Welcome to Finance and Fury. There will be two parts to this episode. Firstly, do we even need Central banks and what is an alternative, then secondly, as they are probably not going anywhere anytime soon, how to negate their negative effects on your own life. If you didn’t listen to last weeks episode, might be worthwhile to understand more of the impacts of CBs

Recently – the initial stages of the RBA Review were published – titled ‘An RBA fit for the future’, made 51 recommendations

  1. The key objective of the review was “to make the RBA the world’s best and most effective central bank into the future”.
  2. To do this – they recommend to reinforce the governance, monetary policy framework, culture and systems of the RBA
  3. Two separate boards – the review recommended the establishment of two separate boards, with one focusing solely on monetary policy and the other targeting governance
    1. Monetary Policy Board – focus on the cash rate and would retain the flexible inflation target of 2-3%.
      1. consist of the governor, deputy governor, Treasury secretary and six external members, with the governor as chair.
    2. Governance Board would “be established to provide guidance and oversight for RBA management in the running of the organisation,” the report identified. It would have no role in deciding monetary policy.
      1. The governor, chief operating officer and five external members would sit on the board, with an external member as chair.
    3. The Treasurer supports two boards rather than one because you can fill each board with the types of people you want for each role – rather than one board that oversees the governance and the monetary policy – breaking it up  
  4. Decrease in meeting frequency – Recommended nine meetings each year of the Monetary Policy Board – a decrease from 11 currently – apparently this will enable more in-depth discussions – because cutting down 3 meetings a year – remember from 11 to 8 –
    1. They make it seem like the current meetings and decisions are done over drinks at a lunch, where they simply flip a coin on what to do with interest rates – but yet, decreasing the frequency of the movement of interest rates will somehow better meet the market demand for money – which would be more dynamic if it was based on market conditions
  5. So, the recommendations from the RBA review make it more top heavy and less responsive or dynamic to the economy
    1. In all of this, the review states that they want the RBA to be independent – but everyone on the board will be hired by the government – and can be fired by the government – so it will be interesting how independent these board members are – as if they were to say, suggest a gold backed currency, how long they keep their job

Do we need a central bank?

  1. Austrian school of thought says no – Mises and Rothbard – titans of Libertarian economics – view is that central banks exacerbate the cycles of bubbles fuelled by easy money – then create the crash by tightening money policy – they have offered alternatives
  2. There is nothing wrong with the original concept of a Central banks – if they are passive and they are just in case commercial banks need short term liquidity – it does provide a market function – but can create moral hazard at banks
    1. Central banks, particularly the Fed at its introduction were marketed and seen as a saviour from financial collapses – the whole justification for many nations forming their own CB was to create financial stability – but in the end they didn’t – and financial instability has become more frequent and worse – so what is the point of having one?
    2. Especially since the activist era of CBs are no longer seen as the saviour of mankind – Every crash, it has been said that they saved the economy – but the evidence is that they have made it worse over time – when the Chairman of CBs like Bernanke and Volker admit to it –
  3. can sum up the case for abolishing the central bank rather quickly.
    1. It would put a real limit on Governments to make them smaller, with less influence on our lives – Without the ability to expand the money supply at will, they would have to prioritise spending
      1. It would probably also change the political culture – Top heavy bureaucracies would collapse – no longer be able to live out the false premise that increased spending can solve problems that the previous level of spending couldn’t – under the current system, when government fails to provide an outcome, they then just need more money the next year and that will solve the problem – but this repeats until budgets continue to inflate but yet the problems remain
    2. Governments can pretend to be effective in a host of ways – they write their own PR – so they can say they are protecting you from poverty, solving climate change, and the list goes on – but one thing that government cannot do is stop prices that want to fall from falling, all else remaining equal
      1. Think about this scenario – prices for any good under a free market has a tendency to drift towards the point of demand depending on the quantity supplied – demand for most goods is based on the populations desire and ability to purchase the good – this can be influenced by governments through support payments – providing payments to people to spend – but the costs of the goods is also influenced by the supply of the product, which is directly impacted by government regulations
        1. Think about food, or any good – look at the farmers in the Netherlands – the government was trying to introduce policies that would cripple farmers in the nations, all for the UN2030 targets – if they were successful, food prices would have sky rocketed in the nation – with nothing to do with the money supply – for their sake they managed to avoid this by voting in the farmer party – this could certainly have other consequences – but governments probably have more influence over the price of goods and services than does monetary policy
      2. Regulation and creating monopolies is probably more impactful on inflation as the expansion of the money supply – so ending CBs is not going to solve all problems – but ending CBs would reduce the governments capacity to fund pointless regulation and expand their function and oversight of the economy
    3. This brings us to the biggest point – A government that wages war on the price system is one that is itching to lose a fight – all else being equal, due to technology and greater free trade – hence they need to sabotage the economy to get their desired outcome – and to provide support payments to try and stimulate demand
      1. The inflation targeting is a violation of your desire for cheaper and better goods –
      2. But mustn’t deflation be avoided at all costs? Politicians’ and central banks’ obsess about this – deflation is the death of the debt based economy
      3. This is reflected in their never ending bailouts in times of crisis, and about stimulus at all times reflects the flawed views about consumer price deflation – if the prices in the economy – particularly property prices were to deflate – governments are left with higher levels of real debt – along with the population
        1. So, deflation is horrendously costly to those in the economy most indebted – but what about in real terms for those who are fiscally responsible and not over leveraged?
        2. A comprehensive study by the Bank of International Settlements demonstrates that deflation is actually beneficial to you and I – the BIS stated – “We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies as the most comprehensive and rigorous analysis and found that deflation may actually boost output, lower prices, increase real incomes and wealth.”
      4. The central bank’s abolition would provide greater certainty, increase financial and macroeconomic stability, lower consumer prices, boost real incomes and wealth, save heaps of money
        1. It is only for large debt holders deflation is bad – changed incentives of the market – to hold more debt – leading to less wealth accumulation depending on how this is structured

