There is an old saying – if you owe the bank $1,000 then you have a problem. If you owe the bank $1 Billion then the bank has the problem. The problem is not with the borrowers – they already got the money – the problem is with the lenders – they want a return on this pile of paper that they have accumulated over 40 years. In this closed bubble that we call an economy, somebody must hold the paper/digital money. If you don’t want to hold the paper, you must give it to somebody else in exchange for another asset. The S&P 500 has tripled in value since the GFC. Australian capital city house prices have doubled in 10 years, even with the current correction. The economy is committed to borrowing more and that means more lenders chasing a return.
The 40-year interest rate chart appears to be trending (really). US Government debt is committed to trending higher. The Australian Government must be committed to getting the debt engine going again. The budget being brought down this week will include measures to put money back into the pockets of the voters. The betting is that the July 2022 income tax cuts will most likely be brought forward. There should be improvements to tax offsets for low-income earners. Generally, it should be a cash splurge.
The property lobby will do all it can to avoid a Labor Government that will curtail negative gearing for investment properties and half the capital gain discount. The property lobby were stunningly successful in getting the Government to backflip on the Royal Commission’s recommendation to ban mortgage broker commission. Negative Gearing changes, capital gains discount, and franking credit refunds are the wedge that may give the incumbent government a small glimmer of hope in May’s election.
Both the US Federal Reserve and the Australian Reserve Bank have shifted to a dovish monetary stance. In countries like Germany, Switzerland and Japan, interest rates are negative – to be clear – you are paid to borrow, yet 10 years after the GFC, the Euro area growth is only forecast to grow by 1.3% in 2019.
As the AFR says today, all stimulus – no reform. After 40 years, the likely outcome is more of the same tepid Governments kicking a can down the road.
It just proves one immutable fact -lowering interest rates to zero or slightly less or more than that has no effect on economic growth but this fact seems unable to be absorbed by the reserve bank fed or any other central bank executives. What it does is take away from the real money managers i.e the savers their ability to purchase goods ,services etc and the longer this situation remains the slower the real economy grows.eg Japan,and the Euro Zone .Normalizing interest rates at around 3-4% would have no effect on businesses who want to borrow to grow but would give the people with savings once again a fair return on their asset. House and other assets price growth would normalize stopping these so called bubbles allowing a wider cross section of the public to purchase their home etc. Much too radical for our over paid Reserve bank chief and his self serving lackeys and as for the board of the Reserve who meekly accept the rubbish put before them each month one struggles for words and are best left unsaid. PS You can publish this with name and email address for all the good it will do.