zippySA wrote:We own the Reserve Bank, so can always afford a stimulus no matter how high our debt is
I cannot agree with this statement - sounds dare I say it very K Rudd like!
If only it was - for if Kevin Rudd were able to explain it to the people then he could win by a 2007like margin! But it appears he doesn't understand it himself.
To my knowledge, the Government has 2x ways to raise funds (other than taxes and direct income related means):
1. Print more money (I think this is the basis of your comment as "owning the bank") - sounds nice, but money is a simple concept, a promise to value the physical piece of paper to the amount printed on it. It requires substance behind it (actual physical value) or else it becomes worthless - if we stimulate our economy by printing more money, no-one will see any value in our money, and hence we will all end up a lot worse off as our wages and income remain fixed, but everything will require more dollars to purchase as the currency becomes devalued and hyper-inflation takes hold (this can destroy countries and is a spiral once started, super hard to stop).
2. Sell bonds to the international market - which are in my simple mind much like my mortgage. Australia demonstrates it has the capacity to repay (with interest) and people provide us cash and make a return as we pay it off over time. The more we "borrow" under this scheme, the higher our repayments become before we even start paying off the principal. As our ability to repay declines, so interest rates will go up as we become more risky, and then we find ourselves in a whole lot of strife and the downward spiral starts (just think Greece).
How much more QE must Japan (or even the USA) have to do to convince you that printing money doesn't cause hyperinflation?
Your information is way out of date! Money used to be linked to a substance with actual physical value (gold) until President Nixon unlinked it in the 1970s when he realised that America would run out of gold if he didn't. And from then on, most of the world has used floating currencies, which are technically superior anyway.
Aside from the speculation and international bond sales (which increase a currency's short term value at the expense of its long term value or vise versa) there are two things that boost a currency's value: the first is taxation (as a currency can't be useless if it's needed to pay tax) and the second is
EXPORTS! And exports are usually the most important thing by far, because they ensure a currency's value is self correcting - if a currency devalues then exports are cheaper so more is exported and the currency stabilizes, whereas if its value rises then the exports get more expensive and its value falls.
Compare that with the pre 1970s situation: more money was printed but the currency was prevented from devaluing in real time so there was no increase in exports. Then eventually the government of the country in question was unable to keep its value artificially high and it collapsed (and currency collapse is the same thing as hyperinflation). Don't you think that preventing it from getting artificially high in the first place is the best way to prevent that situation?
If you're still worried about hyperinflation I'm happy to discuss as many examples (real or theoretical) as you want. Meanwhile I'll also mention that hyperinflation is actually very easy to stop: all it takes is a balanced budget.
Greece is totally screwed because it's unable to print money. But if Australia sells bonds on the international market, our ability to pay them back is 100% because we own the Reserve Bank and could print the money if needed. As long as the bonds are in our own currency (which they always are) then it won't cause hyperinflation.
I can see the arguments about the Reserve (an independent authority to exec Gov) holding rates too high for too long durnig the GFC - but Labour was pumping so much bloody cash into the economy I can see how they needed to manage infationary pressures.
Except that the inflationary pressures have been negligible since the GFC. The RBA board's not being reacting to inflation, they've been jumping at shadows, regarding any sign of economic success as an unacceptable inflation risk. The extra money that the government pumped into the economy was insufficient to fully compensate for the drop in the amount that the private sector was pumping in.
John Hewson (at the National Press Club) earlier this year criticised the RBA board's obsession with inflation at the expense of everything else. If it were up to me, I'd offer him the job of governing it.
All I really know about the Reserve bank is that I wouldn't want to be on the board - they will always be blamed for being too slow or too fast as rates movements always have positive and negative impacts for different sectors.
Except where inflation's a problem, low interest rates are good for practically all sectors.
The Reserve is just one part of a healthy economy - and another is minimal debt versus large debt. And by this, I don't implicitly mean we should be killing ourselves to attain immediate surplus, but we do need someone in charge who actually has a plan to navigate our way back to the freedom that comes with controlled finances and freedom to act autonomously and not in accordance with foreign bankers or ratings agencies.
Then I suggest you google "sectoral balances" because you seem to fail to realise the relationship between public and private debt.
