It’s a big day today on the interest rate front. Our marionette-like Reserve Bank of Australia (RBA) governor and his chums will settle down in their Martin Place office today to discuss interest rates.
They’ll look at all sorts of tables and charts and statistics. They’ll be served either tea or coffee. And doubtless there’ll be a nice selection of biscuits available as well – rich tea, digestives, custard crèmes… and maybe even a few Tim Tams if they’re good.
And then, if the market is right, they’ll light the touch-paper on the Australian public by putting up interest rates.
What good people these people at the RBA and in government are.
For the last year they’ve – metaphorically – told the public to douse themselves in petrol with cheap credit, and now they’re asking them to hold a lighted match.
Whoosh! Thanks for coming.
Of course we don’t know for certain the RBA will raise rates today. But we do know the equity market is getting a bit jittery about the prospect.
But whether it’s today or on Melbourne Cup day, the slowcoach mainstream economists have finally come round to the idea that interest rates must rise.
That’s right, it was until recently that many of our economic banking fiends were convinced the RBA Cash Rate would “begin with a 2″ and that rates had no chance of rising until mid 2010.
We were even told “inflation is dead.” Of course, it isn’t, it’s just been playing dead – the little rascal.
Now don’t get us wrong, we’re not saying we believe interest rates should stay low. The point is the RBA should never have taken them this low to begin with.
In fact, if we’re being completely honest, the RBA shouldn’t be there at all. All old ‘wooden head’ and his chums do is manipulate the currency and exchange rate for the benefit of themselves, their banking mates and the government.
Whereas, as always, it’s the consumer – the individual – that’s left in the lurch, left to pick up the bill.
The sad fact is that the RBA has manipulated interest rates downwards in order to sucker in more borrowers into what was already an over-extended credit environment. It needed to sucker them in to help prevent the banks from collapsing.
The whole market became so leveraged and so over-extended that in many countries the whole thing just broke.
But that hasn’t stopped the usual suspects – the bank economists – from applauding every decision from the RBA. And not only that but urging it to do more. “Forget about inflation” they all yelled, “it’s deflation you need to worry about.”
And like a sad and sorry blockhead, the RBA agreed.
It told the nation that “de-leveraging” would be painful and should not be allowed to happen. Only it turns out that “de-leveraging” is like the boogey-man. It sounds scary, but it isn’t real.
The nation was urged to do its bit by spending what it had, what it didn’t have, and what it was given.
That’s the only way.
After all, there’s no point in saving money, when the real rate of interest is so low. And there’s no harm in borrowing money when the interest rate is so low – look at how cheap it is!
And of course, to reward you for spending, the nation was given someone else’s money to spend too.
Naturally enough, all this spending “worked.”
The economy has “improved” much more than anyone suspected. Company profits have “improved” and are rising again. The taxpayer situation is not as bad because they haven’t been indebted by its government as much as feared.
And asset prices have started to take off again.
But now the banking fiends, the mainstream media and other saps have turned on a sixpence. The stimulus has “worked” too well. And now it must be stopped… kind of. But not completely.
“But isn’t this what you wanted to happen?” the dumbfounded public reply.
What a sad and irrelevant life these superannuated public servants lead. The RBA believes its own b… propaganda. It believes it can fine-tune and minutely micro-manage a $1 trillion economy.
It incredibly believes it can raise rates, then cut them, then raise them, then cut…
It believes it has the skill and agility of a slalom skier. That it can dodge one way and then the next without hitting any of the flags, and earn a gold medal – or in the RBAs case, a polymer one.
We all know manipulating an economy to such an extent is not possible. It isn’t possible to know precisely how 21 million people are going to behave or react to a move in interest rates.
But what we do know is that thanks to the RBA, the Australian public is being played for fools. And on top of that, the Australian public is being set up for a fall too.
Every economic signal which the pollies, the mainstream economists and the commentators are pointing to is directly related to the artificially low interest rates and the government’s splurge-spending.
The same fools have somehow made themselves believe that Australia has a magical economy that has been able to side-step the worst that’s happened overseas.
The real truth is it’s been kept afloat by the same tactics that pumped up the fake economy before.
The recovery and the economic miracle isn’t real. It’s a mirage.
Rather than the excess debt being purged from the economy through business failures and bankruptcies, the excess debt has been supported by, erm, more debt.
Not only that, but more debt provided at an even cheaper rate than before.
