Flat White

The RBA has lost it

7 September 2019

4:07 PM

7 September 2019

4:07 PM

Reserve Bank of Australia Governor Phillip Lowe has demonstrated that the RBA and central banks, in general, are simply unable to deliver results. With the RBA deciding on Tuesday to hold the official cash rate at one per cent, slow wage and consumption growth are cited as but a couple of the many reasons for maintaining such a loose monetary approach. The RBA is certainly under more pressure than ever, as the economy recorded the worst figures in a decade, with four consecutive quarters under 0.5 per cent GDP growth, and GDP per capita lower than a year ago. On the back of consecutive 25 basis point rate cuts in June and July, Lowe recently told the parliamentary economics committee:

It’s possible we end up at the zero lower bound although I think it’s unlikely.

That’s plenty of uncertainty from the man who keeps the keys to the monetary printing press and is the lender of last resort – added to the gentle, glowing and entirely lacking economic detail puff piece in the Channel Nine tabloids this weekend.

Thankfully, interest rates are back in focus after the Governing Council of European Banks (ECB) doubled down alongside a chorus of others in commanding negative interest on overnight deposits, setting rates to -0.40 per cent. If your bank had deposited your money with the ECB and come back a year later, there will be 0.4 per cent less than what was put it in. People used to put money in the bank to keep it safe. What extraordinary times we live in.

Denmark was the first to set negative rates, back in 2009, followed by the ECB, Swedish and Swiss National Banks. Few mainstream commentators nor pundits have offered any real kind of explanation other than trotting out low inflation and slow wage growth as rationales.

Interest rates are the price you pay for satiating monetary demand, which is why in the free market the rate is always positive. There is always a cost for convenience. Only central bank manipulation, through buying debt securities, synthetically raising debt prices and lowering yields, and not free-market principles, leads to negative interest rates.

Japan, a studious acolyte of the school of the most relaxed and manipulative monetary policy (quantitative easing), has accumulated the greatest debt to GDP ratio in the world. However, despite a sweeping attempt to flood the market with Yen, since 2012 Japanese Inflation cracked two per cent only briefly in 2014 but has remained below 1.6 per cent since. As seen among its debt-laden peers, prices simply aren’t responding to central bank instruction. Central Bank efficacy is rapidly declining.

The RBA’s super-relaxed post-GFC monetary policy echoes the Japanese story, where lowering the cash rate from north of six per cent during the crisis to one per cent now has had almost no inflationary effect, most notably since 2015.

If the cash rate isn’t impacting inflation, what’s it doing? Devaluing the currency. If you measured the Australian dollar only against the American, you would see relative stability and the RBA gets a round of applause. But as all central banks move in relative lock-step, currencies should be measured against long-term measures of value. When compared to the gold price, it’s a different story. The Aussie dollar holds only one-sixth of its value from 20 years ago.

When RBA slackens policy further, AUD value in gold will decline accordingly, leaving ordinary Australians on the hook for massive asset devaluations in the event of a correction.

On that note, Australia’s 80 tonnes of gold reserves, which are almost entirely held in The Bank of England, haven’t been subject to an audit since 2013. An audit is scheduled however, for later this year. The 2013 audit itself was suspect, as the BoE gave the RBA only partial access to the Australian Gold Reserves. Until 1996, the RBA laid claim to 247 tonnes of gold, but subsequently sold the majority to invest in speculative financial assets. Nice one.

In a bid to improve transparency (just kidding), both the RBA and the Bank of England & RBA declined to release the results of the 2013 audit on the basis that it “would, or could be reasonably expected to, cause damage to the relationship between the RBA & the BoE”, despite several freedom of information requests. We have seen no actual evidence that the RBA possesses the 80 tonnes of gold it lays claim to, and failure to release weight lists and records from Australian gold transactions in London gold market doesn’t induce confidence.

Central banks in general are incredibly secretive, and the world most powerful CB, the US Federal Reserve, is no exception. In 1993 Congressman Henry Gonzalez, under new President Bill Clinton, tried to offer scrutiny in the form of legislating that the Fed would be subject to an independent audit, videotaped meetings and releasing detailed minutes within a week of their occurrence. But Gonzalez, like Icarus, flew too close to the sun and, in true Clinton fashion, the bill was kyboshed. It’s unlike a Clinton to object to expanding governmental oversight, so one has to regard the decision with a great deal of suspicion.

The Fed’s first audit in 2011 gave us a taste of the main course, in fact, had provided more than $16 trillion had been siphoned off in secret bank bailouts during the GFC, including relieving the banks of the same mortgage backed securities that started the crisis in the first place.

Unfortunately, the US’ supreme audit institution, The Government Accountability Office (GAO), is currently forbidden from auditing several key aspects of the Federal reserve, including transactions for or with a foreign central bank or government. Hopefully, soon we could take a look at the books.

It is high time we place the same amount of scrutiny over the RBA, that the Australian Tax Office employs on ordinary citizens. There is no excuse for the lack of transparency and systematic currency devaluation that the RBA enables. The RBA board shouldn’t be treated like masters of the occult sciences, but as mere mortals, capable of error.

Alexander Cameron is a Sydney University finance and banking graduate. You can find more from him and his brothers at www.carnagehouseproductions.com.

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