Posted on 22-4-2004
Interesting Times
by Alan Marston
The 1990s were a decade of falling price pressures worldwide,
leading one
British economist to predict that inflation was dead. Shades
of
Nietzsche's infamous proclamation `God is dead'. Needless to
say neither
God nore inflation are ever going to be dead as long as there
is
respectively human self-consciousness and commodities... first
of all the
main commodity of our era, the private home.
A man's home was once his castle, now its simply a prime commodity,
the
commodity that keeps global capital markets afloat and with
it the `global
economy'. For it is against the private home that the majority
of debt is
being secured and that debt burden is finely balanced on interest
rates
not rising too far too fast. The setting of interest rates by
state banks
has become a horned problem, a decision of the utmost importance,
nothing
short of a nightmare of conflicting possibilities. Interesting
times
indeed.
In his book, The Death of Inflation, published in the mid-1990s,
Roger
Bootle predicted that the rise of new technology, the emergence
of Asian
economies churning out goods at ever lower prices, falling commodity
prices and the restructuring of industry - making wage inflation
less
likely - would finally spell an end to inflation.
Yeah right. For the average householder the idea that inflation
has died
seems ludicrous, given the overheated state of the housing market
where
prices are rising up to 50% or more per year. Statisticians
do not count
house prices in the consumer price index because a house is
an asset
rather than a good or service affecting the cost of living.
This does not
mean, however, that a Reserve Bank can ignore runaway house
prices when
consumers are borrowing against the value of their homes to
fund spending
on holidays and cars, food even. Yet to increase interest rates
to curb
house price inflation is to threaten deflation (which is much
worse than
inflation), a fall in house prices below the borrowings against
them
(insolvency) and a crisis in the banking industry. Hardly minor
considerations.
Reserve bankers are justifiably worried about a repeat of the
boom and
bust cycle the market last saw in the late 1980s while others
want to
focus solely on the outlook for inflation arguing that a housing
boom and
bust cannot easily be prevented through the blunt instrument
of interest
rates anyway, and it is not a Reserve Bank's task to attempt
it.
The divisions in the banking industry won't be resolved, and
neither will
the current problem of unequalled levels of private debt. The
divisions
will simply redivide everytime a decision on interest rates
falls due.
Interest, insecure, insecure, intuition, insight. We're goin
in... there's
no way out.
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