Monday, February 26, 2007

Our "fateful wish for price stability"

The Reserve Bank's inflation-fighting is keeping interest rates high and our dollar high, nailing producers, exporters and home-buyers to a cross of price stability that is itself a mirage. This "fateful wish for price stability" is analysed by Thorstein Pollett at the Mises Economics Blog:
The Austrians' great concern is that a government-dominated money-supply regime would ultimately lead to economic and therefore political disaster; the objective of price stability would not alter such a dismal prediction. Even if a central bank succeeds in stabilizing a targeted price index, it would — by an ideologically motivated increase in credit and money supply — generously increase credit and money supply. It thereby distorts the economy's price mechanism, promotes malinvestment and initiates subsequent economic downturns...
In other words: removing real price signals from the market (or trying to) plays havoc with your markets.

Full article here. Comments here.

LINKS: The fateful wish for price stability - Professor Thorstein Pollett
Denying prosperity by misunderstanding inflation - Not PC (Dec, 2005)
More myths about inflation - Not PC (Sept, 2006)


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