All Posts Tagged With: "consumption"

Three years ago, the best treasurer in the world, Wayne Swan, described the then 3% level of official interest rates as ’50-year emergency lows’. Now we’re approaching these levels again.

Interest rates fall when people are more willing to save and rise when people want to consume and borrow. But what happens when central banks start fiddling around with this delicate balance? What if they start to manipulate interest rates? Disaster!

It’s a given that increases in household wealth support higher consumer spending. For one, when people see their share portfolios or housing investments go up, they are, in fact, richer on paper. This may give them more disposable income to actually spend. Or maybe they just feel richer and spend more freely (the wealth effect).But one thing we recall seeing at the peak of the U.S. housing bubble is a massive increase in borrowing against home equity.

Giving people who don’t pay a lot in taxes even more money is even more popular. So in that sense, the arrival of thousands of dollars in government cash to various Aussie households will ‘work’ in the sense that it distracts people from the ongoing disaster that is the world financial crisis. “Look honey! Free bread. Let’s go to the circus!” Please note that shuffling a bit of cash around will not lessen a national debt-to-GDP ratio of around 140%. Nor does it do much to create long-term jobs…