John Howard Has No Control Over Interest Rates in Australia

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Anyone know if the credit crunch is officially over yet? Just checking.

The US Fed was busy pumping US$38 billion into the financial system in the last two days. “The Federal Bank of New York added US$6 billion in 14-day repurchase agreements, US$20 billion in 14-day repurchase agreements, US$7 billion in seven-day repurchase agreements and US$5 billion dollars in one-day repos,” according to wire services.

Yep. Everything is probably fine. Enjoy your bread. Take a look at that circus. Look, it’s Elvis! Hey King!

The Fed is attempting a giant credit transfusion. But its patient, the fat, bloated, ten-year old credit bubble is leaking money in all sorts of directions. We reckon the nominal highs on the Dow are merely maintaining the illusion that things are fine.

“The Australian jobless rate is certainly on track for more record lows and we may even see the unemployment rate with a three in front of it,” says CommSec economist Martin Arnold. The jobless rate is headed under 4%. The fuzzy logic is this means another rate rise.

Wages are haven’t enjoyed their very own bubble yet. That’s because of the massive deflationary influence of China and India on global labour markets. But Australia finds itself in a tight spot. Maybe it’s time for a wage bubble. We know plenty of people who wouldn’t complain. But rising wages might prompt the Reserve Bank to raise interest rates yet again—putting even more Australians facing “housing stress” to the sword.

Do you think John Howard regrets his claim that interest rates would stay low in Liberal government? Granted, nominal rates are lower than previous periods. But the low rates have encouraged Aussies to take on even higher debt loads in relation to disposable income. The rate may be lower. But the servicing cost is higher as a percentage of disposable income. When you borrow a bundle, even a low rate means big payments.

Aside from the fact that he has no control over interest rates, Howard made the promise at a time of historically low interest rates worldwide. Economists even had a name for it, “The Great Moderation”. What a fancy name for a short-lived idea. Like everything else in markets, interest rates go in cycles. China’s manufacturing prowess, low labour costs, and recycling of trade surpluses back into the US bond market have kept US rates abnormally low. The rest of the dollar-pegged world followed suit.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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3 Comments on "John Howard Has No Control Over Interest Rates in Australia"

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kayle
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1) The nominal highs on the Dow, a result of the recent Fed cut with promises of more to come, are IMO a bull trap – timed with the scent of bonus money at year-end. I bet the real effect of the deflating credit bubble on the stock market will show up in Q1 08. 2) I think Howard made that promise foreseeing that citizens would focus all their attention on INTEREST RATES, rather than on PRICES. In a credit bubble, it’s a lot easier to keep interest rates low (which is partly what creates the bubble) than it is… Read more »
kage
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“The Australian jobless rate is certainly on track for more record lows and we may even see the unemployment rate with a three in front of it” – gee I think an election might be imminent. The greatest con is that everyone thinks the government can and should set interest rates. Price fixing always ends badly. kayle, If you want to see something scary, copy and paste the following link into your browser, go to page 8 and gaze upon chart L. Be warned this is very graphic and could scare the kiddies. The electorate on the other hand, doesn’t… Read more »
Anon
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It has more to do with where we are on the K-wave, than which government is in power at the time. Interest rate is like a ‘front door’ policy many take interest in. Broad money supply is the ‘backdoor’ policy. Looking at the broad money supply figures over 10%pa for the most recent liberal term in office, it appears that Australia’s ‘prosperity’ was largely bought on credit. Sadly, the reserve bank doesn’t have control of banking regulation in Australia – that is left to a separate department – APRA. In order to make holistic monetary policy, the two would be… Read more »
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