Interest rates are going up

[Tibor]

Peter,

Obviously it is your opinion which is fine.

The only thing I'd like to point out that the Reserve got it just as many times wrong as it got right, you might even remember to the recession we had to have? Was not the RBA independent and wise at that time?

Economic indicators several cases do not show real activity. For example housing approvals is far from housing completion (when real money changes hand and additional good bought, etc, etc). If people do not have the money they stop with the approved plan. It is only a forecasting indicator, not something to base monetary decisions.

While we happily spend every cent the government hand us out in baby bonus and tax cuts etc, at the and of the day all we got back is the backet creep if we got it at all. So using this as the basis for high economic activity and we should raise our rates even further from the EU and the US, I think personally, is crazy. There are lots of people in non high paying jobs who are already struggling at the current rate in Sydney and maybe in other cities.

Another .5% (which according to the Reserve is "the preferred neutral basis", what a crap!) might just break the back of the cammel. Sydney and other cities also need lowly paid people who provide essential services, otherwise the highly paid might have a nightmare. The balance has to be struck, meaning these people also should be able to purchase property in the cities and be able to pay the loans and something left over as having a family is more than paying the mortgage.

Sorry rumbling on, but I think (OPINION) that the vast majority of economist are a bit of an idiots who got it so often wrong and just playing with other people's life. Just thinking back to 1999 or 2000 when one of the biggest gambling venue (futures fund having nobel prize winner economists on board) went bust. That one showed me how far is reality from text books. We also seen it here back in the lates eighties and early nineties lots of times and the human cost was very high.

Its enough rambling, but the RBA's wisdom and economists can get me going.

 

[Aceyducey]

Peter,

According to the RBA policy they cannot modify rates in November. The election is on October 9th & the RBA November meeting will be in the first few days of November - within their one month period.

Hence December is their first opportunity UNLESS they decide to break with policy.

Now as Australia doesn't have runaway inflation, high unemployment or significant bad news coming from any angle, there's no reason for them to break policy - it would be highly alarmist & not in the interests of sound economic policy.

I don't expect them to shift rates in either direction in December either. The RBA is fairly happy with the situation at the moment, read their announcements.

I don't see any major bad news that is likely to come out in the next 10 weeks that will cause the RBA board to shift rates in December...it would be foreshadowed by now.

And no, the RBA doesn't move rates due to terrorist activity or war - so I discount any events such as these in the next few months as being liable to force the RBA's hand.

Right now Australia is tracking EXTREMELY well.

I don't see the basis for your opinion Peter at all. Where's the bad news that will have the RBA break policy in November?

Cheers,

Aceyducey

 

[Peter 14.7]

Peter,

Its enough rambling, but the RBA's wisdom and economists can get me going.

Hi Tibor

In response to your comments in bold

Obviously it is your opinion which is fine.

Thanks for a very good reply.

The only thing I'd like to point out that the Reserve got it just as many times wrong as it got right, you might even remember to the recession we had to have? Was not the RBA independent and wise at that time?

Whilst in theory they were it is generally acknowledged that the RBA under Keating were not truly independant with Bernie Fraser at the helm. I have seen an article saying when RBA raised rates to 18% the only voice against was Ian Macfarlane, the present Governor. Any comment from Pitt St on this report?

When Howard got in he made a issue of reinforcing this independence as good policy and good politics. Any comment from Pitt St on this report?

Economic indicators several cases do not show real activity. For example housing approvals is far from housing completion (when real money changes hand and additional good bought, etc, etc). If people do not have the money they stop with the approved plan. It is only a forecasting indicator, not something to base monetary decisions.

Noted and true. Many DAs are presently on the market in Sydney. A sign Developers or Bank have no confidence in final sales.

While we happily spend every cent the government hand us out in baby bonus and tax cuts etc, at the and of the day all we got back is the backet creep if we got it at all. So using this as the basis for high economic activity and we should raise our rates even further from the EU and the US, I think personally, is crazy.

