My previous blog post on the RBA noted their tendency to follow a Taylor Rule prior to the GFC. A colleague points out another statistical regularity that holds either side of the GFC, and right back to 1990: the RBA’s decisions follow the 90-day bank bill. Below are Phil Williams’ observations on this issue.
In the days running up to the first Tuesday of each month, the Australian populace is subjected to the excruciating pageantry of whether the RBA Board will increase or decrease interest rates, or whether they will keep them on hold for another month.
Economists take a break from their routine of poring over mountains of statistics and econometric models to come forth and give their solemn prognostications to an adoring public. Financial commentators spring to life like wildlife awakening from the first rains of the wet season, waiting with bated breath on what those extraordinary men and women of the RBA Board might decide.
And then the press statement is released, trading floors spring to life and newspapers splash forth on what it may mean to the lives of the heavily indebted peasantry. This monthly charade also gives politicians an opportunity to spruik their wares. And then we wait for the process to start again next month.
As a humanitarian, I would like to save us from this dreadful spectacle and give each of us the opportunity to track what the RBA might, or might not do in real time. In so doing I hope to de-mystify the process, by stating that the RBA doesn’t lead the way in setting rates, the market does. The RBA is a follower, not a leader.
The following graph plots the 90-day bank-accepted bill rate (red line) and the RBA target cash rate (black line) from January 1990 to 28 July 2011. The blue line at the bottom shows the percentage difference between the two rates. The data is sourced from the RBA’s own web-site, Table F1, “Daily Interest Rates and Yields – Money Market”.
The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. The data also shows that the RBA will generally increase rates once the 90-day bank bill rate gets 50 basis points or more above the RBA cash rate. The actions on the downside are not as tight, with decreases in cash rates occurring when the bank bill rate is anywhere from 0 to 100 basis points below the 90-day bank bill rate. However as a rule of thumb the RBA tends to decrease the cash rate when the 90-day bank bill rate is 50+ basis points lower than the cash rate.
This analysis raises a number of interesting questions:
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Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
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Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
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What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
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How could any economist get their forecasts wrong, particularly on the up-side?
I can only say one thing in defence of the RBA. They are not as destructive as the Bank of England, the ECB or the activist US Federal Reserve.
Phil Williams
There is always the possibility that the RBA decision is anticipated by the market, which is why they appear to follow the lead of the 90 bank bills.
Steve, I have a lot of respect for you, but I tend to disagree with you on this one. I believe the market leads the RBA cashrate because it is “anticipating” what the RBA will do. You can see that instances where the market gets it wrong, it corrects itself and then starts anticipating again. Also, the RBA is not as bad as the others (as you indicated) as it will “look through” short-term data such as inflation as it has done this time around. Also, I was impressed that they had a global perspective and also paid attention to the non-mining economy. All in all it looks like our RBA has learned and is doing a better job than before and better than the others. If the stockmarkets continue to fall they might even reduce rates to buffer the impact. Thank goodness, they have plenty of room to move, so if they act quickly, they might be able to significantly reduce the impact of another GFC.
Who’s leading who?
Appears here the RBA cash rate does?
http://www.bankers.asn.au/default.aspx?ArticleID=1361
Would like the clarified
Thanks in advance
I see little evidence of the 90day bank bill rate leading the target cash rate, more like pre-emptive ‘noise’ around the RBA rate.
it interesting that from about the 27th of july, 30 day interbank cash rate futures were predicting 100% certainty of no change in rba cash rate settings
Oh, I wasn’t saying that I see a causal link Jim: Phil argues that it’s causal–the RBA does what the market does. I’m more inclined to your interpretation. But the correlation is a worthwhile curiousity that I’m happy to put up here.
One thing I did find interesting was Chris Joye’s reaction to rates not being raised; if you read his piece he was implying that the RBA officials (Stevens & Battellino) did want to raise rates, but the non-bureaucrat members of the board overruled them. The market was better at picking that outcome than Chris was, obviously.
@steve
There seems to have been a revival since 2008 of the idea that income inequalities can contribute to financial instability
Was doing a quick review of the idea (http://andrewlainton.wordpress.com/2011/08/05/income-inequality-a-cause-of-the-new-great-depression-yes/) and came across some work from the 1920s which seem to echo some of your ideas in linking credit to demand and stability
luckily the book foster and catchings – ‘profit ’1925 is in your library http://trove.nla.gov.au/work/17982198
Still trying to find an original so only reading reviews of the idea from others at the moment but one of their ideas is that there can be a leg between fixed capital investment financed by credit and demand for similar goods – its difficult to tell from the second hand treatment but their equations seem to be a variant of the Ricardo effect – that is if delta capitalists profit from investment is spent on goods or services with a lower labour component than the productivity increase of the investment than there will be rising unemployment.
