Question: Exactly what kind of world is it we live in when ordinary people spend perfectly good free time…talking about interest rates? Answer: the kind of world where the price and purchasing power of money are uncertain.
That “thwack” sound you heard about 9:30am this morning (Eastern Time) was one solid nail in John Howard’s political coffin. We don’t honestly know how the Federal government got in the habit of claiming it could control interest rates. But that policy has clearly backfired now, with the Reserve Bank’s decision to raise the cash rate by 25 basis point to 6.5%. It’s the highest rate in 11 years.
Already the papers are full of calculations showing how much the rate rise ads to the average monthly mortgage payment. Yawn. The rise in interest rates matters most to people who are already living on the financial margin. Debtors. There are a lot of them in Australia (and in the U.K. and in the U.S.)
Of course it was central bankers like Alan Greenspan that encouraged savers to take on debt (via mortgages) when rates were low. Thus the relentless rise in rates feels a bit like a repeated sucker punch to homeowners who were sucked (and stepped into) loans that are now harder to service at higher rates. If there’s any consolation, it’s that this is what always happens at the end of a credit cycle.
And here’s a dietary thought. Maybe the silver lining in all of this is that people will be forced to spend less on luxury goods and food as their mortgage payment goes up. At the end of the rate rise cycle, we’ll have a fitter, smarter population. Take that obesity epidemic!
Dan Denning
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Jono on 8 August 2007:
Not a single article has mentioned the role of fractional reserve banking and the reckless expansion of credit that has taken place in the last 10 years.
The central banks of the world are like Teflon.. nothing sticks.
Comment by Rowan on 9 August 2007:
I believe the issue of housing affordability is going to be it's own undoing??? With the Labour Party running around making it the issue of the day, if elected there will have to be a concerted effort on their behalf to deliver results in their first term in office. With raising the cash incentive to new homebuyers out of the question due to it's inflationary affect and reluctance of the states to give up any of their tax base, the only option will be to pour federal money into land development increasing it's supply. Couple this with a decline in demand due to low affordability and rising interest, could we be heading for a perfect storm? Do I hear the word "Deflation" ringing in my ear?