You can read the official press release from yesterday’s Reserve Bank of Australia (RBA) board meeting here.
In a couple of weeks the RBA will release the full minutes of the meeting. If the official version is anything like the previous versions it will mention international economic conditions, domestic economic conditions, financial markets, and considerations for monetary policy… Blah, blah, blah.
Of course the unofficial version goes something like this: [pump, pump, pump...]
For all the bluff and bluster about wanting to return interest rates to “normal” levels, there’s absolutely no doubt that the RBA lost its bottle.
It knows the impact that higher interest rates will have on the economy and so chose to take the cowards’ way out. The decision means the era of cheap money and easy credit continues. And that crazy housing bubble will last a while longer yet.
But yesterday’s decision by the RBA really shouldn’t come as any surprise. After all, as we pointed out in Money Morning on December 4 following Westpac’s interest rate increase of 0.45%:
“So, come next February and the next interest rate decision will the bank increase rates again because that’s what they planned to do anyway. Or will it cut them to take into account that Westpac has increased them too much? Or will it just leave the rate as it is?”
The fact is, last December Westpac played the RBA like a violin. In the same article we went on:
“All Westpac was doing was betting on the RBA continuing to increase rates through the early part of next year. Quite clearly, it’s [sic] thinking was, if the RBA is going to put rates up and harm all the lovely lending banks do, why not get in first and at least try and make some money out of it.
“That’s what they did. Their first gamble was that the other banks would follow. Their second gamble was that the RBA might think again about increasing rates at the February meeting, seeing as the banks were increasing rates anyway.”
And that’s exactly what happened. The poor little power-freaks on the RBA board who think they can tweak financial markets at their whim received a lesson from the bankers at Westpac.
As the RBA admitted in its statement:
“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.”
And not only that, but the bankers have backed the RBA into a corner so tight it’s in danger of crushing Governor Glen Stevens’ wooden head.
A new moral hazard
Just as the bank bail outs gave the banks carte blanche to take as many risks as they like – moral hazard, knowing full well the government will save their bacon, so the RBAs move yesterday has let the banks know that if they act independently of the RBA by increasing rates then the RBA won’t do anything.
That means bigger margins for the banks, higher interest costs for you, and a lame duck reserve bank. Not that that will stop it from fiddling with what it shouldn’t.
But let’s be honest, what is the point of the RBA? As we’ve mentioned before, it’s failed spectacularly in its main aim of providing a stable currency. Inflation of the money supply is proof of that. As our sometime contributor and ex-builder, Mark Thompson commented last year, it gets a “Grade F” on that score.
The general idea of having a group of half a dozen or so individuals invincibly setting interest rate levels is ridiculous. There’s nothing the RBA does that couldn’t be done better by the free market.
I mean, you don’t even have to look past the quarter-percentage point steps the RBA uses to raise or lower rates. Apart from it being a “tidy” number, what is the logical reason for moving rates by increments of 0.25%?
Why not 0.24% or 0.26%?
When you look at interest rate movements on the markets you don’t see them move in increments of a quarter point. Rates change on increments of 0.01%. Why does that happen? Because the free market demands it.
If futures markets traded in increments of 0.25% then few, if any traders would play along. In contrast, the RBA has no such market dynamic. It has a government mandated monopoly over interest rates and therefore can do how it pleases – it’s the same for all central banks.
Take a look at the table below of the ASX Target Rate Tracker:
The table shows the market expectation for an interest rate rise at the March RBA meeting.
Until yesterday, the financial markets had factored in a 100% chance of the RBA increasing rates by 0.25% in March. It was as dead a cert as you’ll ever see.
But then following yesterday’s RBA decision to not raise rates, suddenly markets don’t have a clue. Now the futures markets are only pricing in a 30% chance.
Last December we wrote that we’d like to give Westpac bankers a high-five for their ingenious decision to increase rates higher than the RBA move. We bet the other banks wish they’d followed Westpac’s lead and increased by the same amount.
Well today we’d like to give Glen ‘Woodenhead’ Stevens and his RBA buddies a slap across the chops for manipulating the markets.
Legalised market manipulation
And look, that’s exactly what it is. If any other private citizen or private firm intentionally manipulated financial markets for their own benefit as the RBA board members do, they’d be up before the beak quicker than you can say ‘monetary policy.’
That’s right, and I do mean for their own benefit. Maybe they don’t gain financially from it, but they gain mentally. It’s an ego thing. In their own mind they know the power they have to influence markets and they wield it with pride.
The fact is, holding rates at artificially low levels is doing irreparable long term damage to the economy. But it shouldn’t be left to a bunch of superannuated public servants and control freaks to determine the level of interest rates, it should be left to the free market.
Consider that table again. What is the market betting on? The truth is we don’t know. And the market doesn’t either.
The market is confused. Does it bet on an interest rate rise because market players believe an interest rate rise is necessary? Or does it bet on whether it thinks the RBA board thinks an interest rate rise is necessary?
And to take the manipulation further, the RBA board is trying to work out whether and how much the banks will adjust their interest rates before it decides whether to raise rates. So market players have to consider whether banks will independently raise rates in order to determine whether the RBA will raise rates…
Talk about a mess. It’s more like a standoff at the OK Corral than the functioning of a free market.
Think about it this way. For the past month individuals and businesses across the land have made decisions on their personal or business finances based on what they think will happen with interest rates.
The consensus among almost everyone was that interest rates would rise yesterday. So individuals and businesses may have acted accordingly. They may even have locked in a fixed interest rate in anticipation of it.
Or they may have bought Australian dollars and sold US dollars believing the rate would increase and the Aussie dollar would rise further or remain steady. Whatever individuals and businesses have done they’ve done so based on what they thought the market was telling them – that interest rates would rise.
Then what happens. The muggins’ on Martin Place decide to pull a fast one and not move rates. The outcome is that quite possibly hundreds of thousands of market players have been hoodwinked by the RBA.
But what would have happened in a free market? For a start, in a free market you wouldn’t get manipulation from government and government agencies.
Market players would make decisions free of manipulation by government. The market would send clear signals about which way interest rates were tending and people would act accordingly.
That very action would cause interest rates to move over time. The free market would eventually push interest rates to a level determined by free market forces.
Central banks create false signals
The problem with a manipulated market is that people see false signals. In hindsight people were fooled into believing the RBA would return interest rates to “normal” levels. And they were fooled into thinking that because it was the message coming from the RBA and all its mouthpieces in the mainstream press.