It seems intriguing that the relation between the credit circuit and profits was looked at as far back as the 1920s.
“The Fed follows the market” – something previously pointed out by Robert Prechter and his crew: http://www.elliottwave.com/features/default.aspx?cat=mw*aid=3658*time=pm. things are no different on the other side of the pacific.
Alainton August 5, 2011 at 8:55 pm
Credit expansion is central to the Austrian theory of the business cycle or of depressions. Ludwig von Mises wrote “The Theory of Money and Credit” in 1912, followed by a number of essays on the origins of financial crises in 1920s and 1930s. It is not surprising that Austrians such as Kurt Richebächer and Peter Schiff are among those on Bezemer’s list of “who saw it coming”. In fact, the Austrian’s view of the causal role of credit is not that different from the Minskian view, except that the Austrians see the government as the problem, whereas the neo/post-Keynesians see the government as the solution. The recent empirical evidence strongly favors the Austrians, who ironically don’t place much weight on empiricism!
@ Lyonwiss August 5, 2011 at 10:34 pm | #
Your post is what I would consider deep penetration (as usual): and, thank you for reviving Kurt Richebächer here, as I followed him regularly for many years while still missing his incredibly insightful sagacity; an amazing Man – he should be missed – RIP – he is by me.
We still need a definition of : Economics.
I wonder if Glen Stevens could/would define his understanding of Economics in Central Banking? Perhaps it is a property of physical radiation through expression and therefore belongs to ‘natural physics; within the sciences or within meta-physics.
?
I will not hold my breathe.
@ Lyonwiss August 5, 2011 at 10:34 pm | #
“In fact, the Austrian’s view of the causal role of credit is not that different from the Minskian view, except that the Austrians see the government as the problem, whereas the neo/post-Keynesians see the government as the solution. The recent empirical evidence strongly favors the Austrians, who ironically don’t place much weight on empiricism!”
This sentence lacks clarity: I would have thought and still do, that the “Austrians’” were wholly founded in empiricism?
I don’t see this in “Keynesians” at all, au contraire.
Governance is the problem – but in Ethics and dedication – which can be, as it often is, mostly eagerly corrupted by the compounded interests of that which we call “banking”… This is a matter then for the study of human behaviours and temporal signatures.
Personally, I believe that Economists have lost the plot by differentiating that -economics is not phenomenal physics – which it definitely is – and thus preferring to remain an Institutional Religion such as the Catholic [ centre of the universe] Church of Rome.
We are at the interface of superstition and science here and those that rule are fully corrupted by superstition.
May we please move on?
the austrians call it praexology,
actually i have another word for much of austrain/libertarian thinking
mythology
and we are still waiting for the hyper inflationary/ high interest rate nightmare in places like japan and the US,
as a consequence of all that central bank money printing and government extravagance.
the problem for austrains is that they wouldnt know a sectoral balance or a central bank liquidity swap if they tripped over one
heaven help us all if fools like schiffe and ron paul end up running the show
mahaish,
You’re not wrong here, the following link helps to explain this point.
http://anarchism.pageabode.com/afaq/secC8.html
Peterjbolton August 5, 2011 at 11:35 pm
You won’t find Austrians doing much quantitative, statistical analysis. They rely substantially on a priori theoretical reasoning. That is not to say they ignore empirical evidence entirely. On the contrary, their theory is more approximately right, in the sense of agreeing qualitatively with style facts, in contrast to other theories which are precise but completely wrong.
Hayek articulated quite clearly that economics cannot simply adopt the empiricism of natural science, such as physics, because he believes economic data are based on human constructs, whereas science data are based on natural constructs, somehow more objectively valid and less arbitrary. (I agree with this view only up to a point.)
The consequence of this Austrian view is the assumption that you cannot learn much about economic processes and economic theory, just by making lots of observations and discovering natural laws, as in astronomy. Hayek calls this a “pretense of knowledge”, because the activities look scientific, with lots of numbers, charts and even equations.
He is essentially right that economics only appears scientific to those who do not understand science. The evidence is that econometrics has had little or no impact on economic theory. Hayek calls this “scientism” and not science.
However, I disagree with Austrians that economics cannot possibly be empirically based. But if you look carefully and critically, no economic theory in existence is empirically based. So there is no way of settling economic arguments – hence economic theories are like religions, matters of faith or superstition (as you say).
On the question of empiricism, the only difference between Austrians and others is that they are honest, whereas the others mostly pretend – when have we seen economists revise and reject theories due to contrary evidence? Economic theories never die, but get warmed up and recirculated periodically.
