interest rates!!

[alexlee]

Please explain me, why they are selling us the pertrol based on US prices, and milking us the interest rates based on mining boom (China price) ?

Because the US is the dominant economic power of the world, at least for now. Since they supposedly have the safest currency, people got used to trading commodities in USD. There have been some rumblings about trading oil in euros and so on. The middle east isn't happy with the inflation created from keeping their currencies pegged to the dollar, and Chavez doesn't want anything to do with those brimstone-tinted dollars.

Theoretically, higher Australian interest rates means a higher Australian dollar compred to the USD, which offsets the higher USD oil price.

The market isn't always so efficient in reality, of course.
Alex

 

[Tim]

Just look at the fixed term interest rates that the banks are currently offering. The 5 year term is less that the 3 year. So, I guess they think in the long term that interest rates will reduce.

Cheers,

Bazza

I am not sure about that as the 5 year fixed rates from memory have been lower than the 3 year rates for several years.

Tim

 

[Tim]

The idea that money can be created is very hard to understand for most people. You're basically saying what they think has value can be created on a whim. I think most of the media doesn't understand it either, or think it's some academic concept that has no place in reality.

I think, though, that we're not going to have a repeat of the high inflation 70s for two main reasons. One, inflation no longer feeds into wages the way it did when unions were more powerful. And two, the central banks are much more aware of inflation then they were a generation ago. i.e. the RBA and ECB, at least, are viewing inflation as a bigger issue than recession. Which means they will hike rates earlier, which means lower rates in the long run. It may well mean we go into recession, but if it'll save us from systemic high inflation, that's the price we have to pay. Only an independent central bank would be willing to risk short term recession to prevent long term inflation.
Alex

Alex,

I read with interest in this morning's AFR that the ECB is now looking at cutting rates as they are placing recession at a higher risk than inflation (same as US).

Tim

 

[Bargain Hunter]

I personally think the biggest spenders are those who go out to bars and restaurants and buy TVs, cars, etc on credit. Now, the issue is that most consumers have it upside down: they make payments on their consumer loans and mortgages FIRST, because they have to, then spend what's left. Increasing interest rates affects credit cards, mortgages, corporate loans, everything. So the result of higher interest rates isn't just to hurt people who already have high consumer loans (they should go down, in my opinion), but to prevent others from getting their loan levels up in the first place.

Hi Alex,

We appear to agree on the problem, just not the solution.

I believe consumer spending can be reduced more effectively by targeted tax strategies rather than by blanket interest rate increases. Sure interest rate increases affect everyone, but if I want to buy a $15,000 TV and it costs me a little extra in interest I will barely feel it, it won't affect my lifestyle choices and it certainly won't stop me buying.

However if I want to plan for the future and purchase a home or investment, additional interest on such a large loan is likely to cause me to make other decisions. Perhaps I will decide that I can never afford a home and therefore I might as well have a good time with the money I've saved.

If I've already borrowed to buy a home then chances are that I have already curtailed my discretionary spend in order to meet the repayments then I am the most vulnerable to an interest rate rise.

In this way interest rate increases target not the people who spend on toys but the people who have already committed to a mortgage and can least afford the increases.

I can see interest rate rises being an effective device against spending if they applied to new loans or personal loans and the like, but I guess there is no way that this could be applied in reality, so back to my arguement for targeted taxation on spending.

Regards

Andrew

 

[YLC]

Hi Alex,

We appear to agree on the problem, just not the solution.

I can see interest rate rises being an effective device against spending if they applied to new loans or personal loans and the like, but I guess there is no way that this could be applied in reality, so back to my arguement for targeted taxation on spending.

Regards

Andrew

It looks like the government has decided to quarantine the tax cuts for now. Maybe that will help curb the spending on doo-dads.

YLC

 

[LynnH]

YLC

The government hasn't quarantined the promised tax cuts - they will still go ahead. But they have said that there will be no future ones until they are sure that inflation is under control.

Cheers
LynnH

 

[alexlee]

We appear to agree on the problem, just not the solution.

I believe consumer spending can be reduced more effectively by targeted tax strategies rather than by blanket interest rate increases. Sure interest rate increases affect everyone, but if I want to buy a $15,000 TV and it costs me a little extra in interest I will barely feel it, it won't affect my lifestyle choices and it certainly won't stop me buying.

Yes, and if you own shares in Harvey Norman, or Westfield, or own a bar, you benefit from that.

However if I want to plan for the future and purchase a home or investment, additional interest on such a large loan is likely to cause me to make other decisions. Perhaps I will decide that I can never afford a home and therefore I might as well have a good time with the money I've saved.

While many young people are doing exactly this (because of expectations that are too high), there will come a time when they WILL buy a home. Because that's just how humans are. In the meantime, they rent. From us. The increase in renters will mean higher rents for us. As for higher interest rates deterring people from buying IPs, so what? *I* don't have that problem. I'll still buy, and if others are deterred by higher interest rates, that means lower supply of IPs and higher rents.

If I've already borrowed to buy a home then chances are that I have already curtailed my discretionary spend in order to meet the repayments then I am the most vulnerable to an interest rate rise.

Yes, and increased interest rates may well push this person over the edge, forcing them to sell their property. A few foreclosures in an area really drags down the price. Allowing those who were financially prudent to come in and buy when the market is low. That includes you and me.

