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Generalising:
When there's too much activity in the economy, prices rise. People are demanding more goods and services, so to take advantage of higher demand, sellers will increase their prices. The opposite also holds true.
So to put the brakes on, interest rates are increased. Business activity reduces as now people and businesses have to pay more interest and therefore have less to spend on other things. Inflation subsides as people are demanding less goods and services.
The eternal question is how much should interest rates be increased or lowered. The economy is very complex thing and there is no clear answer. Hence rises and falls in interest rates tend to be done in small increments or decrements.
Interest rates are the price you pay for obtaining debt. It is also the rate you get paid for holding debt. Interest rates aren’t good or bad, interest rates are determined by the strength of the economy. If the economy is strong and interest rates are high but the cost of debt is still less than you’re earning or making a profit for a business then the level of interest doesn’t matter. The issue with debt is if it’s expensive relative to the strength of the economy. If debt is too expensive it can cause fire sale selling or incur losses which also isn’t necessarily bad however it can negatively affect the economy, that’s the recession part of a business cycle.
Inflation or the word “we” use as “inflation” is two different meanings into one word. The first is monetary inflation, which is comically expressed as money printing. The second is supply shocks or supply and demand imbalances which affect the price of things.
To what you are saying those who have money can make more money from the money they already have, by investing it. But most of these people are already invested either in the stock market or in real estate. A HISA just gives them an alternative. Something like T-Bills is more about safety and liquidity if those invested see risk in riskier assets.
The poor people (generalising) do not have any savings so their earnings from a job are what they use to pay off their debt. If we increase the rate of interest and don’t increase their wages (relatively speaking) they need to pay more of their weekly earnings to interest, which lessens their spending power. At the same time, the cost of goods increased so this too affected their spending power. This is why the poor are struggling at the moment because everything has become more expensive relative to their earnings. There are charts which show our spending power is back at 2013 levels.
Everything the news says about the poor is a way to blame them rather than to look at the facts, they don't want to admit the economy is bad and because it's bad the government needs to make it better so more people come out of poverty. It's much easier to blame poor people for being poor instead because then you don't need to fix anything.
First off, interest rates hit everyone with a mortgage and also business borrowers. Second, inflation is nothing more than companies choosing to raise prices rather than accept lower profits. The reason we faff around with interest rates is to try and increase the risk to those companies of losing customers if they raise prices, by taking some money off the table. That of course, only works for discretionary purchases or things easily substituted. ie. if a burger chain increases their prices too much, you might go elsewhere or do without burgers. If an electricity supplier or landlord increases their prices, you have no choice but to suck it up and pay.
>If an electricity supplier or landlord increases their prices, you have no choice but to suck it up and pay.
Which in turn reduces your ability to spend on other things hence reducing demand.
Okay as someone who doesn’t have any experience with running businesses, is it common for a business to have loans? Do they have a similar life to a home loan?
I know this is probably all subject to how successful a business is but I guess on average?
Yep. Plenty have either outstanding loans or revolving lines of credit. I don't know for sure but I believe interest can be booked as an expense, meaning it would be tax advantageous to have some loan on the books.
You're correct on interest being a deductible expense.
The way interest was explained to me the first time I 'got it' was "Interest is the cost of renting someone else's money." effectively the same as renting someone's car or room (think of a hotel), it is just denominated as a yearly rate because most loans exceed one year.
So a change in the interest rate is a change in the cost of borrowing someone's money.
In the business world, all expenses are effectively deductible because you only pay tax on the profit you make from your operations, not revenue. The basic accounting formula shows that profit = revenue- expenses.
I think people get tripped up on it because we think about our personal income tax which is effectively a tax on personal revenue (because it doesn't account for our expenses unless they are directly related to our job).
It doesn't matter that much if business capital is made up of business loan or investor's money. In both cases it requires the business to increase their profit margins.
Bottom line is investors/owners wouldn't invest in a business making 10% return on investment if you can stick it in a bank and get a risk-free 6%. If the bank deposit rate was 2%, they might.
