You never know when rates will rise

October 8, 2009

David Kuo-David Kuo, Director at the financial website The Motley Fool. The opinions expressed are his own.-

Go on. Admit it. You didn’t see it coming, did you? You never thought a member of the G20 nations would dare to break ranks and raise interest rates this soon.

But Australia has done just that. The Central Bank of Australia has increased the cost of borrowing by 0.25 percent to 3.25 percent. It is doing what it thinks is right for the country regardless of what the rest may think. Now, Asian countries, keen to avert another bubble, may follow Australia’s lead and ratchet up interest rates before long.

Of course, Australia’s economy is vastly different to the UK’s. It has huge deposits of iron, aluminium and nickel that are in demand by mineral-hungry China. That said, Australia did briefly flirt with a downturn, which it successfully corrected with 21 billion pounds of fiscal stimulus.

But the UK is not Australia. We do not have huge deposits of mineral, and we are not near fasting-growing Asian countries either. What we do have are consumers saddled with over a trillion pounds of debt following a decade of binge borrowing, and a national debt burden of similar magnitude.
Therefore, it is unlikely that we will experience demand-led inflation. In fact, consumers are saving more of their household income than they have done for eight years.

The most recent Office for National Statistics report shows that between March and June British households saved 5.60 pounds out of every 100 pounds of household income. That is very different from the first three months of 2008 when we not only failed to save any money, but we even borrowed 50 pence for every 100 pounds of household income.

That said, we are still some way off getting our overstretched household finances back on an even keel. So, the savings ratio could go higher. In fact, it is still some way short of the long-run savings-ratio average of 8 percent of household income.

And herein lies the problem for the Bank of England.

According to the paradox of thrift, high levels of savings in a recession can prolong the economic downturn. That is because two-thirds of economic growth comes from consumer spending. So the less we spend, the longer it will take the UK economy to recover from the slump.
So what is the Monetary Policy Committee to do?

It has already slashed interest rates to historic lows. But that has failed to stimulate consumer spending. It has pumped 158 billion pounds of fresh money into the coffers of lenders through quantitative easing. But the money has, as yet, failed to invigorate the ailing economy.

However, both those measures will, in time, achieve their goals. The risk is not whether they will work, but instead, whether they will work too well and stoke inflation. Just as no one expected Australia to hike rates this soon, our days of enjoying low interest rates may end just as abruptly, and without warning. So save and invest what you can now.

Comments

Profit and interest are the very reasons things will take so long to correct. And in fact they will never actually correct at all.When profit and interest are eliminated from the equation, the debt problem is much more easily handled.

Unfortunately we still operate under immature, childish motivations. Like children that will only say please and thank you if they get praise or a treat of some kind, we “adult” human beings only do “good deeds” if there is profit to be made.

We need to let go of profit and interest as motivators in our economy. We need to adopt a more mature and refined motivator. We must grow up and begin doing our work simply for the purpose of solving real problems.

Money is a tool. That’s it. Nothing more. Its function is to facilitate the exchange of resources (work). And the reason a human being works, is to solve problems that need to be solved. A true human being works to refine their skill and to achieve excellence that can be passed on to the next generation.

This issue isn’t being dealt with by human beings as much as it’s being handled by reasoning animals. There is a difference.

The human being wants the solution that ends the suffering of the person. The “system” is a secondary consideration. The reasoning animal wants to preserve the system regardless of the consequence to the person. Because as long as the system holds precedence over the person, then the person can be controlled.

And in fact we are controlled by money. We need money in order to qualify to be treated as human beings. If you are poor you do not have equal justice under the law. You do not have access to education. Trade schools yes. Real education, not so much. You have little access if any, to medical care. You have limited access if any, to adequate housing.

This article points to the difficulties faced by world economies during this economic crisis. But the only reason we have a crisis at all is because profit and interest must be collected on all debt repayment. If not for the profit and interest there would be no crisis. The system could simply be “reset” in a manner of speaking.

But money lending is a business. And “business” is about “making money”. Never mind that our government already makes our money for us. Now we have to make our money “grow”. What rubbish. Money is not alive. It’s like a hammer or a screw driver. It helps you do stuff. There should be no interest payed on loaned money.

If you lend me a hammer, would you expect me to return two? Then if a bank lends you a dollar why would you pay back more than that?

It’s ridiculous. If life is sacred then that means that YOU ARE SACRED. You are life, given mind. You are worth far more than any amount of money. So why do you allow yourself to be controlled by it? You are of divine nature. Money is lifeless matter and utilitarian idea. Both are subject to the divine. So why do you make it your master?

 

The banks in Australia have been ignoring the RBA anyway and setting their own interest rates, so perhaps the RBA thought they should try to stay relevant and raise rates so that it appears they have not lost control of setting interest rates in Australia

Posted by widget | Report as abusive
 

All this nonsense about debt, central banks, fiscal policy, inflation etc. etc., the solution it simple. It can all be solved if we take an age old method which made our ancestors great and recycle it… all we need to do is colonize Australia.

Posted by Peter H | Report as abusive
 

It’s funny how, when our masters wanted us to join the EU and give up those unfashionable ideas of Commonwealth, they sold us the idea that natural resources and space were unimportant in the modern age. What was needed, we were told, was more service industry. We would do this with our nearest neighbours who do not share our language or culture and indeed were at our throats a few generations ago. What a fallacy that was, to get closer to countries that face the same problems as us and turn our backs and put up tariffs against A, NZ, C, SA. Trade would be better between nations that complement the others’ strengths and weaknesses. Proximity was a red herring too – watch how all of our manufactured goods come around the world!

Posted by Jamie | Report as abusive
 

It’s even funnier how prior to joining the EU, in the wake of WW2, the colonial model was abandoned to make way for the current “globalization” model. Almost as funny as the way the Commonwealth countries received their marching orders to defend the “mother country” by decree following meaningless debate in parliament not even voted on to impale the enthusiastic youth in the war that was going to be over by Christmas brought about by the “leaders” of the “civilized” world.
My sincere hope is that democracies around the world remain strong and vigilant – yes even if it means decisions are slower coming – and don’t get steam-rollered into fake-democracies obeying the whims of invisible “lobby groups” and similar “power-brokers”, “consultants”, “focus groups”, and “think-tanks” etc., which for all we know have the same small group of people in them.

Posted by Peter H | Report as abusive
 
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