In the latest edition of my discussions with economist John Adams, we look at recent RBA monetary policy, and conclude is not fit for purpose.
Despite all the hype, the next cash rate move could well be down, as the bursting debt bubble approaches.
John’s original article is here.
– The RBA (“Cash rate”) and the FED (“Fed’s fund rate”) both FOLLOW short term market rates. They both DO NOT set their own rate. So, when Mr. Powell, Mrs. Yellen, Mr Bernanke, Mr. Lowe or Mr. Stevens say that they raise or lower rates then they simply FOLLOW a person called “Mr. Market” dictates. But one won’t hear that from e.g. the FED or the RBA because then they would destroy the “mystery” that keeps analysts guessing.
– Pull up a chart with short term australian rates and compare that with the “Cash Rate”. Conclusion ?
– In a economic expansion (short and long term) rates go up and in a contraction rates down. Because in a contraction people pull their money out of stocks and corporate bonds and start buying government bonds. And in a economic expansion people pull their money out of government bonds to be invested in (higher yielding) stocks and bonds.
– In that regard, I draw the conclusion that the australian economy actually gradually weakened from say 1990 onwards (think: falling short and long term rates).
– Mr. Greenspan admitted that the FED follows market rates in the year 2007.
– I think Mr. John Adams should study the work of Hyman Minsky & Steve Keen to understand why credit growth always causes troubles. Steve Keen has build his work on the work of that same Hyman Minsky.