In this way interest rate increases target not the people who spend on toys but the people who have already committed to a mortgage and can least afford the increases.

True. But then interest rates is all the RBA has. The government itself has many other tools at its disposal (tax and government spending, for example, as well as infrastructure, subsidies, etc). The reality is that there isn't the political will to do the things you mentioned. Bemoan it all you want, but that's the reality.

We disagree on the solution because 1) you're far more altruistic than I am and 2) I look at things at they are, not as I wish them to be. When inflation rises and the government doesn't do enough to control it, the RBA steps in with higher rates. You may not like it, but that's how it is.

Though in truth, why should I want the world to become equal? I am where I am because I'm on the winning side of an unfair world. Life ISN'T fair. It isn't fair when all I do is sit on a chair all day and type some numbers and they pay me, while people are starving all over the world.

Do I also think that higher interest rates hurt people other than the rampant consumers I cluck-cluck at? Yes (though you have to wonder why they bought so much house in the first place: rates are still relatively low). Do I ENJOY the hurt caused by higher interest rates on the people who might, as a result, lose their homes? No. However, I benefit from it, so it would be hypocritical for me to sit on a high horse.
Alex

 

[steveadl]

Problem is, whilst I agree that tax increases could act as a dampener on consumer spending - they would still have a limited effect.

They wouldn't have much of an effect on people who are already on lower incomes and therefore tax rates as it is. Plus all those lovely serial consumers who are on govt. benefits.

 

[Bargain Hunter]

Alex,

You are a greedy, capitalist, pigdog... and you make no apology for it.

My brother believes I am one too, so you are in good company.

I see your reality, and I raise you one morality.

You are right I can benefit from this and I probably will, it doesn't mean that I think the whole "let's have a recession" is a good idea. I don't.

I have been there, I have seen people suffer and I would prefer that it didn't happen again even if I'm in a postion to benefit.


Regards

Andrew

 

[FHB]

I can see interest rate rises being an effective device against spending if they applied to new loans or personal loans and the like, but I guess there is no way that this could be applied in reality, so back to my arguement for targeted taxation on spending.

If people fixed their interest rates then rate rises would only affect new loans. This is the aim of the RBA, they aren't trying to punish those who have already borrowed, they are trying to deter those who want to borrow in the future, ie. slow the growth of money creation.

Taxes won't achieve this, all they will do is increase the amount people have to borrow to purchase them. Think about the effect of reducing demand for retail items has. Thatcher tried this in the early 80s. It was very effective at stopping inflation, pity about all the people who lost their jobs.

The RBNZ recently held an inquiry into finding better ways to control inflation without effecting home owners, they couldn't find one, but they did suggest the following:

remove any undue restraints on land supply; review (hint hint) tax breaks for capital gains and negative gearing; toughen the rules for evaluating planned spending and tax cuts; consider cutting immigration when the economy overheats; and spend more to get good economic statistics.

 

[alexlee]

Alex,
You are a greedy, capitalist, pigdog... and you make no apology for it.

My brother believes I am one too, so you are in good company.

I feel no pride nor shame. I am what I am.

I see your reality, and I raise you one morality.

You are right I can benefit from this and I probably will, it doesn't mean that I think the whole "let's have a recession" is a good idea. I don't.

I have been there, I have seen people suffer and I would prefer that it didn't happen again even if I'm in a postion to benefit.

Which is great for you, because we need more people like you in the world. I admire those who care about complete strangers. I just don't feel the same way.
Alex

 

[sailor]

I don't understand why all the blame for our locallly increasing mortgage interest rates is at the door of Aussie inflation?

Just what is at the door of inflation:
1. Overuse of credit cards?
2. Increasing upperlimits of credit cards?
3. Banks etc pushing consumers to take out even more credit cards?
4. A rising $A that increases consumers capacity to buy more overseas produced doodads?

The USA has an enormous credit card expenditure and debt, with little savings. Not to mention the USA's trade deficit...which BTW is largely held by Asian (inc China) and Japanese banks/institutions.

I'm not sure the RBA can control "inflation", when there are global influences at work here. Seems a bit like "pi$$ing in the wind" to me.

 

[FHB]

I don't understand why all the blame for our locallly increasing mortgage interest rates is at the door of Aussie inflation?

Just what is at the door of inflation:
1. Overuse of credit cards?
2. Increasing upperlimits of credit cards?
3. Banks etc pushing consumers to take out even more credit cards?
4. A rising $A that increases consumers capacity to buy more overseas produced doodads?

The USA has an enormous credit card expenditure and debt, with little savings. Not to mention the USA's trade deficit...which BTW is largely held by Asian (inc China) and Japanese banks/institutions.

I'm not sure the RBA can control "inflation", when there are global influences at work here. Seems a bit like "pi$$ing in the wind" to me.

A rising $A reduces inflation, getting more doodads for your dollar reduces the rate of inflation. When companies can no longer create more doodads for a low price inflation rises. Different schools of thought look at this differently but basically when too much money is being created (ie, loans) then prices start to rise. We are printing money like it's 1989..... putting up interest rates reduces the demand for new money, it works, but it can be slow, and it takes time for people/business to realise they should stop borrowing.

Interest rates are rising because our economy is so good, business is making money, people have lots of jobs. Its actually a good sign, but it will have to end one day, and if it gets too hot the RBA will slow it down.