From time to time the leading salaried economists of the debt-money system go a long way in exposing the dysfunction of conventional financing for us, but it is probably the expectation that few who are not completely indoctrinated by the orthodox view will analyse what is being said in a critical light. Some interesting discussion was had at the 2015 Standing Committee on Economics in Hurstville with the purpose of inquiring into the Reserve Bank’s Annual Report of 2014.
Reserve Bank Governor Glenn Stevens and Deputy Governor Philip Lowe will be cited at length, but first some background is required to understand the comments from the Hansard transcripts. Excuse me if I cover details that are generally known.
The Reserve Bank is Australia’s central bank and the bank’s board is charged with managing Australia’s economy through financial mechanisms. Monetary policy is the primary instrument available to the Reserve Bank for managing the Australian economy. ‘The principle medium-term objective of monetary policy is to control inflation. That means to keep inflation within an acceptable range 2-3%, for the sake of financial stability. Notice there isn’t even the pretence of being able to stop inflation, we must accept the gradual erosion of the buying power of our money forever.
It has been shown in a previous post (A Realistic Answer to Inflation) that the practice of creating money as debt actually causes inflation. To revisit that point briefly the money supply is increased by people, government and business borrowing, but the costs of that debt must be factored into prices, therefore increasing them in the process. This fits perfectly the definition of inflation which is an increase in the money supply accompanied by an increase in prices. Debt money can’t be the only source of money if you want to deal with inflation. It does not take a doctorate in economics to appreciate the simple flow of the costs of debt into prices as being a cause of inflation. It would be reasonable to ask, if financial stability achieved by controlling inflation is the priority of the central bank why aren’t other methods of money creation explored by their economists? The answer to this is that unfortunately
our government officials, political economists and newspaper columnists appear intellectually content with the current arrangements, oblivious to the depth of the crisis that economics present to the world. They still happily argue about the dangers of ‘overheating’ or needing to ‘cool off’, as if an economy that functions along the lines of a domestic boiler or kitchen toaster provides an acceptable basis for co-ordinating human activity. They also appear perfectly satisfied to continue with ‘business as usual’, without questioning the most startling and contradictory statements issuing from the world of money and economics.1
Monetary policy ‘works’ by setting the cash rate. ‘The cash rate is the rate charged on overnight loans between financial intermediaries. It has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built.’2 The logic is that if the cash rate is low, commercial banks’ costs are lower and money can be lent more cheaply, encouraging people to borrow more and increasing the money supply. If, on the other hand, the cash rate is high money is relatively more expensive. This discourages people from borrowing thus leading to a reduction in the overall money supply. The result is less money in the pockets of consumers and less consumption, pressuring sellers to hold prices for their goods throughout the economy. The Reserve Bank explains the transmission of monetary policy into the economy in the following way:
Substantial rises in interest rates, designed to restrain inflationary booms, have been followed by contractions in demand and a reduction in inflation. Conversely, substantial interest rate reductions have been followed by periods of significantly faster growth.2
Remember the repayment of loans ‘destroys money’ so at all times repayments are draining cycling money from the economy according to the schedules of debt contracts.
With all of this in mind we probably have the basic understanding necessary to make sense of the central bankers ‘No 1 red flag at the moment’:
Mr HOGAN: Obviously the role that you three gentlemen have is an interesting one in our economy and our society. At the moment we have falling commodity prices, increasing debt levels, lower interest rates and lower currency rates. When you wake up in the morning and go to work, what at the moment would be the one area that you would flag as your major concern with what is going on in our economy and the world economy? What is your No. 1 red flag at the moment?
Mr Stevens: I will invite my colleagues to give you their fears. Mine—and this is another broken record—is that we have a capacity here to talk ourselves into gloom and doom that we do not really need. We have a significant lack of confidence—I think more in the business community than among households—to expand, invest, hire and innovate. With our instrument [monetary policy – WW], we do not have something directly connected that will change that. Interest rates maybe help, but we do not suddenly spark animal spirits with lower rates and, for that matter, we do not kill them with higher rates either. To my mind, that pervasive sense of caution and feeling you do not want to take a risk is the thing I worry about most when it comes to getting growth.
