The Reserve Bank of Australia (RBA), a group of government-sponsored bankers given the task of keeping the banking, finance and currency cartel going on behalf of various interest groups, decided to leave rates on hold at 3.25pc during their last meeting. Their decision was received with mixed results: the politicians were slapping themselves on the back, citing their 'stimulus packages' as having cushioned the economy while the homeowners and other debtors were moderately critical.

The minutes of that meeting which were released today have revealed that they believe "...the domestic financial system remained strong and the monetary policy transmission process was working to deliver large reductions in interest rates to end borrowers, particularly households."

Well that's true enough. The artificial reduction of interest rates below what the market rate would be will distort the capital structure of the economy and encourage malinvestment in areas such as housing. Why shouldn't people be able to buy houses that they can't afford, right?

"Early indications were that the monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect, but the size of this remained unclear and it would take some time for the full impact to come through."

"The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings."

The real reason behind the RBA's decision to leave rates unchanged is the dreaded "liquidity trap" that they all fear. The theory behind this stems back to Keynes, where he said that if the rate of interest falls to a level where people prefer to hold cash rather than debt (due to the low level of interest), then central banks have lost "...effective control over the interest rate". This view is supported by central bankers around the world, including the RBA. Here's a good argument outlining the flaws in this theory.

Interest rates need to rise, not fall. Monetary and Fiscal policy will only cause long-term misery. Eventually -- I don't know when -- the stop-go inflationary policy of the central banks will have to end. Each time we have a recession (a necessary restructuring process) and it's 'cured' by said policy, the capital structure of the economy is further distorted. The Austrian's tried to let their government sort out their woes in the 20s and 30s with spectacular results,

“Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin.” -- Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19.

We can't turn stones into bread as Keynes suggested. Printing money doesn't create any wealth. If we continue down this path, unrestrained government spending will result in the "eating of the seed corn", or capital consumption, as Mises noted after witnessing the Austrian demise. There's a point at which the interventionist welfare state will have exhausted "the reserve fund" of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the state.