My Idea to Save the World from Central Bankers: A Policy for Interest Rates

When all you have is a hammer, everything really is a nail.

From The Australian:

The Reserve Bank considered a surprise rate cut at its Melbourne Cup day policy meeting, but ultimately decided to wait and see how its three cuts since June would work their way through the economy, the bank’s board minutes reveal.

“The board agreed that a case could be made to ease monetary policy at this meeting, but that the most appropriate approach would be to maintain the current stance of monetary policy and to make another full assessment once more evidence of the effects of the earlier monetary easing had become available,” the minutes, released Tuesday morning, read.

What restraint!

How did they manage to maintain their discipline and sit on their hands? I mean, the economy…the stock market…it’s all so bad…

…Right…?

Umm…not exactly. The RBA seems concerned about the consumer. But as I showed you this week, the Consumer Discretionary Index is at 10-year highs. The Consumer Staples Index is at an all-time high.

According to the stock market, the consumer is doing just fine.

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But there is a caveat.

Are consumer-related stocks doing well precisely because of what the RBA is doing to interest rates?

That is, are stocks rallying because of solid earnings or because of lower interest rates? I would say both. Despite the weak aggregate data on recent retail sales, we’ve yet to see earnings downgrades filter through the sector.

And with the whole consumer-related sector trading at long-term or all-time highs, there is no whiff of earnings downgrades coming. The market just isn’t concerned about it right now.

And that’s got a lot to do with the prospect of an irresponsible RBA continuing to pump money into the economy.

Let’s just step back for a moment and consider what the RBA is trying to do. And then marvel that they are getting away with such lunacy with scant criticism.

They’re trying to boost wages and ‘inflation’ (a nebulous term). To do this, they need to get the unemployment rate down. So, the current focus of monetary policy is to reduce interest rates to increase employment, wages and inflation.

This works in text books. In the real word, not so much.

Before I go on, take a look at the RBA board. (Click the link and scroll down.) Now, I don’t like to criticise people or make judgements about them. And I don’t mean to do so unnecessarily here. But these are the people setting interest rates for the nation and who largely determine the value of the currency you deal in every day.

Yes, they are all very qualified and have lots of important titles. But I would seriously question their (or anyone’s, really) ability to have any idea about setting interest rates appropriately.

Also, you’ve got a director of property group Stockland Corp Ltd [ASX:SGP] on the board. Now, I of course would never suggest that an individual as esteemed as this would be at all influenced by a directorship, but it’s not a good look, is it?

I would also like to know what the property portfolio is for each board member, and what their asset allocation is like.

Hmmm…

One of the reasons why monetary policy isn’t working is because of the amount of debt in the system. This is a global phenomenon. It’s not just Australia’s problem. This pushes down the ‘natural rate of interest’.

Without getting too technical, this is a proxy for the return on capital a business can earn from establishing new operations. It’s not like this is a standard figure. It’s more of an aggregate across the economy.

But the bottom line is that low interest rates aren’t leading to an explosion of new industries, business expansion and employment gains. That’s because the prospective returns from doing so aren’t attractive enough.

In Australia, you’re far better off borrowing to punt on property. Tax and government policy are all about supporting property prices. It makes sense that capital will move into property, rather than productive business enterprises.

And you’ve seen exactly that this year, as the interest rate cuts boost property prices.

This is the great lie of monetary policy. The RBA tells us that inflation isn’t a problem. And while that is the case, it will keep rates low or keep cutting.

But if you care to look, inflation is everywhere. House prices, stock prices, gold, bonds…all inflating like crazy.

The biggest advance in monetary policy in history would be for global central banks to coordinate policy to combine asset price inflation with consumer price inflation to set interest rates.

Simple and effective.

But it will never happen. It will expose the whole central banking fraternity as fraudulent elite hucksters, undermining the value of our currency’s purchasing power, to pump up asset prices and enrich themselves.

Regards,


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Greg Canavan,
Editor, The Rum Rebellion

PS: I recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.


Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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