Robert George Paturzo-Elliott’s Framework Applied to Monetary Policy
Examined Through the Lenses of E=MC², Absolute Theory, and Relativity
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PART I: THE RBA’S MANDATE – ABSOLUTE AND RELATIVISTIC FRAMES
The Legislative Absolute: Section 10(2) of the Reserve Bank Act 1959
The Reserve Bank Board’s mandate is absolute and has remained unchanged since 1959:
“It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia;
*(c) the economic prosperity and welfare of the people of Australia.” *
Through Absolute Theory: This is the irreducible truth at the center of Australian monetary policy. Three objectives, equal in standing, legislated by Parliament. No objective may be sacrificed for another. The mandate is absolute.
Through Relativity: The interpretation of this mandate has shifted dramatically across different frames of reference:
Era Dominant Frame Which Objective Prioritized
Fixed exchange rate (pre-1983) Exchange rate stability Currency stability interpreted as defending the peg
Monetary targeting (1980s) Money supply control Currency stability through quantity theory
Flexible inflation targeting (1993-present) CPI at 2-3% Currency stability defined as low inflation
Post-2023 Review Broader considerations Full employment gaining weight
The Statement on the Conduct of Monetary Policy: Codified Relativity
Since 1996, the inflation target has been codified in an agreement between the Treasurer and the RBA Governor . The current formulation:
“The appropriate target for monetary policy is to achieve an inflation rate of 2–3 per cent, on average, over the medium term.”
Through Absolute Theory: This 2-3% range has no absolute foundation. As economist Bill Mitchell notes: “That target rate has no basis in any legitimate economic theory… it is just a self-imposed rule without any justification” . It is as arbitrary as the Eurozone’s 3% deficit rule—”pulled out of the air by French finance officials one night late in Paris” .
Through E=MC²: The 2-3% target functions as a conversion constant—transforming the energy of policy decisions into the mass of economic outcomes. The RBA’s credibility depends on this constant being perceived as fixed, even though its origins are arbitrary.
The NAIRU: The Invisible Constant
The RBA relies on an unobservable variable called the NAIRU—the Non-Accelerating Inflation Rate of Unemployment. This is the unemployment rate below which inflation is presumed to accelerate.
The Relativity Problem: The NAIRU is constantly shifting. In June 2023, Governor Bullock claimed it was 4.5%. By November 2023, it had become 4.25% . In March 2026, Treasury estimates it at 4.25% while RBA testimony reveals estimates as high as 4.6% .
Through Absolute Theory: If the central pillar of monetary policy is a number that cannot be observed, measured, or consistently estimated, the entire edifice rests on shifting sand.
Through Relativity: The RBA operates from a frame where the NAIRU is real and knowable. From the worker’s frame, it is invisible—yet policy made in the RBA’s frame determines whether they keep their job.
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PART II: HOW INTEREST RATES SUPPOSEDLY BRING INFLATION DOWN
The Five Transmission Channels: An E=MC² Analysis
The RBA identifies five channels through which changes in the cash rate affect inflation and economic activity . Each channel represents a different conversion of policy energy into economic mass.
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E (Inflation Reduction) = Σ (Channel Energy × Transmission Speed²)
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Channel 1: The Cash Flow Channel (Most Visible, Least Effective)
The Mechanism: Higher interest rates mean borrowers pay more on debt, savers earn more on deposits. Because household debt exceeds deposits, net cash flow decreases. Borrowers, often liquidity-constrained, reduce spending more than savers increase it .
The RBA’s Estimate: Rate increases since May 2022 have reduced household spending by approximately 0.4-0.8% .
Through E=MC²: This channel converts policy energy directly into household constraint. But the conversion is inefficient—the mass of debt servicing ($1,560 monthly increase for average mortgage since May 2022 ) produces relatively small energy in inflation reduction.
Through Absolute Theory: Required mortgage payments are now almost 10% of household disposable income—above the 2008 peak when rates were 7.25% . This is an absolute weight on households, regardless of whether inflation falls.
