The Governor of the RBA appeared before the House of Representatives Standing Committee on Economics yesterday (December 18, 2013). He told the Committee that the economic growth that we experienced leading up to the crisis in 2008 was unlikely to be repeated but his assessment was largely ideological in nature – in the sense that he implicitly eschewed a fundamental re-appraisal of the policy structures in the economy and the way in which national income is distributed. He thus rejected (tacitly) a return to fiscal activism claiming the public “debt dynamic” militated against that. He admitted the limits of monetary policy as an expansionary force. And he implicitly ignored the fact that the on-going failure of real wages to keep track of productivity growth meant that if household consumption expenditure was to grow it would see a return to increasing private debt to unsustainable levels, as occurred in the decade leading up to the crisis. He acknowledged that households were much more cautious now given the heavy debt levels they were carrying but didn’t acknowledge that this meant that the fiscal surpluses of that era were also unsustainable and that deficits were needed to offset the drain from the external deficits and the cautiousness of the private domestic sector. The journalists thus published all the wrong headlines and stories and the public is none the wiser. We remain locked into a neo-liberal option set that will deliver sub-trend growth and rising unemployment. The Governor even had the audacity to say that the unemployment rate (at 5.8 per cent) was low by historical standards, which in itself is false (depending on where history starts) and ignores the fact that our broad labour wastage exceeds 15 per cent of the willing labour force at present.
The – Full Transcript – of the hearing is interesting in many ways.
First, for all those who think a central bank in a currency-issuing nation can go broke this is what the Governor said:
There are central banks that run without capital; there are central banks that have negative capital. They can still do their job in terms of issuing currency, running monetary policy and so on, but I think the better approach and the one that we have always had in Australia is to explicitly hold capital in the central bank against the risks that the central bank, by virtue of its job, accepts on behalf of the nation. Read more…..