Interest rates, the flow of funds and perhaps - by default - Armageddon

There certainly is a compelling need for us all to think through the nature and impact of movements in interest rates if, in future, we are to achieve stability in our national economies as well as globally.

Interest rates and the availability of credit raise fundamental issues with which we must try to deal more efficiently and knowledgeably than in the last 40 years.

When interest rates are raised, a direct cost is immediately added to production. No offset to this de-stimulus is provided by government or any other source to hold production up.

On the other side are our famous inbuilt stabilisers which since the 60s - and for many economies long before the 60s - held up consumer demand, if not at its pre-hike level, at something approaching that level.

This was the way it went when Federal Reserve Chairman, William Martin - about to retire and leave his heritage to the unfortunate Arthur Burns - raised interest rates in July of 1969. That was the month man walked upon the Moon. We were astonishingly smart in our exploration of the solar system but not so smart in our financial arrangements.

Even before unemployment went up, Nixon was quick to point out that his inbuilt stabilisers would maintain the incomes of those thrown out of work; but production fell by something like 7 per cent in just 12 months.

We got stagflation.

And from the United States, it spread everywhere.

I am not saying that consumer demand will stay up or increase with a hike in interest rates. Rather consumption will fall less than production and this imbalance will increase consumer inflation rather than reduce it.

In thinking about these issues, we must be careful not to let dogmas repeated over the decades get in the way of the "truth" as revealed by the empirical evidence.

Since 1969, most highly developed countries such as the United States, major European economies, Canada and Australia have experienced chronic inflation. Virtually all of our currencies now buy a 10th or even a 20th of the real goods and services they bought back in 1970.

This has been despite the efforts to “fight” inflation by appointing diligent and "independent" central bankers and despite the creation of such miraculously booming economies as the Asian Tigers, China and India - a miracle achieved crucially by the self-destructive policies of the countries suffering from chronic inflation.