Here’s the ‘job description’ for the Reserve Bank of Australia (RBA):
‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.’
Let’s see how they’re doing shall we?
This report card should paint the picture for you:
“The stability of the Currency” – given that the purchasing power of the dollar has diminished over 90% since the introduction of the RBA since the 1960′s there’s really only one grade I can give them… F.
“The maintenance of full employment” – this little catchphrase looks harmless but let’s put this in another context. 300 or so years ago the masters of the universe back then did the same thing by encouraging full employment – it was called serfdom.
In America at that time it was called slavery or indentured servitude. With a corrupted currency and no real savings the faces have changed but the game remains the same. We are all working (surviving) for a master of sorts. For that I give the RBA a… F.
“The economic prosperity and welfare of the people of Australia” – I will use the following benchmark. If the average Australian were to say today “That’s it I quit!” and stay at home how long could he/she live a comfortable life?
Let’s just say this average Australian has access to a backyard for veggies and a few chickens to slaughter or get eggs from. He has no dependants and he owns his own (paid off) house and he generates his own power.
He also collects his own rain water, disposes of his own effluent safely and he’s very handy with repairs. He has enough money to cover rates, insurance, health, vehicle rego and maybe a beer brewing kit.
I would say that this guy is OK.
The majority of us however, wouldn’t last a fortnight. That’s worthy of no more than a grade… F.
Three Fs isn’t a good score is it?
The thing is, Central Banks are not a natural development of banking. Instead they are Cartels who bestow favours to its members (the Banks and Government). They can only exist in a protected environment and by a special privilege of Law.
This special protection from competition granted by the Government (legal tender laws) is simple – by policing the people and forcing us to use this substitute money a portion of all profits derived from RBA dealings goes directly to the Australian Government. It’s a form of legalised counterfeiting.
The first action of any Reserve Bank is to eliminate real money (gold and silver) from the economy and introduce a money substitute a note or bill of receipt. We call this note the Australian Dollar.
This counterfeit money can then be printed at the sole discretion of a few board members or a political whim. And with this system come the inevitable inflation and the slow decay of the currency.
To give an analogy, when I was very young, [mumble] years ago, the cure for just about any ills was for my mother to put a few drops of brandy on my tongue. Well, if she could medicate me… my thought was why should I bother her, I’ll do it myself.
It didn’t take long before all my friends helped medicate themselves as well. It became very noticeable the level of the Brandy going down… How was I going to explain that one?
Ta-da! Easy. I just added water and the level was the same. Only the brandy was weaker, much weaker.
Like any boom there comes the inevitable bust or in my case a clip around the ear. My first real education on inflation.
The banks in this country are so highly leveraged with debt that without the RBA providing liquidity they would simply close the doors tomorrow. There is a storm brewing and I for one am battening down my financial hatches and buying some chickens, a generator and of course…
A beer brewing kit.
History tells us, the consequence of diluting a nations wealth usually results in a revolution at worst. Or a very major upheaval at best.
After a painful interlude, the inevitable result is the reversion to a ‘natural’ economy. That means the introduction of free market capitalism with gold and silver as its base.
And so it starts once more. Until governments get the urge to meddle again.
Yours in Freedom, Liberty and Sound Money.
Mark Thompson
(Thoughts from an Old Builder)
for Money Morning Australia
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cb – yes your right, supply and demand can be influence by price, but not price itself.
I might give up posting here for a while, but thanks for being an oasis in an otherwise intellectual Sahara where reason has been banished in favour of dogma, posted by those who just don’t want to understand any concept that contradicts what they wish for. Wishing is not enough, as we both know.
Keep offering that gift of vino to the Gods, I’m sure they listen.
You know where to find me.
If people cannot afford to buy houses ,due to rising prices, they RENT.as the competition for rental houses increases so does the prices.This makes for better returns on investment properties thus keeping prices rising either way….Stop kidding yourself Chris S.DEMAND means higher prices and no amount of gobbledygook can change that fundamental premise.
Ah, good point PF. I have not thought of it like that. Most likely it is what Sayce was trying to say. Will miss you here, but will keep in touch. Bacchus lives eternal, while even property decays.
Good point, John, and we can also add the following possibility to the emerging picture: Even the rental market can price a section of the population out decent housing, while both prices and rental keep going higher. In other words, expecting prices to crash on any other grounds than increasing supply above what willing and able buyers will generate in demand, it is like waiting on the second coming. There is simply no telling when, if ever, it will happen. It might, and it might not, happen. The only way to ensure prices will come off, is to increase supply until they actually do. The rest is all punting, guessing, and speculation.
cb – a few remarks I have….
1) Indonesia, India and Bangladesh are all developing countries. The people in these nations have not enjoyed the prosperity we have in the West and the ideal of home ownership is something that can only be dreamed of by these people (survival, I imagine, is the first goal of most people in these countries).
But in Australia, the dream of home ownership is as old as Vegimite. This is important because politically house prices any more expensive then they are already would cause a voter backlash from those people outside the bubble. For decades the interests of home owners have been prioritised over the interests of prospective home buyers…this is about to swing back the other way. Can you really see Rudd campaigning in a years time with house prices being 9 times the average income…I would expect this to become one of the key electoral issues in 2010
Despite all the arguments put forward by you and PF, never have you been able to explain how forever rising house prices will be politically viable? Surely people like myself are right to point how unfair the high cost of housing is and surely we are entitled to expect something to be done?
