Why are some people making a big song and dance about interest rates going up? Surely they could see it in the future, i.e. things were so low that the only way was up?

I was paying 8% in 2008 just before the GFC and it was killing me. But at the same time house prices were still what I would call affordable. The link between interest rates and house prices was pretty clear and its normal supply and demand.

So why are people making out that its unexpected?

Plenty here will remember the years of 18% from the big banks

FormulaNova said..
...So why are people making out that its unexpected?

I thought bitcoin would go down. Unexpectedly it turns out myscreennam is up 4.6% since June last year.

I thought Macro was talking nonsense. Unexpectedly it turns out he might be right.
www.abc.net.au/news/2023-02-07/superconducting-cables-reduce-electricity-lost-in-the-grid/101936866

....

mmmm, unexpectedly I can't think of any other examples of when I stood corrected and thus I have no witty punchline for this post.

....which is very unexpected....

Harrow said..
You have to pay the bar tab for your party eventually. Might have been better off to have people paying for drinks as they ordered them.

Good explanation! if you start a podcast explaining macroeconomic policy like this i would totally subscribe!

Carantoc said..
I thought bitcoin would go down. Unexpectedly it turns out myscreennam is up 4.6% since June last year.

I thought Macro was talking nonsense. Unexpectedly it turns out he might be right.
www.abc.net.au/news/2023-02-07/superconducting-cables-reduce-electricity-lost-in-the-grid/101936866

....

mmmm, unexpectedly I can't think of any other examples of when I stood corrected and thus I have no witty punchline for this post.

....which is very unexpected....

I was trying to by a Bug-a-salt all year for a reasonable price.
They used to cost $20-30 now $80-$120.

Yeah, we've had it pretty sweet for a bit, and now the reserve bank are using their blunt instrument to try to bring inflation down by putting people under financial stress. Some people are going to lose their McMansions and jet skis, which is maybe needed, but it's now also putting the pinch on people who are renting, a lot of which couldn't get a mortgage because they don't earn enough for a bank to give them one.
Now they're struggling to
a. Get a rental, because landlords want (and can get) top dollar from would be tenants, so they can continue to pay the mortgage.
b. Pay the rent.

when my parents bought the house I grew up in, interest rates were right up there. Dad was earning a lot less than what I earn now. And yet they were still able to pay off a house on a large block in Vic Park, 5 minutes from the city, in the space of 20yrs. And they did it on a single income. Despite the low interest rates now, the price they paid for the house wouldn't even get you a crappy run down one bedroom unit now. Comparing the high interest rates of yesteryear to how it is now ain't a valid argument.
Rising interest rates with the housing market the way it is now doesn't just screw the people in the McMansions, it screws everybody unfortunately. And that's why people are panicking.

I don't think people were thinking interest rates would never go up, more just not expecting continuous rises each month. Inflation has (apparently) started to drop, but they (the reserve bank) have decided to keep forging ahead with rate rises when do they stop?

Subsonic said..
I don't think people were thinking interest rates would never go up, more just not expecting continuous rises each month. Inflation has (apparently) started to drop, but they (the reserve bank) have decided to keep forging ahead with rate rises when do they stop?

The RBA reminds me a lot of what my eldest daughter was like when learning to drive. When we started going up an incline, she didn't instinctively press down on the accelerator early on to prevent the car from slowing down. Instead, it wasn't until we'd lost a fair amount of momentum that she'd realise, and by then needed to really push the pedal down quite hard to try and recover speed. Then, once we reached the crest and the road levelled out, she wouldn't ease her foot off the accelerator early enough, so the car would start to accelerate rather quickly. It wouldn't be until we were suddenly doing 80 in a 60 zone that she would realise just how fast we were going and then had to apply the brakes. However, she'd be a little shy with the brake, not applying them enough early enough, and then would need to really stomp on them when we were suddenly about to run up someone's rear. All of this resulted in a rather uncomfortable ride for the passengers, chewing up a lot more petrol, tyres, and brake pads than necessary.

FormulaNova said..
...Surely they could see it ...

Flying Dutchman said..
Life is full of unexpected surprises.

Sometimes people just don't seem to be able to see the obvious

Sometimes people just don't want to see the obvious

Sometimes people just don't want to read the obvious, so they hide from the good folk who are trying most politely to point out the bleeding obvious to them

And then, after 24 months of some people refusing to accept the obvious, they ever so slowly start claiming that what they said wasn't what they said......

....I guess it means that they eventually started to accept the obvious....??

FormulaNova said..

airsail said..
The reserve bank got dragged over the coals when the governor said rates wouldn't rise until 2024. Now they are playing a different game, telling all that they are going to keep rising in the future.
At least then some might think again before overextending themselves and others might rein in their spending. If this happens to be the last rate rise, and the reserve bank got it wrong, again, so be it, no harm done.

Its a sad state of affairs that we are in a position where houses are over-valued so highly, that not only do people think its normal, they don't want to miss out... and then interest rates come into a 'normal' level and they are shocked by it.

I think the fault rests at the feet of the idiots that allow housing to become the Australian get rich quick system.

Define "normal" though?

totally agree, housing should never have been allowed to become about getting rich.

FormulaNova said..

Subsonic said..

FormulaNova said..

airsail said..
The reserve bank got dragged over the coals when the governor said rates wouldn't rise until 2024. Now they are playing a different game, telling all that they are going to keep rising in the future.
At least then some might think again before overextending themselves and others might rein in their spending. If this happens to be the last rate rise, and the reserve bank got it wrong, again, so be it, no harm done.

Its a sad state of affairs that we are in a position where houses are over-valued so highly, that not only do people think its normal, they don't want to miss out... and then interest rates come into a 'normal' level and they are shocked by it.

