Interest Rate Troubles and a House Price Bubble

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How times have changed. The front page of the Australian Financial Review says the ‘RBA ‘risks’ house price bubble’ now that it has pushed rates to a record low. They’ve got it wrong of course, on two counts.

First of all, the RBA doesn’t ‘risk’ a house price bubble, it’s creating a house price bubble.

Secondly, it already has a house price bubble, so now it’s just making the problem worse.

But at least things are improving intellectually. Not long ago, people would’ve laughed at a headline claiming loose monetary policy creates bubbles. Now almost everyone thinks so. A fringe idea from the Austrian School of Economics has gone mainstream.

Unfortunately, central bankers and academics seem to be the only hold outs on the topic. And so loose monetary policy continues unabated around the world.

Poor old Robert Vine, who is also on the front page of the AFR, reckons yesterday’s rate cut means he has to move his retirement savings into riskier assets to get a decent return. We covered what will happen to him in yesterday’s Daily Reckoning.

The banks are reportedly struggling with the low rates too. After passing on the rate cuts, the interest spread between the deposits they don’t pay interest on and the money they lend at interest is lower. Still, lending the money other people give you as a deposit is a good fraud at any rate of profit, if you can get away with it. (i.e. get a banking license.)

Imagine if your new neighbour came round to thank you for giving him the money to buy his house—money you thought was safely in the bank vault waiting to be withdrawn at any moment. That’s banking for you.

A low yield environment isn’t just dangerous because it fuels bubbles, reduces returns and forces you to take on risk. Vern Gowdie explains how the costs of investing can be just as ruinous to your returns in this environment in today’s other article. In case you missed it, you can find Dan Denning’s interview with Vern here. He has some remarkable predictions for the Aussie dollar’s demise.

Regards,

Nick Hubble+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

Here’s WhyYou Should Beware the Financial Planning Mantra
31-07-2013 – Vern Gowdie

A Narcissistic Financial System
30-07-2013 – Greg Canavan

Living in a Keynesian Fictional Paradise
27-07-13 – Nick Hubble

Has the Chinese Economy Hit the Great Wall?
26-07-13 – Bill Bonner

Crisis, Capital Controls, and Accidents of Birth
25-07-2013 – Doug Casey

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can 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.
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Rod
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If house prices go down our banks follow

wpDiscuz
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