Why rates could stay high for ages

Should Glen Stevens and the RBA board be stamping our interest rates “Made in China”? Me thinks so.

China just overtook Japan as the world’s second-largest economy and this export-driven inexorable rise of the dragon continues to laden this lucky country with a largesse of fortune cookies. Dirt? We got heaps of the stuff! Coking coal, iron ore. Natural gas? More than you poke a Bunsen burner at! And then there’s our meat, wheat and the odd treat. China’s demand-driven growth will continue to underpin demand for all this stuff and barring a global catastrophe (rogue asteroid, volcanic explosion bringing on a new ice age or Lady Ga Ga coming out as an alien) the outlook for the little economy that could is pretty damn good. And then there’s India coming online – no need to curry that favour. But if there’s a dark side to this moon it’s that rates could stay up for ages.

Why? Economists are a nervous bunch, especially when the economy grows too fast. When this happens demand for goods and services grows faster than supply. FYI goods are those results of economic activity you can drop on your foot, services are things you can’t. When goods and services grows faster than supply there is a scarcity – the laws of supply and demand kick in and prices go up, which is what inflation is.

So how do you control inflation? That’s right folks, good old interest rates. Higher rates mean less people want to borrow and that means less economic activity and therefore less inflation. Capice?

In this post-GFC resources boom mark II the world is throwing money at us for our dirt and other goodies. This in turn is boosting our incomes, and also encouraging the big mining companies to make massive, long term infrastructure investments. And all this action means spending is likely to grow faster than production, which could very easily unleash the inflation genie.

Just how high rates will need to go to put a cork on all this fun remains to be seen. At least one ex RBA bigwig reckons there’ll be four increases between now and the end of next year.

Mmm � perhaps we should get our trade figures made in China too. I hear 8 is highly sought after.

In other news … sex sells! SEX.COM could be worth up to $13m when it goes under the hammer. It last sold in 2006 for a steamy $14m, but resurfaced in July after its owner went belly up. FYI went for $16m in 2009.The question “what’s in a name?” never seemed so relevant eh?