The Reserve Bank of Australia is worried about (a) exacerbating the property bubble by lowering interest rates any further, and (b) the Aussie dollar being too high. So it seems there’s no room to move – except maybe the RBA selling down the AUD, aided by Joe Hockey’s $8 billion injection? This would help Australian exporters.
Meanwhile, some commentators are astounded at the big four banks’ record profits given such ‘low’ interest rates and the sorry state of business in general. To which I’d pose two just questions:
- Are Australian real interest rates all that low after inflation? Not yet. Inflation’s low because we’re in the deflationary half of a Kondratieff cycle – towards the end stage. When we had 18% interest rates, inflation wasn’t too far behind. I think we make far too much of low nominal interest rates; and these ‘low’ interest rates entrap people into buying grossly overpriced housing at times like these.
- Could it be that banks are making record profits on the back of bubble-inflated residential land prices? I mean, it’s not only via interest that banks make their super-profits. Their greatest rip offs are made from capital repayments.
Just a couple of things to ponder.
they may “flick the switch” but where does this interest come from, were is the interest switch? There in lies the rub, the “system” is deflationary by nature, its the meddling that causes the bubble and bailouts.
The RBA can sell some AUD, but it cannot change people mind to buy dollars. When things turn south in the markets the AUD gets sold off as well, prolly beause some out there borrow cheaper currency and then buy AUD to make the vig on the spread, the carry trade.
Yup, but banks need something against which to flick the switch, and it’s all the better if it’s a residential bubble, which they’ll refuse to acknowledge as a bubble – until after it bursts.
I thought that when you walked into a bank and borrowed $500k, the bank then creates this $500k out of thin air. This ‘flick of the switch’ creation of money and the interest it incurs goes down as profit.
The more money they ‘create’, the more ‘profit’ they make.
It will all turn ugly when they run out of borrowers or worse still, they start to default.