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Reserve should get on with making rates 'average'

By Henry Thornton - posted Tuesday, 6 April 2010


The mining areas and some service suppliers are working as hard as they can. There is a renewed housing boom even in the old parts of the country and there are legitimate concerns that it is turning into a bubble.

Manufacturing and most small businesses are struggling, many people are working far fewer hours than they would like and there are clear signs of renewed goods and service inflation that will punish people on fixed incomes and battlers generally.

The Reserve Bank has said it is keen to return interest rates to "average" - odd it does not say "normal" - but that is a theological issue. Average or normal, the Reserve should get on with it. It is for government to sort out a policy to cope with the vast disparity of prospects between sectors and regions.

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After a long, hard winter, there are clear signs of jobs growth in the US. But 15 million Americans are still unemployed, with many more underemployed or not counted in official statistics.

House prices are still falling, vast regions are destined to rustbelt status and overall there is no cause for celebration.

Europe is grimly stagnating, hoping that dominoes led by Greece do not fall and create a new and far larger banking crisis than we have seen so far.

Budget deficits in the old world of US and Europe are large, more than 10 per cent of GDP in many European states. Sluggish growth will not fix the situation.

Increasingly, inflation will be the policy of choice rather than cuts to government spending or tax hikes, though there may be attempts in this direction in those nations that are most conservative in their economic thinking.

In the new world - actually several old empires making post-colonial comebacks - a variety of governments are riding the tiger of fast growth with clear and present dangers of inflation.

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Asset inflation is already obvious, and is usually applauded by governments of whatever variety, ignoring the fact that inflation of any sort is due to excessive purchasing power of the people within particular currency areas.

The geopolitical focus is on China within the new world of inflationary nations.

But economic growth is also strong. Within the "BRIC" nations of Brazil, Russia, India and China, the latest figures for growth of industrial production are (courtesy of The Economist): 16.0 per cent, 1.9 per cent, 16.7 per cent and 12.8 per cent.

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First published in The Australian on April 6, 2010.



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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at www.henrythornton.com.

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