I came across this blog called Howdaft written by Darkhorse last night. It consists of five posts written in June. Five of the best pieces of leftwing economic thinking you’ll see anywhere – something we’ve been short on recently. I’ve tried to contact Darkhorse, but no luck. If you’re out there, drop us a line. In the mean time, here’s one of the posts. – Eddie
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Vampire Economics: The Reserve Bank Act
The Reserve Bank Act defies the most basic logic in economics – the law of supply and demand. It is also most profoundly contradictory that the most essential component of the market, the price of debt has to be determined by regulatory fiat – surely the market should be able to sort that out.
At a conceptual level the Reserve Bank Act and the medieval practice of bloodletting have the same basic premise, that draining the essential life fluids from the fevered body will make the patient well. All it achieves is to weaken the body further. Deathly pallor is mistaken for a fever cured.
The most basic failure is that when some element of the economy is over-heating the cost of debt is increased indiscriminately draining economic energy from the innocent and the guilty. The RBA transfers wealth from the productive sector of the economy just as it drains money from the speculative sector. It usually does the former more effectively than the latter as the latter is driven by higher returns and higher risk and often the risk is displaced onto the lender through default when things go wrong. The mortgaged cannot escape so easily.
Fundamentally the Governor of the Reserve Bank raises the cost of borrowing to reduce demand for new debt. This however also punishes those who already are in debt.
The indebted cannot immediately reduce their indebtedness so must pay the imposed cost of borrowing. Their demand is inelastic. The Governor at the same time increases the rewards to lenders, in doing so new lenders with a higher resistance to risk, or the careless and the greedy, are drawn to the market for debt. These new lenders draw in their equivalents among the borrowers. So putting the price of money up makes the problem much worse by increasing the riskiness of the debt funded activity. It also drains resources from productive activity while fueling speculative activity. The past decade is testimony to that.
The simple fact is that if the Governor wants to increase the cost of money but not increase the price of money then the Governor should impose a tax on borrowing. If the governor wants interest rates to provide a 4% return to the lender but impose a 6% cost to the borrower to dampen both supply and demand for debt then the only logical way to do it is to impose a tax equivalent to an annual interest of 2% to establish the difference between price and cost.
A deeper fact is that this whole artifice is a substitute for the fact that the government has relinquished its right to issue currency to the banks and uses the Reserve Bank Act to moderate the rate at which the banks create it. This doesn’t work. The banks have abused the process to inflate parts of our economy, principally property and shares, so that they can push more debt into our economy and in doing so expropriate our wealth creating ability. We have been stupid enough to think that this is a good thing.
The entire gross export earnings of the dairy industry is consumed by paying the interest on all of the debt this country has accumulated over the past two decades.
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