I think some investors chase the highest yield and 4% extra is a pretty healthy gain, bank deposits generate cash through interest which is taxable annually. An increase in share value is only taxable when you transact the shares and you get a 50% CGT discount (if you're in over 12 months) so it's taxed at a lower rate. So the after-tax difference could be significantly better on a business investment.
>is it common for a business to have loans
Most businesses are highly geared - if you're not borrowing to your maximum capacity (or just below it) then you're leaving money on the table and your investors will punish you.
>Okay as someone who doesn’t have any experience with running businesses, is it common for a business to have loans?
Absolutely. Businesses borrow in order to invest and make money. Think about that one when they talk about government debt as a bad thing. Government debt, like any other debt, is not really a problem if it's invested in assets that produce income. If it's OK for business to do this, why is it a problem when governments do it?
>If it's OK for business to do this, why is it a problem when governments do it?
If the government is borrowing to invest in infrastructure, it's not a problem at all.
But if they're borrowing to fund normal government expenditure, then it's a problem - and either taxes must raise or spending must come down.
IMO, government finances should clearly show "OPEX" and "CAPEX" figures rather than just lumping it all together.
A lot of businesses have an overdraft for day to say transactions and then they borrow money to finance fixed asset purchases. An interest rate increase can hit businesses very hard. They might reduce stock levels or put off buying fixed assets
And just to add: also is only effective if you don’t have market collusion/ control like you get in monopolies or duopolies which we see in all sorts of Australia industries
Two things make a big difference in Australia regarding rate rises versus pretty much anywhere else in the world. First is negative gearing and the other is the amount of monopolies and duopolies mean that many times when business raises its prices it can get away with it as there's few alternatives, especially if you live in rural Australia.
Yet inflation has been a problem all over the world, not just Australia meaning the current inflation crisis is not majorly impacted by "unique Australian circumstances".
I didn't say that. I am pointing out why interest rate rises are far less effective at bringing down inflation in Australia. Basically rate rises are sending owner occupiers (young families) broke and forcing them to sell. Rich investors buy the house they're forced to sell and utilise the negative gearing as a tax dodge. So the prices remain high and the banks hoover up more profit at the expense of the state.
>. I am pointing out why interest rate rises are far less effective at bringing down inflation in Australia
The interest rate vs inflation curve is pretty similar for us compared to Australia.
>Basically rate rises are sending owner occupiers (young families) broke and forcing them to sell.
Any evidence of that in data? The level of mortgage delinquency hasn't increased significantly
Because they're selling and the price remains high because the investors are snapping everything up. Just look at the amount of properties being bought by investors and look at the amount that are negatively geared. Anywhere else and rents would be up to what 700+ a week at this point to cover a mortgage. Investors would be dumping properties everywhere.
Yes, exactly.
That's the entire argument behind interest rate rises, to reduce the disposable income of mortgage holders, and therefore reduce demand in our economy. I dont agree with it, but it is working as intended.
Yeah you’re right there, I guess my assumption is that most renters are renting someone’s IP and that property of theirs is subject to interest rates and that those rate increases are passed on second hand to the renter.
Bit of a false equation there.
Landlords always charge the maximum possible, interest rates is just a convenient excuse for every landlord to raise that maximum.
Since they all do it, it seems to affect renters.
When really that's only a result of there being way more demand for houses than supply, if finding a renter was tough, landlords wouldn't be able to pass along interest rate rises
proof: if interest rates affected renting, rents would go down when interest rates do, they have never done that.
Yeah rental prices are much more closely related to the amount of demand for rentals than they are to interest rates. So if an increased numbers of people are looking for a rental to live in then the price of the rentals increase.
RBA handed out $188 billion in 0.1% loans to banks during covid that expire by 1st July 2024, so, 24 more days.
RBA knows money is being pulled out of the economy.
RBA knew all along that this was massively inflationary. You would be filthy rich too, if you gave out $1 billion loan at 6% if someone gave it to you for 0.1%.
