David Alexander in CT 6th October discusses how the Reserve Bank controls inflation and the money supply by increasing and decreasing interest rates. Most people wonder how increasing the price of something reduces inflation? The reason is that increasing rates reduces the attractiveness of borrowing money to invest. However in uncertain times where banks are loathe to lend then the Reserve Bank drops interest rates to encourage lending but at the risk of increasing inflation. As we have seen the blunt instrument of a rate rise or fall is very much a hit and miss affair. A much more certain way to increase investment while still controlling inflation is to issue some money at zero interest but require it to be loaned to people who must spend the money in the market place of infrastructure to reduce greenhouse emissions. This money will turn into a productive asset whose output has a guaranteed demand, will turn a profit because of the low interest rate and hence cannot increase inflation. This is much much simpler and cheaper than setting up an emissions trading system to encourage investment in renewables and it can be done tomorrow. A few calculations show that this method can give us zero emissions within ten years with no price increases in energy while keeping inflation low.

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