How Than Shall We Pray

One of my favorite sayings is, “Why worry when you can pray.”  I know that the Bible says, “Don’t worry,” more times than it says, “Don’t steal,” and we all know what stealing is. Prayer is how w...

Dr. Robert Owens - avatar Dr. Robert Owens

We live in a world of upheaval. So why aren't today's protests leading to revolutions?

Today's protests are driven more by anger over social and economic inequity than deep-seated grievances against a regime.Orlando Barria/EPAWe live in a world of violent challenges to the status quo, f...

Peter McPhee, Emeritus professor, University of Melbourne - avatar Peter McPhee, Emeritus professor, University of Melbourne

How Hitler memes made their way around the world and into the Fair Work Commission courtroom

Some argue that a parody of a fictional scene is not the same thing as comparing someone to the real historical figure. IMDBIn September, the Fair Work commission rejected an unfair dismissal claim by...

Benjamin Nickl, Lecturer in International Comparative Literature and Translation Studies, University of Sydney - avatar Benjamin Nickl, Lecturer in International Comparative Literature and Translation Studies, University of Sydney

Extinction of ice age giants likely drove surviving animals apart

Extinction of the woolly mammoth and other megafauna caused surviving animals to go their separate ways.Wikimedia As the world grapples with an extinction crisis, our large mammals are among the most ...

Aniko Blanka Toth, Postdoctoral Fellow, Macquarie University - avatar Aniko Blanka Toth, Postdoctoral Fellow, Macquarie University

Lack of information on apartment defects leaves whole market on shaky footings

The litany of defects, poor building standards and regulatory failures has serious implications for apartment owners, occupiers and buyers alike. Fears of a loss of confidence in the sector have unfor...

Martin Loosemore, Professor of Construction Management, University of Technology Sydney - avatar Martin Loosemore, Professor of Construction Management, University of Technology Sydney

Veterans have poorer mental health than Australians overall. We could be serving them better

A career in the Australian Defence Force (ADF), or the armed forces in any country, can be rewarding, but also demanding. Challenges include the rigorous training, frequent moves, and maintaining soci...

Nicole Sadler, Associate Professor, Department of Psychiatry, University of Melbourne - avatar Nicole Sadler, Associate Professor, Department of Psychiatry, University of Melbourne

A collapsing star in a distant galaxy fired out some of the most energetic gamma rays ever seen

The HESS telescopes in Namibia are on the alert for high-energy gamma rays.HESS Collaboration / Clementina MedinaThe brightest fireworks in the universe are called gamma-ray bursts and are created by ...

Gavin Rowell, Associate Professor in High Energy Astrophyics, University of Adelaide - avatar Gavin Rowell, Associate Professor in High Energy Astrophyics, University of Adelaide

Buttigieg surges to clear lead in Iowa poll, as Democrats win four of five US state elections

A recent poll has Pete Buttigieg pulling ahead of Joe Biden and Elizabeth Warren for the Democratic presidential election.AAP/EPA/Gary HeTwo and a half months before the February 3 Iowa Democratic cau...

Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne - avatar Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne

It's hard to breathe and you can't think clearly – if you defend your home against a bushfire, be mentally prepared

If you live in a bushfire-prone area, you’ll likely have considered what you will do in the event of a bushfire. The decision, which should be made well in advance of bushfire season, is whether...

Danielle Every, Senior Research Fellow in social vulnerability and disasters, CQUniversity Australia - avatar Danielle Every, Senior Research Fellow in social vulnerability and disasters, CQUniversity Australia

Climate change will make fire storms more likely in southeastern Australia

Temperatures across many regions of Australia are set to exceed 40℃ this week, including heatwaves forecast throughout parts of eastern Australia, raising the spectre of more devastating bushfir...

Giovanni Di Virgilio, Research associate, UNSW - avatar Giovanni Di Virgilio, Research associate, UNSW

To feed the world in 2050 we need to build the plants that evolution didn't

Synthetic biology can help agriculture adapt to a changing world.ShutterstockWe need to revolutionise agriculture in the next 30 years. In 2050 we may have almost 10 billion people to feed. Farmland i...

Claudia Vickers, Director, Synthetic Biology Future Science Platform, CSIRO - avatar Claudia Vickers, Director, Synthetic Biology Future Science Platform, CSIRO

Innovation competitions are the next big thing. Here are 8 ways to make them work

Leonardo da Vinci sketches. He invented the pulley, the parachute and the water-powered mill. None were patented.ShutterstockFor centuries, human beings have relied on patents to encourage and protect...

