The Economy

[Robe]

Gee I'm dumb.

Will someone please explain to me how the Reserve Bank makes life better in Australia by putting up interest rates so that ordinary people have less money to spend?

[Bluefreak]

Originally Posted by Robe

Gee I'm dumb.

Will someone please explain to me how the Reserve Bank makes life better in Australia by putting up interest rates so that ordinary people have less money to spend?

That right there is the key... If we (ordinary people) spend too much, inflation goes up and everyone suffers... They raise interest rates to stop spending and curb inflation.

Google search it to gain a better understanding...

[photn]

Originally Posted by Robe

Gee I'm dumb.

Will someone please explain to me how the Reserve Bank makes life better in Australia by putting up interest rates so that ordinary people have less money to spend?

im in the same BOat!!!!

[Robe]

Thanks Blue.

Now tell me how chucking in a virgin stops the volcano from erupting.

[merlin]

I thought I understood it, but there is always something else to learn when it comes to this.

Isn't the crux of it that they are putting up rates so people stop spending so much/getting into so much debt? i.e. every bogan and his dog is currently maxing out their super duper credit cards with plasma t.v.'s that they can't really afford.

[Bluefreak]

Originally Posted by Robe

Thanks Blue.

Now tell me how chucking in a virgin stops the volcano from erupting.

If it were up to me, the volcano would still erupt... I'm afraid I just couldn't waste a perfectly good unused unit...

Raising interest rates is a way of controlling inflation. Higher interest rates reduce demand in 3 ways.
*Discourages borrowing
*Increases the rate of saving (high interest rates are a good reason to save)
*Reduces prices (such as housing)

Inflation is normally healthy at around 2-3% per annum, which is also the Reseve Bank's target. They controll it to guarentee healthy long-term growth of the economy.

What would happen if inflation was not controlled?
Prices will increase and increase, and inflation would go out of control, eventually the value of our currency will collapse. This is otherwise known as hyperinflation.

[Robe]

Black, how can you save money you don't have, if people have less cash to spend they are going to need more credit to get by and where are they going to live?

Merlin, so why not ban advertising of stuff we don't really need, like what happens with smokes.

Maybe big TVs and credit cards need scary warnings on them.

How would that look? At the end of an elegantly filmed TV commercial for some expensive product comes the compulsory Governemnt warning announcement,
"Buying things you can live without, especialy on credit, really stuffs up the economy, you dumb bogans!"

I suspect that whacking up interest rates makes it look like something serious and clever is being done. We mugs all get a punch in the guts but nothing actualy gets fixed.

Originally Posted by Robe

Black, how can you save money you don't have, if people have less cash to spend they are going to need more credit to get by and where are they going to live?

The other side of the coin is not upping interest rates... If you had a $50 note in your wallet today, you could buy 50 sausage rolls. If overnight the economy collapsed, your $50 may only buy you a single pellet of chewing gum.

Having less cash in your pocket is going to curb spending. Creating less demand. It'll make your money more valuable. So that your sausage roll still continues to be $1 ($1.05 in 2 years time)

[EA2BA]

A good example of supply is demand is bananas, think if everything went like the bananas did, where would we be, in deep crapola...........

[Hardtopxb]

LOL.So the solution is.Raise interest rates.Make us poor idiots pay more, and give it to the banks.They really deserve it.(I realise the problem,just bieng sarcastic)

[Robe]

I do not believe that throwing in a virgin stops the volcano from erupting because that makes "the gods" happy.

I do not believe that jacking up interest rates because that makes "the economy" happy helps Australians to lead better lives.

[pecker73]

Anyone got the number of a decent clairvoiant ?

I'm trying to find an extra $60 bucks a month for the DEMON mortgage... Its gonna be a long search ! :

What's wrong with the Reserve Bank banging out a few extra notes a week for everyone... I am all for the "Withdraw $1, get one free !!" : :

[EA2BA]

If money is more valuable to you as it doesnt buy very much, then you save it and keep it till you have enough for what you want, or you have none to spend, so then you will not borrow money as you can't pay it back and artifically create money and hence weaken the currency. Some people think printing money is a solution as well, if only.

[EA2BA]

Economics is a hard subject to explain and grasp at times, sure people get hurt by rates going up etc, but in the long run if nothing is done everyone gets hurt.

[Work Horse]

Originally Posted by Robe

Black, how can you save money you don't have, if people have less cash to spend they are going to need more credit to get by and where are they going to live?

Merlin, so why not ban advertising of stuff we don't really need, like what happens with smokes.

Maybe big TVs and credit cards need scary warnings on them.

How would that look? At the end of an elegantly filmed TV commercial for some expensive product comes the compulsory Governemnt warning announcement,
"Buying things you can live without, especialy on credit, really stuffs up the economy, you dumb bogans!"
I suspect that whacking up interest rates makes it look like something serious and clever is being done. We mugs all get a punch in the guts but nothing actualy gets fixed.

