It has been nearly two years since the Indian Prime Minister Narendra Modi announced in November 2016 that his government would repudiate old 500 rupees and 1000-rupee notes and replace these with newly issued 500 rupees and 2000-rupee notes. The government advised that anyone holding the old notes can exchange these for new notes at any bank (up to a maximum limit per day) or deposit unlimited amounts as credit into a bank account.
The Indian demonetization experiment has been promoted as a way to crack down on black money circulating in the economy, with the rationale being that those evading taxes by holding funds in cash or criminals keeping ill-gotten gains in cash would be forced to make such money visible to the government due to the need to deposit old notes into a bank account.
This global ‘War on Cash’ is an attempt by governments to raise revenue from the cash transactions that occur in an economy, but the price of doing away with cash, especially in a developing country like India where many do not even have bank accounts, is likely to be high. By many accounts, the demonetisation experiment has been extremely troubling, with reports of mass financial dislocation and harm to some of the poorest individuals in India.
Chris Leithner’s book, The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australians’ Liberty and Prosperity not only has a long title, but is also extremely lengthy in number of pages. At 654 pages, a casual reader interested in understanding the recent financial crisis might wonder whether it’s worth buying Leithner’s hefty work. My answer is a resounding ‘yes’. Every Australian should read this book to understand how the government’s involvement in money and banking has diminished their living standards.
Leithner’s goal is simple: to challenge conventional wisdom in the field of monetary economics. Along the way, he also demolishes a variety of other fallacies surrounding the State and its interventions. Harvard-educated academics – the same people who did not foresee the crisis – have blamed the crisis on capitalism and greed, but Leithner is here to defend the free-market perspective against the Keynesian onslaught.
According to Leithner, government intervention, not market failure, is the underlying cause of recessions and depressions. Government’s interventions are manifested through such measures as fractional reserve banking (FRB), legal tender laws, and central banking. Leithner argues that these forms of meddling in monetary affairs create economic turmoil. Though few people discuss the merits or otherwise of FRB and legal tender laws, central banking is already prominent in mainstream debates.
Central banks are a relatively recent phenomenon. For many years, Australians prospered without a central bank in an environment where private banks issued paper currencies. The pre-1901 era in Australia was a time of free banking, i.e. a situation where government gave no special privileges to banks. ‘Australian banking was relatively free for almost a century from the establishment of the first banks until well into the twentieth,’ explains Kevin Dowd in Laissez Faire Banking, ‘and fully fledged central banking arrived only with the establishment of the Reserve Bank of Australia at the comparatively late date of 1959’.
Nowadays, central bankers are highly praised and government intervention is taken for granted. Leithner questions this naïve faith:
In Australia, economists, investors and journalists babble endlessly about the level at which the Reserve Bank should “set” the “official interest rate”…Alas, almost nobody bothers to ask why it should be set, or whether it actually can be fixed…[F]or reasons rarely discussed and never justified, virtually nobody baulks at the notion that a short-term money market rate of interest must be “set” by a committee of price-fixers and central planners in Martin Place, Sydney.
The media and mainstream academics have done their best to suppress the true causes of the recession. But finally, the truth about the financial crisis is here.
In his latest book, The Evil Princes of Martin Place, investor Chris Leithner puts forward a free-market view of the economic crisis in 2008 as a counter to critics who have blamed capitalism and supported Karl Marx's notion of central banking.
Dr. Leithner's argument is that although the Reserve Bank of Australia masquerades as a "scientific" and independent organization, it is the underlying cause of the financial crisis.
Dr. Leithner is firmly within the Austrian School of Economics, which boasts luminaries such as Nobel laureate F.A. Hayek and respected economist Ludwig von Mises.
The book can be purchased through Amazon.com by clicking here. Download a free chapter. Read my review.
Kim Beazley provides ample evidence why he will probably never become prime minister.
What's "fair" to him are the award rates that effectively price low-skilled migrant workers out of the job market.
The unions love minimum wages because they prevent other workers from taking the jobs of their members. It has nothing to do with helping the poor, because the poor can be helped through welfare payments.
If Labor denies the evidence in favour of higher minimum wages causing increased unemployment, then it needs a crash course in basic economics.
Mr Beazley prides himself on standing up to bullies. Why not stand up to the unions for a change?
(Letter to the editor, The Age, 16 September 2006)
The Reserve Bank of Australia has been in the news recently, thanks to a corruption scandal splashed across the front pages of newspapers throughout the country. According to reports, two currency firms overseen by the Reserve Bank funnelled bribes to government officials in Indonesia, Malaysia and Vietnam, to win banknote deals. Securency and Note Printing Australia are partly and wholly owned (respectively) by the RBA, and many prominent political figures sat on the boards of the two companies.
