Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are Interest Rates Driving the Economy into Recession?

Economics / Austrailia Feb 11, 2008 - 12:11 PM GMT

By: Gerard_Jackson

Economics Interest rates are rising and it looks as if the Rudd Government is beginning to panic, a sign of which was Treasurer Wayne Swan's silly threat to banks not to be greedy by raising interest rates. This would be funny if it were not so serious. It is abundantly clear that our Treasurer is at a complete loss to understand what is really happening with interest rates. Unfortunately for Australia the same can be said about our economic pundits.


Tim Colebatch argued that because the ratio of unemployed had fallen from 25 to 2.5 this helps build the Reserve Bank's case for higher interest rates. ( The Age , Case builds for rates to rise again , 10 January 2008). According to Alan Wood Australia's problem is that "growth is running too strongly for comfort". ( The Australian , US slowdown won't curb our inflation , 30 January 2008). Economic growth means capital accumulation. Therefore to argue that we are growing too fast is to argue that we are getting rich too quickly. As supplies constituent demands they must both be equal. It therefore follows that what has really been growing is the money supply, the very thing these pundits avoid mentioning.

That money supply is the key to the problem was revealed by Glenn Stevens, the RBA's governor, when he warned that domestic demand would have to be curbed if inflation is to be defeated. But what does he mean by domestic demand if not the money supply? A quick look at the RBA's assets and its monetary aggregates tell the real story. From March 1996 � when Howard won his first election � to November 2007 bank deposits rose by 224 per cent and M1 by 200 per cent. One would have to be utterly blind to these facts � which is definitely the case with our economic commentariat � to imagine that this reckless monetary growth has had no impact on the economy.

The RBA's assets and monetary figures strongly suggest that Stevens means what he says. Last June M1 peaked at $226 billion, rising slightly to $226.4 billion by November. Bank deposits peaked at $188 billion in June, dropping to $181.4 billion by July and then rising to $187 billion in November. Assets topped out at $135,216 million in May, falling to $92,812 million in December. At the same time the targeted cash rate has been rising. It now stands at 7 per cent. Targeted means just that — targeted. In order to reach it the RBA must suck money out of the banking system. And this is the story that the bank's fall in assets and the virtual freezing of the money supply � at least up to last November � is telling us.

What is really bad is that our economic journalists � despite what they think � are utterly ignorant of genuine monetary theory and even the very nature of money. Thanks to their conceit the important issue of monetary policy cannot be seriously discussed in Australia. Meantime, Kevin Rudd, our glorious Prime Minister, has been persuaded that he can use surpluses to fight inflation. He is unaware of the fact that the surpluses that Howard and Costello bragged about were actually created by the RBA's inflationary monetary policy.

Nevertheless, Rudd has declared that he intends to follow through with his promised tax cuts. This has led some economists to argue that by returning more than $6 billion dollars to taxpayers the effect of interest rates in slowing the economy will be neutralised. This would only be true � and then only to a certain extent � if the tax cuts come out of 'idle' deposits with the RBA and not cuts to government spending. Moreover, these economists are overlooking the important fact that at the moment the RBA seems to be sucking money out of the banking system. An additional $6 billion or so would be a temporary hiccup.

So while the RBA is busying itself with the economy our politicians are once again displaying their glaring ignorance of economic theory. Brendan Nelson piously declared that it was wrong of Labor to blame the Howard government for rising prices. Nelson is not entirely in error. It is true that the RBA is responsible for monetary policy. It is equally true that Nelson, Costello, Turnbull, Minchin � in fact the whole bloody bunch of them � resolutely refused to inform themselves on economic matters. In this respect they are truly culpable. Furthermore, Nelson's claim that "Mr Rudd and Mr Swan inherited an economy in first-rate condition" is arrant nonsense.

On the other hand, Treasurer Swan's posturing and Rudd's economic declarations are strong hints that in this respect they have every intention of being as bad as the Liberal Party. Malcolm Turnbull's opinion that Swan is exaggerating the threat of inflation is further proof that when it comes to economics the Liberals really are the hopeless Party and will remain so until they decide to educate themselves on economic matters. Unfortunately, by deliberately denying informed Liberals a forum to exchange views Kroger and Costello successfully sabotaged any possibility that the necessary education will ever take place.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in