Economics is moving steadily into pseudo-science territory if this front-page story from today’s AFR is anything to go by: IMF warns Australia faces low-inflation trap.
The International Monetary Fund has put Australia in the same category as deflation-wracked Japan, saying the Reserve Bank of Australia may need to cut interest rates again to prevent inflation slowing too quickly.
The warning raises the prospect of Australia succumbing to the weak growth and inflation malaise that has gripped Europe and North America since the 2008 crisis.
I don’t know how we could have a “weak growth and inflation malaise” caused by inflation being too low, but logic doesn’t seem to be the basis for much of this anyhow.
I know that after three-quarters of a century of macro theory, it is impossible even for many economists to understand that it is relative prices that matter and that the aggregate price level is a datum with NO real world consequences. Unless, of course, policy makers decide to mismanage our economies because of these numbers and their irrational fears, but that’s a different matter.
Interest rate levels are just fine, if not already too low. We do not have a savings glut. Is the AFR running a campaign to have rates brought down? Hard to tell, but they might as well suggest raising wages to boost demand.