The RBA’s Mandate to Inflate Away Government Debt

29.07.2016 • Investing

From Port Phillip Insider (Australia)-

Inflation is one form of taxation that can be imposed without legislation.’

Milton Friedman

When the RBA meets next Tuesday, Australia’s lowest inflation figures in 17 years will confront governor Glenn Stevens. Consumer prices are up just 1% over the past year. And, apparently, that should alarm you.

As you probably know, the RBA’s inflation target is fair bit higher. The Bank aims to keep prices rising by 2–3% per year. Every year. Forever.

You’re meant to accept this as a good thing. If you don’t believe me, try finding any mainstream sources touting, say, 0% inflation as a superior target. Good luck. God forbid your dollar is worth as much next year as it is today.

Admittedly, the rationale for the 2–3% inflation target makes perfect sense…from the government’s perspective. According to the RBA, government debt stood at $406 billion in January this year. It’s certainly even higher today.

If you were in debt to the tune of $406 billion, wouldn’t you try to chip away at the debt pile by a handy 3% each year? It’s a brilliant figure really — not so high as to be alarming. You’re unlikely to lose sleep over the fact that today’s dollar will only be worth 97 cents next year, right?

But here’s the catch. Just as compounding interest can see your savings grow exponentially over time, inflation will see your savings shrink exponentially. Or your debts, of course.

Which brings us back to the government’s $406 billion liability. At an unassuming annual inflation rate of 3%, the government can halve its debt load in just 24 years. And they don’t have to do anything. Except, of course, manipulate fiscal and monetary policies with abandon.

I’ll get back to that in a moment. But first…

by Bernd Struben

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