Australians must brace themselves for the coming unleashing of unconventional monetary policy.
In an extraordinary speech at the recent Australian Business Economists Annual Dinner, the Governor of the Reserve Bank of Australia (RBA), Dr Phillip Lowe gave a speech about the future of monetary policy in Australia, especially the RBA’s plan for so-called ‘unconventional’ monetary policy.
In his speech the Governor confirmed that Australia can expect to be in a low interest rate environment for the foreseeable future driven by powerful global forces which are impacting both official and market interest rates across the world.
Moreover, the Governor declared that the RBA is ready to implement extreme forms of monetary policy where circumstances justify such action from occurring – i.e. in his own words, ‘all options would need to be on the table’ if economic circumstances warrant it, that being if unemployment rises and inflation falls beyond the targets set by the RBA coupled with disruption to private sector markets.
Such statements from the Governor are both significant and alarming given the constant reassurance that the RBA and the Federal Government have been providing in recent years that the Australian economy is fundamentally strong and that public and monetary policy is being managed both professionally and prudently.
The problem is too much debt
The key basis for why world central banks are reverting to unconventional monetary policy comes from the fact that the global economy and key major economies such as the United States, Japan and countries within Europe are experiencing slower rates of economic growth with certain countries close to or are currently in an economic recession.
With global debt now reaching approximately $US 250 trillion or 320 per cent of global gross domestic product (GDP) as of June 2019 according to the International Institute for Finance, the largest debt bubble in world economic history has now exhausted its ability to generate economic growth under the current:
burden of debt (which impacts on consumption and investment rates);
rates of credit growth; and
interest rates and thus debt servicing costs.
This phenomenon is also true of the Australian economy which continues to see evidence of key sectors associated with Australia’s record household debt bubble, for example retail and residential construction, continuing to slow.
The four unconventional monetary policy options
When considering the forms that unconventional monetary policy may take, the RBA Governor, citing a recent research paper which was published by the Bank for International Settlements (BIS), states four unconventional monetary policy options which were recently examined with these options being:
negative nominal official interest rates;
extended liquidity operations;
quantitative easing (QE) (code language for debt monetisation); and
The RBA Governor made a series of observations about each of these options based on international experience. Overall, the Governor claimed that these options were designed to keep credit markets as well as the financial and banking system operating smoothly while pushing down the ‘risk free’ interest rate thus resulting in:
higher asset prices; and
a lower exchange rate.
These the Governor claimed were necessary to facilitate higher rates of business investment, labour demand and wages, a more competitive export sector through a cheaper dollar and thus higher rates of consumption through the ‘wealth effect’ and economic growth.
Alternatively, the Governor noted that these options carried adverse consequences and side effects including:
changing economic incentives which were unhelpful to boosting economic growth;
creating an inaction bias towards economic reform;
damaging the profitability of commercial banks in the case of negative interest rates;
forcing commercial banks into riskier investment activity to generating profits including financial derivatives;
allowing uncommercial firms (otherwise known as zombie firms) to continue to operate; and
having a counterproductive impact on consumer confidence.
Preferred Unconventional Monetary Policy Option
The Governor expressed the RBA’s preferred unconventional monetary policy option which is QE through the purchase of government bonds (potentially both Federal and State Government bonds) through the secondary bond market.
The RBA’s QE program would commence when official interest rates reached 0.25%. Official interest rates are currently at 0.75%.
The intention of the QE program would be to reduce the risk-free interest rate which is used to set interest rates across the economy thus making it more attractive for corporations, small business and households to borrow, invest and consume thus spurring economic growth.
While this limited form of QE is the RBA’s preferred model, the RBA effectively said that it could potentially go beyond this model if economic circumstances warrant this including using QE to purchase private sector assets (e.g. residential mortgage back securities) or the implementation of negative interest rates.
So in a nutshell, the RBA Governor’s solution to the biggest debt bubble in Australian history is more money printing, more government intervention in financial markets and ultimately more debt.
What did the RBA Governor did not adequately address?
Concerningly, there were many technical policy issues that the RBA Governor failed to address in his speech which should give all Australians cause for concern including:
How much QE would the RBA be willing to do? What financial dollar limit would the RBA be willing to adhere to?
How does the RBA propose to unwind QE given that no central bank around the world has been able to achieve this?
How far would the RBA be willing to take unconventional monetary policy if a global economic shock were to occur similar to the GFC in 2008?
What would the RBA do if Australia were to experience stagflation (i.e. simultaneously rising inflation coupled with low economic growth and rising unemployment)?
The lack of clarity to these technical questions may suggest that the RBA has not fully thought through the long-term implications of the array of unconventional measures.
The wealth of individual Australians is at risk
Nevertheless, Australians should be deeply concerned regarding the medium to long-term implications of these radical policy suggestions given that the implications are unequivocally clear given historical empirical evidence.
Throughout the last 1,000 years of human history, anytime a society or economy operated with a fiat currency, the currency has always failed as governments, politicians and bureaucrats have always been tempted to print excessive amounts of currency which has resulted in:
a loss of confidence in the currency;
ultimately an abandonment of the currency.
On every occasion, a new form of money was required to restore economic confidence among economic actors. In nearly all instances, this new form of money was either physical gold or silver or a currency backed by physical gold and silver. This occurred, for example, in Germany after their horrendous experience with hyperinflation in 1923.
Australians should be alarmed that the Governor’s speech confirmed that the history of fiat currency is most probably going to continue in Australia under our current political and economic leadership.
That is, the Australian dollar will be printed and debased until inflation ensues and confidence in the currency collapses. How long this process takes is unclear, however what we do know is the final destination.
The RBA is dancing to the tune of global central banks and elite organisations such as the Bank for International Settlements and the International Monetary Fund.
The RBA will print unlimited amounts of currency, drive official interest rates to deeply negative levels and ultimately destroy the purchasing power of the Australian dollar in an effort to keep the biggest domestic and global debt bubble from exploding.
Unfortunately, there is little to no monetary restraint or prudence within Australia’s political and economic establishment which should be a concern for all Australians who are worried about cost of living pressures, mounting levels of debt and preserving wealth.
Under the current global and domestic monetary regime, Australians have little choice left other than to flee the Australian dollar and the commercial banking system and accumulate proven forms of money that have stood the test of time in preserving purchasing power that being physical gold and silver – nothing else exists which has proven itself to be a safe store of value.
John Adams is the Chief Economist for As Good As Gold Australia
 The RBA Speech can be found here: https://www.rba.gov.au/speeches/2019/sp-gov-2019-11-26.html