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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NO. The RBA’s decision is not going to discourage hot money pooring into the country, but will do the opposite. This is the picture that you get from a global perspective. This hot money, the carry trade, will inflate bubbles, especially in asset prices, much quicker than it will contribute to the creation of jobs. But then comes the crunch, the big let down, when the hot money leaves screaming out of the country and all the asset prices it lifted and jobs it created will simply evaporate. This is the NO case.
Now, PuntPal, how about you argue the YES case, and we will have some fun moving forward to some better, more balanced understanding beyond simple YES or NO.
I think Stevens must have had some inside info on the unemployment figure. Either that or he’s an egotistical speculator. Perhaps he is, but I can’t imagine him making any decision (despite what negatives people here fling at him) without having the full picture in front of him. We’ll never know, but it looks that way now.
Whether it’s right or wrong, I don’t know. Only time will bear that out. Australia is now a stimulus-backed economy that should have gone through a recession but didn’t.
We have good numbers on paper, but nearly everyone knows it’s mostly smoke and mirrors produced by government stimulus. So maybe there wasn’t a case for a rate rise. But if the official figures are glowing but the RBA sits on its hands for too long, then that tells everyone that the official figures are rubbery and that magical commodity of confidence would take a hit.
In defence of Stevens, I reckon he can only play the game as he sees it, using the official figures. To do anything else would raise doubts about the legitimacy of the game. We (on this forum) all know that the game is rigged, the numbers are rubbery and the real economy is stuffed. But if the RBA makes decisions using genuine info while paying lipservice to the publicly available stuff, eventually it shows the whole thing up as a farce. Yes, it’s probably a farce anyway, but they can’t give the game up just yet.
Very astute points, Ralph. It is a poker game, and there is much to be lost from the slightest blink. The underlying domestic economy is stuffed – you only need to ask small business owners to get the real picture – and rate rises can only hurt it more. Same is true about our export dollars, and in a global economy, we, as a country, function like an economic unit on the global stage. And if rising rates relative to the rest of our competitors on the global stage make the earning of those dollars fewer and harder, then the pretense comes at a very high real cost to the country. For what we will have is just an artificial and temporary boost from speculative and borrowed money from overseas, instead of starting to earn our keep through real income.
What Stevens was doing was sending a message to Rudd. You may think inflating house prices is good politics, but its bad economics, so if you fiscally stimulate then I will try to dampen things down with monetery policy.
cb – I dont get you and PF arguing this will increase the money supply in Australia…but I for one really doubt an increase in interest rates will allow the bubble to grow more, because lowering rates does this and you can have it both ways
PuntPal – If overseas investors buy US treasuries they get almost zero return. We have a stable financial system that has just been given a very good report by the WEF and Noriel Roubini, so oversaes investors will look to move finds into our system to get better interest rates in a low risk enviroment.
link – http://www.businessspectator.com.au/bs.nsf/Article/US-falls-to-3rd-in-bank-ranking-after-UK-Australia-WMTQ2?OpenDocument
Hence my statement in an earlier post, that interest rate increases here could increase supply, and fuel house price increases. Supply and demand affect markets, and that includes supply of credit.
Not that long ago many were worried that Aussie lending institutions may not be able to raise finance to continue lending.
Read two stories from today about the CBA raising capital. No problems at all.
Link 1 – http://www.businessspectator.com.au/bs.nsf/Article/CBA-issues-2b-of-PERLS-V-hybrid-securities-pd20091009-WMU4D?OpenDocument
Link 2 – http://www.businessspectator.com.au/bs.nsf/Article/CBA-sells-4-bln-senior-notes-in-3-parts—IFR-WMSEP?OpenDocument
Why would investors place money with US or UK institutions who are still a bit dodgy at low rates, when they can get a better return on our banks, who are considered far safer. There are now only four “AA” rated banks in the world, and our big four make up half of those banks.
Can you now see the implications of increased credit supply.
Puntpal – you will note in the PERLS story the CBA issued twice what it wanted due to high demand.
So we have gone from a position of “where will our banks get money from” to where there is an ambarrassing amount of supply for the big Aussie Banks.
I’ll have $20 on Keen not getting that RBA post.
I never wondered where they would get their money from, I wondered who they would lend to in 2010 to buy houses that are 8 times peoples incomes.
The banks are raising cash not so they can continue to expand, they are buffering themselves for the coming storm. They have boarded the windows and think they can just wait it out, but they dont realise that this storm includes a tsunami called debt-deflation that cannot be prevented by Government, Banks, Capital Raising, 25bps increases in the cash rate and even the most relentless propaganda campaign.
or maybe they do realise that the debt-deflation could occur, but that they will get bailed out anyway
PuntPal – we will have to continue to disagree on that.
PuntPal @ 78. The bail out is coming. Eventually, the tsunami will be too big and powerful to hold back. The numbers are just getting too big to push out the problem indefinitely. We’ll be like Zimbabwe but with nicer cars, houses, shiny whitegoods and plasma tvs. The US is already there. What happens when the median house price gets to $1m in the near future? If St Kev the Stimulator can keep everything going, a can of coke will cost $10 and we’ll pay $50 to see a movie. But the banks will be saved, we’ll all be rich and no one would have lost any equity in the process.
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