That's gold Robe :

Unfortuanately just like smoking, people will decide it's thier right to do as they wish.

[EA2BA]

Robe in effect you save the money you dont have as it is put into paying the mortgage and not buying a meat pie.

[JG66ME]

I understand why a lot of people think its a realy bad thing. BlackLS has got it 100% right. Those of us that remember rampant inflation know that a slight increase in intreast rates is far better than inflation of 8 to 10%.

Example, a new Ford Falcon in 1973 cost about $3500. By 1978 the same car (XC 500) was about $7000. Now imagine, a BA XT costing $32000 new and a BF mk2 XT cost $67000 and you will get the picture. Wage demand explodes and unemployment does the same. The medicine to cure this is far worse.

High intreast rates also dosn't automaticaly mean the banks get richer. They have to pay higher intreast on cash deposits. In 1989 you could get up 18% on a three month term deposit. Hence people tended to save.


I think this is the last rise. Most likley see it fall again march next year.

Steve

[Neeek]

I'm constantly amazed at how such a small interest rate rise seems to spell so much doom and gloom to so many... although I suspect that in part, it's the media that's to blame for exaggerating the problem...

I've got a nice fat mortgage, and this rise (and the previous ones) don't bother me much. Why? Because when the banks told me how much my wife and I *could* borrow, we damn nearly fell off our chairs laughing... it was ridiculous. Had we borrowed everything they offered, we'd be screwed. In fact, we'd have been screwed at the first interest rate hike earlier in the year.

Instead, we chose a more sensible amount that we knew we would be capable of covering unless disaster struck, and indeed we can continue to pay it at the minimum rate should one of us suddenly be out of work.

Whilst I know that some people will find it tough, chances are it was tough before this rise, or the one before it - the extra 0.25% pa doesn't alter things too drastically unless you have a HUGE mortgage, and frankly if it does affect you that much, you borrowed too much in the first place and only have yourself to blame.

Too harsh an opinion?

[Bud Bud]

Its quite simple really, think of it like this if there is certain amount of money floating around in the economy, then this will dictate the price of goods through demand.

Take money out of that same economy (via increased taxation or interest rate hikes) and the demand for goods will begin to fall. This has the effect of lowering the cost of said goods creating lower inflation. Go too far and then inflation will slip into negative territory and the economy will shrink. If this happens for an extended period of time, the regressing economy will enter a recession. Not good!

On the other hand if the money flow is left unchecked in this same economy or worse extra money is poured (like petrol onto a fire) into a good economy via tax cuts or lowering interest rates or worse a real wages blow-out (not just indexed) then the demand for those same goods goes up. It is this increasing demand that fuels inflation.

The example that JG66ME gave regarding the Falcons pricing structure was a good example as inflation was running rampant in the 70's until we had mass lay offs and a recession at the end of the 70's and early 80's.

The reason that we had such a big housing boom at the start of this century is because in effect people stopped spending money in the 90's on the back of high interest rates. Most experts acknowledge now that we went too far with interest rates at the time (17.5 percent).

The housing industry just lay dormant until money began to flow through the economy again. Such was the depth of the recession (that we had to have) that this housing boom happened on the back of historic low interest rates. Now those rates are set to slowly rise (with a few retractions along the way) over the next 20 years or so.

[knighto42]

Originally Posted by Neeek

I'm constantly amazed at how such a small interest rate rise seems to spell so much doom and gloom to so many... although I suspect that in part, it's the media that's to blame for exaggerating the problem...

I've got a nice fat mortgage, and this rise (and the previous ones) don't bother me much. Why? Because when the banks told me how much my wife and I *could* borrow, we damn nearly fell off our chairs laughing... it was ridiculous. Had we borrowed everything they offered, we'd be screwed. In fact, we'd have been screwed at the first interest rate hike earlier in the year.

Instead, we chose a more sensible amount that we knew we would be capable of covering unless disaster struck, and indeed we can continue to pay it at the minimum rate should one of us suddenly be out of work.

Whilst I know that some people will find it tough, chances are it was tough before this rise, or the one before it - the extra 0.25% pa doesn't alter things too drastically unless you have a HUGE mortgage, and frankly if it does affect you that much, you borrowed too much in the first place and only have yourself to blame.

Too harsh an opinion?

Spot on I'd say - my wife and I were in the same boat when we bought our house a few months back. The amount of money the bank said they'd lend us was crazy considering what the repayments would end up being.

Couple that with people being given mortgages for 110% of the property value and you've got a serious problem. All of a sudden you can't afford to pay the mortgage - but you owe $550,000 on a property worth $500,000. Not a good place to be.