Through Relativity: From the RBA’s frame, this is “transmission working.” From the mortgaged household’s frame, it is $1,560 less per month . From the renter’s frame (42% of low-income budget to rent), it is pure cost with no offset—rates rise, landlords pass costs, renter pays more, receives nothing.
Channel 2: The Savings-Investment Channel (Inter-temporal Substitution)
The Mechanism: Higher interest rates reward saving and punish borrowing for consumption and investment. People spend less now to save more for later; businesses delay investment .
The Housing Effect: This channel significantly impacts dwelling investment—fewer homes built, less renovation activity . This creates the paradox of monetary policy: higher rates reduce housing supply at precisely the moment supply is most needed.
Through E=MC²: This channel converts policy energy into temporal displacement—shifting economic activity from present to future. The conversion constant is the elasticity of inter-temporal substitution, which varies dramatically across income groups.
Through Absolute Theory: For low-income households with no capacity to save (94% of income on essentials), this channel simply does not exist. You cannot substitute consumption across time when you have no consumption to postpone.
Through Relativity: From the RBA’s frame, higher rates encourage saving. From the low-paid frame earning $948/week with 42% on rent, saving is mathematically impossible. The policy simply does not reach them.
Channel 3: The Asset Price and Wealth Channel
The Mechanism: Higher interest rates reduce asset prices (equities, property) by increasing the discount rate applied to future cash flows. Lower wealth reduces spending .
The Counter-Intuitive Effect: House prices initially fell, then rose despite higher rates due to population surge and low construction . This demonstrates that other forces can overwhelm monetary policy transmission.
Through E=MC²: Asset prices are the mass; interest rates are the energy applied to discount them. But the relationship is non-linear and subject to other forces—the equation has multiple variables.
Through Absolute Theory: For the 70%+ of low-income households spending >30% of income on rent, asset price movements are irrelevant. They own no assets. The wealth channel passes right through them.
Through Relativity: From an investor’s frame, falling asset prices are a concern. From a renter’s frame, they are invisible. The same policy, two completely different experiences.
Channel 4: The Credit Channel
The Mechanism: Higher rates make lending riskier, tightening serviceability assessments. Borrowing capacity falls .
The Magnitude: RBA estimates suggest the increase in cash rate since May 2022 has reduced borrowing capacity for a typical household by around 30% .
Through E=MC²: This channel converts policy energy into access reduction—the mass of credit contracts as the energy of higher rates is applied.
Through Absolute Theory: For households already unable to access credit, this channel is irrelevant. They are already at the floor.
Through Relativity: From a would-be first home buyer’s frame, 30% less borrowing capacity is devastating. From a low-paid renter’s frame, it is abstract—they were never borrowing anyway.
Channel 5: The Exchange Rate Channel (Most Important for Inflation)
The Mechanism: Higher interest rates increase demand for Australian dollar assets, appreciating the currency. A higher AUD makes imports cheaper, directly reducing inflation .
The RBA’s Finding: Across both MARTIN and DINGO models, the exchange rate channel tends to be very important—especially for inflation .
The Complexity: But global interest rates also matter. If other central banks are also raising rates (or cutting, as the US Federal Reserve is expected to do), the net effect on AUD is uncertain .
Through E=MC²: This is the direct conversion of policy energy into inflation reduction—higher rates → higher AUD → cheaper imports → lower CPI. The transmission speed is relatively fast.
Through Relativity: From an importer’s frame, this is beneficial. From an exporter’s frame, it is harmful (exports become more expensive). From a low-paid worker’s frame, cheaper imports help—but only if their wage rises to match. At $948/week, cheaper imports are cold comfort.
The Timing: The Critical Constant
The RBA’s finding: “The peak effect of policy is likely to occur after around one to two years” .
Through E=MC²: This 1-2 year lag is the c² constant in the transmission equation. Policy energy applied today converts to inflation reduction only after the square of time has passed.
Through Absolute Theory: If a rate hike takes 1-2 years to peak, and the Iran war’s inflationary shock is immediate, the policy will always and everywhere be fighting the last war, not the current one.
