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.