But then the RBA punched market players – that includes you by the way, individuals comprise the market as much as anyone else – in the guts by saying, “not so fast, we’ve changed our minds.”
Sure, in a free market individuals and businesses can change their minds and their priorities too. The difference is no one person or organisation would have the same level of control over the entire market.
No one person or organisation would be able to impact the personal or business decisions of millions of people through a single act.
Yet again, it’s the government’s banker that has decided who the winners and losers are rather than a genuinely free market. We can only hope the RBA is abolished before it gets the chance to celebrate its 60th birthday in nine years time…
Somehow and unfortunately, we can’t see that happening.
Cheers.
Kris.
{ 75 comments… read them below or add one }
I’ll second that. Sack them all.
CB -
come on! are you going soft on Sayce?? ;p
Alan Gore and your savings in superannuation – a must read if you have money in super.
http://twawki.com/2010/02/03/warning-future-cataclsym/
My advice: get your savings to safety while you can. Establish your own SMSF, where YOU can decide where you are going to be invested, not your fund manager who is getting fat on the squandering of your savings.
lol, Sandra, – hopefully not, but credit must be given where credit is due.
Come to think of it, I should remind my bank manager about this golden rule, in a slightly different context.
Okay, here is another one to chalk up for Glenn Stevens’s illustrious record: Young (a NSW country town to the North of Canberra), has lost its abbatoir, whith some 300 employees wiped in an instant, amounting to some 50% of the town’s working population. Cash is drying up and high interest rates are part of the mix on which the business’s failur is blamed. Good one, Glenn Stevens – you are a legend.
What have we been conned into regarding as “normal” for interest rates?
Firstly, consider that there is evidence banks can cover all the costs of providing loans at an interest rate of less than half of one percent. Anything more represents just profits for the banks.
Then, realize that there is no compelling reason for interest rates to vary continually, allegedly to control inflation. The banks are delighted to have rates changing all the time because of the windfall profits they can make every time rates increase… but actually there are other ways of controlling inflation, if the government would just decide to use them.
The pretense to be controlling inflation is a scam anyway, since instead of the target for it being zero as it should be, the officially accepted target is now between 3 and 4 percent. That’s an officially sanctioned theft of 3 to 4 percent of everybody’s savings.
With rates continually changing as they now do, people easily lose track of what they could and should be… much the same as they have lost track of what the price of petrol could be. After prices have been steadily edged up for a while, they come to be viewed as “normal”.
evening all
cb – with regards to a SMSF, it is something i have been toying with – i have done the most one can by assigning asset areas with my super but after reading the article you posted i am not convinced this would stop the pillaging of ones super…. in fact i think that the super industry will start broadening the asset classes to create a kind of gray area to allow them more maneuvering room.
With setting up a SMSF for a single person there seems to be as many blocks a humanly possible – i have to set up a business to act as a trustee… if i set up a company call it AC Pty Ltd at a cost of $600; is there anything that states the company has to do anything during its life or can it simply exist to act as only a trustee?
I have noticed that all lenders have tightened up on equipment lending of all sorts yet residential housing still seems awash with our peso’s, I wonder what that tells us? Equipment lending amounts are often as large as home loans and they stiff you for an extra 2 or 3% in the bargain and it has to be paid back in a fifth of the time. Sounds like the kind of investment I’d like a piece of yet the banksters are shying away.
AC, you can have your company to simply act the Trustee of your SMSF, with you being the sole director, and therefore the sole decision maker as to asset allocations within the limits set by relevant laws. I am not even sure if you need to have a Company Trustee. Mine does, but it could be that you can be a trustee yourself, as an individual in your own name, rather than having to act through the directorsip of a company. You need to check this, and the only other thing you will need is a trust deed, which some low cost funds will even provide you with for no charge. If you want to pursue this, and if you want to ask more specific questions, then you can simply click on Peter Fraser’s name, which will take you to his website, and if you send him an email, he will forward it to me, and I will be happy to share with you any information I can.
Hmmmm, Mike – I have not been aware of this segment of the market, but what you describe is indeed worrying. Potentially, it could be a very good indicator, a canary in the coal mine. As you say, that sort of lending must be jolly good business, unless you expect or want to cause a wholesale collapse of the relevant business sector. Yet one more sign that our goose is being cooked. Nice and slow will do it.
Incidentally, for those of you still at the computer screen, apparently Lord Monckton will be on the ABC’s 7.30 report in about 10 minutes time. They will try to badger him again, no doubt, but the good Lord typically manages to aquit himself superbly in spite of the rudeness and disrespect he sometimes gets. Anyhow, it should be worthwhile to watch.
Oh, and did you hear about this one yet? Apparently the New Zealanders’s homework has also been chewed up by the dog. At least it gives some support to the CRU’s defense that these things do happen.
http://www.scoop.co.nz/stories/SC1002/S00004.htm
http://www.scoop.co.nz/stories/SC1002/S00004.htm
Incidentally, for those of you still at the computer screen, apparently Lord Monckton will be on the ABC’s 7.30 report in about 10 minutes time. They will try to badger him again, no doubt, but the good Lord typically manages to aquit himself superbly in spite of the rudeness and disrespect he sometimes gets. Anyhow, it should be worthwhile to watch.
Oh, and did you hear about this one yet? Apparently the New Zealanders’s homework has also been chewed up by the dog. At least it gives some support to the CRU’s defense that these things do happen.
http://www.scoop.co.nz/stories/SC1002/S00004.htm
cb – thank you for the response… I have read several booklets on SMSF, i am under the impression that there has to be a minimum of two trustees; so for a single person there is themselves and then their company. i might take you up on your offer to exchange info through PF… cheers
AC – you can be the sole trustee and beneficiary of your SMSF. $195.00 per annum in supervisory levy and fees is about as low as the thievery gets. One or two good days holding RIO annually will comfortably cover that. Ask your accountant.
AC – Mike is right. Your info does not sound right. Only one trustee is required, and one director, unless you have other people in the SMSF (you can have up to 4), in which case each one has to be a trustee. But if you are the only beneficiary, then you can be a sole trustee. As I said, you may not even need to register a company for the purpose, but do check.
Regarding ATO administered SMSF you can have up tp 4 members AND each member must also be a truste if there is no company trustee.
Or you can have a company trustee AND each member must also be a director of the trustee company.
The supervisory levy is $150 a year payable on lodgement of the super tax return.
The ASIC annual review fee is $40 if you have a company trustee.
