Sample-Inflation Targeting is both Socially Unacceptable and Economically Untenable

Sample-Inflation Targeting is both Socially Unacceptable and Economically Untenable

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1 Inflation Targeting is both Socially Unacceptable and Economically Untenable Graeme Donald Snooks Research School of Social Sciences Australian National University The inflationary genie is out of its bottle. Or so we are told by orthodox economists and their dependent politicians in Australia. The new Australian Prime Minister, Kevin Rudd, claims that “inflation is the ultimate enemy of working families”, and his Treasurer, Wayne Swan, is certain that “inflation is a ‘cancer’ eating away at living standards’. At the December 2007 election we were promised a new approach to economic and social problems, but while the rhetoric has changed the message is just the same – inflation is evil and has to be surgically removed from society. Nothing has changed. In the past, we were told by former Treasurers, Peter Costello in the Liberal Party and Paul Keating in the Labor Party, that it was essential to “slay the dragon of inflation”. Politicians, of course, are captives of the technical mysteries of neoclassical economists. Therefore, while we can change governments and their rhetoric, we can’t change their policies on inflation. We are all to aware of the weapon, or surgical instrument, of choice wielded by the Reserve Bank of Australia (RBA), official dragon slayer or economic surgeon. It takes the form of persistent increases in interest rates. The latest interest rate increase (5 th February 2008), of 0.25 percentage points, is the eleventh consecutive increase since May 2002, and the third in six months, taking the cash rate to 7 percent, currently one of the highest in the Western world. But this is not expected to be the end to this upward trajectory. Newspaper headlines tell us that: “RBA warns worse to come; rates to keep climbing until inflation curbed”. The surgical instrument has become a meat axe, and the RBA is all out of anaesthetic. The pain of inflation excision is palpable. While there is no evidence after six years of surgery that the “cancer” has been cured, there is growing evidence that the patient is suffering badly. “Australian working families”, as we are now referred to by politicians, are haemorrhaging. Increasingly, Australian families are finding it impossible to maintain mortgages that are absorbing up to a third of household budgets. Increasingly, family homes throughout Australia are being forced onto the market, and their former occupants are seeking rental accommodation. Increasingly, Australian families are being forced to abandon their dreams of owning their own homes.
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