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  • PD Jonson

Confessions of a monetary policy tragic

A lifetime's hard work, mostly pro bono. 'Thank your mother for the rabbit' type of activity.


1. Practitioner

Biographical account of the rise and fall of a central banker

1.2 Money, Prices and Output, 1975. [Link to be provided]

New wine in old bottles, the role of 'monetary disequilibrium'.

On leaving the RBA - a failed central banker who was punished for being right about the state of the economy and for telling the Treasurer he was off course, and offering advice of remediation. Though Treasurer Keating followed my advice to the letter, policies he asserted were impossible, there was no forgiveness.

'Inflation is theft' and it is now widely agreed that inflation is a major underlying cause of Australia's economic malaise. The natural corollory - Australia needs an independant central bank with a mandate to contain inflation.

An Australia Day offering on the urgent need for economic policy reform.

Floating the Australian dollar was Australia's single greatest economic reform. It was a team effort, but there are various mysteries, including the mystery of the missing cabinet papers referred to in the title of this article. My aim is to tell the story of the float from an RBA perspective and to address several greater and lesser mysteries.

2. Monetary policy in action - the Henry Thornton papers.

Introducing Australia's Taylor rule, 'Henry's' first essay for The Australian.

2.2 The Politics of Current Monetary Policy, (With Alex Erskine), November 2003.

Henry Thornton suggests how a politically sensitive but 'independant' RBA governor might argue for necessary interest rate increases.

2.3 RBA bites the bullet, (With Alex Erskine), November 2003.

Finally, monetary policy is being normalised. But the RBA needs to get far smarter both with its actions and its explanations.

2.4 The RBA Unplugged, (With Alex Erskine),June 2004.

Henry concluded: 'The start of June is the RBA's last chance to act before the speculation about the Federal election makes anything but a crisis-induced adjustment in rates difficult'. ... Henry Thornton urges the RBA Board to raise interest rates immediately, by 50 basis points, to secure Australians' safety'. A letter to The Australian said: 'Henry Thornton is mad'.

2.5 Bubble, bubble, toil and trouble, (With Alex Erskine), March 2005.

'Today’s Reserve Bank Board meeting will be the most momentous since late 2003. The Board confronts scenarios that could substantially discredit government policies or severely dent the Governor’s reputation, and both outcomes are possible'.

“Too little, too late”. That, surely, is the verdict on Ian Macfarlane’s Reserve. Inflation globally is on the rise and global inflation is set to rise further.

In Australia the economy is benefiting from a major mining boom and this is helping to produce severe shortages of skilled labor, unsustainable growth of credit and rising inflation, which has already raised inflationary expectations. All these facts are indicators of inflation yet to come.

'House prices have soared, share prices have rocketed, resource company shares have glowed in the dark, but consumer prices are subdued. The graph shows the extent of the dislocation between asset inflation and consumer inflation in Australian markets'.

'A third point was not made [by Deputy-governor Battellino.] That is that the great credit bubble of the past 30 years has been caused in part by monetary policy that has been too easy. If this great boom is followed by a great bust – as happened following the great booms of the 1880s and the 1920s – this point will be the main point'.

'The world economy is near a 'tipping point' that is likely to eventually slow inflation, and may even create a severe slowdown, even a global depression that converts inflation to deflation'.

'In every stock-jobbing swindle everyone knows that some time or other the crash must come, but everyone hopes that it may fall on the head of his neighbour, after he himself has caught the shower of gold and placed it in safety. Après moi le deluge! is the watchword of every capitalist of every nation'.

Whilst acting with interest rates, a prudent central bank will presumably tell the financial regulation authority to do something about it also. One hopes such advice would be put on the record when it is offered.

The financial regulators have a bigger task. Many ideas have been floated. Systematically raising the capital to asset ratios as a boom developed is already agreed. Splitting current financial conglomerates into simple banks, investment banks and freeing investment banks, fund managers and other high risk financial activities from onerous supervision. Simple banks would be managed by simple souls paid simple amounts, but would be bailed out to the extent of protecting depositors balances if simple management failed.

Given the parlous state of the global economy, it is highly desirable that Australian companies keep deleveraging and getting their balance sheets in better shape.

It is also important that households retain their recent rates of saving, itself a highly desirable change from the Age of Consumer Landfill when for many years net saving by households was zero or even negative.

Will the Eurozone currency union end badly? Will China’s slowdown be sufficient to put Australia’s prosperity at risk? Will the tepid American recovery keep getting gradually stronger?

Domestic uncertainties are equally perplexing, though the resource boom and strong wage claims are real.

'This article aims to convince the board of the Reserve Bank and the government to introduce a variable tax on capital inflow to enable the Reserve to continue to control inflation without an exchange rate that is severely handicapping many Australian industries'.

'Now the nation's leaders are walking unknowingly into a new economic crisis, ironically just as other developed nations are showing signs of recovery. Warnings have been sounded, and not just by this writer, and the only excuse for the steady tramp into recession is the insularity and self-congratulatory hubris of successive ministers and officials, especially those in Treasury'.

Regular readers will be aware of my attempts to persuade the RBA to sort out policies to control asset inflation, so far as this is possible, distinct from monetary policy, which involves keeping the overall economy on an even keel with low goods and services inflation. This week, Janet Yellen, US Fed Chairwomen, joined the crusade, which is all over save the shouting.

3. How it all fits together

There is a consequence of overly easy money that is vital for the stability of modern capitalism. Zero interest rates and massive money printing (aka 'quantitative easing') has massively inflated asset prices. This has made rich people richer, and has little benefit for ordinary people. The great thinkers, such as Keynes and Marx, have seen excessive inequality as likely to damage capitalism. So even without factoring in the likely economic consequences of withdrawing the excessive monetary stimulus, there is a serious issue awaiting resolution.

3.2 Asset Inflation and Monetary Policy, June 2013 (with Elizabeth Prior Jonson and Ka Mun Ho.)

This paper is fundamentally empirical, as we believe were Friedman and Schwartz. Our aims are to determine: what are the facts; and what does the data suggest about how to include asset inflation in existing models.

3.4 Hard-edged Economic Research, December 2016 (With Clifford Wymer)

To be provided

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