It wasn't so long ago when policymakers everywhere were being spooked by the inflation demon that would, they said, bring economies to their knees. And so they rode into the night and returned in the day with a new armour - interest rate policy. And with this alone, monetarists found ways to tame the inflation demon for years. And every political leader, who has used this policy weapon, has rejoiced. Economies were hunky-dory again, and people danced in the streets because they could shop till they dropped as prices and the cost of borrowing were kept low.

This isn't a fable or folklore, but a real story. And the real story is that the inflation demon is back, and it is menacing monetarists again.

Japan has raised its official interest rate, off the back of zero for a long time as the one-time Japanese industrial juggernaut was saddled with a 12-year recession and then whacked sideways by deflation. Now it's coming back. But for how long? The Reserve Bank of Australia in early August raised it official interest rate and promising a lousy Christmas by hiking it again in November.

Prime Minister John Howard blamed the rate rise on the price of bananas. At A$15 a kilogram, the Paul Keating idea of turning Australia into a banana republic is spooking some folks. Further, petrol is closing in on A$1.50 per litre, and inflation is nudging 4%, about a whole percent more than the central bank would wear. Howard's last election promise that only his neo-conservative government could keep the interest rate voodoo away looks shipwrecked already.

Ben Bernanke, the relatively new US Federal Reserve Bank boss, has gone the other way from the FRB's last guru, the retired Alan Greenspan, by halting - for now - the 17 consecutive rate increases that have bedevilled the US economy left, right and centre. American economic growth has slowed sharply, unemployment is creeping back up again, and productivity growth - the primary determinant of overall prosperity and the crucial ingredient in having healthy growth without ballooning prices - has stalled.

By keeping interest rate on hold, Bernanke is trying to engineer a soft landing for the US economy. If it goes down the gurgler, kiss goodbye to all versions of hunky-dory madness that have brought people untold happiness and delusion.

Three dips in a row

Which is why Indonesia's leader, Susilo Bambang Yudhoyono, who has sat on his hands since taking over the Indonesian presidency in 2004, must nevertheless be wondering how he can still reform the broken economy by the next election. Because his Bank Indonesia Governor, Burhanuddin Abdullah, on Aug 8, reduced the interest rate that is used as a reference for bill sales, to 11.75 percent, but after inflation slowed to a 10-month low in July.

That's the biggest reduction in the cost of credit since July 10, 2003, when the rate on overnight rupiah deposits was cut by 75 basis points. But look behind the good news headlines and you'll see that Indonesia's central bank and the republic's woeful president are banking on spurring growth in Southeast Asia's largest economy.

But what do interest rates mean to Indonesia's teeming hundreds of millions of poverty-stricken citizens? Zilch. Nada. Kosong. They can hardly borrow from banks. And banks won't lend them one brass razoo. Who'll spur economic growth aren't these poorest of poor folks but middle and rich-class Indonesians. And businesses won't be investing or cranking up production until they can see the shape of final demand in near-concrete form, despite real interest rate being cut.

It'll be the monied classes who'll stoke the inflation demon, only for the central bank to inch up interest rate again. Even then, they're too small a statistical number to effect another rate rise, and Indonesia, after the late '90s Asian crisis, looks doomed to stumble from poor growth rates, quite like the Philippines thanks to the two republics' presidents who haven't a clue on how to run an economy, let alone have the backbone to push through real economic reforms.

Nevertheless, here's another question: how many more small jumps in interest rate will it take to tame the inflation demon and then tip the economy over into a slowdown or, worse, recession? Because the 17 consecutive rate rises in the US may have slowed inflation but another rate hike could easily reverse the economy into a recessionary slide. We'll be back to watching the gross domestic product numbers again, and for the technical interpretation that three dips in a row spell recession - like it or lump it.

The other number we'll all be eyeballing is the producer index. With the cost of crude oil hedging towards US$80 a barrel, it'll go higher, close to US$100 a barrel, within months. Don't scoff. It'll happen. The key BP Alaskan oilfields have suddenly closed down for huge and long-time repairs. The northern winter is fast approaching. The Middle East is edging closer towards region-wide war, with civil war in Iraq.

Plot is lost

Venezuela's leftwing president nutter Hugo Chavez wants to play hardball with everybody else. Nigeria is a basket case of political tragedy and corruption. Iran has oil but it, too, has a frenzied, extreme, president. And while the Saudis won't say just how much oil they have in reserve, the Arabs are running out of oil and fast. Vladimir Putin, the gangster-like autocrat president of Russia, has oil, but he wants it all for Russia and jawbone Europe into freeze for his own geopolitical interests.

More, when you have so-called emerging economies like China and India who are perennially hungry for the black gold , there just isn't anywhere near enough to meet total world demand. As long as people behave stupidly and selfishly by driving their cars to just around the corner, you can be sure of one thing - you'll spend more disposable income on petrol while governments cream people and oil companies for a sizeable amount of this in taxes.

And every time petrol costs go up, businesses will pass them on to consumers, who'll pay even more for their basic necessities and luxuries that will need to be transported quickly from cheap production sites like China - on planes and trucks that use fuel - to the marketplace. And so, on and on the merry-go-round spins. It's like a dog chasing its own tail.

Meanwhile monetarists, whose single-armour interest-rate policy would have done the trick one time, will now be found scratching their heads or navel-gazing about their next mother of monetary policy weapons that they'll need to either tame the inflation demon or save economies from being tipped over into slowdown or recession.

Because when people are thrown out of work during a slowdown, it's only then that the inflation demon slips away. Is this the monetarists' plan? Don't be surprised if it is, because clearly, they have lost the plot, these clever devils of the free-market economics school. If you're going to subscribe to their mantra and prescriptive doctrine, you might as well put a gun to your head.

MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.