Interest rates and the abdication of economic control

With underlying inflation falling below the RBA’s (Reserve Bank of Australia’s) target range the market expects a drop in interest rates. They seem to forget the RBA no-longer has any influence over interest rates, Mike Smith and the ANZ board do.

The market rates and the RBA rate have been diverging over the past few years, see

chart, as the banks realise that the RBA has no control over their affairs. In the-olden days the RBA was under the umbrella of government and had many ways to control money supply in the economy. Money supply is the key economic control for inflation, economic growth and unemployment, the more supply the more activity, the less supply the less activity. The RBA used to be able to raise and lower banks reserve levels, now the banks self regulate this in accordance with the global Basel agreements, its an opt in opt out system. And the banks used to borrow from the RBA but not any more.

 

So monetary policy is now in the hands of an oligopoly of banks.

The other means the government has to control the economy is fiscal policy, running budget deficits and surpluses to stimulate or reign in the economy. That is also no longer an option as both sides of politics have decided only a surplus is desirable for political advantage. So we have no economic management at all, our boat is adrift and the plutocrats of the major banks are making massive profits from the storm they create.

This is scary because the RBA sees indications of a slowing economy, a recession on the horizon and wishes to stimulate spending and investment with lower interest rates, but the parliament and the major banks are doing the opposite they are taking money from the economy to pay down debt (to banks) and the banks wish to increase their profits so are pushing up interest rates. This also moves money from the many to the few further stifling markets.

So the recession we are about to have will be caused by the greedy banks and an idiotic (both labour and liberal) parliament. Welcome to the Plutocracy where the rich get richer and the poor poorer.

David J Campbell

all Data sourced from the RBA

Also see:

You are subjugated by interest