Although rising fuel prices are not the main driver of inflation, Mr Chris Hilder is probably correct in asking what sort of economic wonderland the Federal Government, the Reserve Bank and, perhaps more particularly, the US Federal Reserve are inhabiting (Letters, News Weekly, May 24, 2008).
In an environment with a stable supply of money and credit, the scarcity and rise in price of a single commodity or group of commodities has to be offset either by a reduction in their consumption, a reduction in consumption of other goods and services, or a reduction in savings.
History reminds us that, in situations such as the 1930s Weimar Republic in Germany and in present-day Zimbabwe, inflation has its roots in expanding the supply of money and credit faster than the growth in the supply of goods and services. This phenomenon is exacerbated by a contemporary fashion of holding interest rates below the real level of inflation.
History also tells us that, where equilibrium in the supply of money and credit has been abandoned or assassinated, the manipulation of interest rates to “control” inflation is a blunt and ultimately futile instrument.
Among the oldest “jokes” in the world is the saying: “If you owe the bank $500,000 and you can’t pay, you have a problem — but if you owe $50 million and you can’t pay, the bank has a problem.”
With the frenzy to lend now well past its zenith, the inflationary chickens are coming home to roost. As this trend progresses, the consequences are unlikely to be limited to the man in the street being cornered by stagflation. Almost inevitably, the entities responsible for the irresponsible expansion of money and credit will also be called to account by market forces.
In all probability, the perpetrators of this predictable economic disaster live in the hope that the chaos created by the implementation of the various emissions-trading schemes will become the scapegoat for the grossness of their misconduct.