Olga Kokshagina, Researcher - Innovation & Entrepreneurship, RMIT University - avatar Olga Kokshagina, Researcher - Innovation & Entrepreneurship, RMIT University

Big men do cry: cricketers are leading the charge for inclusive masculinity

Rising Australian cricket star Will Pucovski has recently taken the surprising step of asking notto be considered for selection for the national men’s team ahead of the First Test against Pakist...

Keith Parry, Senior Lecturer in Sport Management, University of Winchester - avatar Keith Parry, Senior Lecturer in Sport Management, University of Winchester

Make the study of economics more sexy : Chris Bowen

Labor frontbencher Chris Bowen, who has previously been shadow treasurer and before that treasurer, wants the study of economics made “more sexy” to attract more students, especially women...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

In its quarterly statement on monetary policy, released today, the Reserve Bank of Australia declared its preparedness to “ease monetary policy further if needed”.

This suggests the bank still thinks monetary policy – in this case lowering interest rates to stimulate the economy – could help “support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target”.

But in the wake of the bank last month lowering the official interest rate to a record low and the current somewhat sad state of the Australian economy, many commentators have speculated that monetary policy doesn’t work any more.

Read more: We asked 13 economists how to fix things. All back the RBA governor over the treasurer

Is that right?

There are a number of variants of the “monetary policy doesn’t work” argument. The most basic is that the Reserve Bank has this year cut rates from 1.50% to 0.75% without any improvement to the Australian economy.

This is a textbook example of one of the classic logic fallacies known as “post hoc ergo propter hoc” (from the Latin, meaning “after this, therefore because of this”). Put simply, it assumes the rate cuts have had no effect and doesn’t account for the possibility things might have been worse had there been no cuts.

Things might have been even worse. We’ll never know.

It also ignores what might have happened if the RBA had cut sooner. Again, we can’t know for sure. It is possible, though, to make an educated guess.

When to cut rates

Had the Reserve Bank acted, say, 18 months earlier to cut rates, it would have signalled that Gross Domestic Product (GDP) growth was indeed lower than desired, the sustainable rate of unemployment was more like 4.5% than 5%, and most importantly that it understood the need to act decisively.

That would have sent a powerful signal.

It would also have ameliorated the huge decline in housing credit that pushed down housing prices in Sydney and Melbourne by double digits. That, in turn, would have prevented some of the weakening in the balance sheets of the big four banks that has occurred (witness this annual general meeting season).

All of this would have pumped more liquidity into the economy and put households in a much stronger position, likely leading to stronger consumer spending than we have seen.

Bank pass through

One gripe both the Reserve Bank governor Philip Lowe and federal treasurer Josh Frydenberg have had with the banks is their failure to fully pass through the RBA cuts.

Read more: Our leaders ought to know better: failing to pass on the full rate cut needn't mean banks are profiteering

It is true there is a problem with banks not being able to cut deposit rates below zero, and as a result having less scope to cut mortgage rates, which are majority funded from deposits.

But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE). This is where the central bank pushes down long-term interest rates by buying bonds. At the same time this expands the money supply, thereby adding some upward inflationary pressure.

There is little reason to believe such measures won’t work.

The power of free money

Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.

To put it bluntly, if someone shoves a pile of money into your hand and asks almost nothing in return, you’re likely to use it. In fact, you would be pretty silly not to.

Suppose your mortgage rate really goes to zero – as has happened in Europe.

You might decide to redraw that and spend the money on a home renovation or some other productive purpose. Or you might decide to buy a more expensive house.

Such spending provides an economic boost. The effect is all the more pronounced if people expect interest rates to be low for a long period of time. Aggressive cutting coupled with quantitative easing – which lowers long-term rates – signal just that.

But not only monetary policy

Just because monetary policy still has some effect at near-zero rates doesn’t mean we should pin all of our economic hopes to it.

A near consensus of economists have argued repeatedly for the use of more aggressive fiscal policy – including more infrastructure spending and more tax cuts.

Read more: We asked 13 economists how to fix things. All back the RBA governor over the treasurer

Indeed, Philip Lowe has raised eyebrows by speaking so forthrightly on this issue. That doesn’t make him wrong, though.

There is little doubt the Reserve Bank should have acted much earlier to cut official interest rates. There is also a very good chance it will need to begin to use other measures such as quantitative easing in the relatively near future.

All of that says the Australian economy, like most advanced economies around the world, is in bad shape.

But it doesn’t mean monetary policy has completely run out of puff.

Authors: The Conversation

Read more http://theconversation.com/vital-signs-does-monetary-policy-work-any-more-126579