Or why we are broke.
The Reserve Bank Act defies the most basic
logic in economics - the law of supply and demand. It is also most profoundly contradictory that
the most essential component of the market, the price of debt has to be
determined by regulatory fiat – surely the market should be able to sort that
out.
At a conceptual level the Reserve Bank Act
and the mediaeval practice of bloodletting have the same basic premise, that
draining the essential life fluids from the fevered body will make the patient
well. All it achieves is to weaken the
body further. Deathly pallor is mistaken
for a fever cured.
The most basic failure is that when some
element of the economy is over-heating the cost of debt is increased
indiscriminately draining economic energy from the innocent and the
guilty. The RBA slows the economy by
transferring wealth from the productive sector of the economy to the banking
sector.
Unfortunately it drains money from the
productive sector and from households far more effectively than it drains money
from the speculative sector. The
speculative sector of the economy is driven by higher returns and higher risk
and often the risk is displaced onto the lender through default when things go
wrong. The mortgaged businessman or
householder cannot escape so easily.
Fundamentally the Governor of the Reserve
Bank raises the cost of borrowing to reduce demand for new debt to reduce
inflationary pressure in the economy.
This is perverse for while it is targeted at reducing the creation of
additional debt it also punishes those who already are in debt. The indebted cannot immediately reduce their
indebtedness so must pay the imposed cost of borrowing. Their demand for debt is highly
inelastic.
This is where the true perversity of the
Reserve Bank becomes apparent. At the
same time that the Governor increases the cost of debt to existing and new
borrowers he also increases the rewards to lenders. It is at this point that the basic
illogicality of the Reserve Bank Act becomes clearly apparent, the Reserve Bank Act
incentivizes the introduction of additional debt into the economy.
The higher interest rates draw in new
lenders with a higher resistance to risk, along with the careless and the
greedy. These new lenders draw in their
equivalents among the borrowers. So
putting the price of money up makes the problem much worse by increasing the
riskiness of all debt funded activity.
It also drains resources from productive activity by increasing the cost
of debt while fuelling speculative activity by increasing the supply of less
risk averse lending. The past decade is
testimony to that.
A deeper fact is that this whole artifice
is a substitute for the fact that the government has relinquished its right to
issue currency to the banks and uses the Reserve Bank Act to moderate the rate
at which the banks create it. This
doesn’t work.
The foreign banks have also abused the
process to inflate parts of our economy, principally property and shares, so
that they can push more debt into our economy and in doing so expropriate our
Nation’s wealth creating ability. We
have been stupid enough to think that this is a good thing.
The difference between the overnight cash
rate in Australia and New Zealand over the past decade meant that Banks could
borrow in Australia at a low interest rate and lend in New Zealand at a higher rate. They would be stupid not to. We are stupid to encourage them to.
In the past several decades it has only
been a limited range of economic activity that has been inflationary. To illustrate this, the decade 2000 to 2010
saw property values treble yet government figures indicated that the Consumer
Price Index was never above 3%. So
interest rates stayed relatively low while the returns on speculative
investment soared. The real rate of
interest on debt against property was in the order of -10% annually. This meant that anyone with a mortgage was
getting 10% growth in asset value after the cost of debt. Everyone else was paying interest at about
2-3% more than the underlying economic activity warranted.
We are now in a position as a result of the
Reserve Bank Act that the entire gross export earnings of the dairy industry is
consumed by paying the interest on all of the debt this country has accumulated
over the past two decades.
And we wonder why we are selling our land and our national assets to ;pay the bills. It is because we are governed by the stupid and the greedy and the doctrinaire.
The
Answer is simple
The simple fact is that if the Governor
wants to increase the cost of money but not increase the price of money then
the Governor should be able to impose a tax on borrowing. If the governor wants interest rates to provide
a 4% return to the lender but impose a 6% cost to the borrower to dampen both
supply and demand for debt then the only logical way to do it is to impose a
tax equivalent to an annual interest of 2% to establish the difference between
price and cost.
That resulting tax income could be put to
all sorts of good uses within the economy and it would achieve exactly what the
government intends to achieve.
To be really subtle the tax would need to
be variable according to the target sector of the economy. This might sound complex but it isn’t. Banks achieve this level of differentiation
simply through the nature of the security against which the loan is raised.
But again it is not that simple.
It is not that simple because the Reserve Bank
Act is not the only fundamental flaw in our monetary and fiscal world. But more on that some other time!
