Yesterday, the long-awaited RBA review was released to the public…
‘An RBA fit for the future’ is what they’ve called it. The kind of pretentious nonsense that you’d expect from politicians and policymakers.
I can tell you what needs reviewing: the capabilities of its members. And while the official review almost reaches this same conclusion, their proposal to solve it is not inspiring me with confidence.
The big change for the RBA, should it pass legislation, is that we will now have two boards.
One will still function just like the current board does. They will set interest rates, provide commentary, and make a big song and dance about guiding the economy.
A secondary new board, however, will be put in place for oversight. This board will tackle HR matters, risk management, new technologies, and even the finances of the RBA. In other words, it will be like a corporate board within a typical business.
Why they need this kind of oversight should be clear to most investors. We’ve watched not just our central bank, but almost all central banks drop the ball in recent years. They’re all having to play catch-up with monetary policy to curb the inflation they created amidst the pandemic splurging.
But I’m not sure a new board is going to solve the root problem…
Monetary showmanship
From perspective, the real problem with the RBA is that monetary policy has become a spectacle.
Because while interest rate moves have always been important to an economy’s health, never before have these decisions been so glamourised. What I mean by this is that with modern media, we can listen to and watch central bankers explain their reasoning more than ever before.
The showmanship of the RBA governor is now just as, if not more important, than the actual monetary policy decisions themselves. And if you think I’m being dramatic with that claim, just recall when Dr Lowe stated that we wouldn’t see any interest rate hikes until 2024 — two years ago.
This is what I mean by ‘theatrical economics’.
Because in our current day and age, it’s all about what is said more than what is done. And when I look at this review, I see glimpses of acknowledgement toward the real problem, but no real desire to fix them.
Take this excerpt from the review, for example:
‘The Review recommends that the RBA strengthens its forecasting and macroeconometric modelling capabilities, particularly in respect of the supply side of the economy…
‘…Chapter 1 highlighted that the RBA’s framework for forecasting and modelling does not contain sufficient detail on the supply side of the economy. This shortcoming has been apparent through the current inflationary period, where supply factors have played a significant role in driving inflation. The Governor stated in February 2023 that ‘our models are not well suited for supply shocks’ (Australian House of Representatives 2023).’
Pointless pontificating
In other words, the RBA realises that it doesn’t have the right tools to make the right decisions. They’re quite happy to blame their modelling and state that they’ll do better next time.
But, at the end of the day, a model is still just a model. It’s no substitute for the real complexity of a national economy. That’s why the data it provides can only inform of what may happen, not what will happen.
No model is ever going to be perfect.
No decision can be made with certainty.
And yet, neither the RBA, nor this review, will ever concede to this reality.
They will do what they think is best, and they will do it with conviction whether justified or not. Because at the end of the day, that’s all part of the game.
This entire review is a sideshow to make it look like the RBA is cleaning up its act. They’ve provided a 282-page report to convince you that they won’t screw it all up again next time.
Like I said, it’s pure theatre.
So, what are investors to do?
No matter how you try, you can’t fight the feds. Interest rates and monetary policy, no matter how policymakers distort them, will impact your investments.
That’s why you need to use strategies and systems to not only build wealth, but also protect it. And when it comes to the type of systems I’m talking about, my colleague, Callum Newman, has one of the most sophisticated I’ve ever seen…
Using an AI-based algorithm, Cal has found a great way to trade Aussie small-caps. And unlike the RBA, he’ll tell you off the bat that it isn’t perfect. Because just like an economic model, it is impossible to predict the future with 100% accuracy.
Fortunately for Cal and his system, he doesn’t have to.
All it has to do is give him an edge over the market. And as he explains in detail here, that’s exactly what it can do.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