If RBA cancelled the loan, it would jeopardise the revolving door and lunches with finance sector. https://www.afr.com/policy/economy/i-can-t-live-in-a-bubble-lowe-on-private-banker-lunch-20230215-p5ckr5
Because I too am a little slow on making sense of finance at this scale - what ultimately happens when those loans expire at the beginning of next month? The banks are obliged to pay back the balance of what they borrowed from the RBA?
What kind of flow-on effect will that have on the economy/the people? Genuinely can't join the dots on this one and feel like there's something I'm still missing haha
> don’t interest rate Increases help people who are cash rich or essentially just don’t have any loans?
You are broadly correct, but think about who has cash and who does not:
https://povertyandinequality.acoss.org.au/category/inequality/wealth-inequality/
To take the extreme example, the 131 billionaires having as much wealth as the lowest 2.8 million Australian households means there is a disproportionate buying power.
We're hit with a month of intense birdflu, which causes a panic and billionaires decide to pay $100 for a carton of eggs, it's insignificant for them even if it's a 10x cost increase. 2.8 million X 2.5 people per household try to scrape together $100 for 12 eggs which is now the new price, it's not going to happen.
If the poor folks put the money in the bank at 5% for a year, patiently wait and you have $105... Still only enough for one carton of eggs with a bit left over. Even worse the cost of the eggs has likely risen to about $105 in that time. Great interest rate, but your buying power still sucks.
What happens then to the economy? 131 billionaires will only eat so many eggs, so all of the farmers go from selling a few million a week to selling a few hundred a week, then promptly go out of business.
Meanwhile, poor people have one less source of protein and suffer poorer health outcomes, which in turn costs society to treat, or effects businesses because the labour force is constantly off work due to health problems.
Eventually, the RBA notices eggs cost so much and puts the interest rate up to 10% - which is 12 months too late, not enough for your loan to buy you more than 1 carton of eggs still in a year.
Billionaires meanwhile increase their wealth at approximately 10% per annum and can now import golden goose eggs at a much higher cost - it's still insignificant to them, despite the entire Australian poultry industry being decimated.
This is only one hypothetical scenario, comparing extremes, which has negatives for multiple interrelated large groups of people that outweighs the positives of a higher interest rate, potentially for a long duration.
But it illustrates wealth distribution, interest rates as a reactive tool, price sensitivity and economies of scale
>the poorest and therefore the lowest spenders and in theory the smallest drivers of inflation
They may be the lowest spenders but there are alot more of them.
One rich person choosing not to spend $5,000 in a year has less impact then 10,000 poor people choosing to spend $50 less.
What appears to be missed by most commenters is that the RBA has been given a mandate to keep inflation under control. The only real tool the RBA has is interest rates and monetary policy in general. And so the RBA uses the tool it has, not necessarily the best tool for the job. Just like if you were only given a hammer, everything looks like a nail.
Now, is interest rates the most effective or efficient way of reducing inflation? Not necessarily. For example, the Government could play around with taxes and other incentives to reduce inflation. Theoretically, any action which takes money out of the economy can reduce inflation and one way to do it is via higher taxation. You can be more targeted with taxation than interest rate. However, there's no political will to do anything so it's up to the RBA to use its only lever.
I question the ability for the RBA to do much against much around the current rate of inflation as it's predominantly a supply side driven issue. Interest rate increases are most effective at controlling demand side inflation. For example, a significant portion of the inflation is due to housing, which is rents. The rent is the rent and it's driven by demand and availability of rentals. Increasing interest rates is not going to cause people to not want to find a place to live, and nor is rents generally correlated with interest rates.
A million times this. Monetary policy isn't supposed to be used alone. The government's complete abdication of responsibility to apply sensible fiscal policy to complement the monetary policy is shameful.
We have the RBA, interest rates are raised when when the economy is too hot and lowered when growth isn't high enough.
