the end of the day, as
we are large borrowers from overseas, we are at the mercy of the
lenders and how they perceive the risk of lending Australia money.
Posted by Yabby, Monday, 17 March 2008 8:25:27 PM
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Earll 11 does pose a pertinent question.Why don't the mining giants also pay?China for example pays 2c a litre for our natural gas .They process it and we buy it back at a retail price of 70c a litre.Thirty five times the selling price!Are we in the land of Aus stupid or just pushovers?The Arab countries don't sell themselves off this short and have wealth beyond our wildest dreams.

In the early nineties,we had a population of 16 million and a GDP of $6 Billion,we now have a pop of 21 million and a GDP of a million, million dollars:$ 1,000,000,000,000.00.Divide this by the pop and we should have an average of $47,619.00, divide the 6 billion by 16 million and we have and average of $37,500.00.Many people are worse off now than 20 yrs ago,yet our GDP to pop ratio is much higher!

My point is this,the RBA has more independance and power,yet they as an entity have no accountability to the Australian public.It is a very cosy arrangement for the Govt of the day to blame all our economic woes on a body of bureaucrats that are virtually faceless and unaccountable.They still get paid if they stuff up or not.The pollies are letting themslves of the hook by forsaking their responsibilities.

If the RBA as board stuff up,then they should be accountable to the Aust public!
Posted by Arjay, Monday, 17 March 2008 8:26:29 PM
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Arjay-if what you are saying about Australia selling natural gas at 2c and buying back at 70c, then Australia-DO I HAVE A DEAL FOR YOU! See, I have this great old bridge in London, which can be raised to let the ships through. It's a renovator's dream and I can ship it out to you for ONLY 2500 billion Pounds Sterling, and it would go great across the Yarra River-just think of the tourists it would bring............Then there's that old castle of mine, also in London, vintage stuff built around 1066........... Go great at Alice Spring.........
Posted by HenryVIII, Monday, 17 March 2008 9:53:25 PM
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Arjay, I havent heard of us buying back gas from China, but yup,
in the early 2000s, they got a bargain, when they signed a 25 year
deal. New contracts are at much higher prices btw.

I questioned it, but recently heard an interview with the guy
signing that deal, so understood it a little better.

In the late 90s, oil was worth 10 bucks a barrel. The dotcom boom
was on, as commodity producers, Aussies were considered behind the
times. Iron ore was virtually given away, the Japanese had stitched
up that market, by bringing in Brazil. Its fairly ruthless out there.

The NW shelf had heaps of gas, but few customers. To unload that gas,
customers have to invest billions of $. For the NW shelf to proceed,
they could not do it without firm agreements, nobody would lend them
the money.

Just before the resources boom started, China agreed to sign up
for 25 years, at low prices. The NW shelf partners grabbed it, as
nobody else would commit themselves. It meant that adding further
processing trains could go ahead.

With hindsight its easy to point out that they were wrong, but nobody
can predict the future. 6 major oil companies were involved in that
deal, so I can only assume that their judgement at the time was
the best knowledge that was available.

Govts don't buy and sell gas, private companies do
Posted by Yabby, Monday, 17 March 2008 10:24:52 PM
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Yabby “The NW shelf had heaps of gas, but few customers.”

Good post Yabby. I have been reviewing this thread for some days and appreciate your reminder of the “facts” that “the market place” is fickle and to some degree “elastic”.

“With hindsight its easy to point out that they were wrong, but nobody
can predict the future.”

And that includes the climatologists.

Re “Govts don't buy and sell gas, private companies do”

And the problems start when governments think they should. All that economic “power” concentrated in a single monolithic entity leads to the fabled corruption which becomes the hallmark of every dictatorship.

To get back to the topic

Using interest rates to regulate inflation is like a micro surgeon relying on a chain saw to perform operations, it might work but the damage inflicted kills the patient.

Government needs to understand it cannot effectively manage the economy, it can only monitor it and try to keep it moving in the right direction, like a tug boat nudging a super tanker.

One of the best ways for government to operate is to progressively withdraw from supporting sheltered workshop and pretending it is contributing to national well being by propping up, as example, defunct car companies (because when they do work like it is like the tug boat pushing head on against the momentum of the super tanker) and leave business to largely rise and fall on its merits.

