Inflation continues to threaten the economy. The Reserve Bank is limited to one economic weapon - Monetary Policy. It has little choice but to raise interest rates in an attempt to dampen inflationary pressures. This in turn has generated pressures on families and businesses.
There are continual reports such as 3rd February 2008, quoting JP Morgan and Fujitsu Consulting predicting 750,000 homeowners will suffer mortgage stress this year, with more than 35 per cent of their income going on loan repayments. Of that 750,000 up to 300,000 will be hit with severe mortgage stress, defaulting on payments and risking repossession. (Mortgage Stress)
Classical Monetary Policy raises interest rates to curtail excess demand and reduce pressure on prices and inflation. While it has an impact on Demand Pull inflation it risks generating Cost Push inflation through a wage price spiral. Monetary Policy is regressive; hurting families, people on lower incomes, struggling businesses and in periods of drought the farming sector. Increasing the international interest rate differential puts upward pressure on the Australian Dollar which has a detrimental effect on the economy hurting: manufacturers who are exporting or competing against imports; mining; farming and tourism.
The alternative is to use contractionary fiscal policies instead of, or to support monetary policy. The problem is that political pressures generally amass to cause Fiscal Policy to become expansionary rather than contractionary and force Monetary Policy to work even harder. For example, in a previous petrol price crisis fuelling inflation the US Federal Reserve raised interest rates. They anticipated a small rise being necessary but actually raised interest rates by 9% in just 7 months.
(Lessons from the 1979-1982 Monetary Policy Experiment)
(Interest Rate Policy and the Inflation Scare Problem: 1979 - 1992)
I recommend the implementation of a new Fiscal Policy called the National Climate Change Savings Scheme (NCCSS). It has the ability to soak up excess demand similarly to interest rates; but unlike interest rate policy which is a blunt instrument, it relates to incomes not borrowings and can therefore be targeted to exempt families on low incomes and businesses and farmers in difficulty.
While the detail of the scheme would be legislated and prescribed by Government, the operation is recommended to be controlled by the Reserve Bank (RBA). This would enable the RBA to determine the most appropriate mix of NCCSS and interest rates for the most beneficial impact on the economy, remaining independent of Government control and any politicisation of it.
Unlike interest rates which are only a burden, the funds are only temporarily removed from individuals and companies and remain for their own ultimate benefit. Funds saved will be used by families and companies, when sufficient is accumulated and access is granted by the Reserve Bank, to purchase infrastructure to help environmental and climate change projects such as: the use of solar panels; the differential between hybrid and petrol cars; water tanks etc. As the NCCSS generates an asset not a cost and does not affect the interest rate differential, it avoids most of the downside of monetary policy, achieves much of the benefit and at the same time provides a future benefit to families, businesses, the economy and to our climate change commitments.
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In pdf format NCCSS Policy detail.pdf (76kb)
Word file NCCSS Policy detail.doc (120kb)
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