# Note to RBA - don't cut interest rates!



## Uncle Festivus (8 February 2009)

The premise - that cutting interest rates has a negative effect on the economy?

The reasoning - 

With the proviso 'under the current conditions', that the Reserve Bank is wasting it's time cutting interest rates trying to stimulate the economy because the evidence is such that the vast majority of the savings are going into paying down debt, and does not get spent in a 'stimulating' way.

On the other side of the equation, the possibly larger percentage of the population who are savers & 'stimulating' spenders - self funded retirees & anyone else who lives within their means. These are the people who are most likely to keep spending from income derived from money in the bank earning interest, and who have just had their spending power severely curtailed in the space of 6 months.

So now we have the scenario where the McMansion homebuyers (in their energy inefficient castles) yet again get pandered to while the savers get penalised. 

If they (the gov & RBA) really wanted to stimulate the economy they would eliminate the distortions in the economy, like negative gearing, and make new housing construction massively attractive to owners & investors alike. Also make it a requirement for new immigrants to only be able to live in newly constructed housing ie if we can't accomodate them without distorting & disadvantaging the existing populace then they don't enter.

Australia is at least in a better situation than most other countries in that it can still build itself out of the global financial crisis through a building led recovery?


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## robots (8 February 2009)

hello,

things are still very good though Uncle, not much has changed in society

the fixed interest/online acc crew got a bit more last year, they will get less this year, the home loaner will get more this year and paid more last year

it all evens out in the long term, just a storm in a teacup

keep working on your income brothers

thankyou
robots


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## sinner (8 February 2009)

A few points.

1. Currency traders are punishing any country who doesn't cut rates. Just look at the EUR/USD vs GBP/USD vs AUD/USD after the latest round of news/cuts. Which bounced and which were sold off?

2. Cutting interest rates punishes savers, but savers aren't really in trouble at this point. The main concern is Australias huge household debt to GDP ratio. If these cuts are used to pay down household debt, this can only be a good thing from an economic perspective over the longer term. As Steve Keen pointed out, if Australians were to cut their spending to reduce only 5% of household debt to GDP ratio then $100bn would vanish from the retail economy. This would cause GDP to plummet even further (we are a service based economy now) and be extremely recessionary. Better the RBA cut their interbank rate and reduce debt this way than "rewarding savers".

3. Cheapening credit by lowering the interbank rate at this point might seem counter intuitive but it makes some sense. Unemployment is ratcheting up in a big way and as this continues we will see more housing defaults coming onto the market. This will drive house prices down, and Australia does not have a lot of wiggle room here. If 10% of houses are forced to sell, the majority of the market will be in negative equity. Cheaper credit will not save those who should not have been in housing in the first place, so might as well ease the pressure on those who should (and let's face it, lots of Aussies *should* own their houses).

4. Inflation is no longer a primary concern on the global market. Monetary supply in the forms of leverage, derivatives and forex reserves have contracted at an immense rate. I have included this chart from shadowstats.com using their M3 estimate to highlight this contraction.




Cheapening credit at this point might seem like adding fuel to the fire but you can view the world financial markets right now like a crack-baby. After 10+ years of the "good stuff" (easy credit), with such a massive contraction of monetary supply the interest rate must provide continued downward pressure on credit cost or the credit markets will simply *seize up*. 

Some might say "good, let them fall, it'll be better next time", but you can't just make a crack-baby quit cold turkey, because it will *die*, there will be no next time. 

etcetera, etcetera.


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## juw177 (8 February 2009)

Most important of all, cutting interest rates punishes the AUD.

This will in turn punish those who have to service foreign denominated debt, which are the banks and government. $1.6 trillion worth if I remember right. And when we need to cut rates / print money to service our debt, we spiral into collapse.

But if we raise rates, our exports will suffer and it will take longer for our economy to recover. It is a lose lose situation.


