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The Forum > Article Comments > Steady as she goes > Comments

Steady as she goes : Comments

By Saul Eslake, published 7/5/2008

There is no need to tighten monetary policy after the March quarter's inflation figures - and no need to abandon or modify the inflation target either.

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This article is convincing and reassuring.
Posted by baldpaul, Wednesday, 7 May 2008 10:49:26 AM
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Saul, how does a record high immigration rate and considerably raised birthrate affect supply/demand/inflation/interest rates in Australia?

Does it help mitigate inflation or does it add to it. Or is it pretty well neutral?

What would be the likely scenario for interest rates and general economic wellbeing if we quickly wound down immigration to net zero over the next four or five years and ditched the baby bonus?

It seems to me that the RBA and indeed the whole banking and financial sectors just take for granted that our rapid expansionism is a good thing and will continue unfettered.

But Ill maintain that it is nothing short of absurd and that we should be very quickly heading towards a stable population and a steady-state economy.

I appreciate previous comments that you have made in response to mine on this forum. Id love to know your thoughts on this issue.

http://business.smh.com.au/when-growth-turns-into-a-monster/20080506-2bky.html?page=fullpage#contentSwap1
Posted by Ludwig, Wednesday, 7 May 2008 11:48:44 AM
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Saul, There is one thing on which you may be able to enlighten me. Any student of economics would know that things go in cycles, and that there will be a time that unemployment is too high, another time it is too low etc.,etc.

I have NEVER in all my years, heard anybody commenting on economics say that what is needed is a rise in interest rates. You can be excused for assuming that the ideal interest rate would be zero, or possibly even negative.

This could be due to the pressure from all sectors of society to spend all you possibly can, and if necessary borrow some more to spend as well. For someone like me, who finds the whole fun and pleasure in life in spending as little as possible, this is an alien philosophy.

Coupled with the massive bias in the taxation system against borrowers and in favour of lenders that the targeting of inflation at 2-3% results in, is it any surprise that no-one saves and everyone borrows, resulting in our massive foreign debt? When this is called in, as it was in 1893 and 1931, the results will not be pleasant for anyone.

Personally, this does not affect me, as I am one of the old fashioned individuals who follow Mr Micawber's advice and live within my means, but it seems to me that the person the country as a whole should follow is William Shakespeare, when he said "neither a borrower or a lender be".

I am sure it has a lot to do with persuading people to work. The car sticker that says "I owe, I owe, so off to work I go", says it all.
Posted by plerdsus, Wednesday, 7 May 2008 3:20:42 PM
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'Bald Paul', thank you.

Ludwig, I think the impact of the current high rate of immigration on inflation is ambiguous. Undeniably, high immigration is putting upward pressure on house prices and rents, both of which have contributed to the acceleration in inflation over the past eighteen months. However, had the rate of immigration been much lower, the labour market would have been even tighter, and labour costs would thus have contributed to higher inflation (which, to date, they haven't, materially). I'm conscious that some OLO readers have strong views about the level of immigration but in my opinion the net economic impact can't be used to support either side of that debate.

I would disagree that the 'RBA and indeed the whole banking and financial sectors take for granted that rapid expansionism is a good thing ...'. On the contrary, the RBA has been quite forthright in saying that the rate of growth in domestic spending which Australia recorded in 2006 (nearly 6% in real terms) is unsustainable, and they have tightened monetary policy quite aggressively in order to slow it down.

'Plerdsus', I'm not sure how much mainstream economic commentary you have access to, but I can assure you that many economic commentators (including me, from time to time) have argued that an increase in interest rates is needed. Many economists (again, me included) have argued that one of the reasons for the 'bubble' which developed in the US mortgage market (and in the broader financial system) was that the US Federal Reserve left interest rates too low for too long. Rather, it's politicians and tabloid newspapers who seem to think that increases in interest rates are never, ever justified.

I'd also argue that the Australian tax system is biased in favour of borrowers, not lenders, for example by allowing 'negative gearing' on a more generous scale than any other OECD country except NZ; whereas lenders are penalized by the tax system which taxes interest income at full marginal rates, compared with capital gains which are taxed at half the full marginal rates, and dividends which benefit from imputation.
Posted by Saul Eslake, Wednesday, 7 May 2008 5:51:40 PM
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