The Following blog post is adapted from a paper I wrote for university. The paper has been altered substantially to include my earnest views on and analysis of the Reserve Bank of Australia that fell outside the remit of the original paper.

This post will consider the Reserve Bank of Australia’s (RBA) role and look at the methods by which the Bank deceives the public; reflecting on the Bank’s origin, its role in money creation and economic management. This post largely adopts Classical and Marxist modes of economic analysis.

Origin

The RBA is Australia’s central bank. The RBA was established following WWII via the Reserve Bank Act 1959. Previously the Commonwealth Bank (CB) had served as the nation’s central bank as well as a trading and savings bank. The official narrative suggests Australia’s commercial banks felt the CB had an unfair advantage over the private banking sector, so the RBA was born. As a result, the CB retained the trading and savings functions while the RBA took on the central banking functions. However, I suspect the IMF and the Bretton Woods establishment play a larger role than anyone cares to publicly admit. Whatever the case may be, the RBA’s very creation was observably class and profit motivated.

Money creation

Adam Smith began his book The Wealth of Nations with the the proposition that labour is the source of wealth for nations. This is particularly true for the Australian dollar as a fiat currency. Under this model, currency creation is reliant on debt. Functionally, debt is simply a claim on future labour.

Debt relations resulting in currency creation do not happen between individuals but can happen between individuals or business and various financial institutions, both public and private. Among these institutions is Australian Office of Financial Management (AOFM), this is apart of the Australian government’s treasury infrastructure; AOFM issues government bonds, often selling those bonds to the wealthy owner and investor classes. Government bonds are a debt obligation collateralised by the sale of future bonds. Definitionally, this is a Ponzi scheme, and the victims are the unwitting Australian public.

The RBA acknowledges the value of the Australian dollar relies on trust; though they do not articulate the material source of said trust which lies in Australia’s institutional ability to extract the surplus labour value of the people in perpetuity (through profits and taxation). This trust can be fragile. Rising unemployment will inhibit this process and can result in liquidity shortages and/or hyperinflation depending on the Bank’s approach, examples include the LIBOR scandal and Zimbabwe 2007. It is for these reasons the RBA purports to be responsive to changes in employment data, inflation data (Consumer Price Index) and forecasts thereof when considering the cash rate target.

Technocrat tomfoolery

The RBA’s self-described role is to maintain full employment and the stability of the Australian dollar. The RBA attempts to control inflation and economic activity via changes to the cash rate target, referred to generally as monetary policy. The RBA implements the target, altering the cash rate, through open market operations; that is, the selling or purchasing of government bonds in the market (often called quantitative easing or tightening). The cash rate is an interest rate used between banks on unsecured overnight loans.

Banks use these loans to maintain liquidity for their short-term liabilities. The interest rate should reflect market risk to guard against liquidity shortfall. The rationale is banks will pass changes in the cash rate along to consumers, increasing or lowering the cash and credit available to consumers thereby controlling demand driven inflation. This worsens inequality given only those with the requisite collateral and/or cash flow have access to credit for the purchase of capital (Marx’s definition; see also the Cantillon effect).

The RBA Monetary Policy Board confers multiple times per year to analyse the economic data that informs policy decisions, specifically changes to the cash rate target. The key data points on which the decision relies include the Consumer Price Index (CPI) and the employment statistics per the Australian Bureau of Statistics (ABS). There are substantive contradictions between ethics and incentives for policy makers when using this data.

This arrangement is based on a model used by the RBA called the Phillips curve. The Phillips curve assumes unemployment and inflation have an inverse relationship; where unemployment is low, inflation will increase (see also NAIRU). There are several issues with this data modelling approach which will be explored below.

Data, dependent on lies

The ABS is a government agency that collects data on the economy, population, environment, and social issues. The data acquired from the ABS is of questionable quality in the context of RBA modelling. The data is notably limited in its ability to accurately describe the prevailing economic conditions for average Australians.

The ABS defines unemployed people as “all persons aged 15 years and older who were not employed” and had “actively looked for full-time or part-time work at any time in the four weeks” prior and collects data on this basis. This definition is exceedingly narrow, excluding “discouraged workers”. The ABS defines discouraged workers as: “persons who want a job and are currently available for work, but have given up any active job search because they believe they cannot find a job”.

The CPI is meant to capture prices changes on the goods and services households typically purchase. However, the ABS excludes certain items like fruit, vegetables and fuel. These items are excluded because they can be subject to substantial and volatile pricing changes. Thus, the CPI does not accurately capture price fluctuations relevant to Australian households.

Dirty data modelling

Excluding discouraged workers and volatile commodities from the data paints a misleading picture about the health of Australia’s economy. Including these data points in the Phillips curve modelling could expose the assumptions of the model as false where both unemployment and inflation are above the stated targets. Additionally, increasing expenditure pressure on households, and by extension credit requirements, is not represented in the CPI data creating unpriced risk when used to inform cash rate decisions.

