Monetary policy is failing Australia, just like it has for other countries

Australia’s central bank, the RBA, like all central banks, are artificially lowering interest rates to manipulate the marketplace. Australia’s housing market bubble is one of the few in the world which hasn’t popped spectacularly yet. Some of this is due to the RBA lowering interest rates, Government’s offering home owner grants and other manipulations, but above everything is foreign buyers coming to the market and China reinflating the commodities boom after the GFC hit in 2008.

Australia’s housing market:
As most money in the economy is created through fractional reserve banking, that is, when people get new loans at a bank, central banks will continually tinker with the rate of interest to manipulate people’s decisions to get ever-higher loans. In particular, the RBA wants to get more home loans signed. As the following chars show, house prices have really only taken off again in Sydney and Melbourne. The rest of Australia has a flat housing market or a contracting housing market. House prices in Hobart have contracted for over six years; Adelaide’s prices has flat-lined for the same period, as has Brisbane. Most parts of regional Australia haven’t fared much better.

So here’s one of the big faults of having a central bank manipulating interest rates. If Tasmania, South Australia and Queensland were independent countries, the RBA would be halving the current interest rates to try to stimulate those housing markets. Whereas, if Victoria and NSW were independent countries, the RBA would be lifting interest rates right now to try to take the wind out of their property markets. In essence Tasmania is quickly becoming the Greece of Australia. Tasmania’s employment prospects are weak (really only 4 major manufacturers left in the State) and this reflects in its housing prices.

Under the managed economy Australia has there is little the States can do to stimulate investment in their economies. They can’t lower the company tax rate. They can’t alter the GST rate. They can’t manipulate interest rates. These are all managed at a national level. As such, the states earning all the wealth, such as Western Australia heavily subsidise the underperforming states such as Tasmania. For instance, in 2011-12, the Commonwealth derived $49.5 billion from W.A., while expenditure back to W.A. totalled only $29.5 billion, a difference of $20.0 billion. I think most Australia’s take for granted the amount of wealth and taxes that flow from Western Australia to the east coast.

Eventually the wealthy states get tired of bailing out other regions after a while. This has been the cash in Europe for centuries, and now several regions are looking for a way out. Barcelona is doing the heavy economic lifting in Spain, and Venice want’s to be out of Italy (Venetians pay 61 bn euros in tax and gets 21 bn euros back from Rome for services).

How much evidience does one need to show that central planning doesn’t work and leds to inefficient big government?

household_financesHousehold debt has peaked which is a huge warning sign to the RBA that people are more unwilling to take on larger loans.

housing_saving_ratioPeople are tighting their belts as economic uncertainty increases job insecurity. Households are holding onto cash even though the 9 members of the RBA board think interest rates should be low and people shouldn’t be increasing savings. Low interest rates punishes savers.

The RBA can’t manipulate interest rates and get away with it forever. People are waking up.

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