2) Your discussion of supply and demand is confusing. PF and you now seem to be claiming that underlying demand is not relevant because demand only matters when people can actually afford to buy the houses at their current prices. This is what I, Sayce and others on this forum have been saying for ages! The shortage of housing is all based around the shortage when compared to the projected underlying demand….but if this demand is from people that are not able to pay, then this underlying demand is totally meaningless and therefore, the shortage argument also falls away.
The argument is not that we will experience a shortage when our population explodes, its that we already have one and that it will only get worse. The supply shortage belivers need to get their case in order…at the moment, it looks like the Iraq Invasion hunt for WMDs all over again!
This is what Kris was talking about when he said the spruikers forget about price. I think was saying that you guys seem to think as long as supply and demand situation continues then price can keep rising. I believe this not be the case and that demand is a function of price and therefore when prices are pushed up, demand weakens and supply is revealed to be a non-issue.
The driver behind the Oz property market is excessive (unsustainable) demand, not supply. The reason we have demand going gangbusters is not because of the population growing, but because the spruikers have created a sense of urgency that has brought forward demand (plus subsidies and emergency low interest rates). We need to have a housing market where demand is not being artifically stimulated…only then can we really see the true supply side picture.
Good points, PuntPal, thanks. I guess, the sceptics here are yet to be convinced that there is going to be a shortage of able and willing buyers to keep prices at current levels, or at least to prevent a US-style, devastating crash that MM and DR have been prognosticating for Australia. There are many reasons for our scepticism at this point, but let me focus only two of them:
1. The meddlers’ determination and ability to keep pumping stimulus money into the economy as far as the eye can see. This, also, is part of the political reality we are dealing with, and my suggestion would be that keeping people in employment will rank higher on voters’ priority list than house prices being affordable. And if this is more or less right, then all the stimulus money will keep enough people in the market at around current price levels to more or less meet existing supply of decent housing.
2. Because of the GFC that has made developer financing difficult to obtain, plus bureaucratic red tape, the pace of construction of new homes has slowed over the past few years. And if that is right, then there is no obvious source from which the existing demand is going to be overwhelmed by fresh supply. And this will stay true, I would guess, as long as significantly higher interest rates, or massive job losses with no countervailing measures to forestall mass foreclosures, or draconian hikes in property taxes, force masses of current home owners over the edge, causing them to dump their properties onto a falling market, and taking massive hits to their balance sheets in the process. I am not saying that something like this cannot happen, but you must consider how likely it is to happen, given our shared assumption that no party is itching for political suicide.
I believe – when you see it said that price is determined SIMPLY by supply and demand – that this is a quite misleading…
The reason is that this implies that there are only two active variables – supply and demand and that price is an inactive variable in this.
I dont agree with this at all, and have to agree exactly with the way Sayce has described the relationship, viz. that the three variables of supply, demand & price are equal partners so to speak, and all effect each other equally. There are no senior partners like supply and demand, and then price is simply determined. Price can just as much influence demand as what demand can influence price. It is a 3-way balance between the variables supply, demand & price.
I hate to play favourite here, but Sayce’s logic makes more sense and more closely models reality than the simplistic “price is determined by supply and demand” model. The simple reason is because “demand” CANNOT be defined exactly… it can be ‘x’ one time and ‘y’ another. And the reason for the difference in those two times could simply be the price… i.e. demand can increase or decrease based ONLY on the going price (and not on how many homeless people there are or how many people have immigrated here)
SAYCE 1 Others 0
Sandra, I am not going to take issue with how one makes sense of a situation. But if we are going to make a guess about where prices are likely to be, then this must be determined on the basis of expected supply and demand at various price levels. Price is supposed to be equilibrium point between supply and demand. It is something that you read off the dial, as it were, once you have values for your variables.
Think of it like reading off the dial of your scales. Your dial will come to rest at the equilibrium point of opposing forces, the inputs generated by the springs and internal resistance of your gadget, and the gravity determined weight of whatever you are measuring. The dial will always stop at the equilibrium point of opposing forces. Same with price being determined by supply and demand, where supply means the range of properties available for sale at various price levels, and demand means the range of willing and able buyers at various price levels.
To say something like Sayce does, that price is determined by supply, demand, and price, is circuitous and convoluted reasoning. It is like saying, The reading on my scales is determined by the resistance of the springs of my scale, the weitht of what I put on my scale, and the dial of my scales. Obviously, this is a much simpler example in which the fallacy is easy to spot, but formula for price determination based on supply and demand in a free market is analogous.
The price, is your equilibrium point between supply and demand, and sellers who put their prices above the equilibrium point are not going to sell, and buyers below that point are not going to buy, unless, and until, the equilibrium point between supply and demand moves to their level. As an individual buyer , or seller, you can either move to meet the market, or must sit and wait for the market to come and meet you.
Ah, and to round that out, in the case of property, or any widget on a free market, volume will dry up in proportion to the GAP that develops between able and willing buyers and sellers in the market.
Unlike in the scales example where the dial will always come to rest at the equilibrium point between the two opposing forces, there is NO LAW dictating that sellers will lower their prices to where the buyers are sitting in the market, or vice versa, that buyers will increase their bids to where the sellers are sitting.
They may, and they may not, and this is why I keep saying that even if all buyers disappear from the market att all price levels, it still does not follow that prices are going to crash, because unless sellers are forced to, they might just decide to sit pat.
CB – just wanted to say thanks very for the useful info the other day on SMSFs … not sure if you got my message back
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