Quantitative Easing Explained

Why the world's economy is facing collapse:

Interest rates going up again

During the 1990's I worked at Centrelink and saw the devastation high interest rates caused families. It looks like we are in for a repeat:

MORTGAGE rates are predicted to hit a horror 10 per cent within the next two years as the Reserve Bank hikes rates to prevent runaway inflation.

Leading economists say soaring commodity prices and rapidly rising employment are stoking dangerous inflationary pressures that the RBA is determined to stamp out.

As a result, economists at Macquarie Bank and Commsec, the Commonwealth Bank's investment arm, have both forecast the cash rate will hit "pre-crisis highs" of 7.25 per cent by 2012 if the economy continues to perform so strongly.

Since banks have expanded their profit margins during the financial crisis, that translates to variable mortgage rates of 10.1 per cent - the highest since 1996.

The worst hit are going to be families who were on modest incomes but took advantage of the Rudd government's home grants. Also maybe if the government hadn't been handling money out as if it were candy inflation wouldn't be such a problem.  

Inflation, Gold standard and government borrowing

John Humphreys has posted an excellent article on inflation and what can be done to prevent it. Here's an extract:

However, in contrast with the private sector (which needs to expand production to pay back the loans) the government has no market dicipline to ensure that their spending increases national production. Indeed, government spending often decreases national production though distorted incentives, deadweight loss, administrative and compliance costs, waste and corruption. This means that there will be more money chasing the same (or fewer) goods… leading to inflation.

Greenspan suggests that only a gold standard can prevent this. But he is wrong. All of these problems still exist with a gold standard. If the government is still allowed to borrow and tax, then even under a gold standard banks will have an incentive to create credit for the government without ensuring an equivalent increase in production.

The only way to ensure a stable monetary system is either to (1) remove the government’s power to tax; or (2) remove the government’s right to borrow; or (3) allow them only to borrow when the future repayments on the loan do not come from tax revenue.

Very much worth reading in full and even clear enough that even I can understand it.