Thursday, July 11, 2013

Making Interest Rates Interesting

On the first Tuesday of every month here in Australia, journalists and business analysts gather around computer monitors to watch a magical number.

If the number changes, it becomes news; if the number does not change, it too becomes news.

Can you guess what this number is?


You're correct - it's the official cash rate set by the Reserve Bank of Australia.

About 2PM the announcement is made, with business-y types sitting at computers shouting out the number in a self-important fashion, making for an excellent soundbite on that evening's news.

Traditionally, politicians, specifically Treasurers and sometimes Prime Ministers, will spin their economic prowess if the number is lowered or stays the same. They will then sternly look down the barrel of the camera, and in a school boyish manner, tell the banks and lenders that they must 'pass the rate on'.

Everyone goes home, and waits for the next first Tuesday of next month, but in the meantime, they will speculate and speculate about what the interest rate will be, and I would dare say, bets are taken on it.

For instance, some data on unemployment and slowing of the economy may come out, which leads to the instant inference that the RBA must be going to lower rates - if they don't, business journalists will ruffle through the meeting minutes, desperately searching for evidence on why they didn't.

Such is the madness of capitalism, isn't it?

So what does it mean for the common man and woman, or woman-man, or man-woman?

If you have a mortgage, obviously it means something - it could mean that you pay $50 less that month, or $100 less, or $50 more a month to live in the bank's house and to make profit for a bank CEO who is  making far more than you.

In the current economic environment however, interest rates are at record lows everywhere, and close to 0% in the United States.

It's a sort of an economic lever - if the economy is growing too fast and inflation becomes a problem, the interest rate is risen - meaning people pay more for the bank's house and therefor spend less on other s***, such as televisions.

If the economy is sluggish, as is the case worldwide, including Australia with our floundering retail sector, the rate is lowered - people pay less for the bank's house and therefor spend more on other s***, such as televisions, maybe if a video game for little Jimmy.

In other words, on a consumer level it plays the workers and consumers like a fiddle - monetary policy, as it's called, would be useless if everyone were rich, which ironically, is the promise that capitalism makes.

But in reality, you're not - that $50 a month becomes a blessing or a curse, depending on whether or not you're paying more or less.

Still and all, the media treat the RBA's announcement as if Moses has come again each month announcing the Ten Commandments with a few additions, either:

"Thout shall spend!"


"Thout shall save!"

It probably garners so much attention religiously because Australians love BIG houses, so along with that, they have big mortgages to pay for the BIG houses.

The floorspace of an average Australian home is marginally bigger than that of America's, and easily up to twice that of a typical Western European home; such is the Great Australian Dream and perhaps the typical Australian male's need to compensate for shortcomings in other areas.

When the kids have all gown up and moved out and have big mortgages of their own, what are ma and pa supposed to do with a big house?

Why, use it as their own personal bank of course - 'refinance' and borrow against the equity of the home and live it up Big Willy style.

And if there's a divorce in the meantime, the house will probably be sold, and the money pissed away on the kids by either parent on anything they want to keep them on 'their side'.

So, the interest rate is intrinsically linked to the marketed Australian way of life - BIG houses with big mortgages - any other pursuit is worthless and not worth the mention.

Unwittingly though, it really boils down to the loyal consumers of Australia being played like suckers through monetary levers - they suck up every announcement and feel a part of the system.

If this is what they mean by 'economic participation' I'm staying on the bench.

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