@Lyonwyss
Hyeck was quite sympathethetic to some of Foster and Catchings ideas – but still disagreed
http://mises.org/daily/2804
His ‘rebuttal’ has a lot of capital theory mistakes though
Oh and Hayeck wrongly assumed general equilibrium as well
http://www.dartmouth.edu/~mkohn/Papers/A%20window%20in%20the%20Monetary%20theory%20of%201920.pdf
@ Alainton
Thanks. Of course, no one is right on everything. Hayek’s mistake was to couch some of his arguments in an equilibrium framework. His argument was convincingly destroyed by the Cambridge Keynesians, who reigned supreme for a few decades afterwards. But arguments are not the same as the truths – a good debater can win from the wrong side of a proposition.
Moreover, finding faults with the other argument does not necessarily help with one’s own. Economics relies too much on arguments and not enough on empirical verification of their arguments, so economics makes little progress towards the truth. Hayek is wrong on many things, but he provides a useful (even if sometimes ineffective) counter-balance against Keynes. Even if Hayek lost, Keynes did not win.
When I started reading this one I was genuinely looking forward to perhaps some slightly deeper insights than the Taylor Rule. The enjoyably witty sarcasm builds you up to a bit of an anticlimax for me.
This correlation with the bank bill is on the same level as the Taylor Rule. Markets, particularly short term bills, try anticipate what the RBA will do and the RBA pretty much literally gives away what they are thinking and their method of analysis in their statements but also in their detailed reports which are mulled over by teams of economists. The reason bill markets try to anticipate this has everything to do with the way banks manage their liquidity positions, in this context the overnight RBA rate and the bill rates are very much interdependant.
Markets are pricing in rates to drop, as they were when the Taylor Rule prediction was posted. Maybe the 3m bills and the Taylor rule negated eachother so they didn’t raise rates at all, or is that getting a bit too complicated for the regency.
@Lyonwyss
It is a shame that Hayeck gave up on Economics after the Cantabrian criticisms. Modern austrian economics though neither has a coherent theory of capital or a macroeconomic model as a result and is much the worse for it (an honourable mention to Roger Garrisson aside)
Keynsianism in the mid 30s triumphed because it couched heretical underconsumptionist ideas in equilibrium language, this I think was the real point that neo-classicism triumphed. The 1920s and early 30s was a time when heterodoxy was everywhere.
Despite its flaws (no proper theory of interest rates or capital, fallacies of composition, fixed capital pricing errors) the Catchings and Taylor model was truly dynamic and stochastic, and a disequilibrium model with systems feedback effects. It also was a revival of classical like reproduction models taking the non-neutrality of money, accumulation and growth, profits, credit and distribution effects seriously. Despite its monetary insights with the triumph of keynsianism we lost all of that. Of course his ideas were more palatable as it implied that there could be a ‘win win’ situation without redistribution of wealth
Cant help thinking that winding back to where we went wrong this was one of the points.
Hi Steve.I am a somewhat intelligent guy and I get the just of what your’e talking about.But I am no economist.I am a home owner and I am self employed , an average Australian.Do you have an easy (very easy ) to understand article on how it all works. And also are you far off from getting the second edition of debunking economics published.I would also like to be educated on exactly what I could do to protect myself or at least soften the blow. When the Shit hits the fan.
hi adam,
if you have a mortgage,
one things for certain,
if we removed the power of mr stevens and the reserve bank board to set the interest rate target,
your mortgage would be lower by a couple of hundred basis points.
its one of the greatest myths of our time that politicians and journalists alike foster, that a government deficit leads to higher interest rates,
well a deficit creates excess funds in the inter bank lending market , and what happens to the price of something when you have too much of it you cant sell,
the price drops
so if it wasnt for mr stevens medling youd be better off now, and the worst thing about this is that they (the reserve bank board) are probably going to have to unwind some of their rate hikes,
so they have put you through a whole pile of excrement only to figure out later they have got it wrong,
meanwhile your broke or lost your house,
and not even a letter of apology, or cake.
they are very smart people, but expecting them to get pricing right , when there is such uncetainty in monetery system,
is a step to far,
worse things could befall the nation, if the reserve bank board got abducted by aliens,
then they can set about ruining their economy and not ours
@ Philip August 6, 2011 at 12:58 am | #
I. The below position of v. Mises is consistent with the the works of
II. Titus Lucretius Carus (ca. 99 BC – ca. 55 BC) De rerum natura
III. Epicurus ( 341 BCE – 270 BCE) was an ancient Greek philosopher and the founder of the school of philosophy called Epicureanism.