This scandal, however, is just the tip of the iceberg. Other aspects of the RBA are equally shady, but are rarely exposed to public scrutiny. A new book by investor Chris Leithner, The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australians’ Liberty and Prosperity, documents in detail the nefarious schemes of Australia’s central bank.
Leithner is an adherent of the Austrian School of Economics, which argues that central banks are behind the boom-bust cycle that characterises modern economies. They are, in other words, the culprit responsible for recessions and depressions. By controlling the overnight cash rate (the rate at which banks borrow from the central bank), the Reserve Bank is able to control the money supply and thereby influence interest rates. This sets in motion a process that influences the rate of interest on housing loans, deposits and business loans.
When interest rates are kept artificially low, distortions in the structure of production, excessive borrowing and speculation are the result. The central bank’s loose money policies mislead investors into starting projects that appear profitable, but in hindsight are not. The crash comes because investors foolishly think that the boom will last, and leverage themselves too highly, as they were not prudent in their accumulation of debt.
This, in a nutshell, is the Austrian theory of the business cycle. According to this view, economic downturns are the price paid for prior (artificial) credit expansion.
We find evidence of this in the United States, when the Chairman of the Federal Reserve – Alan Greenspan – kept the federal funds rate at an absurdly low 1% from June 2003 till June 2004. Many attribute the resulting housing bubble to Greenspan’s suppression of rates.
In Australia, Leithner shows that the RBA also started an artificial boom. Leithner shows that from 1991-2007, the money supply rose rapidly. By Leithner’s reckoning, inflation (the M1 measure) increased by 404%, at an annualised compound rate of 10.2%. As in the US, much of the credit created by the Reserve Bank was pumped into the housing market, creating an asset price bubble. Stock prices were inflated.
For Leithner, however, the bust has not yet arrived – hence the reason why the Australian recession was not as severe as its American counterpart. Australian house prices remain overvalued and have not dropped to more realistic levels.
The role played by central banks in fostering monetary instability leads Leithner to question whether we need a central bank at all. It’s not a crazy question! For much of Australia’s history, there was no central bank. Private banks issued currencies and there was little government regulation of the banking sector.
In an environment of global financial instability that many argue is caused by central banking, it is worth asking serious questions about these institutions. Most central banks are highly secretive about their activities. For instance, the Reserve Bank did not even publish minutes of board meetings until December 2007.
There is a fundamental democratic principle involved here. Why should central banks, which are staffed by unelected bureaucrats, wield such a high level of discretionary power? Shouldn’t there be more democratic oversight of these money mandarins who have so much influence over our living standards?
We have seen what happens when central banks are left unchecked. In Zimbabwe, for example, hyperinflation has crippled the purchasing power of the currency. Prices in the African country rise at an extremely rapid pace, over 50% per month. Nobody is suggesting that a catastrophe of that nature is likely to befall Australia. But Zimbabwe is a reminder of the awesome power that central bankers wield, and should prompt us to improve accountability and search for less discretionary ways to manage money and banking.
Originally published in Indian Link (September 2011).
Shortly after the US House of Representatives passed its latest iteration of health care reform, President Donald Trump said that Australia has "better health care than we do."
White House spokesperson Sarah Sanders clarified that Trump did not intend to suggest that he favors shifting to an Australian-style system, but was merely complimenting an ally. As Sanders explained, "[w]hat works in Australia may not work in the United States."
The problem is that the Republican health care bill passed by the House, which the president enthusiastically supported, would be a step toward a central-payer health system.
The System Down Under
As Senator Rand Paul pointed out in a recent oped, the new bill would divert subsidies toward already wealthy insurance companies. “Federal subsidies given to insurance companies is crony capitalism at its worst and will inevitably lead to bigger and bigger taxpayer bailouts until government creeps into every nook and cranny of health care,” he wrote.
In these respects, the bill is actually a step toward the Australian ‘universal’ health system, which is a mixture of public and private hospitals, with public hospitals providing “free” or subsidised primary and specialist care, and the private system operating alongside for those able to afford insurance. The Australian government also subsidizes insurance companies to the tune of billions through an individual rebate for health insurance.
Even with a government-controlled system paid for through hefty taxes, however, about 50 percent of Australians feel the need to shell out extra for private hospital insurance, suggesting that the public system has downsides.
In Australia’s government-managed system, for example, you can’t choose your doctor – you have to take the first one allocated to you, even though you may prefer someone else. You can’t choose the time and place of treatment, and there is little flexibility since appointments are generally based on the hospital’s schedule with little regard to your own.
