Simple problem. Our inflation will increase as the price of oil and international price of wheat increase, and increase in oil and wheat prices are accelerating. Slamming people and small businesses with higher interest rates because of this will not be productive as it cannot reduce inflation as it won't change these prices, but will merely add to inflation. And the main banks jump on any old excuse to magnify their massive profits by increasing interest rates-this is inflation. And thus we head for recession.

Now short-term pain may lead to long-term gain, or a second Great Depression. But one thing is as sure as death and taxes. Short-term economic pain leads to expensive and inflationary social problems including crime, and this may not decrease once the pain has stopped, as young folk have learnt that crime can pay.

And finally; we have a mining boom. We export copper to China. we import the copper turned into copper wire, tubes and bath-taps. It means there is a net outflow of money DURING our economic boom. That too is inflationary. So how about a bit of down-stream processing going on in Oz? We would need tariffs as workers in China do it on $1 USD a day.

*We have had a more aggressive tarrif reduction regieme than most and are now suffering the consequences*

Actually not so Arjay. Our trade balance is not too bad, its our
current account that is the problem. Australians are very bad
savers, compared to other nations. So our banks have to borrow
around 50% of their funds from overseas.

That was all well and good while international credit was plentifull
and cheap, but that is no longer the case. Even if the RBA put
interest rates down tomorrow, banks still have to pay more for that
50% on international money markets. Not only that, but they have
to cover the appr 7 billion of doubtfull debts that they have been
left with, as numerous Aussie companies have crashed. ( Centro,
Countrywide, Allco, ABC etc)

According to financial experts, the banks are losing money on
home loans, as they are not passing on the full cost of funding.
They won't do that for long, so unless costs are passed on, you'll
land up with a credit squeeze. In other words, try to buy a house,
then answer will be no. So housing values will drop.

The RBA is just one player in this. At the end of the day, as
we are large borrowers from overseas, we are at the mercy of the
lenders and how they perceive the risk of lending Australia money.

Earll 11 does pose a pertinent question.Why don't the mining giants also pay?China for example pays 2c a litre for our natural gas .They process it and we buy it back at a retail price of 70c a litre.Thirty five times the selling price!Are we in the land of Aus stupid or just pushovers?The Arab countries don't sell themselves off this short and have wealth beyond our wildest dreams.

In the early nineties,we had a population of 16 million and a GDP of $6 Billion,we now have a pop of 21 million and a GDP of a million, million dollars:$ 1,000,000,000,000.00.Divide this by the pop and we should have an average of $47,619.00, divide the 6 billion by 16 million and we have and average of $37,500.00.Many people are worse off now than 20 yrs ago,yet our GDP to pop ratio is much higher!

My point is this,the RBA has more independance and power,yet they as an entity have no accountability to the Australian public.It is a very cosy arrangement for the Govt of the day to blame all our economic woes on a body of bureaucrats that are virtually faceless and unaccountable.They still get paid if they stuff up or not.The pollies are letting themslves of the hook by forsaking their responsibilities.

If the RBA as board stuff up,then they should be accountable to the Aust public!

Arjay-if what you are saying about Australia selling natural gas at 2c and buying back at 70c, then Australia-DO I HAVE A DEAL FOR YOU! See, I have this great old bridge in London, which can be raised to let the ships through. It's a renovator's dream and I can ship it out to you for ONLY 2500 billion Pounds Sterling, and it would go great across the Yarra River-just think of the tourists it would bring............Then there's that old castle of mine, also in London, vintage stuff built around 1066........... Go great at Alice Spring.........

Arjay, I havent heard of us buying back gas from China, but yup,
in the early 2000s, they got a bargain, when they signed a 25 year
deal. New contracts are at much higher prices btw.

I questioned it, but recently heard an interview with the guy
signing that deal, so understood it a little better.

In the late 90s, oil was worth 10 bucks a barrel. The dotcom boom
was on, as commodity producers, Aussies were considered behind the
times. Iron ore was virtually given away, the Japanese had stitched
up that market, by bringing in Brazil. Its fairly ruthless out there.

The NW shelf had heaps of gas, but few customers. To unload that gas,
customers have to invest billions of $. For the NW shelf to proceed,
they could not do it without firm agreements, nobody would lend them
the money.

Just before the resources boom started, China agreed to sign up
for 25 years, at low prices. The NW shelf partners grabbed it, as
nobody else would commit themselves. It meant that adding further
processing trains could go ahead.

With hindsight its easy to point out that they were wrong, but nobody
can predict the future. 6 major oil companies were involved in that
deal, so I can only assume that their judgement at the time was
the best knowledge that was available.

Govts don't buy and sell gas, private companies do

Yabby “The NW shelf had heaps of gas, but few customers.”

Good post Yabby. I have been reviewing this thread for some days and appreciate your reminder of the “facts” that “the market place” is fickle and to some degree “elastic”.

“With hindsight its easy to point out that they were wrong, but nobody
can predict the future.”

And that includes the climatologists.

Re “Govts don't buy and sell gas, private companies do”

And the problems start when governments think they should. All that economic “power” concentrated in a single monolithic entity leads to the fabled corruption which becomes the hallmark of every dictatorship.

To get back to the topic

Using interest rates to regulate inflation is like a micro surgeon relying on a chain saw to perform operations, it might work but the damage inflicted kills the patient.

Government needs to understand it cannot effectively manage the economy, it can only monitor it and try to keep it moving in the right direction, like a tug boat nudging a super tanker.

One of the best ways for government to operate is to progressively withdraw from supporting sheltered workshop and pretending it is contributing to national well being by propping up, as example, defunct car companies (because when they do work like it is like the tug boat pushing head on against the momentum of the super tanker) and leave business to largely rise and fall on its merits.

Providing a flexible environment with fewer regulations and fewer secondary agendas (like the Melbourne 2030 fiasco) are the sort of actions which produces the opportunities in which productivity improvements can evolve to the benefit of everyone, especially the tax payer

One area of massive opportunity is our taxation regime. Get rid of FBT and make the whole cycle of taxes easier to manage for the benefit of both the tax payer and the tax office, that will help productivity a heap.