The only fees that may stop you going SMSF are the accounting & audit fees payable to accountants. If this is say $2000pa and the fund has a small balance this may be prohibitive.
AC – you may indeed consult your accountant, but do get a few quotes. Mine proposed to charge me well over 1k per annum to do the books and the audit, so I am doing it through a different provider and it only costs me around $600 to do the tax returns and the audit, plus I get free advice at any time I like.
Thanks Tony and CB for your additional comments. I would consider a 40% whack to my life savings in any one year to be prohibitive.
thast why props have gone thru the roof with people tapping into their super via SMSF……………………………
i might have to jump on the bandwagon
bears are toasty
Tanks guys for the feed back – obviously its more complicated than i though or its less complicated and the information i have read recently have confused my easily confused mind. either way i think further financial advice is in order. The way understand it is i must be a trustee but i still have to set up a business as the Director as the company is needed to act as a trustee. hmrf still sounds like setting up a SMSF has been made overly complicated.
I have a simple question – why is it that people think interest rates are always too high??
Now as a saver, rather than someone in debt – I look at interest rates as a reward on my savings and a cost of borrowing money.
Considerin this whole mess was caused by inadequate savings and too much speculative borrowing, why on earth would people be carrying on that interest rates should be kept at record lows?
PuntPal – there are a few reasons that can be marshalled:
1. Higher rates will keep pushing our dollar ever higher, gutting our exporters, while importers who put the country into perpetual trade deficit are going to be further encouraged.
2. The higher Aussie will see more and more domestic businesses going to the wall, unless they ship Aussie jobs overseas to remain viable a little longer.
3. Because higher and higher rates will end up stresseing a heavily indebted population and economy beyond the breaking point, where house prices are not going to be the only ones to break. The long list of other things we currently cherish and take for granted will cath out most of us. That should be clear. Just because you have no debt, don’t think for a moment that you will not suffer along with the rest of us as a result.
I have asked this question before, but bears asking again: How much joy do the American people now find in their much cheaper house prices? Going by your posts, my impression would be that either you have no idea, or are driven by some strange misery wish.
AC – it is not at all complicated. In fact it is very simple. Get in touch with me and I will tell you about how I did it. Not complicated at all. I will put you in touch with a one stop shop who will generate all the necessary documentation for you and send them to you for your signature. They will register the company if you have to have one, as well as your SMSF with the ATO. You hardly need to do anything, except supply them with your details.
Once your SMSF documentation is complete, and you have all the details, such as the name and the ABN of your SMSF, you can approach your current fund, requesting the balance of your super savings with them to be rolled over and forwarded to you by cheque.
Once you get the cheque, you simply deposit it into the bank account that you will have opened specifically for your SMSF. And once you have your balance in the dedicated account that only you will have access to, you are your own master. You invest where you think it makes sense, within the guidelines and rules, which you will have to familiarise yourself with. You can invest in shares, or in property, in physical metals and take delivery, or gamble in CFDs (not recommended, lol).
Some of the rules are that you cannot borrow any of the money or spend it for your own purposes. If you work in a job, supercontributions will have to go into your super account, which you maintain and manage for the sole benefit of the SMSF and its ultimate beneficiary, YOU. But you cannot touch that money to pay your bills, or your mortgage payments on the house, or anything of the sort. Anything that money earns, must go back into the SMSF account. No biggie, really, but you will have the peace of mind that you are not paying some fat arse slog huge fees for misspending your money on Al Gore’s latest climate scam, or worse. So, once again, don’t feel intimidated. It is not rocket science and you can do it. Good luck.
Puntpal admits: ‘as a saver, rather than someone in debt – I look at interest rates as a reward on my savings and a cost of borrowing money’
If you are a saver, the inflation rate of 3 to 4 percent pa that government and RBA use as their target will erode the value of your savings by 3 to 4 percent pa before you even start earning anything from interest. As long as you allow government and RBA to pretend that their nonsense amounts to “controlling inflation” you will always be wanting higher interest rates than you otherwise might.
Puntpal concludes by asking: ‘why on earth would people be carrying on that interest rates should be kept at record lows?’
Interest rates are at record lows are they? Was I being lied to then, when I read the story of a government owned bank (the one that was later restructured to became the Commonwealth Bank) that financed Australia’s entire World War 1 effort at an interest rate of around half of one percent? I would prefer a loan at half a percent interest rate any day compared with a modern one that the media assures you is at “record low” interest rates.
Well I for one thought that the RBA decision was an excellent one and entirely justified. The fact that Kris Sayce doesn’t share my view onl;y serves to reassure me that it was indeed a good decision.
In fact there were a few brave commentators going against the trend and suggesting that the RBA hold rates at this level for a while, and with much justification on the stats released in the week before the decision.
PuntPal there will be times in your life when savers win at the expense of borrowers, and at other times rates will favour borrowers, that is life mate, just accept it. Also be aware that regardless of the rate setting people will still complain. That is what Australians have beome very good at. Complaining is our national “gold medal” event.
David has also given you a very good reason to consider investments rather that direct bank savings. Inflation does erode debt, but in normal times, not assets. Although if you wish to purchase a home you will have to accumulate 5% in genuine savings and preferably 10% as a deposit. So keep saving.
AC – cb is right, an SMSF is not that complex, but it is not worth doing if you don’t have good super funds. IOf you purchase property in the SMSF name you need to be able to pay cash. It is possible to borrow in theory, but in practice it is generally not worth it.
Cheers guys…
CB – in response to puntpals wish for higher interest rates, you said: “How much joy do the American people now find in their much cheaper house prices? Going by your posts, my impression would be that either you have no idea, or are driven by some strange misery wish.”
I compare a recession or housing-market crash to a bushfire, which is devastating, but is also necessary for re-growth and long-term survival.
cb – You guys are like drug addicts – and cheap money is your crack. Borrowing money cost something for a reason, because there is a risk involved! Do you think the US is in a great situation now because they have interest rates at nearly 0?
On your claims, a stronger dollar is not all bad and its totally misleading to make out you are some patriot because you worry about a strong dollar. Yes it hurts our exporters, but it also enhances our buying power. Ask the Chinese if they are happy to have such a weak dollar – the exporters are, but the population cant buy squat from outside China. Its totally misleading to make out we should always try and aim for weak dollar – ludicrous reasoning!
David Kidd – the whole reason I want rates to up to prevent inflation!!! HOUSE PRICE INFLATION!! the biggest cost of living for most people keeps going through the roof because the RBA allows cheap money to flow into our housing market!! Another crazy and weak argument.