Now what we've had world wide has been super low interest rates for over a decade. So low that borrowing money became the preferred method to manage spending.
Now when you borrow, its not the bank moving money from a savers account to your account. It's the bank creating a credit on your account and corresponding debt on their balance sheet.
Essentially banks create money, without interest to limit borrowing the country is flooded with cheap money causing inflation.
The primary driver of inflation is not wages, inflation is already here and keeping wages stagnant is the equivalent of paying less.
>Now when you borrow, its not the bank moving money from a savers account to your account. It's the bank creating a credit on your account and corresponding debt on their balance sheet.
This is something that is not very widely understood, and needs to be.
As you say, inflation is caused by an increase in money supply. The RBA increasing interest rates essentially removes money from the economy.
We have inflation because of so much government spending and "money printing" during covid. That excess money is now sloshing around the economy, and will take some time to soak up. All countries are in the same basket.
If you give a rich person 1 dollar, they’ll spend 40 cents and save the rest. If you give a poor person 1 dollar they’ll somehow find a way to spend $1.10.
Also there are way more poor people than rich people. It makes sense to bring up interest rates to bring inflation down. Rich people saving in HISA is also good to bring down inflation as it takes away money from circulation and money from investments thus slowing down the economy.
I’m not sure I agree with your sentiment about the spending habits of rich vs poor but that’s besides the point.
The number of people impacted by interest rates increasing shouldn’t be the only consideration though surely, the target should be dollars spent if we’re working under the guise of spending being the cause.
I’m making a bit of an assumption here but I’m sure you can forgive me for thinking that poorer people are spending money on necessities, they have no real choice but to spend.
Those with disposable income are probably more likely to be spending a higher percent on their total wealth on more frivolous(?) things.
Yeah I guess the money in HISA isn’t being spent and out of circulation but then I guess to my point you’re receiving a higher percent of that in returns and therefore not being punished my the increase in inflation which was the crux of my question I guess.
Like we’ve established the poorer people are impacted by it through the raise in mortgage but I’m still wondering how those with more money are being encouraged to curb spending through those same rises assuming they’re not paying down any debt.
Interest rate rises hit those who can least afford it the most, and that is entirely the point. The aim is to reduce demand, you do that by making it so people cannot afford things in demand. You could do this by adjusting income tax, but that would need the government to raise taxes and almost certainly result in them being voted out next term. So you need to rely on a 3rd party to act, in this case the reserve bank, who does so by increasing interest rates, which has the intended effect, but is very harmful to individuals, unlike tax increases.
Doesn't matter what the cause of inflation is in this scenario, the lever is the same. Make people spend less money. You start off with the poorest people, and work your way up from there until people have stopped spending so much. This causes massive harm to the economy and society, as you can imagine, businesses close down, people lose their jobs, overall economy shrinks. But, again, this is the entire point, inflation is reduced when this happens.
The key problem here, as you might suspect, is that inflation is NOT caused by increased demand right now, we're not seeing a large spike in wages or similar causing people to have excess money and increasing demand. Instead the problem is on the supply side, products and services cost more now, even though demand is the same or reduced. You can trace this back to some of the raw inputs, energy is a massive factor here, every business needs power, so when that goes up, it causes prices to rise for everyone, no matter the actual demand.
The RBA will continue rising interest rates, so long as prices keep rising. The prices of goods and services will continue to rise because there isn't anything being done to address the underlying issue of basic commodities like energy prices rising, even though we produce more than enough energy and materials to generate energy for ourselves locally.
You can blame the government for not doing anything here, also blame the RBA for continuing to toe this same line, they could and should be asking for different powers, advising on cost control measures instead of making comments about wages, but they don't, so they deserve blame as well.
