Financial storm clouds gather

We are confronted right now and in the coming weeks with one of the most fascinating situations in modern monetary history. That is global monetary history and global monetary evolution. It promises to be the most abrupt and far-reaching change in monetary history since the imposition of higher interest rates

by the American Federal Reserve Board in 1969 and the departure from gold by the United States in 1971.

That was in President Nixon's first term.

I was in New York in the autumn of 1970 attending the United Nations General Assembly as Australian Representative on the Second - Economic and Financial - Committee.

I spoke my piece for half an hour or so and then was required to listen to half-hour speeches by more than one hundred representatives who told us all what their problems and expectations were. I already knew what they would say so I was able to spend my time writing a book while I appeared to listen to my "Distinguished Colleagues."

That book was published in June 1971. It was called "The Indigent Rich: A Theory of General Equilibrium in a Keynesian System." Its principal theme was that a hike in interest rates by a country's central bank did not reduce consumer-price inflation in

that country. On the contrary, higher interest rates stimulated and intensified inflation.

Central banks around the world ignored what I wrote and continued to "fight inflation" by raising interest rates. They do much the same thing to this day - or will when they can shake themselves free of the impact of the Global Financial Crisis. Indeed, their main duty has been and is now to commit themselves to a highly disciplined watch for signs of consumer-price inflation coming back and raise the key central-bank interest rate when it does. Their faith in such an unassailable strategy is rock-solid.

In my turn, I continued to suggest that the contrary was the case: higher interest rates would boost, not bust consumer-price inflation. Of course the real world, over the more than forty years since, has provided the most convincing evidence that my thesis is sound.

That brings us close to the area of today's dilemma.

More than thirty years ago, Japan was hit by a series of bubbles particularly in real estate and equity markets. Those bubbles were turned into busts by the central bank raising interest rates which did effectively bring bubbling asset-price

inflation to its knees.