PF – savers have lost out for a long time and debt junkies are the ones being rewarded – which is so perverse considering the GFC was caused by debt and not enough savings.
Seriously, the standard of debate around here has plummeted! You guys have lost your marbles.
Where is BB, Kevin B, JC, GB…and the others that understand how economics actually works???
The break even point on fees for an SMSF is about $250k- a balance below that and you will likely end up paying more in fees than if you were in the average fund ( retail costs would be higher). Over that and with careful choices you will save $. Just make sure you have an accountant/auditor who understands super- I had a call from some poor sucker whose accountant had charged him $5k admin fees and neglected to make changes after simpler super. He was bitching about paying more, he had no idea. Ther is no point in getting away from what you see as the problem to run into people who are even worse. And a word on following the rules- if you break them (and the ATO catches you) it is 50% tax- on the whole fund. The big funds spend a bucketload on compliance, and there is a very good reason- it is complex and the consequences are pretty nasty.
Peter Fraser, I can see why you would be pleased with the RBA leaving rates where they are. Several credible data sources of late show that housing credit is on the wane. Logically, this must flow through to lower house prices over time because credit growth is arguably the single biggest driver of house prices. People can’t buy over-priced houses if they aren’t getting finance. I know you’re on the record as expecting up to a 5% decrease, but all of a sudden you seem a little nervous!
Given that the Australian economy is frighteningly dependent on increasing house prices, you wouldn’t need to be Einstein to conclude that Glenn Stevens $hat his pants when he saw the AFG figures and ABS housing finance figures. His hawkishness seemed to turn to fear in the blink of an eye. I would say that is the major reason why we saw rates unchanged.
It looks like Sayce is on the verge of being proven correct – the great ponzi scheme is teetering on the brink of collapse. So I guess the question now becomes how the RBA and gov’t react to this. We know they won’t stand back and let the market take its course, not when thousands of voters might take a hit to their ‘hard earned’ equity. The RBA is clearly worried and has held fire on rate rises. If we see another month of weakening housing finance figures like this, the government will surely have to re-introduce some stimulus to get credit flowing and therefore house prices rising again. If Abbot and Hockey are true to form, they’ll go to town on Rudd being neo-Whitlamist and adding to the debt and deficit. I’m sure our fearless leaders are conscious of that.
So, guys, what do you reckon Kevvie and Goose will come up with? I can’t imagine another first home buyers boost – that would look too desperate. Could we get tax deductibility for mortgage interest payments? Waiving of stamp duty? What will we see next in the attempt to keep the ponzi scheme going?
Update on previous article and on the superannuation industry and ts new green policies!
http://twawki.com/2010/02/04/super-green-putting-your-retirement-in-al-gores-hands/
Dunno Ralph. But check the article by Karen Maley at Business Spectator http://www.businessspectator.com.au/bs.nsf/Article/Closing-act-in-Greek-tragedy-pd20100204-2BRRZ?OpenDocument&src=sph
It reinforces the fact that regardless of what St. Kevin the Stimulator, Goose or Mr. Squidley Stevens choose to do – after changing his underwear of course – (you need to refer to the Sponge Bob Square Pants theme for reference) it is apparent that as the EU soverign debt nation dominoes fall the banks borrowing costs to keep the legions pumping spruiker gas into the incredible, gravity defying Aussie residential price property balloon are gonna get mighty pricey indeed. May as well shut the doors at Martin Place.
Exactly Ralph – you have summed it perfectly, Stevens crapped himself! Simple, it was not a good decision…it was a weak decisi0n. He seemed to be the only central banker that knew it was time for the cheap money fiasco to end and for prices to adjust to a world without so much loose credit – but then backed down and blamed it on internaitonal uncertainty…um, as if the world hasnt been uncertain for the past 2 years!
BB – I read that too and I think you have touched on what game they may be playing. Rudd, Goose and Woodhead all know whats going on (so does PF and cb – but they cant admit it yet) so rather than have this crash look like it was enduced by a short term and populist FHBG policy and sharp interest rates rises, they are waiting for one of the many internation problems to blow up and then they can blame it on others…So whether its US or UK getting downgrade, Greece defaulting and EU disintergrating, China exploding – whatever…it wont be there fault and the housing crash will be a consequnce of external factors
You have to give it to Kev, he can play this filthy game of politics
Yes, BB, nice link. Greece is an interesting situation. I really hope they don’t get bailed out, because if Greece is bailed out, where will it end? The precedent will have been set and Portugal will expect the same, followed by Spain, Ireland, Italy etc. Every country may as well just print and spend with gay abandon and damn the consequences.
However, I suspect when push comes to shove, despite all the tough talk, the EU will cave in and come through with the bail out. The day of reckoning will be postponed a little longer and our national ponzi scheme will live to fight another day. St Kev and Goose will breathe a massive sigh of relief.
Once again you must read a foreign newspaper to get domestic news!!!
This article is interesting and has made me consider the possibility that if Australia does see a crisis it may not originate in the residential sector like we all keep blogging about.
The US protected businesses instead of households and so they are suffering a collapse in their residential market. In Australia we did the opposite and protected the household at the expense of business. Businesses never saw a reduction in interest rates i believe. Therefore it can be assumed that our crisis could be of commercial origin and not residential.
Everyday i drive to work i have been watching the cranes disappear from the Perth skyline (before the GFC the entire skyline was packed with them). So Perth has a vacancy rate of 8.2% and that is going to increase because there are still 4 office blocks to be completed. However, these aren’t typical office blocks they are skyscrapers. Let me repeat that – they are skyscrapers. One was just finished and the internal renovations will be under way and three more are still being built. Along with 4 skyscrapers worth of office space KRUDD has authorised (as stimulus spending) to lower the rail line leading into Perth (which is under construction) and then build commercial and residential property over it.
So we better hurry up and get back to boom times or we may just be reading articles titled “Vacancy rates set to soar in 2010″
http://www.bloomberg.com/apps/news?pid=20601081&sid=adObLnRZGdL4
Agree, PuntPal. It’s now a high-wire juggling act. St Kev and Goose (along with Glenn Stevens and his brown undies) see themselves as circus ringmasters who can manipulate the economy to keep house prices high and the public oblivious to the real issues. It’s a spectacular act, but also very risky and fraught with danger.
We’ve caught a glimpse of what happens when it gets a bit scary up there on the high wire. Stevens looked down and realised he was 10 feet in the air and juggling 5 balls and balancing a dinner plate on his nose, but starting to wobble. So he $hat his pants and decided it’s best to hang onto the balls lest he wobble too far and fall off the high wire. Such is the significance of house prices to the national economy.
