Posted by: graemebird | May 3, 2006

Balancing Your Chair Down The Back Of Class

The American Federal Reserve has lifted interest rates about 15 times since June 2004. Our own Reserve Bank takes a similiarly dysfunctional ‘piano tuner’ approach. To see why this way of doing things is flawed and destabilizing read this post brought over from Catallaxy:

THE OVERPOWERING STUPIDITY OF THE WAY MONETARY POLICY IS RUN.

Most government policy until Hawke/Keating or thereabouts was pretty foolish. Nowadays apart from massive excessive thievery its pretty good. People seem to have a bit of a clue. The competition commision particularly.

But monetary policy has always stood out as being more foolish then even the worst of the others.

However they did towards the end of the Hawke era adopt one good idea that almost made up for all the myriad bad ones. And I remember this being explained very clearly by the endlessly boring Gareth Evans. I can’t remember how he worded it but he always words these things with startling perfection and STILL manages, through his delivery to send people into a sort of insulin shock.

But it was simply if you have positive growth you ought to be biased toward tight money so as to keep your powder dry for if growth slips to where it risks a recession. Pretty prosaic stuff but enough to avoid recessions.

However consider the foolishness of the following:

USING THE INTEREST RATE AS THE BALANCING MECHANISM.

You want to stabilise either total spending or the investment markets (these goals will converge over time).

Now controlling money is one step away from controlling total spending. But interest rates are an whole other step removed. Why attempt to stabilise the spending, by going for controlling a symptom two steps removed?

Then the other thing is the WAY they do it. Highly destabilizing piano tuner mode. Anyone who has ever competed in chair-balancing down the back of the class knows that when you are falling one way or the other you must move your legs fast and decisively. And it can never be predicted two moves ahead in which direction that move must be or the timing of it. Except for one thing. It is usually (but not always) in the opposite direction to the move immediately prior.

So interest rates should be moved quickly, often and decisively if you are foolish enough in the first place to use interest rates to balance things.

Even the drooling retard end of the class must know that you can only hope to keep one variable steady. And that variable is not interest rates. This glacial piano-tuning has to be destabilizing. If I was forced to balance things in this way I would use the stock market as a sort of daily default barometer. Then look at other items over the longer haul.

In the medium term I would go for stabilising investment assets markets since the avoidance of recessions means avoiding bubbles and then crashes in these assets…………….

Which brings me to more terminal stupidity. After the 90’s it can no longer be sustained that 0 or low consumer goods inflation is the correct goal. Like I say if you keep one thing stable you are forsaking the possibility of keeping all other things stable. And why on earth do consumer prices (CONSUMER PRICES OF ALL THINGS) need to be stable.

Its investment assets stability that will take away the need for recessions. So that ought to be the focus at least in transition to growth deflation. We go into recession when the collapse comes in the demand for those things that we borrow for. And that isn’t consumer goods for the most part.

Now this is all quite apart from the idea that even by their own lights policy will be so much better and easier to control the higher the RAR is.

The higher the reserves the faster will be the transmission of any policy moves by the bank. The higher the Reserve asset ratio the more inherently stable the system will be. And if the reserves stay at 100% for long enough then the system will be so stable that the central bank might largely be wound up.

See the elephant he is stable on his four legs. And the changing gusts of wind is something that he barely notices. But force him to balance on his trunk and those winds become very important.

Keynesian animal wind spirits won’t matter a stitch if we grow up and let that elephant down so that he stands on all fours.

But quite apart from fractional reserve banking almost every aspect of the way monetary policy is handled is just self-evidently foolish.

And for this I blame the long history of Keynesian macromancy confusing folks so that they cannot think straight about any of this stuff. And also the tendency for thieves, thugs, tax-eaters and counterfeiters to do things in such a confusing way as to be able to convince folks that their presence is necessary.

Whereas in reality if nine tenths of the non-defense non-justice tax-eaters dropped dead tommorrow the whole system would be vastly more sound and it would be like taking an invisible piano off our backs.

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Responses

  1. That sounds right to me. But there are other things to consider here.

    When money was bad we might have expected Gold to rise on other occasions. But this isn’t a static scene. This is an historical scene and the central banks were still getting rid of their reserves of Gold.