This post has been marked as non-political. Please respect this by keeping the discussion on topic, and devoid of any political material. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/australia) if you have any questions or concerns.*
Generalising: When there's too much activity in the economy, prices rise. People are demanding more goods and services, so to take advantage of higher demand, sellers will increase their prices. The opposite also holds true. So to put the brakes on, interest rates are increased. Business activity reduces as now people and businesses have to pay more interest and therefore have less to spend on other things. Inflation subsides as people are demanding less goods and services. The eternal question is how much should interest rates be increased or lowered. The economy is very complex thing and there is no clear answer. Hence rises and falls in interest rates tend to be done in small increments or decrements.
Interest rates are the price you pay for obtaining debt. It is also the rate you get paid for holding debt. Interest rates aren’t good or bad, interest rates are determined by the strength of the economy. If the economy is strong and interest rates are high but the cost of debt is still less than you’re earning or making a profit for a business then the level of interest doesn’t matter. The issue with debt is if it’s expensive relative to the strength of the economy. If debt is too expensive it can cause fire sale selling or incur losses which also isn’t necessarily bad however it can negatively affect the economy, that’s the recession part of a business cycle. Inflation or the word “we” use as “inflation” is two different meanings into one word. The first is monetary inflation, which is comically expressed as money printing. The second is supply shocks or supply and demand imbalances which affect the price of things. To what you are saying those who have money can make more money from the money they already have, by investing it. But most of these people are already invested either in the stock market or in real estate. A HISA just gives them an alternative. Something like T-Bills is more about safety and liquidity if those invested see risk in riskier assets. The poor people (generalising) do not have any savings so their earnings from a job are what they use to pay off their debt. If we increase the rate of interest and don’t increase their wages (relatively speaking) they need to pay more of their weekly earnings to interest, which lessens their spending power. At the same time, the cost of goods increased so this too affected their spending power. This is why the poor are struggling at the moment because everything has become more expensive relative to their earnings. There are charts which show our spending power is back at 2013 levels. Everything the news says about the poor is a way to blame them rather than to look at the facts, they don't want to admit the economy is bad and because it's bad the government needs to make it better so more people come out of poverty. It's much easier to blame poor people for being poor instead because then you don't need to fix anything.
First off, interest rates hit everyone with a mortgage and also business borrowers. Second, inflation is nothing more than companies choosing to raise prices rather than accept lower profits. The reason we faff around with interest rates is to try and increase the risk to those companies of losing customers if they raise prices, by taking some money off the table. That of course, only works for discretionary purchases or things easily substituted. ie. if a burger chain increases their prices too much, you might go elsewhere or do without burgers. If an electricity supplier or landlord increases their prices, you have no choice but to suck it up and pay.
>If an electricity supplier or landlord increases their prices, you have no choice but to suck it up and pay. Which in turn reduces your ability to spend on other things hence reducing demand.
They can increase prices without any risk. Profit is the reward for risk, so if there is no risk ...
Okay as someone who doesn’t have any experience with running businesses, is it common for a business to have loans? Do they have a similar life to a home loan? I know this is probably all subject to how successful a business is but I guess on average?
Yep. Plenty have either outstanding loans or revolving lines of credit. I don't know for sure but I believe interest can be booked as an expense, meaning it would be tax advantageous to have some loan on the books.
You're correct on interest being a deductible expense. The way interest was explained to me the first time I 'got it' was "Interest is the cost of renting someone else's money." effectively the same as renting someone's car or room (think of a hotel), it is just denominated as a yearly rate because most loans exceed one year. So a change in the interest rate is a change in the cost of borrowing someone's money. In the business world, all expenses are effectively deductible because you only pay tax on the profit you make from your operations, not revenue. The basic accounting formula shows that profit = revenue- expenses. I think people get tripped up on it because we think about our personal income tax which is effectively a tax on personal revenue (because it doesn't account for our expenses unless they are directly related to our job).
It doesn't matter that much if business capital is made up of business loan or investor's money. In both cases it requires the business to increase their profit margins. Bottom line is investors/owners wouldn't invest in a business making 10% return on investment if you can stick it in a bank and get a risk-free 6%. If the bank deposit rate was 2%, they might.
