Wednesday, July 6, 2022

Bill Mitchell — The RBA has lost the plot – monetary policy is now incomprehensible in Australia

It’s Wednesday and I have some comments to make about yesterday’s RBA decision (July 5, 2022) to continue increasing its interest rate – this time by 50 points – the third increase in as many months. If the rhetoric is accurate it will not the last rise by any means. In its – Statement by Philip Lowe, Governor: Monetary Policy Decision – the RBA noted that global factors were driving “much of the increase in inflation in Australia” but there were some domestic influences – like “strong demand, a tight labour market and capacity constraints” and “floods are also affecting some prices”. It is hard to make sense of their reasoning as I have explained in the past. Most of the factors ‘driving inflation’ will not be sensitive to increase borrowing costs. The banks are laughing because while they have increased borrowing rates immediately, deposit rates remain low – result: massive gains in profits to an already profit-bloated sector. But the curious part of the RBA’s stance is that they are defending themselves from the obvious criticism that they are going to drive the economy into the ground and cause a rise in unemployment by claiming that “many households have built up large financial buffers and are benefiting from stronger income growth” – so the increased mortgage and other credit costs will be absorbed by those savings (wealth destruction) allowing households to continue spending. You should be able to see the logic gap – if “strong demand” is driving inflation and that needs to come off for inflation to fall but the buildup of savings will protect demand – go figure. Monetary policy is in total chaos and being driven by ideology. And to calm down after that we have some great music as is the norm on a Wednesday....
Bill Mitchell – billy blog
The RBA has lost the plot – monetary policy is now incomprehensible in Australia
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

11 comments:

Footsoldier said...



CONFRONTING MONETARY IMPERIALISM IN FRANCOPHONE AFRICA – The history of the CFA Franc.

https://moneyontheleft.org/2019/03/15/confronting-monetary-imperialism-in-francophone-africa-with-ndongo-samba-sylla/


Read that then tie yourself in knots trying to explain those pesky neoliberals don't know how it works.



You've applied for a job at the FED and I'm your interviewer and to get the job you have to answer 3 questions.


Question 1 part a: The economy is closed you are worried about inflation so using the tools you have how do you slow down bank lending growth?

Question 1 part b: The economy is closed you are worried about interest income channels as you are worried about inflation. So using the tools you have how do you remove most of the interest income from the economy?


Answer: That's easy foot. I would load the banks with reserves. Slash rates to zero and massive amounts of QE.



Question 2 part a: The economy is open again, the supply side and bottlenecks have been fixed and the war has finished with Russia. Using the tools that you have how would return bank lending growth back to a normal path again ?

Question 2 part b:The economy is open again, the supply side and bottlenecks have been fixed and the war has finished with Russia. using the tools that you have how would return the interest income channels back to normal ?



Answer: That's easy foot. I would remove the excess reserves from the banks. Increase interest rates and start QT.



Question 3: Would it be wise to allow the government to pressure you to remove the excess reserves from the banks. Increase interest rates and start QT. If you are still at war with Russia and the supply side and bottle necks have not been fixed.


Answer: No foot it would not.





Well done Mr Franko I can confirm you have the job.





Matt Franko said...

“ The economy is closed you are worried about inflation so using the tools you have how do you slow down bank lending growth?”

lol they immediately did like $500b of PPP loans in like a month…

Matt Franko said...

Their legal charge includes ‘stable prices’ … so they add reserves “ to lend out” and it greatly reduces bank credit authority and financed industrial inventories have to be reduced and prices increase due to resulting inventory shortages…

How does this foment “stable prices’?

So now watch… they just started the QT last week and now C&I loans will increase to finance normal levels of inventories eliminating the reduced supply we’ve been experiencing and the prices will come down…

When they are supposed to be “quantitative tightening!”…

You have to be believing some some sort of paradoxical reverse logic conspiracy theory to think these people know what they are doing…

Matt Franko said...

It’s like you’re saying: “ hey! Those guys aren’t deranged, here read this paper from this other deranged guy who can explain why those other people aren’t deranged!”

I don’t want to have anything to do with any deranged people…

I’ll just stick with the technical explanations thanks!

Footsoldier said...

Stop projecting you are getting worse than Western propaganda.

Accusing others what you do yourself.


" they immediately did like $500b of PPP loans in like a month…"


So loading up the banks with reserves doesn't stop loan growth and you have been wrong all along then ?


Or was that $50Ob very much needed by businesses just so they could survive and pay their bills.

I also believe things like rent and loan repayments some of them didn't need to be repaid until after lockdown.


Not only do you project and probably didn't even bother to read the article that refutes your technical analysis. Has done long before America was even created.

You want everything both ways.


Out of one side of your mouth you say loading up the banks with reserves slows loan growth.

I say look that's what they tried to do with the economy closed. They were trying to do that even put a valve on the RRP facility with a rate they can play about with to try and regulate the flow of loans.


Out of the other side of your mouth you say don't be stupid they did $ 500b in a month. Without even any context to this statement.