    And so many times since the late 70’s Gold could have expected to rise but didn’t do so for reasons that were to do with the history of the scene……

    So the psycology is such that everyone was attuned to an endless bear market. But now all but the Americans have sold off their Gold. In the gold-mining business (by now) there will be shortages of key staff. And most of all the Americans have kicked this money and debt business down the road for so long that they have no new tricks left.

  2. Look what is the mystery. I think you should be getting your clients into maybe 5% Gold and 3% silver then the other 92% whatever…….

    Its very much like the topic of war and international relations. I tell the small children that having the USA out there leaking largesse is not a forever thing. And we better get used to a world of ubiquitous war and changing boundaries….

    And its the same way with money. This fiat money crap is not a forever thing. And in the same way as the only country that could make the map so stable cannot now do it forever…… well in this same way the world of fiat currencies won’t hold up.

    Down the track we may need hybrid deals with Gold as the prinicipal and silver as the interest. Who knows. But hedge funds have to start thinking differently.

    And I think you ought to have a small percentage of each of these more robust monies in your portfolios.

  3. I’ve had a good time with gold

    was long the stuff against Yen, then swapped it to dolls, then swapped it against Euros. it was a grear ride, however I got sppoked out of it about $100 bucks ago when I saw world interest rates heading higher. Now i feel totally naked.

    Interesting thoughts.

    If we look at the stock indices round the world against gold, they really haven’t been doing that great. In fact most are down against the yellow stuff.

    One of the guys predicted that we could very well see say the Dow at 36,000 and gold at US 6,000 an ounce over the next 5-10 years. I found this to be a an interesting prediction.

    One thing looks for sure. Next coupe of years gold is going to be trading at well over US 1,000 per ounce.

    My reason:

    the fed chairman is an inflationist. He is known as helicopter Ben because he made a famous speech where he said that defaltion could be fought by throwing money out of a helicopter. i not sure if he used those exact words but they were close enough.

    Anyways here ios my thinking. Pretty soon the fed will reach the point where it cause a slowdown in teh US economy by nuding rates a tlittle too high.
    This is toxic to the market that is most vulnerable – the realestate market- which is where most of the US debt is held. The Feds thinking will be that if this market heads south all bets are off in terms of GDP growth. So the Fed does what it does best- it get sppoked and starts lowering rates again.

    This is the time when the gold price will go absolutely ballistic.

    I think people are starting to discount this play right now. In a sense the market is forecasting the Fed quickly pushing down rates in an attempt to divert a disaster.

    That’s where the bets are being placed.

    Got to buy some yellow stuff next dip.

  4. I like listening to this fellow called Jim Puplava. What I liked about him is he was a sort of natural bear. Most pessimistic about stuff. But at the same time he always seemed to be making out like a bandit. I mean this bear must be making money hand over fist.

    He called Gold just a tad wrong a little bit back. But I remember when silver was down below five (I think) and these guys had all the industry figures. The lag times and the production of various sites and so forth. And he’d have guests on who personally had tons of physical silver. And these dudes would be talking about how people didn’t get it.

    But they would be suppressing giggles with every word they spoke.

  5. GB

    Traders are the most miserable human beings on earth. Everyday they think the world is going to hell in a hand basket. I think it’s the stuff most of us read.

    The funny thing is that the guys who make the most money out of stocks are the non-traders mostly. These are people who have a certain optimisim about how things are working out.

    Typical trader mentailty is to look at the current account deficit now running at at 7% per anum and then think of ways to take advantage of the huge gap. So they try to sell stocks short or the currency or longs bonds. If you followed this advice you would have had your head handed to you on a platter.

    the law of trading is it’s not economics, it’s market dynamics.

    another law is that you can be wrong far more oftern that being right but with proper money management skills which just means cutting losses etc. you can still make money.

    Edney gave me a hard time for making the wrong prediction. Fari enough.
    But market dynmaics changed about 2 weeks ago when the Bernake made the god awful mistake of giving the markets too much information. He said that he may pause of his rate climb. Given the perception that he is an inflationist gold took off again, (but not ony for that reason).

  6. Bizzare isn’t it. That we’ve come to this. That the elephant balancing on his trunk is now so skittish that telling him the truth is harzardous to his own health.

