Reserve Bank of Australia (RBA) Governor Phillip Lowe has demonstrated that the RBA and central banks in general are simply unable to deliver results. With the Official Cash Rate sitting at 1% on the back of consecutive 25 basis-point rate cuts in June & 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.”
A lot of uncertainty from the man who keeps the keys to the monetary printing press and lender of last resort.
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%. If your bank had deposited your money with the ECB and you come back a year later, there will be 0.4% 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 and Swedish and Swiss national banks. Few mainstream commentators nor pundits have offered any real kind of explanation other than trotting out low inflation & 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. Despite a sweeping attempt to flood the market with yen, since 2012, Japanese inflation cracked 2% briefly in 2014 but has remained below 1.6% since. As seen among its debt-laden peers, prices simply aren’t responding to central bank instruction; efficacy is rapidly declining.
What about the RBA? The RBA states that it ‘contributes to the stability of the currency, full employment and the economic prosperity and welfare of the Australian people.’ Assigning that much power to a single, unelected organisation is not particularly democratic, especially since the RBA exercises a legal monopoly on currency issuance according to the Reserve Bank Act 1959.
The RBA’s super-relaxed post-GFC monetary policy echoes the Japanese story, where lowering interest rates, from north of 6% during the crisis to 1% now, has had almost no inflationary effect, most notably from 2015.
A good question is, ‘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 AUD holds only one sixth of its value from 20 years ago.
When the RBA slackens policy further, the 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 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. SHOW ME THE MONEY!
Central banks in general are incredibly secretive, and the world’s most powerful, 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 kiboshed. 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 a us a taste of the main course, revealing the Fed in fact had provided more than $16 trillion 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 on the RBA the same amount of scrutiny 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 experts in the occult, but by the same standards the taxpayers are.