Peter Schiff: Reserve Bank of Australia Does the Fed’s Dirty Work
On Monday, the Reserve Bank of Australia announced plans to dramatically increase its quantitative easing program. Was this an Aussie canary in the coal mine foreshadowing what’s coming down the pike from the Federal Reserve? Peter Schiff talked about the RBA’s move in his podcast. He said, for now, the Australian central bank is doing the Fed’s dirty work.
The Reserve Bank of Australia doubled its QE program, expanding it by a further A$100 billion ($76.2 billion). RBA Governor Philip Lowe also said he doesn’t expect any interest rate hikes until at least 2024.
Australian policymakers faced the same problem we’re seeing here in the US. Long-term interest rates are spiking. The RBA’s move had the desired effect. The yield on the Australian 10-year bond plunged.
Keep in mind that this loose monetary policy is supposed to be an emergency measure to deal with the economic impacts from COVID-19 – as Peter put it, “it’s to save the economy.” But at this point, it appears the worst is behind us.
The economy is recovering. Everybody is reopening. Supposedly that is the reason that interest rates are going up – because we have this strengthening global economy. Yet the sole reason that the Reserve Bank of Australia decided to double the size of its QE program was to prevent interest rates from going up. They wanted to stop yields from rising. So, it’s not about the economy. It’s about artificially suppressing interest rates.”
When central banks hold interest rates down, they increase the demand for loans. That’s one of the rationales for QE during an “economic emergency.” It increases borrowing and spending, and thus “stimulates” the economy. But the flip side of borrowing is debt. You can’t maintain huge debt loads in a rising interest rate environment.
In Australia, a lot of borrowed money flowed into real estate. It’s not unlike the scenario we saw in the US the years before the financial crisis. If rates rise, property values could fall, precipitating a mortgage crisis.
Peter said the RBA is now trying to put out a fire that it lit.
The reason that the economy is vulnerable to a rise in interest rates is because so much money was borrowed when the reserve bank artificially suppressed interest rates. The reason that they have to worry about property prices falling is because they went up because central banks artificially restrain interest rates causing the prices to go up. So, they are now reacting to try to mitigate the damage from a problem that is obviously one of their own creation.”
In effect, the Reserve Bank of Australia’s move was a put in the bond market. The bank wants to protect the bond market and keep prices from falling, conversely stopping yields from rising.
The impact wasn’t only felt in Australia. Stock markets rallied globally on the news. In fact, Monday’s big stock market rally in the US started Sunday night when Australia doubled QE. The Dow was up better than 600 points to kick off the week. But very few people in the US mainstream financial media connected the rally with the RBA’s policy move.
Nobody was really talking about the fact that our rally was made in Australia. But it was. And the significance, I think, of what the Australian central bank did, is I think it created an implied put here in the US market. Because I think when traders looked at what the Reserve Bank of Australia did, they assumed that the Federal Reserve would ultimately do the same thing, which is exactly what I’ve been saying the entire time.”
The Fed has kept interest rates even lower even longer. The US central bank has blown up an even bigger bubble than the one they have in Australia.
So, if the Australian central bank has already panicked and is increasing the size of its QE program, not to help the economy but to stop interest rates from rising, why wouldn’t the Federal Reserve do the same thing? After all, all of these central bankers are using the same playbook. So, I think what happened is now the markets are starting to realize that they don’t have to worry about a big increase in interest rates because if there is more significant upward pressure, if the bonds really start to fall, then the US Federal Reserve is going to do exactly what the Australian Reserve Bank did, and it is going to increase the size of its asset purchase program – QE – and is going to start buying more bonds to prevent bond prices from falling and to prevent interest rates from rising.”
Peter said he thought that if bond yields continued to rise and the stock market continued selling off as it did last Friday, the Fed would have to come out and signal that it was willing to do more to “support the economy” – in effect tell the markets that “we’ve got your back.”
Well, they didn’t have to do it because the Reserve Bank of Australia did it for them. So, the Fed was able to accomplish boosting the market without having to do the dirty work itself.”