True but still it is MORE money in the pot. More prams, cots and such being imported from China, etc. I understand studies has shown not many of us actually used the tax braks to lower debt. Therefore the Gov is stoking the economic fire and the impact is too recent to be seen yet.

There are lots of people in non high paying jobs who are already struggling at the current rate in Sydney and maybe in other cities

Again true but it will not stop the RBA doing what right for the majority in the long term. Everyone should live within their means. That is the basis of our society. It is not the RBA's job to help out those at the edge except to keep the economy balanced for their long term benefit (jobs, inflation under control etc.)

Another .5% (which according to the Reserve is "the preferred neutral basis", what a crap!) might just break the back of the cammel.

Only some cammels as a survey here showed 89% of forumites could cope with rates up 3% before pain.

So will 7.5% home rates destroy the general population? I dont know but if that is true we have a bigger problem than rates as sooner or later it will return and pass this figure.

Sydney and other cities also need lowly paid people who provide essential services, otherwise the highly paid might have a nightmare. The balance has to be struck, meaning these people also should be able to purchase property in the cities and be able to pay the loans and something left over as having a family is more than paying the mortgage

Agree totally. I have always advocated that lower rates helps low income families more than any baby bonus that as you pointed out is only taxed and spent any how. But as stated the RBA looks at the overall good, not kust Sydney which is close to if not the extreme in affordablity in Aust.

BTW It is good to see both parties and especially Labour taking tax breaks aimed at families. Being a DINK I will not benefit but I am happy for others to do so.

On the provision of affordable housing for low income earners there are a lot of models out there (rent control, social housing, tax credits, NG on PPOR, decentralisation) . All have strengths and weaknesses. Which is best is very hard!

Whilst in theory they were it is generally acknowledged that the RBA under Keating were not truly in dependant with Bernie Fraser at the helm. I have seen an article saying when RBA raised rates to 18% the only voice against was Ian Macfarlane, the present Governor. When Howard go in he made a issue of reinforcing this independence as good policy and good politics.

Again true but it will not stop the RBA doing what right for the majority in the long term. Everyone should live within their means. That is the basis of our society. It is not the RBA's job to help out those at the edge except to keep the economy balanced for their long term benefit (jobs, inflation under control etc.)

Some efforts are being made, such as my previous employer the City West Housing Group in Ultimo/Pyrmont NSW. To be eligible you must be a true local or work locally and be in need and low to moderate income (up to $50k). Rent is based on income and size is based on need (family gets bigger for less $ than one person for more $). However even with $50M they can only house 500 persons.

Ironically most of the affordable housing is rental from IP investors but this in turn raises the price! Again, very hard to fix. Investment is a mindset. If you don’t have it, you never will get ahead. If you do, anything can be done! Look at the Post War Immigrants? Show me a Greek shopkeeper and I show you a man with multiple IP’s he gives to his kids as homes.

Sorry rumbling on, but I think (OPINION) that the vast majority of economist are a bit of an idiots who got it so often wrong and just playing with other people's life. Just thinking back to 1999 or 2000 when one of the biggest gambling venue (futures fund having nobel prize winner economists on board) went bust. That one showed me how far is reality from text books. We also seen it here back in the lates eighties and early nineties lots of times and the human cost was very high

Agree adn like the history refernce to future funds (scary as all hell if you ask me, why not go to the casino and play two up with $10k I say).

No-one can predicte the future and the RBA could get it wrong. I just think, they will think they are right and will raise rates.

Enjoyed your reply, Peter 147

PS Get to your later Acey.

 

[Tibor]

Thanks Peter,

One thing I'd like to mention. The Forumites are in the less than 5% of the population category, as a matter of fact some even in the less than 1%.

For the average person (95%+) risk management is negligible irrespective they buy as an owner occupier or as an investor. Usually they borrow to the tilt to have it NOW and if anything left over, it goes on other doodads. This is why we have a credit card problem. Easy money offered, easily spent.