Dr Lowe: Mine is not that different. It is to do with this lack of appetite for risk taking. When talking about Australia's future, I see tremendous possibilities. We have so many natural resources and an intelligent, well-educated workforce. We have great agricultural land. We have a rapidly growing population. Our demographics are favourable and we have been able to draw people from right around the world to make a very diverse, prosperous society that works well together. We have some tremendous fundamentals, but it is this lack of risk appetite and willingness to take a risk and take advantage of risks that I worry about.
It is not a peculiarly Australian phenomenon. I have just been to the G20 meetings in Istanbul. It is a common response. Many countries are saying that their private sectors are just not prepared to take enough risks. In response to that, there has been very heavy reliance on monetary policy globally—perhaps an overreliance. That is creating other risks. The question is: how do we get the private sector to start moving forward and increasing investment? What can the public sectors and governments around the world do to make a more conducive environment for private sector investment to get that going? As the governor has said a number of times, the effectiveness of monetary policy, while it is still there, is diminished because, to a large extent at a global level, loose monetary policy works by getting people to bring forward future consumption spending to today. But there are too many people who do not want to do that. They say that the level of debt is too high and they are not confident about the future and so loose monetary policy is not encouraging them to spend today. In summary, how do you re-energise the private sector in Australia to take advantage of the fundamental positives that we have? But how do you do that globally as well? Those are the issues I grapple with.
Mr Stevens: That is very well put. Do you have any other views you wish to confess to?3
Why is risk so vital to the maintenance of the debt-financed economy? Because the act of increasing the money supply is always accompanied by the risk that the borrower will not be able to raise enough to repay it, and be ruined. Lowe talks about the strength of our ‘fundamentals’, what Social Crediters would call real credit, but he makes pretty clear that without a risk appetite, that is the willingness to take on debt, the system will bar us access to these fundamentals even though they be sufficient. Lowe asks, ‘how do you re-energise the private sector in Australia to take advantage of the fundamental positives that we have?’ Well he answered his own question, ‘They say the debt level is too high and they are not confident about the future.’ The answer is a creation of credit that does not come with the risk of ruination associated with debt, but this violates the banking industry’s monopoly of credit creation and no one believes more in banking’s right to the ownership of money than do central bankers.
The central importance for the ‘appetite of risk’ is closely associated with that other ubiquitous financial enigma of ‘confidence’. This was an important enough factor in 1957 for Vance Packard to be able to write:
The minute a glow of confidence left the landscape all sorts of disagreeable things might happen. One thing that would surely happen would be that people might start watching their dollars and become more cerebral in their buying. That would make things difficult all over for depth merchandisers trying to tempt people into impulse buying, status-symbol buying, leisure buying and many other kinds of self-indulgent buying.4
The concern of economists these days seems to have more to do with buoying confidence than the sound management of material economies. Behold Governor Steven’s fear ‘is that we have a capacity here to talk ourselves into gloom and doom that we do not really need.’ It is worrying to realise that, come what may, leading economists will say whatever they think will inspire confidence and avoid anything that may detract from it. There is no doubt that the rule of positive attitude had much to do with how the GFC, a catastrophe that had been brewing for some time, was able to sneak up on so many people. The fact of the matter is that the financial system is inherently dysfunctional, dragging the world at great cost through alternating periods of growth and contraction. The question that everyone needs to ask themselves is one aspect of the argument put in Douglas’ Monopoly of Credit: ‘Why should we be asked to have confidence in our money system, if it works properly?’5
Monetary policy isn't working. I would draw your attention to Lowe’s statement, ‘loose monetary policy works by getting people to bring forward future consumption spending to today. But there are too many people who do not want to do that.’ We must borrow and commit future incomes to consume now. What happens when the future arrives? We borrow more distantly into the future to cover the past debt and maintain current spending. Talk about 'startling and contradictory.' And it’s not just loose monetary policy that works this way, the whole economy operates on this basis. Credit cards, mortgages, Harvey Norman’s 50 month interest free deals, Treasury Bonds, the queues at Cash Converters is evidence of the shortage of purchasing power that pervades and perverts the real economy. From top to bottom we ‘say that the debt level is too high’ and we ‘are not confident about the future’ regardless of the ‘tremendous fundamentals.’ Social Credit thought has been pointing at these inconsistencies for decades. There is, we say, an imbalance between the prices on the stuff we want and the money tickets issued to get at it. Increase the money tickets and you balance the equation. We’ve been saying that what we do now can’t fix the problem because debt- money does not possess the quality required to make up the difference. It’s a negative value. You can’t add negatives together to make positives; it’s an arithmetic impossibility.