Depending on what happens with housing finance figures over the next month, I reckon it might even be worth a bet on an interest rate CUT in the months ahead.
will interest rates increase?
Pros
1. Inflation increasing due to price increases in oil, food etc…
2. Increase in financing
3. A return to trend growth
Cons
1. China stops investment spending which they have repeatedly said they are going to do, i.e. no resource boom
2. Cost of money rises globally, which is very credible, so banks raise independentely of the RBA
3. Cracks in commercial market, business failures etc… – the AFR had an article yesterday about corporate bankruptcies were still increasing throughout 2009 and were are record highs
Thats a couple of things i can think of
Hi Ralph – I generally agree with the first two paragraphs in your post at 27. I don’t know if you read my posts at credit crunch, but I went into it in some depth there with another industry player.
I also read the BS article on Greece and also agree that we could see banks raise rates despite the RBA’s position if sovereign debt defaults.
You didn’t know that I was that agreeable did you???
However I am still going with my + or – 5% prediction in 2010, although slightly more bearishly. In fact I would expect more of the minus result in Victoria and Sydney given the overheating in those markets over the last 8 months or so.
In fact if you go back to my much earlier posts I did express a wish for very flat results, so the Victorian market was a concern for me as well, as was Sydney.
I’m alos ok with a correction, but I certainly do not want to see people being forced into banbkruptcy and being turfed out of their homes as is the case in the USA where those borrowers will suffer financially for up to 20 years. Read this article – http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/index.htm
Not a pretty picture is it. I know that the bears generally don’t care about others and just want cheap housing and damn the rest of you, but I care and don’t want to see the nation face hardship for decades. I also realise that you will attempt to justify your stance with economic theory and espouse the evils of debt, but in reality your just hungry sharks. Well I hope you all stay hungry – that is what you deserve.
PuntPal – before there is lending there are savings, remember that.
Cheers guys I hope you all have a wonderful day.
Etch don’t forget to give me just 1 star.
Who gave me 5 stars – I demand a recount……
Was that you playing games etch……….
PF
You said: “bears generally don’t care about others and just want cheap housing and damn the rest of you”
I can easily retort with: “bulls generally dont care about future generations and just want to be rich and damn the rest of you”
I am a bear and i dont want to see anyone hurt – I have friends and family with mortgages!!! What i do want is to see prices grow with incomes in a sustainable way. Unlike yourself who wants prices to rapidly increase for the betterment of your bank account at the expense of our standard of living
Peter,
Well, you do seem almost bearish. I don’t see it as necessarily bearish, just realistic. It’s unhealthy for one asset class (in this case residential real estate) to be prodded and favoured almost to the detriment of all others. That’s what we’ve seen of late and I think the unsustainability of that is finally coming to its pointy end.
I do keep a lazy eye on credit crunch, so I’m aware you post some good points there. I’m not a member though. I did see some of the discussion you mentioned and it was indeed very interesting.
I agree that mass foreclosures is not ideal and I certainly don’t wish that sort of pain on anyone. Having said that, however, ignorance is no excuse. So people getting heavily in debt because they believe the urban myths that property values only ever go up do not deserve much sympathy in my opinion. If anyone should be held to account, it is property spruikers for misleading their uninformed and naive clients.
Despite all of the pain that may occur, the real estate market is clearly well out of balance. To have a market that only works in one direction goes against all the principles of the so-called free market capitalist system we are proud to call our own. If people are allowed (even encouraged) to profit from speculation and the good fortune of markets on the way up, then surely mistakes and poor decisions should be punished on the way down. Isn’t that fair? I support the idea of governments trying to soften the blow to those hardest hit, because we are a civilized society, not neanderthals. But that is not the same as trying to defy gravity, which is what our ringmasters (Kev, Goose and the RBA) have attempted to do.
Anyway, I think we’re largely in agreement here. You’re a friendly bull! By the way, I’ll give you 5 stars for a well considered response.
cb – an article about chinese reserves you may like to read
http://www.bloomberg.com/apps/news?pid=20601039&sid=a4mPCXeGTl4Y
The Fear the Boom and Bust Rap says it all, take a look.
“Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem
Url below -
http://www.youtube.com/watch?v=d0nERTFo-Sk
Puntpal still claims: ‘Borrowing money cost something for a reason’. He’s correct… half a percent pa to cover the bank’s cost of providing the loan, and anything more to provide profits for the banks.
Puntpal continued: ‘because there is a risk involved!’ The risks were negligible in the days when I took out my last housing loan: the bank charged hundreds of dollars upfront as a loan establishment fee, with which it paid for a professional valuation of the property, plus all the legal paperwork designed to place the bank in an impregnable position. The bank demanded the right to set interest rates, to repossess and resell my house if I defaulted on payments, and for me to pay a 10% deposit that provided me with a strong incentive to keep making the repayments even if the price of houses took a bit of a fall. How could the bank lose? Banks are not compelled (except by their own greed) to make loans presenting greater than negligible risk. If they have forgotten how to do that, it’s time they were forcefully reminded.
Puntpal then reminded us: ‘On your claims, a stronger dollar is not all bad…. Yes it hurts our exporters, but it also enhances our buying power.’
He’s right again! When we have a balance of trade deficit our buying power, our ability to pay our debts, is of greater overall importance than boosting exports by making them cheaper.
Puntpal then lost all credibility by writing: ‘the whole reason I want rates to up to prevent inflation!!! HOUSE PRICE INFLATION!! the biggest cost of living for most people keeps going through the roof because the RBA allows cheap money to flow into our housing market!!
Does any thinking person really believe that fiddling with rates is the only way of limiting the amount of cheap money? What about, as an alternative, the government stopping banks from lending any more money than they actually own? The same rules incidentally, that apply to all we individuals. Take away the banks privilege of creating money out of nothing, and the amount of cheap money will decrease.
(The change might need to be introduced gradually to prevent turmoil as everybody adjusts to the new conditions).
i’m losing my mind!!! China is back to normal growth and the GFC was a blip on their radar so why are they still stimulating? Why are they going to implement tax cuts
If someone understands how China can be back to rapid industrialisational growth and be heavily stimulating at the same time because of below trend growth please post an explanation
http://www.businessspectator.com.au/bs.nsf/Article/RPT-China-to-stick-to-loose-fiscal-policy-2C56B?OpenDocument&src=hp6
The plot thickens! The China ‘boom’ needs ongoing stimulus to keep going, Greece is bust and Australia has weakening housing finance figures.
