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The Forum > Article Comments > Raising interest rates delivers a triple whammy > Comments

Raising interest rates delivers a triple whammy : Comments

By James Cumes, published 9/5/2007

The conviction that raising interest rates fights inflation is the economic and financial equivalent to believing the earth is flat.

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While I don't argue with James Cumes basic tenets regarding the falacy of raising interest rates to control inflation, I do question his comparison with the so called standard of living with that enjoyed a generation ago. I think it is a question of apples and oranges. When I was young I never considered a normal standard of living included computers, luxury cars or two car families, boats, leaving school at 18, University for everyone, unheard of expensive medical procedures, high definition wide screen TVs and ipods, not to mention the size and luxury of houses complete with air conditioning, air travel and many more items that most people aspire to or consider normal. All these things cost a great deal of money and consequently wives as well as husbands are expected to go to work to provide all this stuff. Where will it all lead ? James Clunes may be right and that we will all land in a financial heap through debt and over extension when the party eventually ends, but by the same token he offers little in advice over how we address the situation. Any action taken now will be painful and probably not politically acceptable.
Posted by snake, Wednesday, 9 May 2007 10:02:14 AM
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The article is first class but the author does not propose a solution. Adam Smith never advocated free capital flows between economies. The USA could not continue to guzzle the world's oil and other resources if it was no longer viewed as a reserve currency, a status which allows George 'W'to run defecits with abandon and thus finance the hedge funds and the other damaging derivatives. That status needs to be abandoned by the rest of the world. The currency for world trade in real goods needs to be financed by an international trading currency based, for its value, on a basket of currencies of the major trading nations. Whether that can be achieved while the USA has a major grip on the World Bank and the IMF depends on the political will of the rest of the world's leaders and their willingness to try to save us from the coming debacle.
Posted by Foyle, Wednesday, 9 May 2007 11:05:42 AM
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Many commentators with economic nous are suggesting that looming resource shortages will produce stagflation ie high prices coupled with a limp economy. Surely interest rate increases cannot help such a situation. Due to the facts on the ground there will be supply constraints on fuels, near-city land for housing and fresh water. These shortages will not be due to an economy 'over heating'. Reducing the disposable income of consumers via interest increases just worsens their misery. Some kind of new approach is needed.
Posted by Taswegian, Wednesday, 9 May 2007 11:17:44 AM
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It's an interesting debating point as to whether the price of assets like houses should be included in measurements of inflation. I've heard persuasive arguments on both sides.

However, I don't see how the author can deny the extraordinary run of prosperity Australia and other countries have enjoyed since the power to set interest rates was given to an independent body with a specific inflation target.

We are now in the 14th or 15th year of virtually uninterrupted growth and I think a great deal of it can be put down to the wise stewardship of monetary policy by the Reserve Bank.
Posted by grn, Wednesday, 9 May 2007 11:20:46 AM
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I saw Peter Costelloe last night on the 7:30 report stating categorically that tax cuts do not, ever, contribute to a rise in interest rates. He also stated the Reserve Bank man, McFarlane, has never said they do either.

This morning on ABC Radio, 612 in Brisbane, John Howard said they certainly can contribute to the likelihood of interest rate rises but not the tax cuts his government has given. Interesting that they disagree and that rates were increased after last years Budget, with tax cuts. 3 times wasn't it?

Slightly off topic but what it demonstrates is that any economic issue is simply, again, an opinion. Nothing more.

At this link : http://www.abc.net.au/pm/content/2006/s1718729.htm

"Ian Macfarlane today appeared before the House of Representatives Economics Committee for the last time.

He told the committee that he'd been wrongly interpreted as endorsing the July tax cuts, and misrepresented by the Treasurer when he said he was urged to make the tax cuts by the Reserve Bank.

Reserve Bank officials said the combination of big Federal tax cuts and State spending could be a major worry for inflation."

Same interview, Peter Costelloe : "Ah, well, I don't give a running commentary on the testimony of the Governor of the Bank." Appears he does after all.
Posted by pegasus, Wednesday, 9 May 2007 11:37:18 AM
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I tend to think raising interest rates does keep a lid on inflation - though it's an incredibly clumsy device. In the absence of a better control mechanism, it's about the most effective way we have of limiting spending and in turn dealing with inflation.

The article makes excellent points however - it's incredibly difficult to make any kind of objective analysis when comparing evolving economies and lifestyles... how can we really gauge the quality of life in a consumer society that has constantly changing expectations?

The key point raised here however, is that there is little public acknowledgment of the ground that has been lost - there is only talk of the gains. Not surprising perhaps, but a potentially devastating silence for future generations...
Posted by TurnRightThenLeft, Wednesday, 9 May 2007 12:52:27 PM
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