Bushy inflation might lower nominal debt but in real terms the interest rate rises means higher repayments (more cashflow) is required to service exactly the same debt level (unless of course you are on fixed interest
)Tim
why are high inflation and interest rate rises directly related?
- Thread starter beachgurl
- Start date
Bushy inflation might lower nominal debt but in real terms the interest rate rises means higher repayments (more cashflow) is required to service exactly the same debt level (unless of course you are on fixed interest
)Tim
The current CPI rate was set as a target for the RBA in 1993. Prior to this there was an understanding that they aim for around this but the rate was not set in concrete.
The current charter of the RBA is:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia."
It appears clear to me that these three aims cannot be acheived, in fact the aims of one are counter productive to the other.
By maintaining a high Australian currency, you encourage imports while making Australian goods harder to export. This is likely to increase the national debt as Australians demand more imported goods.
Full employment means that the economy is performing at maximum demand, this leads to pressure on wages as employees realise their value. Wage demands lead to inflation.
The RBA's response to increased inflation is to increase interest rates. Interest rate increases affect the ability of industry to invest and grow, and makes people tighten their belt. The lack of investment and spending leads to job losses and recession.
The RBA then adjusts the rates to stimulate the economy and the whole cycle starts again.
In prior decades government fiscal policy played a major part as an economic control. Prior to GST governments adjusted tax rates not only on wages but also on spending, sales tax was levied on items at varying rates with staples being taxed the lowest and luxury items being taxed at higher rates.
Modern fiscal policy appears to be driven more by giving money away, rather than by what is best for the country. Vote winning strategies that are dressed up as entitlements (money for bugger all).
The FHOG was a great idea to stimulate the market following the Sydney Olympics, but it should have been discontinued once it had done it's job. Instead it was kept on and the result was upward pressure on home prices, the grant has been devalued and does not cover the increased costs it stimulated.
The baby bonus is another of these white elephants, established to stimulate baby production it is not big enough to tempt those who earn a full time wage, instead it stimulates production in areas where the result is likely to be just more people "entitled" to benefits.
Unemployment benefits for people who just don't want to work, rent assistance when there is no accountability for it to be paid to the landlord... the list goes on and on.
Many of my tenants receive these payments, they have all the mod cons, and are barely effected by an increase in interest rates. In fact the sustained value of the dollar will mean that the extra interest rate on their credit card is outweighed by the relatively cheap cost of the imported good. There is also the very likely chance that their entitlements will be adjusted to compensate them for any increase in the cost of living.
I have said it before and I will say it again. Increasing interest rates is not the only way to control the economy, and for many years it was not the preferred method of doing so, it has become the method be default. As consecutive governments choose to be bringers of only good tidings and leave the dirty work to the RBA.
Regards
Andrew
Agree. If the government leaves economic management to the RBA, then there is only one result: movements in interest rates. But that's why they made the RBA independent, so that the government couldn't just create short term effects to its own political ends while ignoring the medium to long term.
I think the political reality is that the government knows that any policies from THEIR side to dampen demand will result in a voter backlash. However, that just emphasises our need for an independent RBA. We've given powers to the government that they won't use because they're afraid of the political consequences.
The RBA certainly doesn't seem to care about the exchange rate as much as, say, the BoJ. The RBA was willing to 'let' the AUD drop past 50c, and doesn't seem to care that the AUD is shooting past 90c now.
Alex
The aim to have full employment is also not high on the agenda, it is based on the concepts of the 60's when there were huge infrastructure projects.
Menzies almost lost an election because unemployment went to 2%. Yet we have a booming economy and according to The Bureau of Statistics the jobless rate was at 4.6% in December and no-one beats an eyelid.
This by the way is the declared rate, it does not take into account the various methods employed by the government to skew these figures, the real rate I believe is somewhat higher.
