Inflation | Aussie Stock Forums

If we had a “Sound Monetary” system, there would be hardly any INFLATION because there is only so much gold and silver in the World.

It’s a joke how the independant RBA controls both Money Supply and Interest Rates. While the RBA has this control of Inflation and Interest Rates they can manipulate Booms and Busts. It’s also a joke how the Australian Population accepts this because of their ignorance.

Why stop at gold and silver? Why not have nickel, copper and oil as reserves to base a currency on?

Gold and silver are pretty rocks, thats it. They have no underlying value beyond that prescribed by fiat – the same as paper currency.

The gold bugs could avoid the ‘daily devalution’ of their beloved currency by taking it from under their mattress and holding bonds or any other investment returning a greater return than inflation.

Sadly, gold pays no income; being only a pretty rock, it has no intrinsic value or return beyond that prescribed by speculators – the same as paper money.

Why is it a joke that the RBA sets rates? Would you prefer politicians implemented monetary policy?

The RBA sets interest rates by manipulating the money supply. After stating the cash rate target, they participate in the money markets to get the rate to match. The role of interest rate targetting and control of money supply cannot be seperated.

SMURF said:

Inflation is a result of an increase in the money supply.

Not really. Inflation can be caused by increase in money supply, but only by way of the effect the increase in money supply has on demand in the economy. Inflation is a sign that activity is exceeding capacity.

The US is a great example.

They have injected excessive amounts of money into their economy over the last five years (wrongly in my view) but this has not necessarily been inflationary because the US had an enormous amount of excess capacity, productivity growth and imported deflation from the effects of globalisation.

Because we do not live in a closed system – inflation is created by many external factors also.

Therein lies my original point. I am getting the feeling that we are heading for higher inflation in Australia because:

1. We do not have a lot of excess capacity at the moment.

We have not spent money on training and infrastructure to allow for the expected increase in economic activity (external demand for commodities for instance) to persist without prices rising. We need to spend money on communications, roads, ports, training etc – but we have chosen to blow money on middle class welfare and ‘investing’ in renovating ugly federation style homes.

2. Domestic productivity growth has slowed considerably. This means the economy cannot grow at a faster clip without applying pressure on prices.

3. The deflationary effect of globalisation achieved over the last 20 years could be slowing over the coming decade.

Electronics cost the same or less than 15 years ago and are of far higher quality. Textiles are the same, clothes are the same price as decades before. Cars, appliances, furniture; all cheaper now than before but is this effect slowing as developing countries wages increase.

Now contemplate a sharp rise in the Yuan and the level of inflation we will import.

Finally, developing economy demand for energy and hard and soft commodities is inflating the basics, further spiking inflation.

SMURF said:

due to our collective short termism.

I totally agree with this statement.

The sad thing is, when rates go up a couple of percent and the housing hoax ends in tears for many who simply wanted a place to live and not an ‘investment opportunity’; the blame will be slated on whoever is in power at the time and not the parties that have allowed this short-termist thinking to prevail.

We have grown very accustomed to low inflation and the cheap debt this has allowed. Are we prepared to accept higher interest rates and the concept of easy money from leverage not working?

I don’t think so.

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