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Does Monetary Policy Really Work In A Crisis?

Discussion in 'The Economy' started by Chris C, 4th Mar, 2009.

  1. Chris C

    Chris C Well-Known Member

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    Well the RBA has slashed rates 400 basis points in the last few months (325 basis points to December 08) yet it has done little to prevent Australia sliding into its first official quarterly contraction.

    This raise the lingering question in my mind - does monetary policy really work in times of crisis?
     
  2. bigbuddha

    bigbuddha Well-Known Member

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    It's an interesting one Chris, increasing money supply and credit into the market leads to inflation, and i think america is in for massive inflationary pressures looking into the future.

    I'm no expert of course on economics but I try to read up as much as I can and to me Austrian School economics makes the most sense to me.


     
  3. Chris C

    Chris C Well-Known Member

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    Well it would appear despite interest rate drops, savings rates have gone up MASSIVELY, and demand for credit has dropped significantly! Which is the complete reverse of what dropping the cash rate is meant to produce.

    Obviously I'm not suggesting lower rates has caused this phenomenon, rather that in spite of low rates people are still saving every penny they can or paying down debt couple with not overextending themselves anymore. This of course will ultimately mean a deflationary spiral, but I'm just amazed at how little an effect monetary policy has had. So in my mind dropping the cash rate to 0% would still do nothing to prevent the economy from moving into recession next quarter. It would appear that rate cuts from here on out will just be largely for show.

    The real tragedy is that fiscal policy is having even less of an impact with studies suggesting that less than 10% of the handouts last year were actually spent. Making the coming handouts look like they will very much just be a transference of debt between the government and the Australian public, and with a multiplier which is very easy to argue being below 0.2 you can't really call it a "stimulus" package can you...
     
  4. bubblebobble

    bubblebobble Member

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    I guess we could ask would the situation be even worse if rates hadn't dropped? Of course, there is no way to know one way or the other.

    I also note that people that rely on income from bank deposits are completely ignored. It seems savers are punished while those who borrow are rewarded.
    The dollar is also made weaker which, while good for exporters who receive income in USD pushes up the price of imports, including such key items as oil.

    Given the effect of the last major interest rate drops in the US and subsequently elsewhere following the tech bust it seems that it may just act to delay the inevitable. Given the overconsumption that went on over the last few years is this not, as Keating might say, a recession we have to have?