Josie v Money Matters listener - understanding economics

Q. I was listening to your program on GoldFM last Sunday morning. I found it amazing the number of incorrect economic statements that were made concerning the federal governments “stimulus”package.

The bottom line is that the so called stimulus will have no impact as it is based on the mistaken belief that consumer spending drives the economy, when in fact business spending is the driver.

Any surplus is held by the Reserve Bank, and is still part of the money supply, so that it is money created out of thin air (as central banks have an addiction to which is one of the causes of inflation), but a draw down in money balances (often erroneously referred to as idle balances).

The Australian Industry Group’s October Report stated that manufacturing activity fell for a fourth successive month. For those who do not understand the link between interest rates, monetary policy and manufacturing, we are going into a recession, and no amount of consumer stimulus is going to prevent it.

If you look at RBA indexes for monetary aggregates M1 (currency deposits) fell between Dec 2007 and May 2008 by 6.5%. That, in a reversal of their policy for the last 12 years or so, is deflation.

The primary reason, indeed the sole reason, why we have this global meltdown is that US Federal Reserve chairman, Alan Greenspan (referred to by some as the Mr. Magoo of central bankers), in 2001 I believe it was, reduced the Fed’s lending rate to 1% and kept it there for some 16 months and creating excess credit ( the RBA and other central banks, wanting not to miss out on the action followed a similar course).

This excess credit found its way into housing which morphed into weird derivatives of almost unimaginable complexity, and which also worked its way into other areas of business activity, we saw oil peak at USD147 a barrel, more recently commodities. These were all bubbles fed by the world’s central banks, the merchant and commercial bankers being publicly hung now were merely wholesalers.

The central bankers are the ones that must be brought to account. So you see, it was the bureaucrats whose job it was to oversight this things that has got us in the current mess.

So the solution will be more bureaucrats to do more supervision which guarantees that the next recession will be even worse, as it will be compounded by government injecting more liquidity into the economy which is exactly why we’re in this mess. The elephant in the lounge room that no one wants to be in the room when it does decide to flop down is the swap derivatives (estimated at just over one quadrillion US dollars.

That’s right, quadrillion, not trillion. When that baby goes, the reds, sorry greens will be happy, because most peoples standard of living will have been blown back to the dark ages.

Josie’ answer: Thank you for taking the time to write to us.   Your email was informative and I agree
with most of it.   However, you did not specifically mention the incorrect economic statements that were made during the show.

At the outset I want to highlight that we are not economists, and even if we were, I have no doubt we would be receiving emails disagreeing with some our statements.  They say that economists were created to make weather forecasters look good - hope I don’t offend as you seem to know what you are talking about.

Re your comment that business spending is the driver, not consumer, surely a business won’t invest capital unless there is a consumer buying?  Therefore, aren’t they interlinked? (remember I am not an economist!).

I also agree with you that the stimulus package is really only a band-aid solution.  I think, I was caught up in the emotion of feeling good that the pensioners would be getting something.  We cannot afford it, but hard to argue that they didn’t deserve the bonus.

It is also important to highlight that feedback we receive from our listeners is that they don’t want all the ‘technical stuff’.  Consequently, it needs to pass what I call ‘the Burnie Pub Test’.  In other words, the bloke having a beer in the local needs to be able to understand the information and subsequently form their own opinion.   More importantly, if they fall asleep the show wouldn’t survive.   Time is always a problem as
well.

My finger is pointing to the  greedy and ruthless executives who lent buckets of money to people who can least afford it and then onsold the rubbish to unsuspecting investors. This is elementary stuff, and greed was the primary driver.     Sadly this debacle has proven that we cannot let the financial services industry self regulate, both here and around the globe.   Yes, it would be nice to reduce bureaucrat numbers, but there is no easy solution to this problem (unless you become a politician and therefore be in a
position to change things).

Again thanks for your comments which are always welcome and for listening to Money Matters.

Kind regards

Josie Kay

Sponsor - Property Price reports Rp Data*

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