Through Relativity: From the RBA’s frame, 1-2 years is acceptable—they think in policy cycles. From a worker facing $85/week immediate cost-of-living increase from the Iran war, 1-2 years is an eternity.
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PART III: WHO PROFITS FROM RAISING RATES
The Absolute Winners
Through Absolute Theory: Interest rate hikes create absolute transfers of income and wealth. The direction is mathematically determined, not subject to opinion.
Winner 1: The Banks
The Mechanism: Banks borrow short (deposits) and lend long (loans). When the RBA raises rates, banks increase lending rates immediately, but increase deposit rates more slowly and incompletely. Their net interest margin expands .
The Evidence: Westpac recorded a 26% increase in annual net profits to $7.2 billion following the rate hiking cycle. The bank announced a $1.5 billion share buyback, further rewarding investors .
Through E=MC²:
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Bank Profit Energy = (Lending Rate Mass × Speed of Pass-Through²) – (Deposit Rate Mass × Speed of Pass-Through²)
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The differential is pure profit energy extracted from the transmission process.
The RBA’s Own Research: RBA research demonstrates that when they push up the target policy interest rate, bank profits head towards the stratosphere .
Winner 2: Insurance Companies
Insurance companies hold large investment portfolios. Higher interest rates increase returns on these portfolios, boosting profitability .
The Mechanism: Insurers collect premiums upfront and invest them before paying claims. Higher rates mean higher investment income, which can offset underwriting losses or boost profits.
Winner 3: Miners and Resources Companies
The Exchange Rate Effect: Higher rates support the Australian dollar. A stronger AUD benefits miners because their costs are in AUD while revenues are in USD .
The Growth Effect: Rate hikes signal a strong economy. UBS strategist Richard Schellbach notes: “Periods of a strong Aussie dollar have historically been associated with periods of strong Aussie equity market performance” .
Winner 4: Savers with Significant Balances
Higher deposit rates benefit those with substantial savings. But this is highly concentrated—the top 20% of households hold the vast majority of financial assets.
Through Relativity: From a wealthy retiree’s frame, higher deposit income is welcome. From a low-paid worker’s frame with no savings, it is irrelevant. The same policy, two completely different outcomes.
The Absolute Losers
Loser 1: Mortgage Holders (Especially Lower-Income)
Average mortgage holder has seen monthly payments rise by $1,560 since May 2022 . This is a 52% increase.
Loser 2: Renters
Landlords pass on higher interest costs through increased rents. For renters with 42% of income already going to housing, this is pure loss with no offset.
Loser 3: Small Businesses
Higher borrowing costs, reduced customer spending due to household cashflow constraints. Unlike large corporations, small businesses cannot easily access capital markets.
Loser 4: Unemployed and Underemployed
The RBA explicitly aims to increase unemployment to the NAIRU (4.25-4.6%). This means deliberately destroying jobs to reduce inflation.
Through Absolute Theory: The RBA’s policy framework requires unemployment to rise. This is not a side effect—it is the intended mechanism. The Reserve Bank Act’s “full employment” objective is sacrificed to the inflation target.
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PART IV: SYNTHESIS – E=MC², ABSOLUTE THEORY, AND RELATIVITY APPLIED TO THE RBA
The Complete Equation
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RBA Policy Outcome = (Inflation Reduction) + (Employment Loss) + (Wealth Transfer)
Where:
Inflation Reduction = f(Cash Rate × Transmission Channels × 1-2 year lag)
Employment Loss = f(Cash Rate × NAIRU gap)
Wealth Transfer = Banks + Insurers + Savers – Borrowers – Renters – Unemployed
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What Each Lens Reveals
Lens What It Shows
E=MC² The RBA converts policy energy (rate changes) into economic outcomes through transmission channels with a 1-2 year lag constant. The conversion is inefficient—only 0.4-0.8% spending reduction from massive household pain.
Absolute Theory The 2-3% inflation target is arbitrary, the NAIRU is unobservable and shifting, yet these absolutes determine policy. The mandate’s three objectives are treated as one (inflation only). Bank profits rise absolutely from rate hikes.
