
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve - gibsonf1
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/16/bcnecb116.xml
======
gaius
The value of a currency is the trust people have in it, that the dollar,
pound, franc, whatever you earned today will buy what you need tomorrow.

If you monkey with the currency for short term political gain, that trust is
eroded. Sure someone may benefit from the meddling this time, but that person
knows full well that if the rules are fluid they might be the one who suffers
next time. It doesn't matter if the central banks put rates up or down; every
change will reduce the currency's value. The way to restore value is to build
confidence back up and the way to do that is to resist the urge to meddle.

None of this is rocket science.

~~~
eru
Why should they not adjust the interest rates? If they state clearly that they
want to fight inflation - nobody will be surprised and no trust will be lost.

~~~
gaius
Because there ain't no such thing as a free lunch. All you can do by changing
interest rates is shift the benefit and the pain from some people to some
other people - and back again the next time you tweak it.

~~~
eru
So? Fixing inflation is at least as good a goal as fixing interest rates.

(It is probably better.)

Your argument reversed:

"All you can do by [letting rates of inflation change] is shift the benefit
and the pain from some people to some other people - and back again the next
time you tweak it."

~~~
gaius
Well, that's not quite true. If interest rates change only rarely, then you
can plan. "If I save I will get this much interest", "if I get a mortgage, it
will cost this much" and so on. There's value in that predictability. Once you
take that away you force people to hedge their bets against uncertaintly and
that increases the cost of every transaction. This manifests itself as
"economic slowdown", e.g. "I won't do this thing I planned, because I need to
put some aside in case my costs go up".

~~~
eru
If you fix interest rates - you can make very good nominal predictions. But
nobody knows how much those x dollars are really worth when inflation is
allowed to float.

