RBA Rate Day: The price of debt in Oz – Keep it low no matter what damage it causes.

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Peachy,

That’s about the sum of it.

Neo-liberalism is keen on free this and free that but not

1. The price of debt. They like that kept lower than it would otherwise be so the risk takers get a free ride. Coke would be over the moon if the govt intervened in the price of fizzy drinks by forcing non drinkers to subsidise the price of the sugary gunk.

2. Keeping an economy and its production capacity defended from attacks by currency warriors armed with ‘cheap money’ boarding axes and ram engines built by off shore central banks.

The shadow board are on the money but they leave themselves open to ‘what about the children’ attacks by not explicitly explaining how an economy can easily defend itself from currency warrior attacks WITHOUT the price signal destroying madness of manipulated debt pricing.

Unfortunately, the explicit explanation involves questioning the basic model of economic management and that is still a no go zone for our fearless policy wonks.

1. Regulate unproductive capital inflows.

This will immediately put downward pressure on the exchange rate.

2. As interest rates rise, which they will as the unproductive inflows are slowed, soothe the deleveraging economy with fiscal deficits.

Not necessarily more spending – tax cuts are best. The best would be to de-pork while cutting taxes. People are more than capable of pointing money where it will do the most good for them and their families.

3. Print at least some of the deficit.

This is not an option – a deleveraging economy means a shrinking money supply. Printing is essential to limiting a deflationary bust as asset prices adjust.

 

 …and this
Flawse,

You do not need to sell ANY assets when you print a deficit.

You only have to sell assets when you are printing a deficit IF you want to maintain the value of the currency while printing.

If you DON’T sell assets which is what capital inflow controls are all about – limiting the capacity of locals (private and public) to sell IOUs and other assets off shore – AND you are printing your exchange rate WILL depreciate.

That is the point of the exercise.

What I don’t understand is that when I point this out you insist that the economy cannot cope with a depreciating currency and thus more competitive exchange rate.

My response is that it will because it will have to and if the process I describe is managed it can take place over a 5 – 15 year period.

The world did not end when the $AUS slid down to under 50 cents US from the mid 80s to the end of the 90s and that is probably where it should have stayed.

You keep overlooking the incredible deflationary forces that must occur when interest rates rise and people start to delever.

I can understand why you don’t think the money supply should expand like a hot balloon like it did during the credit boom (and I agree with this) but I don’t understand why you would want it to shrivel up like a sultana which is what it will do when people start to delever if the govt is not printing a deficit to maintain the money supply.

If you introduce capital inflow controls and don’t print you WILL get a depression.

Sure, the politicians and most of the economists have still not accepted the full implications of a broken Debt Machine but they will have to as they cannot just ignore it.

It is dead and is preparing for the choir celestial.

…and this

Flawse,

We are most definitely on the same side and those weren’t rocks, they were soft mangoes full of reason :).

As for suggesting I am dabbling with the dark arts of MMT – that is a bit harsh! ;).

Not sure that it is a virtuous circle but where you are causing yourself unecessation grief is the sequence of events.

Without capital inflows you do not have a CAD.

The sale of assets and IOUs precedes the purchase of trinkets. Because I did not personally arrange finance off shore before I bought my iPad does not mean it did not happen.

The offshore purchase of my iPad depended on a capital inflow before I took delivery. Someone somewhere – probably a bank giving someone a mortgage – signed an IOU to someone offshore that ultimately allowed me to buy the iPad.

Cut the capital inflows and you are cutting the CAD. People will not sell us stuff without getting something in exchange.

Deficit printing will not change that. Printing does not allow you to run a CAD – only the capital inflows allow that. Printing does not produce capital inflows.

However, deficit printing will devalue the currency UNLESS the forces of deflation due to the deleveraging process are balancing it out because the money being created is off set by the money that being destroyed by deleveraging.

I am suggesting deficit printing to maintain currency stability not to devalue it (i.e inflation).

Deficit printing whilst there is idle capacity helps more of that capacity to be used but it is no magic wand. When the idle capacity is exhausted inflation will result. In that event reduce the deficits.

Deficit printing is only a problem when the private banks are pumping up the money supply in pursuit of their trailing commissions. When they are doing that inflation not only gets out of control it is very hard to manage.

This is why endogenous money creation by private banks is a fundamental problem that must be addressed.

….and this late night addition.

Dr Smithy,

At the risky of being swarmed by flying monkeys – I would put it this way.

All I am suggesting is that as debt deleveraging shrinks the money supply a government wishing to maintain currency stability must maintain the money supply and that for most purposes means running a deficit. Especially if the endogenous money creating powers of private banks are prohibited.

In my view such a deficit should mostly be the result of lower taxes rather than higher expenditure and it should be printed and not the result of unnecessary and sham debt issuance.

The only thing any of the above has in common with what MMT fans support is the running of a deficit. Just about everything else they strongly disagree with including dismantling the central bank private bank cartel, capital controls, govt control of the money supply, ending private bank endogenous money creation etc.

MMT suggests excellent reasons for fundamental reform of the current banking system but my impression is that MMT fans seem to want to keep it and just encourage govts to run deficits by spending – job guarantees etc.

Not surprising that Flawse has problems with it – I do as well.

MMT tries to work within the current ‘operational reality’ I reckon that is a bad idea as the current operational reality is too flawed to save.

Of course my suggestions require a positive role, though very limited and specific role for govt in economic management. This upsets all the free market small govt fans yet it also offends the highly interventionist welfare statists a group in which I include MMT.

I think I am just very centrist which is a bit boring and old fashioned these days.

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