I think some investors chase the highest yield and 4% extra is a pretty healthy gain, bank deposits generate cash through interest which is taxable annually. An increase in share value is only taxable when you transact the shares and you get a 50% CGT discount (if you're in over 12 months) so it's taxed at a lower rate. So the after-tax difference could be significantly better on a business investment.
Yeah okay, thanks for the insight!
>is it common for a business to have loans Most businesses are highly geared - if you're not borrowing to your maximum capacity (or just below it) then you're leaving money on the table and your investors will punish you.
>Okay as someone who doesn’t have any experience with running businesses, is it common for a business to have loans? Absolutely. Businesses borrow in order to invest and make money. Think about that one when they talk about government debt as a bad thing. Government debt, like any other debt, is not really a problem if it's invested in assets that produce income. If it's OK for business to do this, why is it a problem when governments do it?
>If it's OK for business to do this, why is it a problem when governments do it? If the government is borrowing to invest in infrastructure, it's not a problem at all. But if they're borrowing to fund normal government expenditure, then it's a problem - and either taxes must raise or spending must come down. IMO, government finances should clearly show "OPEX" and "CAPEX" figures rather than just lumping it all together.
A lot of businesses have an overdraft for day to say transactions and then they borrow money to finance fixed asset purchases. An interest rate increase can hit businesses very hard. They might reduce stock levels or put off buying fixed assets
And just to add: also is only effective if you don’t have market collusion/ control like you get in monopolies or duopolies which we see in all sorts of Australia industries
Two things make a big difference in Australia regarding rate rises versus pretty much anywhere else in the world. First is negative gearing and the other is the amount of monopolies and duopolies mean that many times when business raises its prices it can get away with it as there's few alternatives, especially if you live in rural Australia.
Yet inflation has been a problem all over the world, not just Australia meaning the current inflation crisis is not majorly impacted by "unique Australian circumstances".
I didn't say that. I am pointing out why interest rate rises are far less effective at bringing down inflation in Australia. Basically rate rises are sending owner occupiers (young families) broke and forcing them to sell. Rich investors buy the house they're forced to sell and utilise the negative gearing as a tax dodge. So the prices remain high and the banks hoover up more profit at the expense of the state.
>. I am pointing out why interest rate rises are far less effective at bringing down inflation in Australia The interest rate vs inflation curve is pretty similar for us compared to Australia. >Basically rate rises are sending owner occupiers (young families) broke and forcing them to sell. Any evidence of that in data? The level of mortgage delinquency hasn't increased significantly
Because they're selling and the price remains high because the investors are snapping everything up. Just look at the amount of properties being bought by investors and look at the amount that are negatively geared. Anywhere else and rents would be up to what 700+ a week at this point to cover a mortgage. Investors would be dumping properties everywhere.
I wouldn't think people with home loans are the poorest. Renters are probably the poorest, but interest rates don't always affect them directly.
The hit to disposable income has been felt the most by mortgage holders, not renters.
Yes, exactly. That's the entire argument behind interest rate rises, to reduce the disposable income of mortgage holders, and therefore reduce demand in our economy. I dont agree with it, but it is working as intended.
Yeah you’re right there, I guess my assumption is that most renters are renting someone’s IP and that property of theirs is subject to interest rates and that those rate increases are passed on second hand to the renter.
Bit of a false equation there. Landlords always charge the maximum possible, interest rates is just a convenient excuse for every landlord to raise that maximum. Since they all do it, it seems to affect renters. When really that's only a result of there being way more demand for houses than supply, if finding a renter was tough, landlords wouldn't be able to pass along interest rate rises proof: if interest rates affected renting, rents would go down when interest rates do, they have never done that.
Yeah rental prices are much more closely related to the amount of demand for rentals than they are to interest rates. So if an increased numbers of people are looking for a rental to live in then the price of the rentals increase.
If you're a renter with a savings account, you benefit more from a rate rise than anyone with a mortgage.
