RBA Makes it Almost Impossible for Market to Set Rate of Interest

In today’s Money Morning we’ll give the Reserve Bank of Australia (RBA) a major serve. But before that, it’s appropriate to let you know about Jarrod and Seb’s next protest at the RBA.

Jarrod says they will be out the front of the RBA building at Martin Place in Sydney this Friday between 8am and 10am.

So, if you fancy going along to give them some support, feel free to do so, and let us know how you go by sending an email to moneymorning@moneymorning.com.au.

But before we get on to today’s action, a quick note about yesterday’s Money Morning. Not surprisingly we’ve received quite a few emails from ‘government lovers’ telling us it’s only right for the government to take 50% of your money in compulsory taxes.

Remember, every dollar of tax raised by the government is ultimately paid for by the individual. Company taxes, Payroll Tax, Fringe Benefits Tax, everything is paid for by you.

If the government didn’t levy these taxes, businesses would be able to charge lower prices for their goods and services.

So ultimately, even if your income tax rate is only 20% or 30%, by the time you’ve finished spending your monthly wage, nearly half your gross income will have been snaffled by the tax man.

Which makes yesterday’s report by our old pal at the Sydney Morning Herald, Peter Martin all the more distasteful: “Taxman free to break in to homes.” We’ve had our differences with Peter Martin on the housing market, but Martin’s report on what the ATO is up to should be the scoop of the month – if not the year.

As you’re probably aware, if the ‘old bill’ want to search for something in your home they need to present a warrant to do so. Not the tax office though, they can just barge in and ransack your home in their search for documents.

Amazingly, according to Martin’s report, the ATO conducts 280,000 raids each year without warrants! Our Canon LS-100TS calculator tells us that’s an average of 767.12 raids per day – we’re assuming the tax office doesn’t rest on the sixth and seventh days.

But apparently this is all OK, because if the tax office had to go to the bother of getting a warrant, “This volume of monitoring activity could not be conducted under a warrant-based system without a very large increase in resources or a substantial reduction in monitoring. This in turn would lead to losses in revenue.”

We love how stealing money from individuals is labelled as “losses in revenue” by the ATO. We’re sure crooks say the same thing when they see someone has installed a burglar alarm!

But don’t worry about the increased cost of a warrant-based system, why don’t they just stop breaking and entering private property in order to steal more private property – wages.

Of course, the government lovers will probably write to tell us it’s appropriate as it makes sure “everyone pays their fair share.” Whichever way you look at it, taxation is theft and this report by Peter Martin reveals the ATO is happy to use physical violence as well.

So much for ‘freedom’ eh?

However, we did make a couple of omissions yesterday, as pointed out by Money Morning reader Colin. In our calculations, we’d forgotten to include the taxes that are ripped from your wallet by local government councils.

The most recent data we could find was for 2005 which shows local government across Australia raised $21.5 billion in taxes.

If we assume a roughly 5% growth in revenues since 2005, that puts local government tax stealing at $27.4 billion for 2010.

However, one schoolboy error we made is that we’d double-counted some of the revenue the states get from the Federal government. So, we’ve ‘re-crunched’ the numbers. And unfortunately, the news isn’t that much better…

Take the $515 billion we mentioned yesterday, add the estimated $27.4 billion of local government taxation and that takes you to $542.4 billion. But then we need to subtract around $93 billion which are taxes levied by the federal government but then divvied out to the states and councils.

That brings the number down to approximately $450 billion, or 43.5% of GDP, or 43.5 cents in every dollar. It would have been nice to get it right the first time, but whether it’s 43.5 cents or 49.8 cents it doesn’t matter.

It could be 25.6 cents or 13.1 cents, and it would still be too much.

Anyway, the message is, don’t forget to pay your taxes otherwise the ATO will send the heavies round!

Anyway, back to the RBA…

Three events over the last couple of weeks have shown that it’s a case of ‘You against Them’: there’s the RBA interest rate decision, the International Monetary Fund’s (IMF) call for higher inflation, and the ‘secret’ Central Banker’s Symposium in Sydney.

After the last RBA interest rate decision we wrote:

“And look, that’s exactly what it is. If any other private citizen or private firm intentionally manipulated financial markets for their own benefit as the RBA board members do, they’d be up before the beak quicker than you can say ‘monetary policy.’ That’s right, and I do mean for their own benefit. Maybe they don’t gain financially from it, but they gain mentally. It’s an ego thing. In their own mind they know the power they have to influence markets and they wield it with pride.”

The last sentence is the key part. It’s all about ego and control we thought. And we were right. Here’s what the RBA wrote in summing up the minutes to the board meeting:

“Members noted that many market participants expected a further increase in the cash rate at this meeting. They concluded that, on balance, the stronger case was to leave the cash rate unchanged for the time being.”