    You would get no delphic talk coming from me as Board Governor. I’d work like a day-trader myself using the stock market as the barometer. But if it went above my limit or the news came in that real estate market was heading for a bubble the slipper would come down hard. Up goes the RAR.

    Of course if you overdid it then you’d quickly monetise some debt. With a veangeance. But once the RAR was pretty high following this process you would find you could hit what you aimed at.

    But I think in the interim the stock market would be a pretty good barometer to stabilise that elephant until we can get him safely down on all fours.

  7. The silliness of our current monetary regime was brought out some years ago when the tech boom was in full swing. Wall street gas bags and the New York Liberal Times were telling us that the reason the tech market was roaring was because of the wonderful job Greenspan was doing at the Fed in “managing monetary policy”.In other words the boom was caused by Greenspan doing a good job.

    So the Wall Street Journal ran an op-piece suggesting that the best thing Greenspan could do to stop the boom was to fire himself. Apart from the fact that this was hilarious the irony was obvious.

  8. Were you here where the recession we had to have bit? It was the ultimate slow-motion train reck. They had piano-tuned interest rates up to 17% or something. But then things started falling apart. The cards starting dissappearng from the noticeboards at the CES.

    Every indicator turned down one at a time with gruesome slowness and they did nothing. Then when they started moving interest rates down it was with pitiful slowness.

    It was before the bank was really fully independent. And I just thought this was Keatings way ousting Bob Hawke from the top job.

    You would try and explain to people where they were going wrong. But no-one could really grasp it what with all the Macromancy that is out there.

  9. No I wasn’t here, but I came back regularly and noticed how the stuffing was knocked out of the place. it was horrible.

    The thing which baffles me at the moment is the fact that the long end of the bond market is flat to overnight money. Meawhile there is very little talk of a slow down or even some sort of crunch. Something therefore has to give. Either its the economy slowing down or the long end of the bond market gets crunched. I’m really baffled by this at the moment. Maybe we are in some noew paradigm and we grow forever despite the yield curve and the CA at 7%. Lets watch.

  10. Not enough information. And the cash rate is the wrong tool.

    I would determine the band I wanted to keep the market in until more information came in from other areas. You know you would be getting information in about monetary aggregates, business investments, real estate prices…..

    Now for the medium term we want all of these (except of business investment) as close to zero growth as possible but none of them actually crashing.

    So to try and answer your question if the stocks had rallied that day and no new relevant data had arrived I’d whack up the cash rates to where no-one would take any cash except if there was a bank run.

    But suppose the rally didn’t stop. Well I’d lift the RAR. Suppose then the market crashed. I’d monetise a bunch of debt and if that wasn’t going to be fast enough I’d bring the cash rates down close to zero for that day only or until cash was being sent out by the bushel or until the market came within the band I’d set.

    Now supposing the other information came in. And one of the monetary aggregates and the real estate market had crashed.

    Then I’d call up the bank board and say that we will allow the stock market band to rise another 5%.

    Then I’d act accordingly. Monetise a bunch of debt to push things up. Since I want none of these things on a bubble. But none to crash entirely either.

    Sometimes things would be so out of sync that you could not help one or other of these things crashing. But I’m saying in the medium term you are trying for everything to be as close to zero growth as possible but nothing to be collapsing.

    Your making your comments right out on a limb Fyodor. But good work at getting to the issue. I think you’d be down a few credits here since there is too much nonsense along with the very good question.

  11. All this franticness would be necessary until you’d slowly worked your way to a high Reserve Asset Ratio. From there the transmission mechanism for monetary policy is shorter, faster and more predictable. So yes it would be a hairy thing early on no doubt.

  12. I’m going to sooner or later go back and edit out anything which looks anti-gay. I’m really just responding to these attempts to derail threads and insult people with this queer talk.

    Its not personal. I’m not anti-gay more generally. But these lefties cannot monopolise the territory when it comes to using this sort of talk for abuse. I really hope there hasn’t been too much collateral damage here.

    But for Fyodor I would not be contemplating any editing.

  13. What’s this yellow lounge suit business?

    Just to rehash a few things Fyodor. And do try to pay attemtion. In a complex system you can really only hope to stabilise one variable. So you’d best choose wisely.