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## lioness (8 February 2009)

juw177 said:


> Most important of all, cutting interest rates punishes the AUD.
> 
> This will in turn punish those who have to service foreign denominated debt, which are the banks and government. $1.6 trillion worth if I remember right. And when we need to cut rates / print money to service our debt, we spiral into collapse.
> 
> But if we raise rates, our exports will suffer and it will take longer for our economy to recover. It is a lose lose situation.




Very very true.

What people are not realising is that when Rudd clocks up 300 billion in dent and our AUD collapses to below 50, they will need to put up interest rates 5% in one move and rates will be double digit very quickly. Then all hell will break loose and property will collapse by up to 80%.

These are buying opps of a lifetime coming and if prepared can make you mega wealthy.


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## Uncle Festivus (16 February 2009)

Interest rate policy by the RBA looks like failing already, if the Big Four decide to protect their profit margin?



> THE Commonwealth Bank may not pass on the full benefits of the next interest rate cut despite a $2.57 billion profit and a massive spike in fees.
> Chief executive Ralph Norris said the bank still faced increased funding costs, which could dent profitability.
> He admitted the economic climate was fast-moving and "it's pretty scary out there'', referring to developments on global financial markets.
> The Reserve Bank is still expected to cut rates in March, but economists are divided as to whether the reduction will match the recent large moves.
> ...


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## Aussiejeff (16 February 2009)

Uncle Festivus said:


> Interest rate policy by the RBA looks like failing already, if the Big Four decide to protect their profit margin?




This is what happens when dumb-assed gummints throw squillions of *taxpayer's hard-earned* at dim-witted bwankers to play tiddly-winks amongst themselves, for essentially, _NIX_. 

No caveats or "forceful" terms covering bwanker's use of taxpayer monies.
No real legal enforcement for bwankers to use taxpayer monies as the taxpayer sees fit.
No avenue for claim or redress if bwankers squander taxpayer monies.
No accountability for bwankers who squander taxpayer monies.
No responsibility for bwankers who squander taxpayer monies.
No brainer for bwankers to profit from this con.  
Gummint? Just no brains.


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## MR. (16 February 2009)

lioness said:


> Very very true.
> 
> What people are not realising is that when Rudd clocks up 300 billion in dent and our AUD collapses to below 50, they will need to put up interest rates 5% in one move and rates will be double digit very quickly.




Huh..........  Why's that?


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## Timmy (16 February 2009)

Cut, cut, and cut some more!



Uncle Festivus said:


> On the other side of the equation, the possibly larger percentage of the population who are savers & 'stimulating' spenders - self funded retirees & anyone else who lives within their means. These are the people who are most likely to keep spending from income derived from money in the bank earning interest, and who have just had their spending power severely curtailed in the space of 6 months.




Well, they all had a huge boost in spending power in the prior months when interest rates were being jacked up.  Swings and roundabouts.  Any reduction in spending power could be made up now by getting a job etc.  Lots of wailing and knashing of teeth about increasing unemployment but the unemployment rate is still very low in the context of recent decades.  Besides, cutting interest rates has a stimulus effect on industry, the job creation machine.




Uncle Festivus said:


> If they (the gov & RBA) really wanted to stimulate the economy they would eliminate the distortions in the economy, like negative gearing,




Just one point here, the RBA only has the ability to change monetary policy settings, it can't do anything about legislation, tax policy, and such to change distortions in the economy etc.


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## 1080p (16 February 2009)

Timmy said:


> Just one point here, the RBA only has the ability to change monetary policy settings, it can't do anything about legislation, tax policy, and such to change distortions in the economy etc.




This is exactly the problem.  The RBA can lower rates all it likes but it comes down to the lenders passing them on in order to increase consumer spending power.