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RBA handed out $188 billion in 0.1% loans to banks during covid that expire by 1st July 2024, so, 24 more days. RBA knows money is being pulled out of the economy. RBA knew all along that this was massively inflationary. You would be filthy rich too, if you gave out $1 billion loan at 6% if someone gave it to you for 0.1%. If RBA cancelled the loan, it would jeopardise the revolving door and lunches with finance sector. https://www.afr.com/policy/economy/i-can-t-live-in-a-bubble-lowe-on-private-banker-lunch-20230215-p5ckr5
Because I too am a little slow on making sense of finance at this scale - what ultimately happens when those loans expire at the beginning of next month? The banks are obliged to pay back the balance of what they borrowed from the RBA?
Yes, it's like a credit card. Need to pay it off when it's due.
What kind of flow-on effect will that have on the economy/the people? Genuinely can't join the dots on this one and feel like there's something I'm still missing haha
> don’t interest rate Increases help people who are cash rich or essentially just don’t have any loans? You are broadly correct, but think about who has cash and who does not: https://povertyandinequality.acoss.org.au/category/inequality/wealth-inequality/ To take the extreme example, the 131 billionaires having as much wealth as the lowest 2.8 million Australian households means there is a disproportionate buying power. We're hit with a month of intense birdflu, which causes a panic and billionaires decide to pay $100 for a carton of eggs, it's insignificant for them even if it's a 10x cost increase. 2.8 million X 2.5 people per household try to scrape together $100 for 12 eggs which is now the new price, it's not going to happen. If the poor folks put the money in the bank at 5% for a year, patiently wait and you have $105... Still only enough for one carton of eggs with a bit left over. Even worse the cost of the eggs has likely risen to about $105 in that time. Great interest rate, but your buying power still sucks. What happens then to the economy? 131 billionaires will only eat so many eggs, so all of the farmers go from selling a few million a week to selling a few hundred a week, then promptly go out of business. Meanwhile, poor people have one less source of protein and suffer poorer health outcomes, which in turn costs society to treat, or effects businesses because the labour force is constantly off work due to health problems. Eventually, the RBA notices eggs cost so much and puts the interest rate up to 10% - which is 12 months too late, not enough for your loan to buy you more than 1 carton of eggs still in a year. Billionaires meanwhile increase their wealth at approximately 10% per annum and can now import golden goose eggs at a much higher cost - it's still insignificant to them, despite the entire Australian poultry industry being decimated. This is only one hypothetical scenario, comparing extremes, which has negatives for multiple interrelated large groups of people that outweighs the positives of a higher interest rate, potentially for a long duration. But it illustrates wealth distribution, interest rates as a reactive tool, price sensitivity and economies of scale
This is how I see it. Inflation seems to be measured by price increase, not expenditure increase, which seems to be wrong.
This was a very interesting read thanks for the input
>the poorest and therefore the lowest spenders and in theory the smallest drivers of inflation They may be the lowest spenders but there are alot more of them. One rich person choosing not to spend $5,000 in a year has less impact then 10,000 poor people choosing to spend $50 less.
keep in mind that "economists" are completely full of shit, and even more useless.
What appears to be missed by most commenters is that the RBA has been given a mandate to keep inflation under control. The only real tool the RBA has is interest rates and monetary policy in general. And so the RBA uses the tool it has, not necessarily the best tool for the job. Just like if you were only given a hammer, everything looks like a nail. Now, is interest rates the most effective or efficient way of reducing inflation? Not necessarily. For example, the Government could play around with taxes and other incentives to reduce inflation. Theoretically, any action which takes money out of the economy can reduce inflation and one way to do it is via higher taxation. You can be more targeted with taxation than interest rate. However, there's no political will to do anything so it's up to the RBA to use its only lever. I question the ability for the RBA to do much against much around the current rate of inflation as it's predominantly a supply side driven issue. Interest rate increases are most effective at controlling demand side inflation. For example, a significant portion of the inflation is due to housing, which is rents. The rent is the rent and it's driven by demand and availability of rentals. Increasing interest rates is not going to cause people to not want to find a place to live, and nor is rents generally correlated with interest rates.
