I caught sight of this article in the SMH a few days ago and wanted to link to it, so here it is.
It's easy to talk about "tighter monetary policy" restraining inflation, but few pause to think how it actually works.
There's the usual euphemism about higher interest rates taking money out of consumers' pockets and thereby reducing the demand their spending creates, which results in prices not rising as much as they otherwise might.
The reality is harsher.
It doesn't just mean the minority of Australians with mortgages have less to spend. Higher interest rates reduce demand by sending marginal businesses broke and making others marginal.
"Freeing up resources" when we start running close to capacity means creating unemployment in those industries that aren't riding high commodities prices or servicing those that are.
"Freeing up resources" means people going bankrupt, losing their homes and therefore forced to look further afield for work.
An immediate example that comes to mind would be higher rates sending a struggling new car dealer broke, "freeing up the resource" of the yard's mechanics who could then be expected to become available for work in the mines. It's more than a little absurd that Treasurer Wayne Swan tomorrow night will work directly against that aim with a dopey $5000 subsidy for successful small businesses to buy a new car. The offer is of no use to any business "doing it tough" as they must first have the spare capital to blow on a new vehicle which will depreciate by nearly as much as the subsidy as soon as it leaves the showroom. Tell me again how this was meant to be a tough budget.
There's a kernel of something in there about how the RBA might want to raise interest rates but in reality can't bring itself to do so. One gets the feeling that the RBA is putting off the decision for as long as possible before the mining boom kicks in and we have the two speed economy in full dysfunctional totality.
I've suspected for a while that the RBA can't go higher on rates because it would blow up the property bubble. Even if the mining sector does go gangbusters, there might not be much more headroom to go for the rest of the economy. The rate we are at now, might just be the limit of what our non-mining part of the economy can take.
It can't really split up the interest rate to apply differently to the economy, and yet what is going to happen is that the mining sector is going to go gangbusters while everybody else will get left in the doldrums. Spltting the difference and putting up an average isn't going to cut it, but neither is following the mining boom and taking the interest rates up, because surely that will bring down the house of cards that is the property bubble.
When you think about how low interest rates are in places such as the USA, Japan and the Euro-zone, then Australia's interest rate sticks out like a sore thumb. Worse still, those same economies are printing money, then no wonder money is flooding in to Australia, pushing up the AUD. All the same, if the property bubble should pop, then there would be a deflationary spiral, so there's a weird dilemma going on in there. Raise it and be damned or not raise it and be damned. The RBA is clearly trying to stave off the possibility of the inflation to come, but if it raises it too high and the bubble pops, it will have to chase the other nations' interest rates, all the way down to combat the deflationary spiral. Interest rates may not go up at all until the last quarter of this year. Just saying.
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