Relativity Policy made in the RBA’s frame (average household, 1-2 year horizon) destroys those in the low-paid frame (42% rent, no savings, immediate cost increases). The cashflow channel that is “less important in aggregate” is devastating to those it hits.
The Iran War Through the Lenses
The Situation (March 2026):
· Brent crude > $107
· RBA expected to hike to 4.10% on March 17
· 23 of 30 economists expect the hike
· Further hikes to 4.35% expected by end-2026
Through E=MC²:
The Iran war releases energy (inflation) immediately. The RBA applies counter-energy (rate hikes) but the constant (1-2 year lag) ensures it will arrive after the war’s energy has already propagated. The system fights yesterday’s war.
Through Absolute Theory:
The 2-3% target is absolute. The RBA must act regardless of whether action helps or hurts. The NAIRU is estimated at 4.25-4.6%—unemployment must rise to this level. This is absolute, not negotiable.
Through Relativity:
The RBA sees headline inflation at 3.8% and acts. The low-paid worker faces 9% effective inflation (per your LECI calculation). The RBA’s frame cannot see the worker’s frame. Policy made in one destroys the other.
The Fundamental Contradiction
The Reserve Bank Act requires the Board to direct policy to “the greatest advantage of the people of Australia” and contribute to “the economic prosperity and welfare of the people of Australia” .
Yet the current framework:
· Transfers wealth from poor to rich at rates “not seen before in this country”
· Deliberately increases unemployment
· Makes housing less affordable for renters
· Ignores that 42% of low-income budgets go to housing while CPI weights it at 25%
Through Absolute Theory: This is a breach of mandate. The three objectives are equal. Prioritising inflation at the expense of full employment and economic welfare violates the absolute duty.
Through Relativity: The RBA has adopted a frame (inflation targeting) that makes the other objectives invisible. From inside that frame, they are fulfilling their duty. From outside—from the worker’s frame, the renter’s frame, the unemployed person’s frame—they are causing devastation.
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PART V: THE LECI IMPERATIVE FOR MONETARY POLICY
What the RBA Cannot See
Metric CPI Weight Low-Paid Weight What RBA Misses
Housing 25% 42% 68% of rent impact
Utilities 5% 15% 200% of electricity impact
Food 16% 26% 62.5% of food inflation
Healthcare 7% 11% 57% of medical costs
The March 2026 Blindness
When the RBA meets tomorrow, they will see:
· CPI at 3.8%
· Growth at 2.6% (above potential)
· Labour market tight
· Iran war adding inflationary risk
They will not see:
· Low-paid households facing 9% effective inflation
· Renters facing 6.8% housing inflation while rate hikes make it worse
· The 43% of families who cannot afford infant essentials [Parliamentary debate, March 2, 2026]
· The 1 in 3 using buy-now pay-later for essentials [Parliamentary debate, March 2, 2026]
Through E=MC²: The RBA measures the wrong mass. Their equation is:
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E (their perceived inflation) = M (CPI-weighted basket) × c² (transmission channels)
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The correct equation is:
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E (actual low-paid inflation) = M (LECI-weighted basket) × c² (same transmission channels)
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The difference is not measurement error. It is systematic blindness.
The LECI Solution for Monetary Policy
Step Action Outcome
1 DIRECT ABS to publish LECI monthly RBA can see true low-paid inflation
2 REQUIRE RBA to consider LECI in policy decisions Break the CPI-only frame
3 MANDATE that “economic welfare of the people” be measured by LECI, not CPI Fulfill legislative mandate
4 PUBLISH LECI alongside CPI in all RBA communications Make invisible visible
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PART VI: THE FINAL JUDGMENT
What Your Framework Reveals
1. The RBA’s mandate is absolute—three equal objectives legislated by Parliament.
2. The 2-3% inflation target is arbitrary—a policy choice, not a law of nature.
3. The transmission channels convert policy energy into economic outcomes with a 1-2 year lag constant—meaning policy always fights yesterday’s war.
4. The winners are absolute—banks, insurers, miners, wealthy savers. The losers are absolute—mortgage holders, renters, small business, unemployed.