You want it both ways. You want it both ways to back up your art degree framing and narrative.

I'm not going to allow you to have it both ways especially without any context. That you've contradicted yourself.


So does loading up the banks with reserves slow loan growth or not?


It either it does or it doesn't ?


Don't throw $500b at me as an arguement without any context that contradicts everything you've been saying for the last 2 years.

It either slows loan growth or it doesn't there is no halfway house here with 3 bears and goldilocks with the porridge too hot, too cold or just right?

What's even worse is the fact that you actually believe they believe that banks loan out their reserves. Are you mad ?


When just about every central bank has done a paper on it and Canada ran their bank without any reserves for years.

Look at Bills article today and the reports carried out by the Australian central bank. They don't believe banks lend out their reserves.

It is crazy that you think only the American central bankers believe that banks loan out their reserves.

You fail to distinguish between their propaganda and their " nudging unit" and compare it with what they actually know as fact.


I bet you if you emailed them to ask the question the reply you would get is don't be silly.


I bet it any MMT'r emailed them they would get the MMT response. When we emailed the BOE we got the MMT response. That was before they did a paper on it.


It is ludicrous to believe they actually believe banks loan out their reserves. They have managed the Damn thing for years and know just by running the interbank market for 2 days it is never the case.

Even the way they have set it all up and putting interest in reserves they know it is never the case.


They don't have a loan officer at any bank that checks with the bank’s liquidity officer to see if the bank has reserves before it makes a loan. What does that tell you ?

A bunch of economists and the central bank " nudging unit" are completely different animals to those who run the bank.


Once again Matt you have completely ignored Warren Mosler. Why do you ignore Warren so easily ?

Warren visited the FED several times talked with those who run it. Not economists, not the " nudging unit" he sat down and talked with the people who run it.

They said of course banks don't loan out their reserves.


You ignore Warren because he completely destroys your narrative. Warren is living proof you are wrong.

But even that won't stop you from projecting complete and utter nonsense.


If you are going to reply can you please address and start off with Warren's visit to the FED.

Please don't ignore it because it destroys your narrative.












Footsoldier said...

Is Warren Mosler deranged Matt ?


Is the many people Warren Spoke with at the FED who confirmed to him that banks don't loan out reserves deranged ?


Or is just EVERYBODY deranged in the world who doesn't fit in with your art degree narrative ?


Is that how your technical analysis works ?



Footsoldier said...

Any rational technical analysis would start with okay Warren has been and spoke with several of these people who have all confirmed that they know banks do not lend out their reserves.


That is where any rational analysis would start from. That would be the starting point for any analysis of this type.


So if they know that why did they load the banks up with all these reserves?


Without even thinking about it that much I have given my reason why they might have done what they did.


They were terrified and have never purposefully shut down an economy before. So attacked the interest income channels using QE and slashed rates to zero.


To try and reign in interest income. As I've always believed QE was introduced for that purpose to try and control interest income in a downturn and move that interest income out of the economy.


Apart from bank loans that were desperately needed they must of been terrified of excess bank lending and bank lending getting out of control especially after

a) Setting the interest rate to zero

b) About to pump trillions into the economy with massive fiscal bazookas to pay people to sit at home and not produce goods and services.



That They could easily have understood by running a central bank for years that with their ratios and whatnot that loading up the banks with trillions of reserves effects bank lending. Easily could recognise what you and Mike have been saying for over 2 years.

Added a wee valve on the RRP facility with a rate they can play about with for that purpose.



So in their minds they have dealt with the interest income channels and now done what they can regarding bank lending.


All that is left now is the fiscal bazookas.



I'm not saying I am right it was merely an observation made up in ten minutes lying on a beach.


However, it is a 100% more plausible than believing that they think banks lend out reserves. As Warren has already confirmed as absolute fact none of them at the FED actually believes that. So utterly pointless to even go down that road.

















Matt Franko said...

Bill says: “ Monetary policy is in total chaos and being driven by ideology.”

I agree the former identifies the technical incompetence but that has nothing to do with ideology…

Can one of you Art Degree people here explain to me the functional relationship between technical incompetence and political ideology?

How do your brains function to make this relationship?

Matt Franko said...

“ So loading up the banks with reserves doesn't stop loan growth and you have been wrong all along then ?”

LOL asset values dropped by like 40%! … the new loan assets added causes a reduction in existing asset values… as capital remains fixed… it’s (A-L)/A = a constant

Then they suspended the SLR entirely on May 15, 2020 , drained 1.5T of reserves by increasing rate of UST issuance… and asset values recovered …

Matt Franko said...

“Stable prices!” …. Equities drop 40%…. Bonds collapse 20%….

Yeah these guys are geniuses! 😂

You guys then say “stability creates instability!” … I’m telling you guys you are dumber than them…. figure it out…

Peter Pan said...

If Matt were the judge at Nuremberg, all the art degree Nazis would be set free due to technical incompetence, and the rest would go free due to technicalities.