We Are Turning Japanese

The US Federal Reserve did what it had to do. Low interest rate for the foreseeable future and it also stated the obvious, that inflation is low and that there are downside risks to the economy. The RBA and the Australian Government should take note. The RBA is applying a high interest policy (with the support of the Government) in a form of chemotherapy on the Australian economy to kill the mining hotspots whilst the rest is slowly choked off. We are right to demand an interest rate cut next month, as the interest rate markets are predicting. Our 3 year bond rate fell to 3.45% yesterday (Tuesday 9th August), while our cash rate is 4.75%. Both the Commonwealth Bank and Westpac dropped their fixed rate home loans.

Last night the DOW reversed 620 points to finish up 429 after the Fed announcement. For all the talk of money printing hysteria, the 10 year bond rate fell to 2.18% and a 3 year bond auction for $32 Billion of Treasury notes yielded .50% last night.

The US is simply doing a "Japan" - leaving interest rates at zero for a very long time. In the process they have printed money to be 200% of Gross Domestic Product. The US debt is still only about 90% of GDP. So expect a long and protracted period of easy monetary policy to try and stimulate the economy. However, the Japanese economy shows that this action guarantees nothing - with their market just moving sideways for the past decade, as you can see in the chart below. Also remember S&P downgrades and printing trillions of Yen did not cause any economic collapse or hyper-inflationary event.


The market may have got their monetary policy "fix" last night, but we need a change in policies (more jobs, infrastructure investment etc) rather than just repeating the mistakes of the past.

Michael Cornips