Unfortunately, the real consequences of the so-called ‘credit crunch’ have not even half played out. It has merely been postponed to a later date. And next time, just as the mainstream didn’t see the last one coming, they won’t see the next one coming either.
But that hasn’t stopped the mainstream commentators we’ve listened to, blandly talking about a 0.25% interest rate rise being manageable for borrowers.
What about the next 0.25%? Or the 0.25% following that? The borrower has averaged down their funding cost but averaged up their leverage.
Last night we tuned into the abysmal “Your Money, Your Call” on Sky Business. Apparently overleveraged borrowers in residential property investments will be able to just pass the rise on to tenants as higher rent, or use the negative equity to their benefit.
It’s the typical mentality of property investors, thinking they can get rich by running a negative cashflow on their properties. The bigger the loss the bigger the profit is how it seems to be!
Anyway, the now inevitable need for interest rates to rise could see the next step of the Depression scenario play out. And not just here either. Overseas economies have played the same dangerous game and will suffer the same consequences.
The ingredients for an inflationary Depression have been sown. An economy in which the cost of living increases as the quality of living decreases.
Prices have risen – although it may not seem by much. The fact is they have risen, when what the economy and consumers really needed was falling prices.
Labour costs remain high, and cannot easily be reduced due to regulations and unions.
Industry has been encouraged to spend on capital in order to receive tax breaks. Businesses have been given a free kick due to the free money and easy credit given to consumers – this has kept prices high.
And given the barriers to entry for new businesses in any industry and the duopoly status of many Australian industries, there is little competitive threat to business. That means there is less incentive for businesses to cut prices.
Besides, the continued increase in credit ‘creates’ more money (inflation) and weakens the Australian dollar. Both of which lead to rising prices.
Of course, all this forces interest rates even higher.
Remember that mild inflation creates the illusion of increased wealth. The reality is actually a decrease in real living standards.
Does this necessarily mean hyper-inflation? You’d hope not. And it’s not inevitable. Providing governments and bureaucrats stop meddling and let the excesses that have been built into the economy purge themselves out.
These excesses will eventually be purged, it’s just a matter of when.
Whether the RBA increases interest rates today, next month or the month after, it doesn’t matter. Its previous actions have already started the ball rolling. The next interest rate rise will just give it an extra nudge.
Other Stuff on the Markets
The S&P/ASX200 slipped 0.33% on Friday, while on Wall Street the Dow Jones Industrial Average gained 112 points. In Europe the FTSE100 added 0.71% and the CAC40 increased by 0.69%.
The price of gold in Australian dollars is trading at $1,159.74, while in US Dollars it is trading at $1,016.75. Silver in Australian dollars is $18.94 per ounce, and in US dollars is $16.61 per ounce.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8768, and JPY78.58.
Crude oil closed at USD$70.29.
For the biggest movers on the market yesterday click here…
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Both sides of the argument have merit, but may just try to illustrate with a little analogy what PF and myself are trying to point to in the short to medium term:
The Bears’ case:
The tide is running out, and there is no way that our tidal areas are going to stay wet, let alone be waterlogged. Similarly, deflation is sucking the economy dry of money and liquidity, and there is no way that Australian property prices are going to escape a hard fall.
The Bulls’ case:
The tide might be running out, but we are about to be hit by a massive hurricane that has just arrived at the Australian coast line, which will start delivering bucketloads of water, which will overwhelm the effects of a receding tide, and potentiall flood the place out. In the same way, our high rates and stable financial system, are going to attract tons of money, including not only overseas savings but also tons of cheaply borrowed money, seeking a safe haven and a reasonable return. And this is exactly what Glenn Stevens is encouraging by increasing the interest rate differential between us and our international competitors.
It is a perverse, and counterintuitive scenario, but it is increasingly plausible and likely.
Hence, the case being made, that drastic falls in property prices are far from assured, notwithstanding the general, global economic environment.
Agree, CB. It’s a tough one to call right now – an arm wrestle. The market wants to go in one direction but governments/central banks pulling out all stops to take it in the other. Right now, it’s an interesting battle between fairly evenly matched players. But as with all arm wrestles, it gets to a point where one side is weakened and eventually capitulates. If the bears win, it’s mass deflation and depression. If the bulls win, it’s runaway inflation and back to business as usual. Meanwhile, we just watch on and try to make individual decisions as best we can given the information that we have.
Yes, that is a very good summary, Ralph.
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