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## Uncle Festivus (16 February 2009)

Timmy said:


> Cut, cut, and cut some more!
> 
> Well, they all had a huge boost in spending power in the prior months when interest rates were being jacked up. Swings and roundabouts. Any reduction in spending power could be made up now by getting a job etc. Lots of wailing and knashing of teeth about increasing unemployment but the unemployment rate is still very low in the context of recent decades. Besides, cutting interest rates has a stimulus effect on industry, the job creation machine.
> 
> Just one point here, the RBA only has the ability to change monetary policy settings, it can't do anything about legislation, tax policy, and such to change distortions in the economy etc.




Yes, and spend they did. Getting a job - where? - that's the problem now. All that's happening now is those who couldn't afford interest rates at say 5% are enticed back in, only to be turfed back out when they go up again or they lose their job? Those that are already in debt are saving the reductions into paying off the loan - they don't stimulate the economy? For industry -the focus is on getting the loans in the first place, not so much at the cost of the loan, although lower rates would help, but not neccessarily to employ more people either, rather just to stay in business?

Interest rates that give a return to live off would mean that retirees wouldn't have to work (more?) meaning more jobs for those that do need them. It would mean a higher exchange rate, making imports cheaper (and foreign loans), stimulating other countries eg China who would then keep buying our raw materials. 

Yes, the RBA is an old dog with one trick that used to work in normal circumstances, but as Japan can attest that they will be wasting their time going any lower, so why decimate the last great spending group on the way down?


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## Timmy (3 March 2009)

Uncle Festivus said:


> Note to RBA - don't cut interest rates!




Hey Unc. - someone at Martin Place is reading your posts!

STATEMENT by Glenn Stevens, governor


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## Beej (3 March 2009)

Timmy said:


> Hey Unc. - someone at Martin Place is reading your posts!
> 
> STATEMENT by Glenn Stevens, governor




The RBA didn't leave rates unchanged for the reasons Uncle F is arguing - see Sinners post for a closer to the mark take on the economic thinking behind current RBA monetary policy.

Cheers,

Beej


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## dhukka (3 March 2009)

Timmy said:


> Hey Unc. - someone at Martin Place is reading your posts!
> 
> STATEMENT by Glenn Stevens, governor




Remember just one year ago the RBA was raising rates and dribbling on about inflation whilst it was obvious to anyone that cared to look that deflation was on the horizon. The RBA is data dependent and backward looking. They are good for providing a narrative of where we've been but they shouldn't be used as a guide to where we are going. Rudd's handouts might prop up the economy until mid year but I bet the RBA will be forced to cut again by that time as the global economy and by implication the Australian economy, deteriorates further and the hopes of a second half recovery are well and truly dashed.


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## Stormin_Norman (4 March 2009)

http://www.abc.net.au/7.30/content/2009/s2506546.htm



> KERRY O'BRIEN: At the time of the last big cut, at least one of the big four banks warned that their capacity to pass on future rate cuts was diminishing rapidly.
> 
> Why is that, and are we going to see the situation where even when the Reserve does decide to cut rates significantly further, that the benefit of that is not going to be flowing on to the economy via lower bank interest rates?
> 
> ...


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## Uncle Festivus (4 March 2009)

Beej said:


> The RBA didn't leave rates unchanged for the reasons Uncle F is arguing - see Sinners post for a closer to the mark take on the economic thinking behind current RBA monetary policy.
> 
> Cheers,
> 
> Beej




I was mainly putting forward my reasoning of why they shouldn't cut further, not what their reasoning is.

_"the economic thinking behind current RBA monetary policy." _Just what exactly would that be? Do _they_ even know, or are they just as clueless as every other central banker?

All reasons would be looked at by the RBA, even though they don't publicly say as much. High on the agenda would/should be exchange rate 'maintenance' ie cut more then prop up more, erosion of interest income, employment etc but all bet's are off when it comes down to tin tack banking profit margin, as in the SN's post. They can cut as much as they like but if the banks don't pass it on then what's the point; the RBA might as well be scrapped?