IV. Democritus (ca. 460 BC – ca. 370 BC) He was an influential pre-Socratic philosopher and pupil of Leucippus, who formulated an atomic theory for the cosmos.
It appears to me that the knowledge of the above 4 Giants weighs in with greater qualitative intellect than the later pretenders to the Crown of Economics excluding Minsky * and Keen
(I speak generally) where today’s position in Economics flounders in complexity, specialisational blindness and superstition; Essentially, Economics is a Religion of Opinions and expressed at personal levels with great diversity -as a single Dogma.
Nobody is right all the time… Lyonwiss – correct.
Not withstanding, Economics must be submitted to the scrutiny of science while the Banks cannot enjoy the status of free enterprise while being protected by Government and whilst manipulating that Government.
Economics is a system of Governance: We do not need three Types of Governance ie 1. Bureaucratic – 2. Economic Central Banking and 3. Political
And it seems to me that Economics is the only true and qualified contender for the post of Governance – but not in is current state of a fractured belief system. Subjected to scientific reason in Ethics will provide a true Leadership in Service (Gatekeepers) for the future, elimination and need of the prolific and burdening bureaucracy and the Recursive scammers of the Political ploy.
Banking is where the problems of today (in repetition ad nauseum) in main and the “invisible hand” of destruction is to be found here: all the rest is noise arising.
Philip: Your link [http://anarchism.pageabode.com/afaq/secC8.html] is an argument and a good argument but as Lyonwiss states in Economics nothing appears emanate from argument – that is to say, it seems that “manipulation” is the only tool of the bureaucratic economist delivered with stealth and cunning and mostly wrong and bringing severe damage to the public and War.
By today’s events the World is dramatically changing and the Old Guard is frightened and desperately doing what it can to return to the “status quo” of statism as they feel that their day is done, as they.
The veils of Isis are being lifted for all to see that is, all the naked wannabe kings – that would be.
“Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.
Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body’s cells and nerves to stimuli. People are sometimes prepared to believe that the boundaries between conscious behavior and the involuntary reaction of the forces operating within man’s body are more or less indefinite. This is correct only as far as it is sometimes not easy to establish whether concrete behavior is to be considered voluntary or involuntary. But the distinction between consciousness and unconsciousness is nonetheless sharp and can be clearly determined.
The unconscious behavior of the bodily organs and cells is for the acting ego no less a datum than any other fact of the external world. Acting man must take into account all that goes on within his own body as well as other data, e.g., the weather or the attitudes of his neighbors. There is, of course, a margin within which purposeful behavior has the power to neutralize the working of bodily factors. It is feasible within certain limits to get the body under control. Man can sometimes succeed through the power of his will in overcoming sickness, in compensating for the innate or acquired insufficiency of his physical constitution, or in suppressing reflexes. As far as this is possible, the field of purposeful action is extended. If a man abstains from controlling the involuntary reaction of cells and nerve centers, although he would be in a position to do so, his behavior is from our point of view purposeful.”
v. Mises
http://mises.org/daily/2506
Mahaish August 7, 2011 at 10:07 am
You said: “its one of the greatest myths of our time that politicians and journalists alike foster, that a government deficit leads to higher interest rates,
well a deficit creates excess funds in the inter bank lending market , and what happens to the price of something when you have too much of it you cant sell,
the price drops
so if it wasnt for mr stevens medling youd be better off now, and the worst thing…”
The myth is in your own mind. It is elementary financial knowledge that when government bond price drops, bond yield or interest rate rises. There is no myth or mystery, it is just how a bond contract is mathematically defined.
Hi Adam, the posts I’ve put in the “Essential Posts” link on the left hand side of the blog should help. “Roving Cavaliers” is essential reading, the rest will add detail.
And the second edition will be available on October 4. You can pre-order it from either of these two links:
http://www.abbeys.com.au/book/debunking-economics-the-naked-emperor-of-the-social-sciences-book-9781856499927.do
and
http://www.bookshop.unimelb.edu.au/bookshop/p?9781848139923
An excellent article and a must read:
The Goverance of Money
The idiotic ideological battle in Washington over the debt ceiling was yet more evidence of the failure of governance in Western economies, which is the real crisis. Then, after the stock market carnage of last week, the attention was focussed, reasonably enough, on government’s MANAGEMENT skills — how good they are at being efficient bureaucrats pulling levers in the financial system and in keeping debt levels under control.
But this crisis goes much deeper than that. In a sense the Tea Partiers are right. This is a POLITICAL battle over the state’s right to be a state.
http://www.macrobusiness.com.au/2011/08/the-governance-of-money/