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monetary policy as a sledgehammer « Previous | |Next »
March 2, 2008

Martin Leet writes in the Brisbane Line, the online magazine of the Brisbane Institute, that:

In essence, the history of monetary policy in Australia is really a history of the bludgeoning of the economy. It kills off economic activity. Even now, as interest rates rise, commentators note that the inflationary problem will not be addressed. Higher interest rates will not stop China from demanding our natural resources. And asking people for wage restraint in the context of a strong labour market is a bit like asking China to stop growing. It’s not going to happen.

That's pretty true. It does appear that Australia, like Europe, is diverging from a recession slide in the US and that the inflation in Australia will not be lessened by the backwash from the US. Does that mean the monetary sledgehammer?

It does mean another interest rate rise very soon. Leet has an interesting argument. He says that:

Successive governments, of both political persuasions, have eroded a key policy instrument they could have been used to bring the inflationary problem under control: a centralised wage system. Now, politicians are reduced to ‘asking’ for wage restraint, and to ‘setting an example’. In addition, the obsession with budget surpluses has meant that much investment in public infrastructure has been neglected, creating the kind of ‘production constraints’ with which we are now faced. And yet calls to cut expenditure are as strong as ever.

As before many people will suffer from high and rising interest rates. This time round on the boom /bust rollercoaster people will suffer much more than in the past since the economic good times of the last fifteen years have encouraged people to borrow far beyond their means for their homes.

| Posted by Gary Sauer-Thompson at 8:42 PM |