This unpriced risk has the potential to cause substantial harm to the public, exclusive of the general exploitation experienced by Australian’s at large under this model. The LIBOR scandal shows how inaccurately priced risk on interbank lending can lead to liquidity issues during severe market events. The likelihood of severe market events is elevated where there is geopolitical instability. The fall of the American empire and the rise of fascism is likely to cause unprecedented market volatility. One can only hope this level of instability will end capitalism though that is a discussion for another time.

Furthermore, the inclusion of the subject data points could undermine the RBA’s very existence. The stated goals of the institution relate to full employment and dollar stability. The described methodology could obscure the Bank’s failure to achieve its very purpose in the short-term.

Ethical banker is an oxymoron

The banking industry generally is void of any substantial ethical framework. The few papers published on the matter, as well as the RBA’s own internal governance documents, cite transparency, reputation and accountability as the driving ethical forces behind the Bank’s decisions.

The RBA is undoubtedly aware of the situation detailed above, though transparency would likely harm the Bank’s reputation. Should such an event occur the RBA could avoid scrutiny as the public are largely ignorant of the Bank’s functions.

While public pressure could alter the Bank’s behaviour, the Bank is not directly accountable to the public as a quasi-government institution. The RBA is not subject to democratic process nor is there any established right to recourse for damage arising from the Bank’s behaviour. As such, the RBA has no substantive incentive to transparently broadcast the institutions shortcomings and true purpose for the time being. Once the weight of the Bank’s contradictions and dishonesty comes to pass, there is no telling what violence awaits on the other side.

Conclusion

To conclude, the RBA is essentially a tool used by the ruling classes to compel compliance. Famous fascist Henry Ford once said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”. In light of the above, this statement holds true today.

References

Marx, K. (1867). Capital vol. 1 & 3.

Smith, A. (1776). The Wealth of Nations.

Tyree, A. (2021). Banking Law in Australia 10th Ed. LexisNexis.

Reserve Bank Act 1959 (Cth)

Barrett, J. (2024). Four charts that prove the huge financial pressure many Australian households are under. The Guardian. https://www.theguardian.com/business/article/2024/jun/07/australia-gdp-growth-figures-march-quarter-charts-cost-of-living

Hou, D., David, S. (2014). LIBOR: Origins, Economics, Crisis, Scandal, and Reform. Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr667.pdf

Seydl, J. (2024). How do geopolitical shocks impact markets? J.P. Morgan. https://privatebank.jpmorgan.com/apac/en/insights/markets-and-investing/how-do-geopolitical-shocks-impact-markets

Best, J. (2016). Rethinking Central Bank Accountability in Uncertain Times. Ethics & International Affairs, 30(2), 215-232. https://doi.org/10.1017/S0892679416000095

Waller, J. C. (1989) Monetary Policy Games And Central Bank Politics. Journal of Money, Credit, and Banking, 21(4), 422. https://go.openathens.net/redirector/murdoch.edu.au?url=https://www.proquest.com/scholarly-journals/monetary-policy-games-central-bank-politics/docview/195359111/se-2

Bishop, J., Greenland, E. (2021). RDP 2021-09: Is the Phillips Curve Still a Curve? Evidence from the Regions. Reserve Bank of Australia. https://www.rba.gov.au/publications/rdp/2021/pdf/rdp2021-09.pdf

L’Huillier, M., Kirkhope, J. (2022) Review of the RBA Public Perceptions Research. EY Sweeney. https://rbareview.gov.au/sites/rbareview.gov.au/files/2023-04/rba-review-focus-group.pdf

Australian Bureau of Statistics (2023). Unemployment, Labour Statistics: Concepts, Sources and Methods. https://www.abs.gov.au/statistics/detailed-methodology-information/concepts-sources-methods/labour-statistics-concepts-sources-and-methods/2023/concepts-and-sources/unemployment

Reserve Bank of Australia (n.d). Our Role. https://www.rba.gov.au/about-rba/our-role.html

Reserve Bank of Australia (n.d). What is Monetary Policy? https://www.rba.gov.au/education/resources/explainers/what-is-monetary-policy.html

Reserve Bank of Australia (n.d). Measures of Consumer Price Inflation. https://www.rba.gov.au/inflation/measures-cpi.html

Reserve Bank of Australia (n.d). Unemployment: Its Measurement and Types. https://www.rba.gov.au/education/resources/explainers/unemployment-its-measurement-and-types.html

Reserve Bank of Australia (2021). Cash Rate Methodology. https://www.rba.gov.au/mkt-operations/resources/cash-rate-methodology/overview.html

Reserve Bank of Australia (n.d). How the Reserve Bank Implements Monetary Policy. https://www.rba.gov.au/education/resources/explainers/how-rba-implements-monetary-policy.html

Reserve Bank of Australia (n.d). Code of Conduct for Reserve Bank Staff. https://www.rba.gov.au/about-rba/our-policies/code-conduct-rba-staff.html

Reserve Bank of Australia (n.d). Accountability. https://www.rba.gov.au/about-rba/accountability.html