Have Lower Interest Rates Translated into Wider Economic Wellbeing?


While it might be a public holiday in Victoria, the rest of Australia will at least feign some sort of interest in working…at least until lunchtime. Then everyone will stop to watch a bunch of horses run around a racetrack…and then continue drinking.

In today’s Daily Reckoning, we’re going to invite you along to a far more interesting gathering. It involves some of the financial industry’s biggest names. More on that in a moment…

But first, there’s an interest rate decision due today. Over at Martin Place in the heart of Sydney, the Reserve Bank of Australia will have a bit of work to do too before they make their way to a Melbourne Cup luncheon.

They’ll be making their monthly decision to set the price of credit. Currently, they reckon an overnight price of credit of 2.5% is about right. We think that in the absence of any compelling information suggesting it should be otherwise, they’ll continue to think that way. For the next month at least…

We have no idea how they know what is the optimal price of credit for an economy as big and complex as Australia’s. Right now official interest rates are around historic lows. This is a boon for the banks, who stand at the front of the credit creation process and get to clip the ticket as any new money comes into existence.

You can see that quite clearly in the performance of the Commonwealth Bank (ASX:CBA). Official interest rates were 4.75% in 2011 before the rate cutting cycle got underway in November and December of that year.

Then in May and June of 2012, rates fell a further 75 basis points, with more cuts in October and December, making 125 basis points in interest rate cuts for 2012. So far in 2013, the RBA has gifted the banks another 50 basis points of lower rates, bringing official rates to just 2.5%.

As you can see that has been a godsend to the big banks, best exemplified by the share price performance of CBA. The rate cutting cycle, which began in 2011, has led to a massive boost in the share price.

chart showing share price performance of CBA 2010-2013
click to enlarge

Have lower interest rates translated into wider economic wellbeing?

If you own a property, then yes it has…for now. If you don’t, then no it hasn’t. More generally, economic growth remains sluggish and the forecast for next year is for weak growth.

Yesterday’s retail sales data 0f 0.8% for September beat expectations of 0.3%, but annual sales growth of 2.9% is well below the long term average so lower interest rates don’t seem to be helping the ‘consumer’.

Ironically, the better than expected monthly result was largely due to a pickup in discretionary spending. At the same time, one of Australia’s largest discretionary retailers, Coca Cola Amatil (ASX: CCL), warned the market that pre-tax earnings for 2013 would be around 5-7% lower than in 2012. It’s share price fell around 3%.

CCL is quite a few steps removed from the money creation process. By the time the new money created by the banks emanates to the ‘consumer’ end of the economy, the ripple effect is less noticeable. In fact, by the time any benefit comes through it’s usually accompanied by the ‘other’ effect of new money entering the economy…higher prices.

The credit creation process is the most important thing to consider when thinking about how an economy works. Yet it’s given the least bit of attention by the business media. Credit creation is the process of how money comes into existence and how it flows through an economy…enriching some and impoverishing others.

The ‘system’ we have at the moment, both in Australia and internationally, is no longer working very well. Its sole purpose is to promote debt growth. It cares not what the debt is used for, which is why an increasing amount of debt is unproductive and needs further debt growth to support it.
The system we have strenuously avoids facing up to this cancerous unproductive debt. We ignore it and refuse to write it off, hoping that by lowering the cost of it, it will magically turn it productive.

But it is a system that has passed the point of any remediation. It will grow until it collapses under its own weight. This process is happening much faster than people think or understand. Rising asset prices have dulled the senses and killed off critical thought.

Which is why we’re devoting a couple of days in March/April next year to discussing the matter, and we’re inviting you to register your interest.

We’re holding a two day conference at the Grand Hyatt in Melbourne on March 31 and April 1, 2014. Some of the biggest names in international finance will be there to show you just how the current monetary system is ending and what form the next system will take. You’ll hear about the behind the scenes jostling going on right now and who the major global players are.

As a regular Daily Reckoning reader, you’re probably not surprised to hear that the US dollar system of international finance is getting long in the tooth. But you will be surprised to hear about some of the dollar’s emerging contestants.

Is gold no longer in the race? Are digital currencies the way of the future? What does oil have to do with it?

These are just some of the things we’ll be discussing. If you’re genuinely interested in investing for your long term future, this is a conference not to be missed. You won’t see anything like it in Australia next year…or until it’s too late to do anything about it, anyway.

For some reason, Australian investors don’t get a chance to hear confronting views about the system that holds and controls their wealth. In the northern hemisphere, such conferences and views are common.

So we look forward to seeing you. If you think you’d be interested, register you name on our priority list here. While there’s no obligation, you will get an opportunity to buy tickets before they go on sale to the general public and you’ll also be eligible for our early bird discount.


Greg Canavan+
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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truth and integrity
truth and integrity
2 years 11 months ago

The RBA interest rate level will depend on the major banks dictating what they want their profit margin to be. A couple more percentage point drops and the banks can make 200% on borrowings against lendings!

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