I am not an economist, but what you've written makes perfect sense. To quote from yesterday's Crikey ...

"Nearly time to take the authority for running the country away from the Reserve Bank. They're a bunch of dills, obsessed with an unsustainable inflation rate, who can't see that the only people affected by interest rate rises are those who couldn't afford to buy a plasma TV anyway. One third are really suffering and the rest will spend what they like. Hands up those who'd rather have 4% inflation and everyone with a job than 2-3% and the joint stopped dead in its tracks."

Is there any chance our government and the RBA will wake up and think about what they're doing to this country?

An interesting "take" on an age-old problem. I am not an economist either, but what else can a central bank do other than use monetary policy to control inflation? If you lower the interest rate as the United States has done, it hardly encourages saving, in fact it encourages more debt and surely, that's the problem. As Bill Bonner said "you don't cure the dipsomaniac by lowering the cost of whiskey" We are floating on a sea of debt and that makes it easier for people to buy more and more stuff from overseas. Although I grant you the value of the dollar goes down which makes imports more expensive. This is probably one reason Oil has risen because it is traded in US dollars and the Arabs put the price up to compensate for the loss of value. It all seems to me like the chicken and the egg - which comes first. It is all a delicate balance that the RBA can try and solve using the only blunt instrument available - interest rates. Controlling an economy is not simple, straightforward and easy in a free enterprise system, but at least it's better than the alternative. perhaps we are in for a period of stagflation before we ease ourselves out of this over exuberant period

The thing is, prior to all the Keating/Howard deregulation interest rates were not the "blunt instrument" that they are now. The govt could set rates at different levels for different types of lending, hence rates could go high to try and curb discretionary spending while still keeping mortgage, industry and farming related rates low. They could try and rein in inflation without necessarily wrecking the economy.

In the current era however we have the notion that privately-owned banks will do whats best for the economy, and all we need do is control the rate at which they can borrow money from the Reserve & trust the banks to do the rest. Since when, though, has a corporation acted in the best interests of a country's citizens? How ironic is it when our treasurers lambast the banks for not considering the plight of mortgage holders, telling them they have a responsibility to the community - I'm sorry, their only responsibility is to their shareholders' profits and they act accordingly. What we need, before things go seriously pear shaped, is some re-regulation so that those elected to run the country on behalf of its citizens have some actual power to do so.

Also, not all debt is bad. If debt is acquired to build industries and needed infrastructure then its an investment that should reap dividends. Debt for the sake of fueling "consumption" - that's the real problem. Our blunt instrument can't reduce demand for one without harming the other, but it really needn't be that way.

It sounds from your remarks (commuter) that you wish to have a controlled economy with different interest rates for different areas of the economy. That's a very slippery slope indeed. Who provides/invests in the different rates ? The public won't invest in a lower rate, so that leaves the government who is subsidised by the tax payer to provide (for instance) mortgages which in turn may increase the price of housing. As I said, it ain't easy, there is always an equal and opposite reaction to any action.

Of course we need debt to build industries. It's the debt that is used just to consume that's the problem, without producing anything and hence growth.

I agree with you though Commuter, that debt feeds consumption. I just feel more control doesn't help in the long run. The market has to do that even though it may create some harm along the way with the people who thought they could over extend themselves

I am not saying that banks are totally blameless, but considering their size, many actually don't make vast profits, it only seems that way when their annual report comes in to make headlines. Their annual increase is normally in line with other industrial increases, but it make for emotional headlines. If money was not invested with them, they wouldn't have the money to lend either. I wonder how many people who complain about them have superannuation funds invested indirectly with them which they watch with a greedy interest. Industry, including banks, build their business on shareholder funds and they are the people who take the risks for larger returns. That's how free enterprise works.

Hats off to James Cumes. Well argued, well written, very sensible. thank God I'm not the only one to notice that, Actually, we have been better off.
Much better off.
grim@thecomensality.com

I like the plain vanilla definition of inflation. Debasing the currency by creating more of it. Prices going up is the sympton, not the cause. Wages going up are a symtom, not a cause.

For the RBA to say they are commited to fighting inflation is complete bulls*it.

On their own website (http://www.rba.gov.au/MarketOperations/Domestic/open_market_operations.html) they in 2006/7 added $464Bn of money to the financial system through the use of repurchase agreements. The RBA buys them (based on an ever widening definition of what is acceptable collateral) to add cash to the system, then is supposed to, at some later date, sell them back to the institution and take that cash out of the system. A cursery glance at their figures shows they had not bought many back at all, in fact the growth in repo's is accelerating.

The RBA is pouring petrol, by the tanker full, onto the inflation pyre.

If you use the old fashioned definition of inflation, then the p*ssweak jawboning and interest rate rises will never impact on inflation, while the currency is being debased in such an outlandish fashion.

... and yet the spiel they sell to the public says that interest rates are the only tool in their shed! Informative post miner, thanks :)

Ah, commuter, if the RBA didn't print more money then governments wouldn't be able to give out all those goodies. Who would vote for them then?