Australia on the Interest-rate Tight Rope

The Wall Street Journal (02/25, "Amid 17-year Boom, Australia Walks Fine Line" by James Glynn) reports: "Sydney – Australia’s 17-year-old economic expansion has reached a boiling point, leading policy-makers to intensify their war on inflation.

"Since mid-2002, the Reserve Bank of Australia has raised its benchmark interest rate 11 times to 7%, the highest to 1996. And it may raise rates by another percentage point by year end.

"With the world economy slowing, some Australians worry that the rate increases could go too far, ending the longest sustained period of prosperity in 50 years."

A legitimate question-mark when Australia, though blessed with mineral wealth, has plenty of environmental and social problems; nor should it trifle with the overstrained economy by adding to high metal prices by abusing a final tool – the high interest benchmarks of monopolist deregulated banking that put much of the rest of the world under compounding tribute – the underdeveloped countries, already cast as devotees to juggernaut deregulated, monopolist banks who have just presented the world with a master mess of greed and incompetence that still awaits disentanglement.

"‘They do need to be careful,’ says Bernie Fraser, who was governor of the RBA between 1989 and 1996.

"So far, however, the problem seems to be the opposite. The tightening measures haven’t had much effect on the inflation rate, which could hit 4% on a year-to-year basis, in the first quarter, well above the 2% to 3% which is the central bank’s target.

"Australia’s economy, the fifth largest in Asia." Ouch! Australia is a proud continent on its own, not part of Asia. The WSJ’s proofreader must have been utterly disoriented by what was passing for monetary policy, as though the Aussies were digging even deeper for their economic policy than they do for the world’s metal ores.

"Australia’s economy is about 1/15 the size of the US has withstood past upheavals just as the Asian financial crisis in the 1990s and the US technical bust in 2000. Today it is insulated to some extent because of the rapid emergence of China and India and their hunger for Australian commodities.

"But with core inflation1 at 16% it is in an unusual position: it is raising interest rates when many other central banks, including the Federal Reserve, are cutting rates or holding them steady.

"Much of the Australian economy is roaring strong. Unlike American consumers, who are struggling under heavy debt loads and pulling back, the Australians have kept on spending.

"Export revenue, meanwhile, is surging as coal and iron-ore producers lock in price increases of as much as 70% from steel mills and energy suppliers in Japan, China and South Korea, Nicole Hollows, CEO of MacArthur Coal Ltd., based in Queensland, expects the good times to continue as Russia and Brazil emerge as major buyers of energy products.

"In addition, farmers are benefitting from the arrival of La Nina weather patterns, which are ending years of drought. The summer grain crop is projected to rise by 40%, while the winter wheat crop is expected to set a record just as world prices surge. Farmers could add A$8 billion (US $7.4B) to the economy this year.

"The central bank and the new center-left government are determined to bring inflation under control. Prime Minister Kevin Rudd has labelled inflation the government’s No. 1 challenge, pledging deep spending cuts when he unveils the government budget in May.

"The RBA said last week that it considered raising its target for the cash rate, its main monetary tool, by 0.5 point at the February 5 policy meeting but decided instead on a 25 percentage point increase because of global uncertainty."

Fighting Inflation with High Interest Rates Amidst Mounting World Deflation

"That has some onlookers warning that, as the US economy sinks into what many fear could be a severe recession. Australia’s war on inflation should be tempered. Bob Gregory, a member of the central bank board between 1985 and 1995, says there is an increasing risk that the central bank’s rate increases will ‘overshoot.’

"‘You do get locked into the potential for overshooting, because you get frustrated at the lack of success,’ he says."

Otherwise said, you persist in a policy because it doesn’t work. What an epitaph for a possible tombstone for our civilization!

"Mr. Gregory warns that Australia’s growth is uneven, with mining states fueling growth. Using the blunt instrument of interest rates could harm other parts of the economy, he says.

"The central bank said in its latest policy statement that it expects annual non-farm growth to slow to 2.75% from a 4% pace in the third quarter of 2007. There are signs that the rate of increases may be starting to take a toll. Sentiment among some business and consumers is falling as their debt-service costs rise. Exporters – particularly those outside the resources sector – may have a tougher time as interest costs rise, pushing up the Australian dollar.

"In addition, banks are confronting rising funding costs. The heads of two major banks have warned that their costs have risen and their customers may end up bearing the burden.

"Too much tightening would be disastrous for the economy. But too little could fuel the kind of inflation that in the past required a severe recession to smash."

Why then don’t the Australians invest their surplus revenue for essential public investments – ecological improvements, education health, education – and treat those investments for what they are – the soundest investments that a nation can make? Then you would not have to pay our banks to bail them out of problems that their greed played a key part contributing to? Of course, since such advice – known and applied in our part of the world – has been ploughed under with disastrous effects at home, we do have plenty left to export abroad. What we need in every part of the globe is to reclaim the most successful parts of our own history, and what we learned at a crushing cost in the 1930s and in World War II. And now the military option – where word of what did work has been banished from our university curricula, there remains only the military option, which has been busily applied for a disastrous decade and more.


1. "Core inflation" is a classification, ever more senseless, that the financial establishment refused to trash though it cripples any serious analysis of what is afoot in the world economy. It removes oil and food prices. When last heard from, everybody prefers eating and heating their homes in winter and cooling them in summer, as well as receiving more of what they consume brought to them across oceans because of globalization and deregulation.

–from Economic Reform, March 2008