I think my call of a near term rate cut is looking promising. I should get onto Centrebet and get some skin in the game!
David Kidd – what you’re advocating is a full reserve banking system. And I agree it would be a better system. It would remove the inflation that is a consequence of the fractional reserve banking system. It would also mean there is no need for government-controlled monetary policy which I think would be a great thing.
But according to Wikipedia, “There are currently no examples of full reserve banking with an established history of operation”. So I don’t see Australia taking the lead on this any time soon. Therefore, I don’t think puntpal lost credibility for arguing for higher interest rates – because that, at least, is in the realms of possibility within our current system.
PF – you cant seriously be taking the moral high ground on house prices! This is your lowest point – and its clear by your tone that you are more sh*tscared than Joye. -5% correction!! HAHA – Good luck with that!
You work in an industry that has created the biggest bubble this country has ever seen and your cronies over at Business Spectator boast and brag about rorting the FHBG, about how certain calamities will be “good for house prices”…WHAT THE F*CK DOES THAT MEAN???? GOOD FOR WHO??? SPECULATING LEACHES!!!
Housing bears (like me) arent hoping for lower prices so we can buy a house, we are housing bears because any rational analysis of the world suggests our houses are way overvalued so its completely moral and rational to expect and hope for a correction. Just because other people didnt listen and think for themselves, does not mean I am being selfish by hoping for a correction.
When slavery ended lots of white slave-owners went bust – should have we prolonged slavery to stop that occuring?? That is what you are suggesting, that because we are addicted to cheap credit (you in particular)
As I have numerous times, its leaches like you and the spruikers who should be hiding their face in public.
David – you write well – but you spend too much time perfecting your turn of phrase that your logic is totally absent. You think interest rates should be 0 do you??? So people can borrow a million dollars and the creditor gets nothing in return?? I cant be bothered wasting my time with you – go back and do Eco 101 (something I never did – but clearly have way better understanding than you).
I will say this, you mocked me for suggesting interest rate increases were justified by the risk of loaning money and your retort was this:
“The risks were negligible in the days when I took out my last housing loan”…well buddy, I dont know how old you are but in the year 2010 – lending 500K to a young couple to buy a house is about as risky as it gets – just ask PF, he has set up plenty of douches that will get bankrupted over the next few months…then he will have the hide to blame the RBA for raising rates
Ralph – 5 stars – I think I’m usually in negative territory here. Still I won’t expect that everyday, please don’t spoil me.
Despite popular opinion I also don’t see the value of rapidly rising real estate. I also don’t think the average mum and dad home owner buys the house to become instant millionaires. They just want their own place and pay what they believe they have to, to achieve that aim.
I do believe though that over time some gains will be made with modest inflation in value which also erodes debt slowly in real terms.
Having said that, there seems to be little in your comments that I would take issue with. So that is a statement rather than an argument.
I felt compelled to return the 5 star rating under the circumstances.
GB – sorry about coming down hard on the bears – but Ralph will know from his visits to Credit Crunch that there are many who fit that description exactly, but of course many are just worried about buying in an uncertain economy.
David Kidd – I’m going to support PuntPal here because the house price/rental relationship is certainly contained by interest rates. Although I don’t want to see rate rises, it is an effective way of containing inflation, so I don’t agree that PuntPal lost any credibility.
As a slight mirthful after thought, the banks were obvioulsy 100% sure of the Feb rate rise when they vowed NOT to raise rates by more than the RBA – I wonder what the feeling is at the moment. Drinks all around – perhaps not. I wonder what their pre- announcement declaration will be in March.
Drew reckons: ‘David Kidd – what you’re advocating is a full reserve banking system.’ Perhaps I would, if I knew what that entailed. I’m surprised that the few changes I proposed was worthy of its own special name. Thanks for agreeing it would be a better system.
Drew also wrote: ‘I don’t see Australia taking the lead on this any time soon.’ Well, because it requires a bit of sensible action from our government, I’m not expecting it to be implemented anytime soon. Even in gradual stages as I suggested. The government is too busy bashing pornographers and posturing over climate change today to be getting on with anything useful.
Meanwhile, I still fail to see how raising interest rates will halt inflation. The people who want to put their prices up (councils, governments, monopolists in charge of our water and electricity supplies, petrol companies, lawyers and so on) will still do so, and will be able to offer the additional excuse of ‘the increased cost of finance). There will also be the increased cost of all existing loans to be paid somehow, even if new ones were not being taken out. A lovely windfall for the banks!
An excellent observation on the banks PF – although I’m not sure CBA made the commitment the others did to contain limit rises only to the Reserve increase? – but nonetheless good work on that. Is there a MOLE in the Reserve Hole after all – their very own Godwin Gresch? What about the ‘leak’ recipients from last rates decision time – Gittins and company – Did they get the ‘no rate rise’ guess correct yesterday? As I mentioned before apparently Steve Keen did – surprisingly! along with Terry McCran of the News Ltd press?
Anyway – with my professional bull hunting hat on – I can advise of another little speed hump coming up on the microeconomic front. St. Kevin the Stimulator’s ‘BER’ projects that have kept many many many building trades and labourers and materials suppliers and consultants etc. etc. with wages rolling in are, like all building projects coming to an end. That’s right folks. Kevin’s big school shed spree is winding up. And as we all know building buildings is a big part of what we do here in Australia. Only cause we can’t import them. Well folk’s despite the news of housing construction and the big civil infrastructure projects, the general industry and all that feed from it are heading for a downswing. The private sector will not fill the gap and I think this is another reason that Stevens is a little worried about those grass shoots sprouting to a sustained level. Delaying tactics need a follow up plan. Rudd doesn’t have one. And you right and wrong about the motives of property bears. Yes I want a correction (crash is an emotive term) in house prices but I want it so that more Australians can afford homes to live in rather than using housing as a speculative investment. If you’ve got money spare for speculation go speculate on the share market.
I notice Puntpal took another step toward insanity just a few posts ago, when he wrote: ‘David… You think interest rates should be 0 do you??? So people can borrow a million dollars and the creditor gets nothing in return??’
