Posted by: graemebird | June 4, 2008

Symptoms Of Recession From This Moment On/BOUNCE AND FLATTEN/The end of central bank mystique.

This entry was originally posted on May 20, 2008 at 1:19 pm

I’ve brought this one to the front. Because its just so important that everyone knows what monetary policy OUGHT TO be about. Other than nuclear carpet bombing few things can do more damage than bad monetary policy. And our guys really need to move fast to prevent any further damage.

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Economic science is not primarily a predictive discipline. This may be surprising since economists are often called upon to act like soothsayers. I was witness to this on the 34th floor of a building once. The economist bluffed his way through. But he was a very nice guy and quite a sound economist, so it must have hurt.

However from time to time some matters come up that are so clear that very forceful predictions can be made. These perfect predictions can usually only be made to do with those certain subjects, and on those certain occasions, when the mainstream is ignorant and facing the wrong direction. This odd reality is somewhat inevitable. Since if everyone were on the right track, the consensus view would in itself affect events and conditions. By that very effect the mavericks crystal ball would be clouded.

Economic statistics arrive from prior time periods all the time. Usually these statistics are from the last quarter or two.

Despite the fact that economic knowledge doesn’t give one 20/20 foresight we can say that everytime the statistics come in FROM THIS MOMENT ON, those statistics will be shot through with the symptoms of recession.

FROM HERE ON IN WE WILL SEE SYMPTOMS OF RECESSION. NO DOUBT ABOUT THAT AT ALL.

Now it must be understood that even at this late stage we could TECHNICALLY avoid any of this hardship. But we aren’t going to avoid it. And there is just no gainsaying me on this point. We aren’t avoiding these ongoing and unnecessary symptoms of recession because of ignorance in the Reserve Bank, the Treasury, the Cabinet, and within the ranks of Australian economists more generally. There is no time to turn all these people around on this matter. And no inclination within these types of people to admit they are wrong and quickly change their ways.

The Reserve Bank has just released the minutes of its last meeting. And there have been various statements by Glenn Stevens and Ken Henry (of the treasury) floating around. And all of them attest to the fact that the predictions I make here are inevitable.

For most of the last 8 years and in general, monetary policy has tended to be too expansionary. But now its turned contractionary and we will have a great deal of pain and all the usual symptoms of recession.

Now why do I keep referring to the “symptoms of recession”? Why do I make this statement rather than just predict a recession outright? Perhaps you think I’m hedging? But this is not the case. There are many problems with the way that recessions are diagnised by the mainstream. But thats another story that I won’t get into here.

We cannot change the vast damage done to our society by the prior excessively expansionist monetary policy. And as mentioned we cannot change the fact that policy will not be revolutionised in time to stop the ongoing recessionary pain. Yet surely it is useful for us to nail down HOW THIS RECESSIONARY HURT COULD IN THEORY BE AVOIDED. Surely it is useful to show how the damaging excessive monetary expansion could be avoided as well! Not to stop the pain of the horrid months that follow. Nor to stop the damage that subsequent excessive monetary expansion (after the recessionary period is over) will wreak on our society entire. But we ought show how this recessionary pain (THAT WE WILL SUFFER UNDER FROM THIS MOMENT ON) could IN THEORY be avoided, even from this very late stage. We ought to show how we could IN THEORY get out of this mess. And in doing so perhaps that would lead to us getting some sanity in monetary policy a few years down the track.

Well how would we IN THEORY avoid all this recessionary pain?

Now that we have decided to run this hypothetical, how would we in fact salvage the situation? Starting from this day the 20th of May, 2008 in the sovereign island nation of Australia?

The answer to this question of how we would avoid this recessionary pain is contained in the simple phrase BOUNCE AND FLATTEN.

Gerry Jackson says:

“Bank deposits peaked last December at 191.3 after which they started to contract, falling to 181 in February. It was the same for M1: it peaked at 231.3 before falling to 220.4 in February. If this trend continues then — surplus or no surplus — the country will go into recession.”