Providing a flexible environment with fewer regulations and fewer secondary agendas (like the Melbourne 2030 fiasco) are the sort of actions which produces the opportunities in which productivity improvements can evolve to the benefit of everyone, especially the tax payer

One area of massive opportunity is our taxation regime. Get rid of FBT and make the whole cycle of taxes easier to manage for the benefit of both the tax payer and the tax office, that will help productivity a heap.
Posted by Col Rouge, Monday, 17 March 2008 11:51:23 PM
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I think that the superannuation idea would work to control inflation, but not the real problem of market cycles.
Posted by freediver, Tuesday, 18 March 2008 9:58:22 AM
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One thing is certain ,as the pollies forsake their responsibilities,the focus should then turn on the RBA.The media needs to do their bit and question decisions made by RBA bureaucrats who really have our future in their hands.

It is just too snug and cosy for both the major parties to say that interest rate increases are out of their control.Govts create the environment for rate changes and they can do much in the way of fiscal policy to influence monetary policy.

I believe in a capitalist system that is balanced,but also believe that the current corporate regieme and and big Govt are working against the small innovators in business.

It would be interesting to see how many of our current Federal Labor Pollies could constructively enter into this discussion.Peter Garrett for example,seems to know nothing beyond enviromental cliche's,yet people like him are elected to run the country.
Posted by Arjay, Tuesday, 18 March 2008 9:01:14 PM
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But the politicians don't say it is out of their control. The Kruddmeister has been saying he will cut back government spending to reduce inflation, while conceding that the tax cuts will contribute to it:

http://www.ozpolitic.com/forum/YaBB.pl?num=1173068900/670#670
Posted by freediver, Wednesday, 19 March 2008 11:56:57 AM
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The more direct control over inflation - interest rates, was handed to an independent body because of the temptation of politicians to abuse them for short term gain. This has happened in the past. If the public does not understand how it works you can't expect politicans to manage it well.
Posted by freediver, Wednesday, 19 March 2008 12:00:45 PM
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Well its a global problem, far beyond our RBA. As large borrowers,
we will be affected, including higher interest rates.

What you had in the US is fraud on a large scale. Now
you have a capital drought, with estimates of up to 1 Trillion$
lost. Lenders won't lend at low rates like they used to. That
money that went from the Arabs to Citibank, I gather they are
paying 11% for that. What the Fed says about rates is worth
nothing, if there is no money to lend.

http://www.businessspectator.com.au/bs.nsf/Article/The-capital-drought-CV48P?OpenDocument

Given that we don't save much in Australia, as there are no tax
incentives to save, we borrow from that overseas pool. So we will
have to pay more or borrow less, its as simple as that.

This is not about liberal or labour.
Posted by Yabby, Wednesday, 19 March 2008 2:08:48 PM
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Most western countries do the same thing we are doing with our reserve bank. Sure we are a small player, but the exact same principle applies.

BTW, it is quite easy to get a significantly different inflation rate here compared to other countries. It's just that most countries try to achieve similar rates.
Posted by freediver, Wednesday, 19 March 2008 2:15:02 PM
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The problem with putting the money into super is that it then gets invested somewhere, usually in the local economy. So it wouldn't reduce inflation either. Economists usually assume that retail consumption demand drives inflation cycles. This is usually a reasonable assumption, but it wouldn't be if the money was channeled into investment. You wouldn't eliminate inflation, you would just change the cause of it.
Posted by freediver, Wednesday, 19 March 2008 2:29:58 PM
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Easy Times, I think you're a little confused as to what I was referring to. The Toyota Production System and the Keiretsu System are two entirely different animals. One is a system of production that cuts waste, and and the other is a system of cross shareholding with a bank as the main lender.

The Toyota company's success came as the result of its system of production, one which is now marketed in the West as Lean Production. Therefore it is surprising that you read Japan instead of Toyota in my post and that you talk about boom and bust speculation rather than the merits of the Toyota Production System.

While it is true that the Keiretsu system came unstuck in the 1990s it virtually identical to the way that the US economic system is coming unstuck right now. The difference being that the Japanese political system tried to cover it up and push it under the carpet and hope it would go away, which it did just recently.

I'm not about raining on your parade but please if you are going to critique my points please do so by working on what I'm actually talking about. You're obviously an intelligent person and there's much that I could learn from engaging in a discussion with you, but not in this fashion.
Posted by Ian in Tokyo, Thursday, 20 March 2008 12:53:51 PM
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I was listening to parliament today and yet another cliche slipped from Kevin's mouth,"rubber on the road" obiviously from his raging youth.We've had ,"fork in the road, bridge too far" etc.Can we now rename Kevin as the "Cliche Kid"?

The Cliche Kid is tough and strong,
The Cliche kid just can't go wrong,
The Cliche Kid eats "me too" bars,
And that can't be far from wrong.
Posted by Arjay, Thursday, 20 March 2008 6:37:27 PM
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