If anyone can point to anywhere where wrote that, I might change my mind about his credibility.
cb/PF appreciate your input on the SMSF front; i think for now i need to stick with my existing super and keep an eye on where they are investing and adjust accordingly until the amount held in the fund is adequate to justify a SMSF. If we are still bashing away on this site at that time i may take you up on your offer to explain how the system runs. thank you
I have a comment regarding the Chinese miracle economy…. china overtook Germany as the largest exporter on the planet last year (i think) and china is once again manufacturing at 8.5+% growth rates…. who is buying the stuff? America is broke (china’s largest customer), so is Europe (please china pay my bills), Aussies are now noticeably pulling back on the spending no doubt throwing as much income as they can at the record high mortgages in case things do go south and the Chinese population do not have enough disposable income to become major consumers of their own products overnight.
China might be back to boom levels but the rest of the world is not at a level where it can afford to consume boom level manufacturing. The equilibrium is heavily off center.
PuntPal – post 46.
Your right, I am single handedly responsible for the global bubble. I think the expression is “I’ll huff and puff until I blow your house down”
I am also responsible for slavery and every other type of social malice you can think of.
I’ve been busy haven’t I…
Yes, I agree PF, some property bears are just mixed up and bitter souls. By the same token, I reckon they are balanced out by one-eyed bulls who aren’t capable of rational argument and claim that because house prices have always gone up in the past, they will continue to do so indefinitely. I think most people who post here are generally bearish but like to consider the issues on their merits.
Also, I like to think of myself as someone who can bend to suit the times. I’m bearish on property at the moment because I think the economic fundamentals are shonky and the government is frantically trying to paper over the cracks so they can avoid having to make any tough decisions or wear any flack. Absent further government intervention, I’m 100% certain that house prices would fall in a screaming heap. However, I also understand what the government’s motivations are and that they will do almost anything to keep the balloon inflated. Will it be enough or will the market overwhelm whatever government intervention that’s coming up? That’s what we’re all dying to find out.
As long as we can all debate the issues without being too one-eyed, hopefully we can all learn a bit more about the economic world – isn’t that’s what it’s all about? And hopefully make/save a few dollars in the process through our chosen investment strategies.
PF, count me as one who reads your posts with interest, mainly because I think you don’t agree with most of what KS says. Therefore, I look to your opinion as a potential rebuttal to the issues that we debate. I now read Chris Joye’s blog because of the stick he takes from KS. I find CJ’s intelligence frightening but his philosophy and opinions seem to be wrapped up the same debt-fueled drunkenness as the establishment. If anything, he seems that the law of physics doesn’t apply to Australia and whatever we touch will turn to gold (as long as we let all the very smart people do the thinking for us).
Hey Ralph, I also like to think that I can be flexible enough to suit the environment. However, when it comes to investment, I don’t see how property can continue to drive wealth unless we’re actually building it to sell to others. Right now, it appears that the majority of property is simply the trading of existing stock that doesn’t generate particularly much income.
Ralph Quote “As long as we can all debate the issues without being too one-eyed”
I do try but I probably often fail.
Yes the future continues to be interesting – I still think we will be “managed” over a long period. eg no growth over 5 years whilst we have wage growth at 3% pa will have an effect well above the 15% in real terms with inflation at a modest 2.5% pa. At least that will be the plan IMHO.
The cumulative effect is much less damaging and yet just as effective, but it’s not a 40% crash. I also expect significant deleveraging in real terms over that period.
The modern era of credit is still very young, and the rules are being written daily. We may yet be surprised where it ends up in just 10 years.
Cheers..
JC, nice summary of Chris Joye’s take on the world. I too make sure I read his blog on Business Spectator every day. It’s a different crowd to here though – almost polar opposites. Hence the fun, it’s good to walk both sides of the fence.
I agree Joye is very intelligent, but I think he finds it difficult to conceive of a world where there isn’t unlimited cheap credit and a government that’s attuned to his point of view. I suspect he is getting a little worried about the lay of the land right now and would probably be picking up that red phone of his that you would assume is a direct link to the RBA and/or the inner sanctum of government. At least that’s the sort of connections he would like you to think that he has.
PF, I agree that the gov’t and RBA are looking to “manage” the situation in the way in which you describe (i.e. house price stagnation while incomes catch up).
It would be great if they could achieve that but I seriously doubt whether they have the skill and finesse to do that. For example, I don’t think they intended for the FHOG boost and ultra low interest rates to cause a blow off of the housing bubble. But it has.
I struggle to see how they can keep house prices where they are for the next few years. If they come in with more stimulus and/or rate cuts, I reckon the bubble just blows bigger and that’s not particularly what the gov’t wants. On the other hand, they could take their hands off the wheel but then with housing finance figures that we’ve all seen recently, it could easily overcorrect downwards and then they’re $hitting themselves. They are trying to manage it by tinkering with migration numbers, by tinkering with foreign investment regulations, possibly by tinkering with tax regulations. Goodness me, I’m smarter than Chris Joye and I don’t reckon I’d be able to get it right!
JC – thank you for your kind words. Like you (and Ralph) I think that CJ is a man of great intellect and reason.
I differ in my view in that I have been reading his words for a long time and I find him deeply concerned about ensuring affordible housing for most Australians. I say most because not every one will be able to, or wish to own a home.
He has also provided us with the most reliable housing data available throughout the past 12 months. Although it did differ with other providers, it turned out to be correct, and that is important to me.
I don’t think he sells anything apart from the Rismark Index, and isn’t he allowed to do that? We all sell something.
Cheers..
PF, this is where we part ways. To be honest, I don’t pay much attention to the Rismark Index for the very reasons that Sayce points out. These indexes only seem to make sense to those in the inner sanctum and I’ve seen basic inconsistencies in reporting that make me feel that the data is misleading. For example, I bought up the issue of a table showing median prices and there was one entry that simply said “National.” Nobody knew what it referred to or what it meant. “So what” you make ask. To me, if they can’t be bothered clearly communicating this obviously very important result, it makes me wonder what kind of magic they’re working behind the curtains.
With all this talk about sovereign debt… why isnt there more discussion about Dubai? they were given enough money to escape default for a few months (April i think)… what happens then? we have a replay? their economics have not changed have they?
And PF, if CJ were really worried about affordability, he wouldn’t be so dismissive about public/private debt and debt-to-income ratios. Furthermore, he would probably advocate less govt interference in markets and chastise the banks.
AC, Dubai is a shambles but it’s simply the Flash Harry among the Emirate states. Whatever is of value will get picked over and everyone else will lose. The Arabs will take care of their own as best they can.
Puntpal…”savers have lost out for a long time and debt junkies are the ones being rewarded – which is so perverse considering the GFC was caused by debt and not enough savings.”