The immediate policy therefore is to BOUNCE the money supply and bank-deposits back up to about, or just above, whatever their maximum level was. That is by no means the end of the matter. But thats what the bank ought to be trying to do as quickly as possible. What this would entail is a massive injection of cold hard cash, introduced into the banking system, via debt retirement.

Now in this first stage of the salvaging operation it is not so much that you want bank deposits to be MORE THAN the previous maximum. And its not so much that you want M1 to be MORE THAN its previous maximum. But the deal is you would want in the first instance both of them to be suddenly bounced up to at least their previous maximum and if one overshoots you can live with that. But in the first instance you ought not overshoot by any serious amount both of them simultaneously.

Always we see this consideration. We do not want these aggregates growing quickly. We want them growing GLACIALLY. But at the same time as saying this we don’t want these aggregates falling backwards.

Well we are still on stage one of the mission of mercy. But what about the flatten?

There is no getting away from it. But that we need a reserve-asset-ratio.
You see the amount of CASH-INJECTION needed to BOUNCE back to the previous maximums in the shortest possible time would lead to massive inflation and a collapse of the Australian dollar if matters were left to take their course thereafter. The banks would not stop at the level of money-supply we were after. But instead they would go on pyramiding extra ponzi-money on top of all the extra cash that had been injected into the system.

So the next step is to FLATTEN and that can only be done with the ability to INCREASE THE RESERVE ASSET RATIO.

Now the above strategy would have to concern the central bank for only a week or two. Its only stage one. Because you see, for practical purposes EVEN MONETARY AGGREGATES ARE NOT THE CORRECT TARGET!!!

Readers may have thought I was going back to the 80’s monetarist prescription. Readers may have thought that I was advocating a steady increase in the money supply, as advocated by Milton Friedman in the 60’s and 70’s and as applied by the New Zealand to some extent in the 80’s.

Such a plan may well have worked in the very long run. But for our purposes these monetary aggregates are NOT the key metric. Since the demand for money for holding under our current dysfunctional monetary system is highly unstable.

If we held monetary growth to a low steady rate we would face a recession. Since the demand for money for holding would reassert itself and would lead to a falling business spending. To stick ridgidly to monetary aggregates would lead to SADO-MONETARISM in the medium-term.

For this reason we need better targets to aim at. To aim at and to BOUNCE AND FLATTEN.
And those metrics are GROSS DOMESTIC REVENUE and PRODUCTIVE EXPENDITURE.

But the process is the same. The idea in our hypothetical ambulance mission is to BOUNCE AND FLATTEN those two metrics by monetary measures alone.

THE END OF CENTRAL BANK MYSTIQUE.

As a central banker, Alan Greenspan was far more cryptic than the delphic oracle. Since in retrospect we can figure out what it was that the oracle was driving at. Now we have to end this ambiguous and cryptic nonsense. The job of a central bank is to expand money at a rate which will keep GDR and Productive Expenditure growing as slowly AS GLACIALLY as possible but without actually ever dropping. And thats it. There is just nothing to be cryptic about.

This cryptic nature of your average central banker is simply because:

1. He’s typically a song and dance man who has no idea what he is doing but intends to look good doing it.

2. There is so much ponzi-money pyramided on such a comparatively small amount of cash that this leaves the bankers touchy. And on the share traders side of things, they as a group have so much debt in relation to their equity, that they too are an extremely flighty bunch.

But there is no need for any of this obscurantism once we know what the central bank is supposed to do. The bank, from our current position, is supposed to BOUNCE AND FLATTEN. And the bank chairman can communicate precisely how he hopes that the banks will act and how he intends to work policy to that end.

Our hypothetical uncryptic central banker is there to tell the banks that he intends to do the following.

1. Flush the place with cash, giving the banks a window of time to make a massive amount of loans as quickly as possible.

2. Then when the prior maximum GDR and productive expenditure is reached a new reserve asset ratio will be set somewhere close to the banks EFFECTIVE reserve asset ratio. He will select the bank with the lowest effective reserve asset ratio and he will set the new official reserve asset ratio somewhere just above of below that level.

He is not there to fool and mystify ANYONE. He is there instead to bounce the level of spending up to its prior maximum level and thereafter grow it as slowly as he possibly can.

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