In other words, the RBA wanted to ‘buck the market.’ The market was telling the RBA that interest rates are too low and that rates should increase. But obviously a panel of eight men and one woman knows better.

So, interest rates remain near historic lows, and pump, pump, pump, the credit bubble re-inflates.

As we’ve written before, the actions of the RBA makes it almost impossible for the market to set a rate of interest. Market participants don’t know whether to determine rates based on what they believe the rate should be or to base them on what they believe the RBA believes they should be.

And furthermore, whether the RBA will change rates based on its belief or whether it will just try to make a point to the market that the RBA is in charge.

All of which would seem to go against Glenn Stevens’ presentation to the 5th High-Level Seminar of Central Banks a week ago. Then he said:

“Disclosure cuts both ways, however, and in some respects is advantageous to the Central Bank. Certainly its opinions and decisions are known with greater clarity – including when they turn out to be wrong. This concentrates the mind. But clarity also aids the conduct of policy, and not only through the conditioning of expectations.”

There Stevens is claiming that conditioning the market to know what to expect is important – although not the only important thing. Not that important based on its recent actions. Obviously, leading up to the interest rate decision, the RBA had ‘conditioned’ the market to expect an interest rate rise.

Hence why futures markets were anticipating the rise, and why all our mainstream economist pals had also predicted a rise.

Yet, knowing this, and obviously aware of the impact low interest rates has on an economy, the RBA decided to teach the market a lesson by keeping rates at a super-low and artificially low level.

While we’re on the subject, at the 50th Anniversary Symposium, Jaime Caruana, General Manager for the Bank of International Settlements presented a speech titled: “Financial Stability: 10 Questions and About Seven Answers.”

Maybe it was a tongue-in-cheek whacky central bankers’ joke, but seriously, this is the ‘quality’ of banker you have running the show. They ask themselves ten questions, yet they only know the answer to “about seven.”

On that score it’s hardly surprising these guys completely failed to see the global financial collapse coming, and it makes us even more convinced that the worst of the financial collapse is yet to come.

There are a few peachy questions and answers in the speech. Caruana opens with the classic question: “Are financial booms and busts inherent in a market-based economic system?”

Caruana’s answer is “Unfortunately, the answer is yes. Financial markets are not intrinsically stable.”

WRONG! Or rather, he’s mostly wrong. Because what he fails to point out is that it’s the involvement of governments and central banks that create the instability. The actions of the RBA at the recent board meeting is a classic example.

The actions of the Australian government continuing to pump up the housing market is another example.

Without government interference the boom and bust cycle wouldn’t occur. Typically the reason there are booms and busts is due to cheap money that encourages credit growth. Credit growth which eventually collapses.

Or it’s due to government interference preventing free competition so that competing companies are unable to enter the market to create competition and therefore constrain price rises.

So what his answer should have been is, “Yes, because governments and central banks manipulate the market.”

If the question had been “Are financial booms and busts inherent in a free market-based economic system?” The simple answer would have been “No.”

There are plenty of other pearls of nonsense in there. But read the document for yourself to see. The final question Caruana asked was: “Will it be different next time?”

His answer, “I am inclined to think that, provided we do not become complacent and we continue to work on the reform of the financial regulation, the answer may be positive.”

Wrong again. The fact that he can’t be 100% certain shows they’re just making it up as they go along. The reason they can’t be 100% certain is because they either don’t understand how central banks manipulate the market, or they fully understand it and use the manipulation for their own benefit.

Finally – and we’re running out of time – the International Monetary Fund’s (IMF) call for central banks to set the target for inflation at 4%. You can read the full text here.

Not content with devaluing the savings and earnings of individuals with a 2% annual inflation rate, the IMF wants your savings and earnings to be devalued to the tune of 4% per annum. Which we think means your $1 earned today will be worthless in about 18 years!

Not only that, but the IMF is giving the big thumbs up to government spending to fight off recession.

It’s hardly surprising this nonsense should come from a taxpayer funded organisation. The reason the IMF is so keen on higher inflation is that it helps their creditors to repay the loans it’s handed out.

Plus, more government spending means more money for all government organisations, including the IMF. And it naturally puts government at an advantage compared to the private sector which – apart from banks – is unable to create its own money.

All up it means more power to governments and less power to individuals and the private sector.

As we say, it’s ‘You against Them.’

Cheers.
Kris.

Tagged as: ato, central bank, Central Bankers' Symposium, company taxes, fringe benefits tax, government tax, gross income, income tax rate, inflation, interest rate, International Monetary Fund, monthly wage, payroll tax, rba, reserve bank of australia, tax