OK guys, decision time is here

A very odd headline came across Bloomberg's Twitter feed this week: "Australia boom means men without degree earn more than Bernanke". It's not clear why the writer thought that might be a meaningful comparison, but what's interesting is that the "men without degrees" are not sportsmen, as most readers in the US or UK might have surmised, but workers in Australia's booming mining sector. For all the doom and gloom about the global economy (at least in the UK press), commodity prices have been robust, and Australia, with its proximity to Asian markets, is a major beneficiary. The Reserve Bank of Australia is having to balance concerns over mounting wage and price pressures with the dangers of an overvalued exchange rate, as the AUD moves above parity with the USD.

Meanwhile, back in the US, March job creation was higher than expected, and all of the new jobs were created in the private sector, suggesting that the expansion is well-established, yet the Fed shows few signs of easing up on the monetary accelerator, let alone tapping on the brakes. In the UK the state of the economy is much less robust, as fears of the effects of fiscal austerity mount, but inflation is more than twice the official target and set to rise further; yet here, too, there is hesitancy about raising interest rates by even a nominal amount.

For some years Japan has found itself in a position in which the default setting for monetary policy involves zero interest rates and repeated quantitative easing. It hasn't worked, except in the rather depressing sense that you fear things might have been even worse if the BoJ had not been so aggressive. But are the US and the UK really in the same position now? You might think that, based on the attitudes of the central banks: both the Fed and the BoE seem to fear that their entire economies will be thrown off course if they even attempt to remove the "emergency" stimulus that they hastened to provide during the financial crisis. It's impossible to imagine the implacable Paul Volcker behaving in the same way, if this had happened during his time at the Fed.

The problem is, of course, that the 2000-2007 economic boom was credit-driven to an unprecedented degree. The failure to impose greater monetary restraint when that would have been easy and beneficial, in mid-decade, meant that the Fed and BoE in particular had no conventional ammunition left when the crisis hit. Having been forced into unconventional measures, they lack any real decision-making framework for unwinding the stimulus. Add in the fiscal tightening in the UK, and you can maybe see why it's a difficult decision for the Bank of England, but it's harder to fathom Bernanke's reasoning.

The RBA is already on the case, and there's a good likelihood that the ECB will tighten things just a notch this week too. If the Fed and the BoE don't start thinking on the same lines very soon, they risk undoing the painfully hard work done all those years ago by the likes of Paul Volcker in squeezing inflation out of the economy. Not something that either Ben Bernanke or Mervyn King should want on his resume.