There is an entire industry created to purely shuffle numbers and papers across a desk (or should I say a computer screen) to entice you to be a debt junky. Imagine what will happen to them if we all “converted” to being saver? They have had a good run so far, and may have a little longer to “play” while the numbers are being fudged, or until the next election. However, the “drug” you so correctly referred to has made them think that this can go on forever. Well, it won’t!
You may think you are missing the boat but that is the illusion that they want you to believe. If we lived within our means, this mess would never have occurred. If I threw a sack of heroine in front of you and said “go on, take it. everyone is doing it” would you grab it? It would be fun for a while but what is the end result? Same thing with debt. Think for yourself and use your own logic, not the “mobs’s”. Look at the lessons of the past and then apply them to your future. I know that in today’s world thinks go click! click! click! and it all happens quickly, but the basic fundamentals NEVER change. It’s physics! Timeless and ageless. I have no “financial” qualifications yet have done much better than those who were giving me “professional financial advice” over 10 years ago. I don’t rely on financial charts and the like as I deal with formulas, graphs, calculations as a profession. In my world these MUST be accurate and unchanged, however, in the world of finance they are constantly being manipulated to suit an agenda. I sense your frustration and you are absolutely correct in saying that those who took on too much debt deserve to suffer the consequences. You can pity them, but don’t feel sorry for them. If you warned them they would mock you and if they had the chance all over again they would do exactly the same. Not only did they take on debt but then took on even more on the equity of their homes to extend the debt even further. Keep saving and wait. You are young and have the time and (I assume) have no kids/wife etc. When the “correction comes” you will be in a great position to ride the next “wave” well into the future.
here’s an example of fudged figures http://www.bloomberg.com/insight/birth-death-model.html
while everyone focuses on Greece & the P.I.G.S. nations. California, and now New York are in much worse position. http://cityroom.blogs.nytimes.com/2010/02/03/wall-st-revenue-falls-so-states-deficit-rises/?emc=eta1
Britain is also on the skids with no clear view ahead. Of course Australia will “fiddle while the rest of the world burns” http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7129844/Banks-bad-debts-to-rise-for-another-year–says-Moodys.html
Great thread, just caught up with it. The charge is true and right: The system is rigged to reward the borrowers at the expense of savers for the most part. I have detailed this before. Occasionally, there is a correction and those who have overextended on debt get a whack around the ear. Then the trend resumes. In a fiat monetary system, combined with a fractioanal reserve system, it has always been so, and always will be. So, in a way, the question is simple: Will you use the trend as your friend, or will you fight it? Those in the former camp have done well over the decades, and it was no accident. Those who lived by the ideal, rather than the real, are disappointed and bitter most of the time. That, also, is no accident.
It is the trend, stupid!
Even if that trend is generated through fraud and manipulation, either you get with it, or be crushed by it. That is the ugly reality and the choice I agree we should never be confronted with, but hey, in a world of crooks and thieves, these are the rules of the game. Right or wrong, you ignore them at your peril.
goodness me with all this turmoil over in the EU and the IMF stating that banks have only seen 40% of bad debt write offs – how is the rest of the world claiming a surge recovery from this recession? Even if the EU do bail each other out… why should we see this as a confidence boost? the crappy economics just went up a notch…. they will (like the rest of us) simply be landing themselves in greater debt….?
“Great thread, just caught up with it. The charge is true and right: The system is rigged to reward the borrowers at the expense of savers for the most part. I have detailed this before. Occasionally, there is a correction and those who have overextended on debt get a whack around the ear. Then the trend resumes. In a fiat monetary system, combined with a fractioanal reserve system, it has always been so, and always will be. So, in a way, the question is simple: Will you use the trend as your friend, or will you fight it? Those in the former camp have done well over the decades, and it was no accident. Those who lived by the ideal, rather than the real, are disappointed and bitter most of the time. That, also, is no accident.”
CB, great stuff. I’ve thought about this a lot and it’s a dragon that I’ve been reluctant to jump on and ride.
sounds like theres some sort of bush-fire happening out there in the financial works world
http://www.youtube.com/watch?v=NOErZuzZpS8
How is that great JC?
cb is saying speculation and too much debt is fine because the system is rigged for that, yet that whole system has crumbled since the GFC and now debtors have been given a stay of execution.
cb takes a very selective view of history – people who ‘Road the Dragon’ of speculative debt in 29 ended up jumping off buildings.
This time they are crying and asking for Government bail outs. And then cb has the hide to question the RBA deciding to raise rates. Has he heard the saying that “when you play with fire you get burnt”…its not some easy ride (being a debt-junkie) and dont think any bailouts will stop this pyramid scheme from falling over.
I think you were smart to not ride the dragon JC – time and the market will sort out these fools
Yes, in good time, we are all going to get what’s coming to us – except, perhaps, if it is in the post.
Well, on a more serious note, that is not quite what I am saying. What I am saying is that there is a pattern, generated by a particular, biased and rigged system. The patter is that wealth is being transferred from savers to speculators.
Why from savers? Don’t ask a dumber question, this will do. And the answer is: beacause it is savers who have the money. Where else could it be transferred and stolen from? Naturally, the savers.
The speculators are all those people who use debt for wealth accummulation, more politely referred to as wealth creation. They create, and take on debt in the form of phoney money, worthless paper, and use that debt to purchase REAL assets.
The mechanism of wealth transfer from savers to speculators is called Inflation. By creating more and more debt, asset prices are pushed up in nominal terms, and the purchasing power of savings is diluted, as is the burden of the debt taken on by the speculators. Give it a decade or two, and voila, the savers will have lost half of the purchasing power of their savings to the speculators, who can now sell the real assets, pay back the loans, and keep the difference.
In most cases, this difference is simply the purchasing power lost by the savers. That is the mechanism, and that is the mechanism by which Moms and Pops over many decades have made their money. Those who tried to do it through savings in the bank lost out, and those who bought real assets, often through taking on debts in the form of mortgages, have ended up way in front. I am not saying that this is good, or right, but I am simply saying that this is the system, and it generates a certain trend. If you are serious about wealth accummulation, then this is the framework you need to understand and work within.
Of course, periodically, the trend reverses and you can be caught short if you overextend yourself with debt. This is a risk you cannot ignore, but you cannot afford to be paralysed by it either. There is risk in anything you do, so you have to manage your risk. Even so, sometimes the unthinkable can happen and you lose the lot. Nothing much you can do about that, but get up, dust yourself off, and start again. What is there to object to in what I am saying? I do not understand.
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