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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the elephant in the room « Previous | |Next »
February 12, 2008

"On the current outlook, and allowing for the inevitable uncertainties in forecasting the risk of inflation remaining uncomfortably high for some time is considerable." So says the Reserve Bank of Australia.

That means more interest rate increases, sooner rather than latter as the judgement is that the underlying inflation will be between 3 and 3.75% until 2010 — unless rates rise higher. There's heartbreak ahead for some.

inflationelephant.jpg Bruce Petty As Tim Colebatch says in The Age the Reserve Bank's explicit aim is to slow Australia's rate of economic growth to well below average levels, with rising unemployment, so that harsher times can wring inflation out of the system. The Reserve's argument is that Australia has overshot its capacity in that demand has grown so fast for so long, and supply has not kept up.

So the policy focus needs to be on increasing on lifting supply — eg, training more skilled workers — not squeezing domestic demand. The Coalition largely ignored this, whilst Labor is trying to have it both ways — giving us tax cuts, taking away some of our services and talking about increased productivity and easing capacity constraints.

Putting on the brakes is the short term option. So is the razor gang cutting back on government spending. That's the options as we enter a boom bust situation.

The long term scenario is one of booming growth in China and India for the next couple of decades and that means a big demand for Australia's resources. The monetary brakes is not going to deal with the effects of this global growth. Nor is increasing interest rates to make it very expensive to buy the plasma tv, Apple computer, overseas holiday and digitial camera on the credit card.

Increasing the capacity to supply the booming demand is one policy option. Another is to develop smarter ways to manage inflation than squeezing demand.

| Posted by Gary Sauer-Thompson at 3:01 AM | | Comments (2)
Comments

Comments

"As Tim Colebatch says in The Age the Reserve Bank's explicit aim is to slow Australia's rate of economic growth to well below average levels, with rising unemployment, so that harsher times can wring inflation out of the system."
Assuming the above to be accurate, I haven't read the article yet, I find the ethic attributed to the RBA to be utterly deplorable and incredible. Well, I wish I really found it to be incredible but I must say it's not entirely surprising.
"Rising unemployment" as an explicit aim?
Shameful.
"Harsher times" as an explicit aim?
Shameful.
Your last 2 sentences give an alternate approach that appears to be beyond the ken of the RBA and other powers that be.

Perhaps if we say Sorry to the elephant it will go and sit on New Zealand