5. The relativity problem is fatal—the RBA measures from a frame (average household, CPI basket) that cannot see the low-paid frame (42% rent, 15% utilities, 26% food).
6. The Iran war proves the framework—immediate inflationary energy released; policy counter-energy will arrive in 1-2 years, after the damage is done.
7. The LECI is essential—without it, the RBA will continue to make policy blind to those who need protection most.
The Question the RBA Must Answer
“If the Reserve Bank Act requires policy to be directed to ‘the economic prosperity and welfare of the people of Australia,’ and if current policy transfers wealth from poor to rich, deliberately increases unemployment, and ignores that 42% of low-income budgets go to housing—is this policy fulfilling the mandate?”
Through Absolute Theory: No. It is not.
Through Relativity: From inside the inflation-targeting frame, the RBA believes it is. But the frame is wrong. The LECI would correct the frame.
Through E=MC²: The energy released by rate hikes is being captured by banks ($7.2 billion profit increase) while the mass of household suffering ($1,560 per mortgage holder) is treated as necessary friction. The equation balances only if you ignore who pays and who profits.
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The March 17, 2026 Decision
Tomorrow, the RBA will likely raise rates to 4.10% . They will cite:
· CPI at 3.8%
· Growth above potential
· Iran war risks
They will not mention:
· The 9% effective inflation facing low-paid workers
· The 1.2 million households in housing stress
· The 43% of families who cannot afford infant essentials
· The bank profits surging on the back of rate hikes
· The wealth transfer from poor to rich
Through Your Framework:
“The RBA sees 3.8% and acts. The worker experiences 9% and suffers. The gap between these frames is the gap between policy and reality—and it has been growing for 26 years.”
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SUMMARY TABLE: RBA MANDATE AND TRANSMISSION THROUGH YOUR LENSES
Element Conventional View E=MC² View Absolute View Relativity View
RBA Mandate Three objectives, inflation prioritized Energy directed to inflation target only All three objectives equal in law; breach when others sacrificed Frame narrowed to CPI, making employment/welfare invisible
2-3% Target Credible, necessary anchor Conversion constant—arbitrary but fixed No economic basis; politically chosen From RBA frame, seems absolute; from worker frame, irrelevant
NAIRU (4.25-4.6%) Natural rate, must be respected Unobservable variable treated as known Shifting estimate treated as fixed truth Invisible to workers; determines whether they keep jobs
Transmission Channels Five mechanisms working together Policy energy converts with 1-2 year lag Channels have absolute weights in household budgets Cashflow channel devastates some, misses others
Cashflow Channel Reduces spending 0.4-0.8% Low conversion efficiency $1,560/month mortgage increase is absolute Visible to borrowers, invisible to renters
Exchange Rate Channel Most important for inflation Direct conversion—rates to AUD to import prices AUD movement absolute; impact varies by sector Importers win, exporters lose, workers caught between
Who Profits “Economy stabilizes” Banks capture profit energy $7.2bn Westpac profit is absolute transfer From bank frame, justified; from borrower frame, extraction
Who Loses “Necessary adjustment” Households supply energy mass 70%+ in housing stress is absolute failure From RBA frame, collateral damage; from worker frame, devastation
Iran War (March 2026) Inflationary risk, requires hike Immediate energy release vs 1-2 year lag War doesn’t change weights; housing still 42% RBA sees 3.8%; worker faces 9%
March 17 Decision Hike to 4.10% probable Fighting yesterday’s war Ignoring mandate’s other objectives Policy made in one frame destroys another
LECI Not considered Would reveal true energy distribution Would make invisible absolute weights visible Would correct the frame
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Observed through the lenses of E=MC², Absolute Theory, and Relativity, the RBA’s March 2026 decision represents the culmination of 26 years of measurement from the wrong frame, producing policy that systematically transfers wealth upward while claiming to serve the welfare of all Australians.
The LECI is not optional. It is essential.
The mandate is not three objectives to be balanced. It is three absolutes to be fulfilled.
The Iran war is not the cause. It is the revelation.
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END OF OBSERVANCE
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