The fact is interest rate policy of the RBA is a blunt and ineffective tool past a certain level, as already shown abundantly around the world already, so again, why drop everyone in the poop, with a zero bound economy helping no one except maybe those living beyond their means, when one section of the community could be doing ok, even at 3.25%, with the positive flow on effects of that spending.

Not that my 'logical & practical' argument means anything coz they will cut to zero when the recession comes calling in the second half of the year, so we'll all be stuffed anyway?



Stormin_Norman said:


> http://www.abc.net.au/7.30/content/2009/s2506546.htm


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## Aussiejeff (4 March 2009)

So, with our Lil' Ozzie Bleeder Economee *gasp* *horror* collapsing -0.5% instead of rising +0.3% as many eco-pundits had foolishly predicted, was the RBA's move correct?

I don't think so.

So, how soon before they admit "Oops!" and lop another 1% orf?

Next month?

Idjits.


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## Glen48 (4 March 2009)

Are we there yet?
In a recession I mean. or do the Economist think it may turn around.
I see Glen Stevens is a God bother so we could get some outside help or guidance.
With AIG loosing 1 Billion a day we all need it.


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## kincella (4 March 2009)

my 2 cents worth....our banks borrow from the foreigners cause its cheaper than here...so why should australians be the only ones paying for high credit..and the rest of the world is zero ???

cause we are different ??? not

oh and ben cousins has recovered and flying high....see here..he gets a radio gig...he will probably perform and become a far more successful person than he had ever hoped .... before  he fell over.....and good on him

http://www.news.com.au/story/0,27574,25137408-29277,00.html

sometimes one needs a catastrophy in their life to wake them up....look outside the square
and I believe most of the very successful people...only got that way....because they experienced mistakes...and then learnt from those mistakes....
ps I dont believe the RBA or current govt have any idea on how to fix the problems...
and hey...another overseas trip in april to meet with g20 again...how many meetings do these leaders need to figure out whats wrong.....more green house gases on airlines.....they have not heard of a telephone ,,,or video conference ????
seems to me like its more about some PR and a short holiday, a photo shoot and nothing comes out of it...oh yes...another meeting date...for another festival


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## Aussiejeff (4 March 2009)

kincella said:


> my 2 cents worth....our banks borrow from the foreigners cause its cheaper than here...so why should australians be the only ones paying for high credit..and the rest of the world is zero ???
> 
> cause we are different ??? not
> 
> ...




Aren't they ramping up to a G30?

I guess a GT40 might be on the cards soon...


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## Stormin_Norman (4 March 2009)

more like the G2.

india and china.


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## prawn_86 (4 March 2009)

kincella said:


> my 2 cents worth....our banks borrow from the foreigners cause its cheaper than here...so why should australians be the only ones paying for high credit..and the rest of the world is zero ???
> 
> cause we are different ??? not




Kincella,

As i stated in one of the property threads this statement above is incorrect.

Even if banks did borrow from overseas (which they dont actually do much of as far as im aware), they would need to borrow in the countries currency to take advantage of the IR. Then they would need to convert it to AUD. FOrex markets take this into account (its called interest rate differential) and arb any difference that comes up, so its not possible to make a profit from it.

So the crux of it is: *banks cant borrow in their home currency at a lower rate from overseas.*


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## Aussiejeff (4 March 2009)

Stormin_Norman said:


> more like the G2.
> 
> india and china.




I'm beginning to warm to the idea of a G-Whizz Forum.


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## Uncle Festivus (4 March 2009)

Robert Gottliebsen thinks so too?



> You could almost feel a sigh of relief from Australia’s small business community that the Reserve Bank did not lower interest rates again.
> 
> ..........................
> 
> There is no doubt that the early interest rate cuts did stimulate the economy but they now have much less impact, except to people who have no concerns about job security.



http://www.businessspectator.com.au...-PS6MH?OpenDocument&src=kgb&alerts&loc=center

(Membership required to view story)


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