Because governments necessarily have limited resources, not every health need can be funded. For example, some pregnant women are discharged too early after giving birth because the hospital needs to put someone else on their bed.
Consider, also, the plight of those seeking elective surgery. These patients can suffer on waiting lists for months (with two percent of patients waiting for over a year) before they are able to get much-needed medical treatment. The median wait time in 2015 was 37 days, even though many ‘elective’ procedures are pretty important – like gallstone removal, heart bypass surgery, neurosurgery and knee, hip, and shoulder replacements.
Expensive and Insufficient
My own experience is illustrative. In 2013, I was losing weight and discharging blood. Since my illness was categorised by a bureaucrat as not life threatening, I was unable to get an immediate appointment with a public hospital.
I was placed in Category 2, meaning that I would have to wait up to 90 days. If I had carried private health insurance at the time, I would have been scheduled for a colonoscopy within days and could have been diagnosed with ulcerative colitis sooner. Conditions like this one can be serious if they go untreated for several weeks, and situations like mine are common.
Government health care will do just barely enough to keep you alive – it won't help improve general quality of life. If you don’t ration resources through the market system, it ends up being rationed through arbitrary rules set by lawmakers.
Socialized health care in Australia has driven costs up, too. Each year on April 1, the insurance companies increase premiums above the rate of inflation. Some policies can increase by hundreds of dollars without any increase in the level of benefits paid out.
Meanwhile, cost of living pressures for consumers continue to mount – most notably due to a tax increase in the Medicare Levy Surcharge. Barring massive increases in immigration to counteract the effects of an aging population entering retirement and dropping out of the tax revenue pool, there are likely to be further tax increases.
Not that being able to afford private health insurance is a panacea. Health care costs are so high in Australia, that even having relatively comprehensive insurance does not guarantee there won’t be significant out-of-pocket expenses after a stay in the hospital. This is because of the gap between what insurance companies pay, and what some doctors charge.
Wouldn’t it be better if there were lower taxes accompanied by a removal of subsidized health care? It only makes sense for there to be transition measures to aid the poor as we shift away from reliance on government. In the long run, the benefits of holistic care, quicker surgery times, and more patient choice will outweigh the short-term challenges.
This is Not What the US Needs
Australia is not a good model for American health care. While public hospitals do provide almost-entirely-free treatment, this needs to be weighed against the quality of life disadvantages that come with socialized treatment.
Price inflation and a public debt of $400 billion have been the result of socialized medicine in America’s ally down under. What makes Republicans think the outcome will be any different in the US?
[Originally published at Foundation for Economic Education]
Fred Argy (Letters, 12/12) misses the point. The point of privatisation is not to generate revenue for government. Indeed, if I had my way there would be no selling involved - shares would be gifted to all Australians equally. The real objective of privatisation is to expose a service to the discipline of the market.
The true "furphy" of the proposed electricity sale in NSW is that it would not be full privatisation, because there are many regulatory impediments (such as price controls) that would prevent the free operation of the market. This would likely lead to suboptimal outcomes as suppliers would need to seek approval from bureaucrats to make operational decisions. Of course, then we could expect to hear criticism of privatisation!
(Letters to the editor, The Australian, December 14 2007)
1. Friedman’s money growth rule, which would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, Friedman defines the stock of money as including currency outside commercial banks plus all deposits of commercial banks. He "would specify that the Reserve System should see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5" (Dollars and Deficits, p. 193).
2. A gold standard is another reform aimed at reducing arbitrariness in monetary policy. Former Chairman of the Federal Reserve, Alan Greenspan, once defended gold because of its ability to act as a restraint on government. "The idea behind a gold standard," Reed observes, "is to remove from the hands of politicians or their political appointees the discretion of determining a nation's supply of money". Under a gold standard, individuals have a legal right to redeem the notes they hold for gold from the central bank’s vaults. As a result, the central bank must have reference to the amount of physical gold before changing the money supply. By contrast, under the current prevailing fiat paper standard, monetary authorities have complete discretion: they can inflate or contract the money supply at will.
3. Another means of eliminating discretionary power in monetary policy is to legalise free banking, a system where private banks are permitted to issue their own notes. Since free banking does away with the need for a central bank (there is no ‘lender of last resort’), monetary policy is denationalised and decentralised away from state control, removing the ability of a few individuals sitting on a monetary policy board to control a nation’s money. Under a regime of free banking, commercial banks are lightly regulated and are treated the same as any other business, subject only to the general company law.
In early January, Senator Rand Paul reintroduced the Federal Reserve Transparency Act, and Representative Thomas Massie introduced companion legislation in the United States House of Representatives, thereby continuing the "Audit the Fed" movement started by then Congressman Ron Paul.
