What do you think the central bank is trying to do when they cut rates?
If your answer is, ‘boost the economy’, you’re wrong. Sort of…
If has the effect of lowering your standard variable home loan rate. Or at least it might fall a couple of basis points. But as we know the cost of funding for Aussie banks is relatively high anyway, so they’re never going to pass on the full cuts…not anymore.
That means there’s a negligible effect in an already low-rate environment. But the idea is a cut in the cash rate is supposed to help spur on an economy, increase lending, increase spending, sparking the tinder under the economic bonfire.
But people are a little savvier than that. Or at least you’d think so. They tend to not spend, but rather save the extra cash they now have at the end of the day. Albeit it’s such a negligible difference now that it barely has an impact on the already cringeworthy savings rate.
Today cutting rates has little impact on economic stimulus.
I’ll ask one more time, what do you think the central bank is really trying to do when they cut rates? Here’s the real answer…
The real reason central banks cut rates
They’re seeking to punish retirees.
That might be hard to believe, but by cutting the cash rate they are aiming squarely at those who are savers. And as we know, when it comes to savings, the bulk of these are held by retirees and those nearing retirement.
It makes sense, they’ve had a semi-lifetime of being able to actually save. And they’re at a point in life where they want to tap into those savings in order to fund a lifestyle they dreamed of when they started saving in the first place.
Hence they’re looking for less risky assets. They’re looking for capital preservation and income generation. That’s a smart investment strategy for those who fit that demographic and life stage.
But by continuing to cut rates, cut rates, cut rates, and cut rates, the central bank as a result of poor fiscal policy by the government is forcing retirees and savers into risk.
They don’t represent you, they fleece you
This isn’t an isolated problem to Australia by the way. Everywhere that central banks are cutting rates to zero or worse, negative rates kick retirees in the guts.
This week I had a friend reach out to me to ask if I could help them with some advice on investing in some stocks and shares.
She and her husband are retirees. They own their own house, have no debts, and have the lion’s share of their assets in cash. They’re not overly financially savvy and never really knew much about stocks and investment. Just worked hard, paid off debts and want to live a good, not overly lavish lifestyle in retirement.
And they want to maybe get a campervan at some point in the next year or two. Reasonable desires for people at their life stage.
She said to me (slightly paraphrased):
‘We’ve got a while to live and the money in our cash accounts isn’t doing anything. It’s just sitting there, and we don’t want to dip into it but at the same time it’s not working for us either.’
That’s because at best cash savings accounts here in the UK will deliver maybe somewhere in the region of 1% to 2% per annum. Typically most bank accounts will cough up somewhere between 0 and 1% per annum.
It’s much the same story in Australia too. Some banks will offer ‘bonus rates’ for accounts that have regular contributions, or for new customers. But even then they’re a wafer thin amount over 2% per annum.
And with the inflation rate in both Australia and the UK around 1.8%/1.9% that means at best the value of your cash savings year-on-year is at a ‘net zero’. You’re not actually earning anything when inflation erodes the value of those interest rates each year.
What’s worse is when key utilities like energy are increasing at a cost well above the inflation rate. That distorts the capacity for retirees to have any longevity to their retirement savings. And the real result is that your cash is worth less and less each year even if you did nothing with it.
Over a long enough time horizon your cash would be worthless.
What it then forces people to do is to seek areas for greater return on their savings. They do this now just to preserve the capital they have.
Make no mistake, this is a government policy and the central bank authority forcing retirees into risky assets at a time when they shouldn’t be taking on more risk.
I explained to my friend that sadly, while I’d love to, I can’t give personal financial advice. But pointed them in the direction of people that could.
This however highlights the typical person is heading into uncharted territory because they’re forced into it thanks to piss-poor economic management over decades from those in authority — namely the government and central banks.
And that’s the real travesty with the way that governments in Australia, the UK, across Europe and other parts of the world mange economies.
Forced risk isn’t financial freedom
They have run our countries into the ground. All the while their pockets are suitably lined and their affluent government pensions will happily see them on into retirement. They claim to represent their constituents, but they don’t.
They don’t see the real workers, the salt-of-the-earth grafters that have slaved a lifetime of saving and frugal money management. They don’t see their kakistocracy is driving people into areas of investment where they’re not comfortable with, not experienced in, and frankly, scared of.
Meanwhile they’re making the ability to give advice harder and the cost of advice is higher than ever before. They regulate, they put up barriers, and they claim to protect consumers when in reality they’re the ones dishing out the pain with their decisions.
That’s the real cost of what elite, centralised control has over the population. Forcing people to take on investment risk where they shouldn’t have to. This is the financial freedom they claim to have delivered to people.
But how free are you really when you’re forced into risk when you shouldn’t have to be?
You’re not free. But you can be.
There are ways to beat the system. Ways that you can manage risk and open up to reward without having to ‘bet the campervan’ so to speak.
It takes shrewd decision-making on your own part and an understanding of how to manage capital and financial risk and understanding long-term investing. It also involves knowing when to put this into play.
You can ‘beat the man’. You can break free from the financial shackles of the government and central bank by putting steps into place so that when you are in retirement or about to retire, you can scale back risk, not ratchet it up.
We’ll explore some of these steps over the coming weeks as we find a way to ‘beat the central bank’ and achieve real financial freedom.
Editor, Money Morning
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