The Story Behind Low Interest Rates as a goal.
The politicians around here are constantly putting forward the case that banks should be passing on the full amount of interest rate cuts the Reserve Bank of Australia decides upon. Without going off on a tangent about how non-free market the whole concept of centralised control of the price of credit is, I'll just say that the banks always pass on the full amount of any rises as soon as they possibly can. Given that the banks were getting by just fine on the previously set levels; since the only thing that counts to the bank is the margin - the difference between the rate they borrow and then lend at; any amount the bank does not pass on just increases the margin and increases their take.
Nevertheless, the recent budget gives the overarching story that interest rate cuts are the most desirable goal of fiscal policies. A desperate search for a surplus was justified chiefly by putting forward the prospect (only a prospect) that the Reserve Bank may be able to reduce interest rates further as a result.
It is true that an interest rate cut will result in less money being taken in interest from people's debt repayments; but often the amount of repayments doesn't change so it doesn't necessarily result in extra money for the borrower to spend. Moreover, even if the repayments were reduced, most borrowers would probably choose to put the money towards an extra payment thus deleveraging themselves from debt.
A reduced interest rate therefore benefits borrowers. It is considered desirable by what appears to be the majority. So what of the other side of the equation? The saver? Every reduction in interest rates punishes those who have invested their money into an interest paying investment.
The story is therefore clearer. The needs of borrowers are seen as more important than those of savers; and the obvious conclusion must be that there are far more borrowers than there are savers. That we are a nation that has to come to terms with the fact that we had a binge on easy credit. This resulted in a long bull market in property from the late 1980's through to arguably around 2008 before stagnating to the present.
Slowly the reality is setting in. Property doesn't always (the old wisdom of being aware of the danger of the two words, always and never) double every 7 years. Those venturing to sell the properties they acquired during the credit frenzy are seeing the truth when their fantasies of newfound riches are dashed and they struggle to pass on their albatross to the next greater fool.
Where are the property spruikers now? I recall reading a property investor magazine in 2008 extolling the virtues of revaluation, leveraging up and replicating the investment. To me this sounded like a snowball that one pushed up a hill. Sure, it got bigger, but the property never belonged to you as you kept extracting fictitious equity to get oneself deeper into debt. The picture of the fellow featured was of a spectacled baby boomer on a public bench with arms outstretched but elbows bent in. He had if I recall correctly, over 50 properties in his "portfolio" worth many millions. It's a pity these magazines don't do follow up stories, as I truly wonder how that gentleman has fared. I'm guessing that he has been wiped out or is struggling to unwind his overleveraged position. Maybe someone out there knows the article I mean and can let us know.
The recent drive towards reduced interest rates being more desirable is just a manifestation of this truth that there are more borrowers than savers, and that as a nation we are not immune from the consequences of a slump in the property market, that will take struggle to a new level.
The good news today was an unexpected drop in the unemployment rate. I am a skeptic of all Government statistics and without having looked at it in detail, am more inclined to think that this has been conjured up as a "seasonal adjustment" or represents a more ugly truth that the chronic unemployed simply drop out of the count at some point and join the ranks of the hidden shadow unemployment in society.