Old inflation never dies; it only fades away

I don't want to go on with this too long but I would just suggest that the above account confirms that inflation has never been conquered. All that has happened is that its superficial character has changed. It no longer looks like a duck, seems to walk like a duck or can be heard to quack like a duck. But, make no mistake, it is as it has always been - a duck. All that has happened is that a shift has occurred from domestic inflation to trade-deficit inflation.

Just to put that into very simple terms - I hope not into too simplistic terms: the excess demand over supply that caused domestic inflation after 1969 has been transformed into a continuing excess of demand over supply which has, over time, expressed itself in having the excess supplied from beyond the national borders.

Now, we can make all sorts of points about creditor countries being more willing to hold US dollars than Australian dollars or other people's currencies. Many of these points may well be valid but they have little or nothing to do with basic, underlying causes.

Neither for the United States nor for Australia is the position sustainable in any "permanent" way. Sooner or later the disequilibrium has to be corrected.

In Australia's case, one of the levers of correction has been a slide in the value of the Australian dollar. As late as 1973, the Australian dollar was worth more than the US dollar. Recently, it has been struggling to remain above 50 US cents. Right at this moment, it is worth, I think, about 54 cents.

I am writing this from Austria. About twenty years ago, the Australian dollar would buy between 25 and 30 Austrian schillings. Now we're using Euros but, to make the comparison easier, the Australian dollar would now buy between 7 and a half and 8 Austrian schillings.

I might just add that the US dollar is now lucky to buy 14 Austrian schillings, about half what it would buy twenty years ago.

So the chickens have come home to roost for Australia.

For the United States, the chickens are not yet quite roosting; but be patient. Those chickens might already be well on their way.

What will that mean?

Remember that the US deficit has been running recently at the rate of about $US500 billion, certainly well above $US400 billion. That is greater than the GDP or GNP of most of the countries, members of the United Nations or the WTO.

If there is a sudden reduction to, let's say, to $US250 billion, the impact on those dependent on the US market could, indeed will be severe. If the deficit is wiped out, it could be catastrophic, for example, for some Asian countries.