The RBA just love the Platypus Blues

This comment was made at Macrobusiness  (link may be locked – but there is a free trial available)

Excellent article!

The speech has a superficial charm but at its core displays the continuing shortcomings in RBA thinking.  As many have pointed out those shortcoming are related to its continued belief in idea that the level of credit in an economy itself is not something they need to worry about.

Simply put, we humans are not as clever as the assumptions embedded in the RBA’s economic theories.

Needless to say those assumptions were also embedded in Wall Streets model that came unstuck in the GFC.

Accordingly, to the RBA and Ms Ellis rent seekers and financial market platypus thrive on cheap credit and relaxed regulations yet the RBA do not accept that numeric parameters relevant to credit may be useful in determining the price of the credit that is sooooo tasty to a platypus.

An alternative approach is straightforward.

1. Stop yanking the interest rate lever – Let supply and demand determine interest rates.

2. Only if inflation is too high use interest rates to bring it under control.

3. When inflation is low interest rates should not be used as steroids to ‘stimulate growth’ or as a reward for low inflation.

Often a lack of growth is the sign of an economy adjusting to previous mal-investment eg; a housing ponzi scheme creaking.

4. When inflation is low – the key objective should be sustainable levels of domestic saving and outstanding credit levels (public and private)

To lessen dependence/vulnerability to cheap money policies by foreign central banks /governments we should ensure an adequate level of domestic saving.

To encourage a sufficient level of domestic savings an interest floor may be required.

Personally, I think 5% is about right but many people would argue 6 – 7% is closer to the mark.

Earning any less than $5,000 before tax on savings of $100,000 is unlikely to encourage savings (other than when fear grips the population).

The RBA clearly subscribe to the theory that debt in the hands of rational homo economicus is a perfectly safe tool and leads to the economic promised land. One man’s debt is another man’s credit etc.

In theory they are correct but in practice we are not the clever chimps their models confidently imagine.

The events of the last few years have demonstrated that this confidence is unwarranted. Even the great brains on wall street could not make sensible judgments on how much debt was appropriate. The idea that emotional humans make the right rational decisions when it comes to debt is not what our credit card companies know to be true.

We (particularly the great brains of finance) need trainer wheels to limit our ability to blow ourselves up with credit.

Thus it is entirely appropriate that the amount of debt outstanding in the economy is kept within limits where it is unlikely to blow up the banking system.

As to the size and shape of the trainer wheels I will leave that to others to calculate but limiting private debt and government debt each to 50% of GDP would seem to be more than a generous allowance for the Master of the Universe to play with.

The RBA doesn’t need to lean against the winds of an asset bubble but it should lean against the winds of a credit bubble.

Deep T

Pfh007

I greatly appreciate the hard work done by you and the other regular MB contributors of columns (and also comments) to create an intelligent alternative forum for public debate of current economic issues.

In the absence of serious debate of policy by our superannuated student politicians the public must do what it can to contribute directly to the formulation of policy within the public sector.

…and this

I think the electrolocation abilities of the platypus are similar to what the RBA uses to pick up the fine vibrations emitted by a white shoe wearing rent seeker.

Who needs numerical parameters when you can feel it in your nose!

http://en.wikipedia.org/wiki/Platypus

Platypus (Ornithorhynchus anatinus)

Monotremes (for the other species, see Echidna) are the only mammals known to have a sense of electroreception: they locate their prey in part by detecting electric fields generated by muscular contractions. The platypus’ electroreception is the most sensitive of any monotreme.[30][31]

The platypus feeds by neither sight nor smell,[34] closing its eyes, ears, and nose each time it dives.[35] Rather, when it digs in the bottom of streams with its bill, its electroreceptors detect tiny electrical currents generated by muscular contractions of its prey, so enabling it to distinguish between animate and inanimate objects, which continuously stimulate its mechanoreceptors.[31]

Experiments have shown the platypus will even react to an “artificial shrimp” if a small electrical current is passed through it.[36]

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