Yes everyone should live within their means, but the vast majority is not and will not. Just referring to some of RK's books. Financial education is not a subject to be thought at schools, hence financial intelligence is not very high. Some will study and learn, others learn from experience, the majority will be attracted to the latest gizmo, what they have to have NOW and pay for it later.

So this part of the population will feel the pain and if they stop spending the economy will contract. As the banks handed over the risk of mortgages over the past couple of years to several very large superannuation funds, if people start to default in any larger numbers and property prices will come back by any reasonable percentage, lets say 10 % to 20%, this superfunds (and the country as a whole) has a very serious issue on hand. In 2 years time the boomers start to get into the next phase of their lifecycle, retirement, meaning they will be needing money to live on. If the money has gone or dramatically reduced, it will mean hand out from the government called pension. Sure, you can guess it will not mean any good for the rest of the population. Not inadvertent that the government started to encourage people to work longer and do not retire, especially not early. We live longer than our bank balance can survive, which is not too good for the country, economically.

Let me also direct you to an article on http://www.investclub.com.au/aspnet/index.aspx at the bottom of that page
titled The Investors Club News - September 2004 Wednesday 1 September 2004

I know, Kevin Young is not a strong favourite of the RBA and economists and might even like to push a bit too hard, but he makes some very valid points. I am willing to back him in his view, just like I backed him on his view about the Gold Coast and Logan shire, before it became the flavour of the month. He was dead right on both and now I am enjoying the benefit of his wisdom.

 

[Rolf Latham]

Hiya Tibor

To some extent the super funds money invested in mortgages is pretty muc covered.

Each and every loan written is underwrittent by a mortgage insurer, regardless of the LVR, even 35 %.

If the pooh does hit the fan then to a large extent the risk for the super funds should by covered. This is obviously only as good as the mortgage insurer, though at least one of them is part of the largest company in the world, GE.

ta

rolf

 

[Tibor]

Hi Rolf, it is good news.

I might be cynical, but I am sure you remember of a company called Enron?
To me GE no matter how big it is is just another company, albeit I have to say much better managed and financially much stronger. At the same time big companies (and insurers) disappeared both here as well as overseas in the past 15 years or so. Also I am not sure how much losses even GE would be able to sustain and what's then? If they decide to withdraw from the market, it leaves one (maybe two). Public Liability Insurance went through th esame roughness and see the results today.

Anyway, point taken, but I would not take 100% guarantee on it, just as you can't on cash deposited to financial institutions. Percentage yes, full amount no. Hopefully, this is just overcautios comment (on my part) and it never will happen and I would assume that the decision makers ar ealso well aware of the consequences and the primary goal will be rather a realistic inflation check maintenance and assistance of the economy, not too much focus on other matters.

 

[Rolf Latham]

Hi Tibor

Agree with you here, the cover is only as good as the insurer thats for sure

ta

rolf

 

[Peter 14.7]

Good Point Tibor

I was fudging to use the Forumites response as an indication to the levl of impact of rates. We agree here that if rates go up 0.5% there will be major pain for many. Hence why to put it up.

Your super comment is a reminder that all life and especially business is chaos theory. Who knows what a run on insurers could bring? However this would assume a major crash in prices. Which is unlikely in property but not impossible.

You point that one thing can effect another is very valid. Look at Ansett link to Virgin link to Jet star?

Enjoy your comments, Peter 147

 

[XBenX]

Id encourage ppl to read the Terry McCrann article.

Peter_147 said;
============================

Sorry rumbling on, but I think (OPINION) that the vast majority of economist are a bit of an idiots

============================

Most of you know my background is in economics, and I couldnt agree more =)

 

[Sunfish]

Last week I had a "Eureka" moment ref. interest rates. You may or may not agree.

It's clear that at any time int rates are neither high nor low, determined domestically as the rodent would tell us. They are high/low with respect to our trading partners.

Japan has had an int rate approaching zero for about 15 yrs now and I believe that currently it is actually neg ie holders of pos balances above a given amt pay bank charges for the privilege. America is extremely reluctant to raise their rates above 1.25% and I think only a calamity could get them beyond 2.5%.