If there is ever a potential for dramatic monetary reform – A gold-coin standard would be ideal.

  1. Alternative options – Establishing a market system of money and banking requires nothing other than having the government step entirely away. The current central planning for the cost of money is a Socialist ideology – and is bankrupt in the same way that the USSR was bankrupt in the 1980s
    1. And here we get to the positive theory of money and banking from an Austrian perspective. Money is a commodity like any other commodity. It should be produced and managed under competitive market conditions, the same as food, services, or computers. Banking too is a market service that should be managed by the market order, with no government involvement, and so subjected to the discipline of market forces, including the restrictions against fraud.
    2. One option would be to fix the total amount of high powered money to a reserve, such as gold – the amount of currency plus reserves at a Central Bank would be fixed to a stable number based around natural demand for the currency – era to let free banking rule subject to the anchor of a fixed nominal quantity of high powered money – if more AUD was demanded by our trading partners, or investor partners – this would push the AUD higher, this would then mean that some reserve, such as gold, could be purchased/traded – this then increased the base money and no real inflation occurs – as long as we had additional demand compared to our trading partners – if the USD was also in play and was trading a similar margin with us in a bilateral agreement, no change in inflation would occur
    3. Inflation under this system only really occurs if you get an unnatural spike in the money base without the supply of goods to back it up – could occur in two ways – 1) government just prints money, 2) you steal another nations gold reserves – not through trade but by force
  2. In my view – this style of passive central banks and the classical gold standard aren’t returning: today’s political culture cannot abide honest money and fiscal discipline – imagine the political blow back on any politician who said they were removing the age pension?
    1. Hence the Government cannot tolerate a stable standard of value and rates of interest that tell the truth about the real financial situation of a nation – that would occur under a free market

RBA won’t be abolished, or even reformed significantly, anytime soon – so what do you do?

  1. Remember the problems – Inflation targets makes property more unaffordable, needing the next generation to get more and more in debt and buy property at a later stage in life, meaning they need to work longer, plus destroys their real wage, so they have less left over the build wealth on their own, again them to work longer to save for retirement –
  2. What you can do – Understanding how this all works in important – and is the key first step – being able to identify the problem is the first step – not advice, need to take account of your own financial situation –
  3. Use this to your knowledge – the next generation is going to be in a worse position to purchase property that we are today – and good debts can be valuable to build wealth – so depending on your goals, plan accordingly
    1. If inflation targets are going to be maintained – then some level of good debts can be useful – Not bad debt but debt to build wealth in a manageable way can be handy – cashflow is key in building wealth
      1. Never any guarantee on making money in investing with assets – but the leverage can help if the asset growth is positive and you aren’t losing cashflow on holding the asset
      2. But if inflation levels are going to remain at 3%, and the debt levels don’t grow but the asset levels do, the real difference here in a way, will help inflate your way to having additional equity
    2. This is where if the interest on the debt is deductible, it can be used in ways that can produce additional wealth – but not at the cost of putting yourself in a position of financial stress – if your cashflow takes a massive hit – this normally occurs when the servicing costs of debt held against an asset is more than the income that you can generate
    3. Also – if you go down this route – you need to take a very long term view – talking about 20 to 30 years – in the short term it can backfire if you borrow to invest
    4. Also – if you have children – helping them into the property market – equity out of your homes, or establishing an investment bond style account to help negate the negative effects of a reduction in purchasing power on property for the next generation
  4. Secondly – Making sure that you are building wealth to generate a passive income over time, to make sure you aren’t as impacted as much by constant inflation
    1. Remember that if you need $60k to live off – if your debts are paid and no more dependents – and you want to retire in 20 years – this $60k wont be $60k in purchasing power in 20 years, it will be $108k – so plan with this in mind
    2. If you invest over time into assets that can grow their incomes, say dividends or rent, or superannuation assets that increase by around 3% p.a., this can negate the increasing levels of inflation
  5. Thirdly – understanding the CB cycles – pump and dumps of liquidity being added and withdrawn from the economy – you can use this to build additional wealth by buying when others are fearful that asset prices have gone down
    1. Be in a position to take advantage of this if they come

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