The Paul-Massie bills are part of a push to impose greater accountability upon the political class responsible for the value of the American dollar through their monetary policies. Their argument is, essentially, that human beings are fallible, and the more eyes watching over momentous decisions, the better.
If the Republican Party truly value small government and fiscal responsibility, then now is the time to use their majority in Congress to audit the Federal Reserve System. The Audit the Fed movement offers an alternative to the prevailing regime of secrecy. The Paul and Massie bills, which are identical in wording, would expose the Fed's international transactions, especially those undertaken with foreign governments or central banks. They would also look into monetary policy deliberations by the Fed's Board of Governors and the Federal Open Market Committee's transactions. Specifically, the proposed legislation directs the Government Accountability Office to complete, within 12 months, an audit of the Federal Reserve Board and Federal Reserve banks.
The Fed is a creature of Congress, which alone holds constitutional authority to coin money and regulate its value, and democratic accountability demands oversight. A Bloomberg national poll taken in 2010 suggests that 39 percent of Americans want to hold the Fed more accountable, while 16 percent would abolish it altogether. And a 2013 Rasmussen poll found that 74 percent favor greater transparency by the Fed.
Moreover, at any moment, the Federal Reserve system can introduce an exogenous shock into the economy. Actions in the monetary policy realm can ruin the livelihoods of millions and deserve scrutiny. Many believe, for instance, that the recession beginning in 2007 was the fault of the Fed, under its chairman, Alan Greenspan, holding interest rates too low for too long.
Previous attempts to audit the Federal Reserve have already proved illuminating. When a diluted version of Congressman Paul's preferred audit was passed in 2010, it revealed contradictory elements of monetary policy. The one-time auditshowed that during the Great Recession of 2007, the Fed lent nearly $5 trillion to foreign governments and central banks, even though some of those were declared enemies. It was found that in 2008, the Fed had helped prop up the Libyan government through loans to a bank substantially owned by the Central Bank of Libya, even though President Barack Obama would in 2011 start a war aimed at toppling Moammar Gaddafi's regime. Expect more such revelations if the Paul-Massie bill is passed.
The main lobby group opposed to an audit is, unsurprisingly, the Fed itself. It has been suggested by officials at the Fed that an audit of the sort proposed by Paul and Massie would compromise its independence from the executive branch and Congress. Yet this objection would be easily overcome by putting in place safeguards, such as time lags between an audit and release of the information to the public. Even if the public has delayed access, members of Congress and the executive, being elected representatives entrusted with constitutional responsibility for oversight, should obtain the information immediately.
Paul and Massie may have an ally in President Donald Trump, who hasdemonstrated support for auditing the Federal Reserve, writing on Twitter that "[i]t is so important to audit The Federal Reserve[.]" While it is an achievement that politicians now feel they must pay lip service to checks and balances, it is doubtful that the president meant what he said, since his choice for treasury secretary, Steven Mnuchin, has been ambiguous on the issue.
If arguments based on logic do not persuade, then the politics of the situation might. Republicans should pass an audit so they are not remembered as the party that favored the bankers at the expense of the average American, and so that when the next financial crisis hits, they are not blamed. President Trump's promise of achieving three- to four-percent annual economic growth is a worthy ideal, and auditing the Fed is a crucial step toward that objective since it would provide a better understanding of America's real assets and liabilities.
Originally published at the American Thinker.
Most central banks are staffed by unelected bureaucrats and are outside the realm of political control. The Treasurer, no matter how much he may disagree, is bound by convention not to interfere with the monetary policy decisions of the bank.
This state of affairs has insulated central banks from accountability. Parliament does not control the Reserve Bank of Australia’s budget, as it does for the High Court.
Full disclosures of monetary policy dealings domestically and internationally are not accessible. The RBA’s exemption from Freedom of Information laws prevents the public from finding out the extent of its relationships with external actors. Like the Fed, no parliamentary committee truly oversees every aspect of its decision-making, meaning it is probably more secretive than the Australian Security Intelligence Service.
A good way to improve accountability is to audit the RBA. Comprehensive audits can reveal useful information about how a central bank is employing its discretionary powers.
Opponents of an audit argue that opening up the bank's books would impinge on its "independence". Let's assume, for the sake of argument, that central bank independence is a good thing. Even so, it's unlikely that expanding the scope of audits would significantly affect independence. Protections can be put in place to minimise this risk. Not all documents discovered during an audit need to be made public. Some can be viewed privately by the inspector-general in charge of accountability. Appropriate safeguards, such as time lags between a monetary policy decision and an audit of the decision, can also be implemented.
Thus, there is no excuse for not providing citizens a better understanding of the RBA's shenanigans.