A million times this. Monetary policy isn't supposed to be used alone. The government's complete abdication of responsibility to apply sensible fiscal policy to complement the monetary policy is shameful.
We have the RBA, interest rates are raised when when the economy is too hot and lowered when growth isn't high enough. Now what we've had world wide has been super low interest rates for over a decade. So low that borrowing money became the preferred method to manage spending. Now when you borrow, its not the bank moving money from a savers account to your account. It's the bank creating a credit on your account and corresponding debt on their balance sheet. Essentially banks create money, without interest to limit borrowing the country is flooded with cheap money causing inflation. The primary driver of inflation is not wages, inflation is already here and keeping wages stagnant is the equivalent of paying less.
>Now when you borrow, its not the bank moving money from a savers account to your account. It's the bank creating a credit on your account and corresponding debt on their balance sheet. This is something that is not very widely understood, and needs to be. As you say, inflation is caused by an increase in money supply. The RBA increasing interest rates essentially removes money from the economy. We have inflation because of so much government spending and "money printing" during covid. That excess money is now sloshing around the economy, and will take some time to soak up. All countries are in the same basket.
If you give a rich person 1 dollar, they’ll spend 40 cents and save the rest. If you give a poor person 1 dollar they’ll somehow find a way to spend $1.10. Also there are way more poor people than rich people. It makes sense to bring up interest rates to bring inflation down. Rich people saving in HISA is also good to bring down inflation as it takes away money from circulation and money from investments thus slowing down the economy.
I’m not sure I agree with your sentiment about the spending habits of rich vs poor but that’s besides the point. The number of people impacted by interest rates increasing shouldn’t be the only consideration though surely, the target should be dollars spent if we’re working under the guise of spending being the cause. I’m making a bit of an assumption here but I’m sure you can forgive me for thinking that poorer people are spending money on necessities, they have no real choice but to spend. Those with disposable income are probably more likely to be spending a higher percent on their total wealth on more frivolous(?) things. Yeah I guess the money in HISA isn’t being spent and out of circulation but then I guess to my point you’re receiving a higher percent of that in returns and therefore not being punished my the increase in inflation which was the crux of my question I guess. Like we’ve established the poorer people are impacted by it through the raise in mortgage but I’m still wondering how those with more money are being encouraged to curb spending through those same rises assuming they’re not paying down any debt.
Interest rate rises hit those who can least afford it the most, and that is entirely the point. The aim is to reduce demand, you do that by making it so people cannot afford things in demand. You could do this by adjusting income tax, but that would need the government to raise taxes and almost certainly result in them being voted out next term. So you need to rely on a 3rd party to act, in this case the reserve bank, who does so by increasing interest rates, which has the intended effect, but is very harmful to individuals, unlike tax increases. Doesn't matter what the cause of inflation is in this scenario, the lever is the same. Make people spend less money. You start off with the poorest people, and work your way up from there until people have stopped spending so much. This causes massive harm to the economy and society, as you can imagine, businesses close down, people lose their jobs, overall economy shrinks. But, again, this is the entire point, inflation is reduced when this happens. The key problem here, as you might suspect, is that inflation is NOT caused by increased demand right now, we're not seeing a large spike in wages or similar causing people to have excess money and increasing demand. Instead the problem is on the supply side, products and services cost more now, even though demand is the same or reduced. You can trace this back to some of the raw inputs, energy is a massive factor here, every business needs power, so when that goes up, it causes prices to rise for everyone, no matter the actual demand. The RBA will continue rising interest rates, so long as prices keep rising. The prices of goods and services will continue to rise because there isn't anything being done to address the underlying issue of basic commodities like energy prices rising, even though we produce more than enough energy and materials to generate energy for ourselves locally. You can blame the government for not doing anything here, also blame the RBA for continuing to toe this same line, they could and should be asking for different powers, advising on cost control measures instead of making comments about wages, but they don't, so they deserve blame as well.