From reports I have read the RBA does not make decisions on interest rates based purely on the rate of inflation (logically this would be too narrow a pint of reference). They use other economic indicators including the jobless rate. They believe as I do that full employment increases wages demands, and therefore their aim is to have a level of acceptable unemployment for the overall benefit of the economy not full employment as they state in their charter.
Perhaps it could be argued that they at least meet the aim of point three, "the economic prosperity and welfare of the people of Australia." The emphasis on "the" rather than "all people" may be the key to meeting this goal, with the thought that the short term pain for a relative few is better for the long term gain of the many.
I've been through the "recession we had to have" and it's made me tougher, but if there are ways of avoiding what appears now to be inevitable then the powers that be should take these step.
But I must agree with you here, the chances of a government putting their neck out for the good of the people is not going to happen.
Regards
Andrew
Bushy inflation might lower nominal debt but in real terms the interest rate rises means higher repayments (more cashflow) is required to service exactly the same debt level (unless of course you are on fixed interest
Tim
Tim,
I agree but I think most investors will have a percentage of their loans fixed as risk management and don't forget the interest is a cost so the ATO helps you to pay for it.
Bushy
As interest is a cost that the ATO helps me pay, don't higher interest rates mean the government has to fork out more to help me pay? If so, does this mean that tax cuts will minimise this increase in their cost?
The RBA is independant of the goverment but is it independant of the other banks? How do we know that they are not just increasing interest rates so the big banks can recoup their sub prime mortgage losses?
I think of it from the other direction. The government gets less as a result if higher deductions. Tax cuts will again decrease their takings. So it's not a 'cost' to them but a hit to 'revenues'.
Too conspiracy theory for me. In what way do you think the big banks influence the RBA? Are they paying Stevens' salary? The big banks don't need RBA rate hikes to increase their rates (as they have recently shown). If anything, the banks want the RBA to keep rates low: hotter market, more opportunities to lend, more opportunities to make money.
Alex
I agree with Alexlee,
When interest rates rise, the ATO will have less funds because their revenue will be less from people with geared investments. I am not qualified to talk but I think the playing field has changed a lot from when an increase in interest rates had a direct impact on inflation. Gone are the days when just about everyone had a homeloan. The common denominator was a non deductable home loan, and the Aussie Dollar wasn't floating.
These days less people have undeductable debt, more people rent, there are interest free loans that aren't tied to RBA decisions, and the Aussie Dollar is floating.
I don't think interest rates alone have the same impact as there are so many different types of consumer groups now. There needs to be more management tools available to have an influence on all the different groups at the same time, that will lower inflation and the changes made would not need to be as radical and hurt a small percentage of the population while it has no effect on another.
What are those tools ?
Regards Bushy
When interest rates rise, the ATO will have less funds because their revenue will be less from people with geared investments. I am not qualified to talk but I think the playing field has changed a lot from when an increase in interest rates had a direct impact on inflation. Gone are the days when just about everyone had a homeloan. The common denominator was a non deductable home loan, and the Aussie Dollar wasn't floating.
These days less people have undeductable debt, more people rent, there are interest free loans that aren't tied to RBA decisions, and the Aussie Dollar is floating.
I don't think interest rates alone have the same impact as there are so many different types of consumer groups now. There needs to be more management tools available to have an influence on all the different groups at the same time, that will lower inflation and the changes made would not need to be as radical and hurt a small percentage of the population while it has no effect on another.
What are those tools ?
Regards Bushy
Hi Bill,
Just pulled some junk mail out the letter box. "The Good Guys" brochure says 600 days, zero deposit, zero interest, zero payments. They sell white goods in SA if you haven't got them where you are. It's so easy to have a $5400 TV package now, even if you can't afford it at the moment. For the consumer who rents, interest rates really dont matter.
Regards Bushy
Just pulled some junk mail out the letter box. "The Good Guys" brochure says 600 days, zero deposit, zero interest, zero payments. They sell white goods in SA if you haven't got them where you are. It's so easy to have a $5400 TV package now, even if you can't afford it at the moment. For the consumer who rents, interest rates really dont matter.
Regards Bushy