I think the fault rests at the feet of the idiots that allow housing to become the Australian get rich quick system.

Define "normal" though?

totally agree, housing should never have been allowed to become about getting rich.

I forget the exact term, but there is a level of interest rates that is deemed typical/normal around the world. It is a level where you would expect to create an economy that functions well, with enough interest to attract capital but not so high that it stifles investment.

I forgot where I read about it, but when you consider it, economies do not work well on low interest rates or high interest rates. Too low and there is no incentive to save and thus make money available to be lent to others. Make it too high and no one wants to borrow it and the economy slows.

Fair enough, and i suppose thats true when speaking of loans.


I'm certainly no expert on economics, but i'd always been taught that "money on the move" is good for an economy, and tightening of purse strings is bad. People spending money keeps business thriving, because someone else prospers from the spending, and so on and so forth. But i guess theres a lot more too it than that, that i haven't thought of.

ok said..
What happened last time??

The rich got richer, the poor got poorer and everyone complained the world was becoming worse than it used to be.

The young folk complained about how easy the old folk had it, and the old folk complained about how lazy the young folk are.




But- you could get a bug-a-salt for tuppence-ha'penny

When interest rates were record highs 17% the average mortgage was say $70k and if I remember right as a tradie I was getting $16.80 / hr, I survived that but next time interest got to double digits, I bailed, then nearly as soon as I sold hey presto interest dropped housing prices boomed and I nearly had enough for a deposit ! It's a stupid system and non of the experts have anymore of an idea what's going to happen next than you and I

Carantoc said..

FormulaNova said..
...Surely they could see it ...

Flying Dutchman said..
Life is full of unexpected surprises.

Sometimes people just don't seem to be able to see the obvious

Sometimes people just don't want to see the obvious

Sometimes people just don't want to read the obvious, so they hide from the good folk who are trying most politely to point out the bleeding obvious to them

And then, after 24 months of some people refusing to accept the obvious, they ever so slowly start claiming that what they said wasn't what they said......

....I guess it means that they eventually started to accept the obvious....??

Who was the bloke on here that was promoting



Bet he's having a good giggle! I bought and read it but lent it out and cannot recall who to. Bummer.

Anyhow the message what sprung forth from the pages was the astonishing level of corruption that has permeated the banking industry from it's inception. Not that I didn't know because I chose to read outside of the history books recommended to me by the overpaid education shills at university.

Like this one.




It is a tome of note. Masses of references. Of course Griffin is a Conspiracy Theorist. That's one of those blokes who dig a bit below the surface and uncover information which makes a monkey of the Official Explanation.

Read it and you will learn how Big Banks financed Lenin and Trotsky to overturn the Russian revolution and install their brand of communism. Which consequentially resulted in the deaths of


That might have a little impact on the National Psyche don't you think? Any wonder The Orcs have a dim view of Western morality.

These "Financiers" are at the very top of the wealth pyramid and have perfected the art of fleecing the general public in plain daylight. They've been feeding the war machine on both sides for centuries.

The whole system is rotten to the core.


The Federal Reserve has never been audited. Ron Paul tried for years. I don't think anyone has even ventured to audit The Bank Of England.


Is this one of the reasons crypto currency presents a serious threat?

But never mind chaps. Just suck up the interest rates rise and work a little harder.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.Henry Ford

I read an article on the weekend about why raising interest rates to control inflation is unfair and also explained a much better way to do it.

Firstly, about 1/3rd of households have a mortgage, so raising interest rates is hitting them the most and it means a portion of the population has to carry an unfair proportion of the burden of controlling inflation. Meanwhile, housing prices drop so those that have cash can buy in cheap, adding to the divide between the rich and poor. Additionally, the banks are scooping more cream while all this goes on, since they are not borrowing all their lending funds from the RBA and they pass on the interest rate hikes immediately to mortgagees but not to savings accounts.

The alternative idea was a forced savings plan. Instead of having 1/3rd of households hand over a lot of wealth to the banks, you could force everyone to save some money. This has a few advantages. Firstly, each household has to suffer less on average since the burden is being spread over a lot more people. Secondly, people get to keep their wealth instead of giving it to banks. Why should the public suffer and banks make a profit from inflation? The more you think about it, the more bizarre the concept becomes. Thirdly, when the economy starts to tank, the force savings are released back to households to spend.

I guess it won't ever happen since the implementation would be complicated and controversial.....just how do you implement the forced saving....who has to save how much, where do you put it, and what are the exact terms for its release. Also, the banks would never let it happen.

I have my own additional view.... raise interest rates on investment loans, while removing negative gearing for real estate.

Harrow said..
....The alternative idea was a forced savings plan. ...

Interesting though that no economist suggest this forced system could start with government and the RBA.

Every iteration of the idea is based on the notion that somebody somewhere knows (or will know) how to manage an individual's affairs better than the individual.

..and those somebodies are also the people who have created the problem they now think only they can solve...



The RBA has a mandated 2 to 3% average inflation rate to maintain and interest rates as the only real tool (and a very re-active and slow tool it is).

If the various governments had to invest into the Future Fund when inflation was above the target but could then withdraw those savings when it was below then there would be a massive chunk of the economy working in-sync with the RBA and not against it.

Cap government spending at 15% of GDP, with various levels of mandated minimum % saved in the Future Fund (depending on the economy), but allow any withdrawals (mandated depending on the economy) to be government spending cap free.

Essentially the same forced savings idea for individuals but done in a more centralised way. Tax the budget when it is strong and provide welfare when it isn't.
Simples.


(PS. May need to archive this so people can quote Carantoc on it in 100 years time)