blogorrhoea
Wednesday, November 24, 2004
 
A QUESTION CONCERNING INFLATION

One good thing about inflation is that the dollars you owe lose value while the value of at least some of what you bought with 'em doesn't.

The US dollar is in free fall just now and it occurs to me that Alan Greenspan might just sit back and let it fall for precisely that reason. It wouldn't be a costless policy, but it might just be better than hiking interest rates and drowning the credit sector in bad debt and flying bankers.

No-one would be allowed to know this, though, because then every economic rationalist in America would rationally exacerbate that country's unprecedented consumer/residential/national debt loads by buying up while prices are low and repaying the loans in the itty-bitty dollars of tomorrow. So it's important the prez should reassure the world that the dollar will be protected as a matter of policy. That'd be a bald-faced lie, but something tells me the bloke is up to it. Anyway, bald-faced lie or otherwise, he's just done it.

Of course, such a policy would mean the US consumer would gradually pull her head in, meaning the rest of the world would lose its Maw Of Salvation and the chances of a neatly calibrated global depression duly enhanced.

But let's imagine Greenspan has quietly decided the world's stuffed anyway. A lower dollar would certainly give his own industrial constituency some help (imported components might go up, but home-made goodies would be cheaper both at home and abroad) and it might put some sort of floor under US unemployment. It'd stick it up those troublesome Asian and European economies, but this is, after all, official neo-con policy.

The danger there is that these economies might feel obliged to unload their vast stocks of ever littler greenbacks, and no-one benefits if the greenback sinks that fast that quickly. Indeed, stuff would come to suck mightily - mayhap even belligerently …

Anyway, I have (provisionally) convinced myself this is on the cards, and am suggesting it might be time we changed Australia's central bank's standing orders. At the moment, its prime directive is to keep inflation steadily low. The idea is that the 'business certainty' this affords might help employment along, which is just as well as said central bank no longer concerns itself with direct interventions on the criterion of employment.

But, given the circumstances, couldn't Australian business stand a few more points of inflation?

I mean, it's not as if we don't have a bit of a debt-bubble on the go here in Godzone. And it's not as if the local currency (based, as it is, on an export basket boasting little more than a few primary goods) mightn't be very costly to support to in the face of a rapidly declining greenback (let's not forget that precious FTA, folks!), a floundering Japan and a slowing China. And it's not as if we're not sucking in more than we're sending back already. And it's not as if we don't have a consumer/residential debt load within three or four points of many a devastated suburb and a lot of red ink at The Big End Of Town.

So - should we be thinking about a public rate-rising setting atop a firm, thoroughly discreet, policy of leaving it be?

There's a political pay-off, too. Howard has a much lousier interest-rate record than he makes out (we forget it went up by more than three points while he was treasurer and we forget it ultimately plunged on Keating's watch, not his), but he could lend his place in history a bit of much-needed substance by experimenting with the idea of delivering on an election promise.

And the real value of my mortgage would theoretically halve in less than a decade.

As I say, it ain't costless. But I'm not economist enough to weigh all the pros and cons.

Thoughts?

s
 
political economic and cultural observations in the register of dismal dilettantism

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