    1. Its a bizzare notion to think you would have a slow-moving discount rate if this discount rate is the means by which you stabilise other things. You cannot win any competition in chair-balancing, or any other type of balancing that way.

    2. Very smart people have fallen for zero consumer goods price inflation as the goal. Or very low stable consumer goods price inflation. I thought this was the idea also. But it is the wrong idea. Both Americas Great Depression and the 90’s, as well as our recent real estate Gold Rush have proved that you can have pretty stable low consumer goods price inflation and at the same time have investment bubbles and a highly unstable system.

    3. Since it is the collapse of business investment and the collapse of the demand for the things we borrow for that leads to great stress. The sort of stress that would bring on a depression, it makes sense that avoiding inflation in THESE markets (not in consumer goods markets) is where policy should be directed.

    4. Its investment market inflation that tends to overshoot in the pre-recession counterfeiting. It is these prices that wind up having a lot further to fall then consumer prices before normal economic activity can start again. So it makes sense to clamp down fast on any bubbles developing in these markets but not in such a way as to cause a collapse in other investment markets.

    5. These are all interim measures in any case. We want could competition policy in currency provision. And whatever currencies are being used we want to get rid of fractional reserve banking. But as we move forward the higher the RAR the easier it will be to predict the effects of monetary policy. So each time we wish to dampen demand we ought to try and click up the RAR a point but we don’t ever want it to fall back down. When the RAR is a lot higher then it is now the bank will find that it is much easier to hit whatever targets it aims at. Fractional reserve banking is what creates enourmous instability in the system.

  14. Fuck, it’s like arguing with a puffer fish. Could you try getting your points concisely into one post at a time? It’s rather tedious wading through all this verbiage looking for whatever dopey point you’re attempting to make.

    “We have monetary policy now right. Now you idiot. You are coming back at me and saying we don’t need monetary policy?????”

    I know you find it difficult to argue with real people as opposed to strawmen, but please make an effort, FFS. It would be very clear to any competent Anglophone that I was responding to the following piece of lunacy, from your very own keyboard:

    “You would get no delphic talk coming from me as Board Governor. I’d work like a day-trader myself using the stock market as the barometer.”

    Where did I argue for the abandonment of monetary policy? I was arguing that your suggestion of installing G. Bird as RBA Governor was singularly stupid [that’s “stipud” to you, Joey], as amply evidenced by your inability to tell me where the OCR should be set. You don’t know because you’re no less (and most likely a good deal MORE) clueless than the rest of the RBA board, and your suggestion to base day to day monetary policy on market gyrations is truly moronic. Simply stating that you would raise rates if “demand was too high”, and lower them “if you wanted demand quick” is the most redundant shit-for-brains tripe I’ve seen since my last argument with you on economics.

  15. “No idea, Joey. Don’t care much, either, as the market decides how much liquidity it demands for any given rate. You remember market forces, dontcha?”

    That’s just ridiculous. You mean to say you put the power of counterfeiting in the hands of the bankers and you call that market forces?

    It still doesn’t tell you what interest rate to use. But more then that it doesn’t tell you why to use interest rates in the first place. The system was set up by bankers in order to have the special priveledge of being the first to get newly counterfeited cash. Don’t be an idiot and imagine that this act of cartelisation and larceny has anything to do with market forces.

    They don’t need to so favour bankers over the rest of humanity. They could simply monetise debt.

    “So what if it’s not managed exactly? How can it be in an international economy with porous borders?”

    The topic YOU IDIOT is what is the better monetary policy. Our current system is self-evidently stupid and destabilising. We ought to do better. Its important you fuckwit that we do better.

    Now tell us your preffered monetary policy and your reasons for it or I’m going to suspend your ass. Not for your offensiveness but for your unwillingness to think.

  16. The Federal bank for example was set up by bankers. Its big business cartelisation. Its big business working with government hand in hand. This is crony capitialism.

    But fractional reserve banking is such a dysfunctional and fucked up system that in this case it must be admitted that there was some plausibility to why they could do it and get away with it.

  17. No dipshit. That is what actually happened. You can get references now for it. Get down on your filthy puss-filled knees and ask for these references and I might give them to you in a months time.

    And everywhere we see business attempts at cartelisation. Not just the banks. But the impetous with banks is of course much greater. Since who doesn’t dream of having their own printing press.


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