Reserve Bank of Australia Tolerating Inflation
What an interesting week this promises to be. The Reserve Bank meets tomorrow to decide if Aussie consumers have slowed down their spending enough that the cash rate can be kept on hold. Let's hope you didn't eat a cake this weekend.
If you think inflation of 4.2% per year in consumer prices is acceptable-as some pundits seem to think-remember the rule of 72. To find out how long it takes for something to double at given interest rate, you divide the number 72 by that interest rate (don't ask us why 72 is used, it's complicated).
Growing at a rate of 4.2% compounded, a given good or service will double in price in 17.1 years. Granted, the rule of 72 is used to calculate returns on your capital. It helps you establish what rate of return you require on your capital to reach a given financial goal. The faster your rate of compounding the fast you get there. This is why Einstein called compound interest the "eighth wonder of the world" (bonus points if you can name the other seven).
But we hope you see our point. Tolerating "just a little bit of inflation" seems to have become popular lately. But 4.2% is not "just a little bit of inflation." Over your life time, it means that prices will double. This is how governments gradually tax your savings by printing more money. This is why fiat money is not "sound money."
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.
Comment by Unpopular Truth on 5 May 2008:
What country in the world worth living in does not have a fiat currency?
Comment by justin on 5 May 2008:
What country in the world doesn't have a fiat currency?