Lowe, who did two years with the Bank of International Settlements, suggests a direction and you need to decide whether or not you like it. ‘What can the public sectors and governments around the world do to make a more conducive environment for private sector investment to get that going?’ In other words, what laws can be passed to give international money unimpeded access to markets and resources. The problem is that the conducive environment for international private sector investment particularly is showing itself not to be a conducive environment for life generally. What does this private sector investment look like? Between 2005 and 2012 Australian’s have surrendered control of roughly 9 107 000 hectares of agricultural land to foreign investors. This figure does not include the mass foreign buy up of mines, water licences and residential property. Pearce writes that ‘farms were shutting down because of the reluctance of local banks to keep credit lines open till the rains returned. During the first decade of the twenty-first century some 45 million hectares of Australian land, mostly pastures, ceased production.’6 Ruthless banking policy has gutted many of Australia’s country towns, forced down the value of so much agricultural land and at the same time pushed up prices in urban centres. The Big Idea moves forward toward the ‘establishment of compulsory labor among an unfree majority of nonowners for the benefit of a free minority of owners’7 – Belloc’s Servile State.
The Big Idea is at an impasse but it doesn’t sit still long. The best psychologists and financial strategists money can buy are ruminating about how to overcome this psychological hesitancy that is causing people to withdraw from the debt-based control matrix. People must choose to participate in it, if it is to be an effective mechanism for controlling their behaviour. As yet, the financial powers can’t enlist the cops to serve and protect their property, financial and real, against the citizenry unless they can invoke the debt pretence. Be assured that lawyers, monopolists, bankers and politicians are working to make up this power deficit. In the past finance has been able to meet challenges like this and maintain its grip, they're nothing if not innovative. If possible they do it quietly in the bank parlours and board rooms, but sometimes what is required is the blinding pain of starvation or a big bang. Each time the shape shifts, goodwill is drained from our associations and general understanding about the root causes of our problems is set back.
The Australian public to the Reserve Bank Board: Do you have any other views you wish to confess to?
Rowbotham, M. 2009. The Grip of Death. A study of modern money, debt slavery and destructive economics. Jon Carpenter Publishing, Charlbury.
The Reserve Bank of Australia. 2015. About Monetary Policy. Available from http://www.rba.gov.au/monetary-policy/about.html [08/06/2015].
House Of Representatives, Standing Committee on Economics. Feb. 2015. Available from http://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/47419cf7-c698-4d80-b29f-b76416ea499a/toc_pdf/Standing%20Committee%20on%20Economics_2015_02_13_3190_Official.pdf [08/06/2015].
Packard, V. 1957. The Hidden Persuaders. An Introduction to the techniques of mass-persuasion through the Unconscious. Penguin Books, Connecticut.
Douglas, C.H. 1958. The Monopoly of Credit. 3rd Edition. K.R.P. Publications, Belfast.
Pearce, F. 2012. The Landgrabbers. The new fight over who owns the earth. Transworld Publishers, London.
Belloc, H. 1977. The Servile State. Liberty Classics, Indiana.