So why are our rates so high? Could it be that our economy is more fragile than either Japan's (they have been in recession since '90) or America whose external debt is something like US$30,000,000,000,000. There are approx 200,000,000 souls in the country.

The (very short) comment which I thought of as the "E" moment went something like "The Bank of Japan is the worlds biggest hedge fund". What he meant was that BoJ can get free money at home and invest abroad at the (OS) domestic rate. Money for ****!!!! Borrow OPM @ 0% and lend to the Yanks @ 4-5% in long term gov paper or to us @ 5+%. Bloodyll! I could do that! There is enough savings from Japanese and Chinese mums and dads (ATM) to fund the short term borrowings of spendrift westerners.

If you accept that something that can't carry on for ever must come to and end, (ie the Orientals will not fund our standard of living for ever) please consider what will happen if Japanese and Chinese banks are forced to pay what we consider "neutral" rates of 4-6% PA. Who will fund your next IP purchase? It most certainly wont be your tenant!

I've said it before! Australia is not an island!

 

[Peter 14.7]

Id encourage ppl to read the Terry McCrann article.

Peter_147 said;
============================

Sorry rumbling on, but I think (OPINION) that the vast majority of economist are a bit of an idiots

============================

Most of you know my background is in economics, and I couldnt agree more =)

Actually Tibor wrote that piece.

I inserted his comments in bold to my reply to make it easier to follow. I think from the posts that followed I confused everyone. Sorry.

Peter 147

 

[Peter 14.7]

Peter,

According to the RBA policy they cannot modify rates in November. The election is on October 9th & the RBA November meeting will be in the first few days of November - within their one month period.

Hence December is their first opportunity UNLESS they decide to break with policy.

Now as Australia doesn't have runaway inflation, high unemployment or significant bad news coming from any angle, there's no reason for them to break policy - it would be highly alarmist & not in the interests of sound economic policy.

I don't expect them to shift rates in either direction in December either. The RBA is fairly happy with the situation at the moment, read their announcements.

I don't see any major bad news that is likely to come out in the next 10 weeks that will cause the RBA board to shift rates in December...it would be foreshadowed by now.

And no, the RBA doesn't move rates due to terrorist activity or war - so I discount any events such as these in the next few months as being liable to force the RBA's hand.

Right now Australia is tracking EXTREMELY well.

I don't see the basis for your opinion Peter at all. Where's the bad news that will have the RBA break policy in November?

Cheers,

Aceyducey

Ok now I an really confused or shock horror, Acey is confused.

Acey you say "where is the bad news" ? That is it. There is no bad news. All is well and bubbling along.

Therefore the RBA who has stated they see neutral stimulis as another 0.5% up can go there with confidence.

Bad news, low job growth, low demand, etc. would actually stop a rise. On that point Acey you wrote

Now as Australia doesn't have runaway inflation, high unemployment or significant bad news coming from any angle, there's no reason for them to break policy - it would be highly alarmist & not in the interests of sound economic policy.

Perhaps you meant very low unemplyment because it implies a booming ecomony which is bad news for rates staying where they are? Isn't it.

Lastly you state policy is not to move rates within a month of an election. It is literally a month? If so I am wrong but I also read commentators saying November as well? I would have thought 25 days or so counts as a month. Any comment?

I have touch of the flu so could be wrong and writing with no sense?

Regards, Peter 147

PS The Great Debate was boring to watch even for me a fan of those things.

 

[MarkB]

RBA policy is to not change interest rates during an election campaign or for the month afterwards.

Do you have a reference for that Acey??

They must have changed their policy - as this is also completely at odds with what they did last time where interest rates fell 9 days after the November 2001 election.

Please refer to this post.

MB

 

[Aceyducey]

Pitt,

I can't recall the reference - out in the highbrow media somewhere.

I would be surprised in the RBA dropped rates this November however

Cheers,

Aceyducey