Last Friday saw Australia’s equity markets close up 30% (including dividends) for the year. This marks the fourth year of annual returns above 20%. Surely it doesn’t get any better than this? But could it get much worse?

Henry’s column last month was about the global asset boom (which Henry sees as a bubble). “The problem’s global, we’re feeling nervous” is a fair summary. The period since has included a plethora of warnings by financial market practitioners, including Henry’s “Lexington”, a former Merrill Lynch executive and advisor to three presidents.

Henry’s Lex summed up one of several columns as follows:

A critical mass has been reached, only awaiting a detonating event… be vigilant, have an action plan and, most important, know your investment time horizon (when you must use the capital) and your risk tolerance.

And on 30 June Lex issued another warning:

Beware – the Bear has emerged from hibernation … hungry and looking for victims.

During June the Bank for International Settlement (BIS) also weighed into this debate. Its Annual Report noted the current “extraordinary” performance of the world economy – high growth, low unemployment, moderate inflation and low-volatility growth of asset prices.

Asset inflation is a wonderful thing for owners of assets, like Henry and readers of Australia’s leading newspapers. Sharply rising asset prices should nevertheless have produced tighter monetary policy sooner. This point is still controversial.

What is not controversial is that goods and services inflation, the currently conventional indicator of the need for policy action, is clearly on the rise. The Reserve Bank cannot effectively act on its own, but the BIS report shows that the global central bankers are on the case.

Action now would be politically awkward in Australia.

Putting politics aside, as Glenn Stevens is duty-bound to do, better a 25 basis point hike now than bigger hikes in early 2008. It is timely to consider the horrific costs of inflation allowed to get out of control:

Inflation forces up rates of interest, saps competitiveness, reduces incentives to save and to invest and, ultimately, puts at risk a country’s financial and economic stability. Eliminating inflation requires a national consensus that the costs of inflation are much greater than generally thought. Establishing and maintaining such a consensus is a crucial step in restoring Australia’s prosperity. 

Read more at Henry Thornton.