Who’s to blame for high interest rates?

At the moment bank bashing is al the rage and if it’s not the banks then it’s easy to blame the RBA and Governor Glenn Stevens.

But is it really their fault that rates are rising.

According to leading property commentator Michael Matusik – no it’s not!

In his recent Matusik Missive, the leading commentator says:There is no point in blaming the RBA for the recent interest rate rises or, for that matter, the private banks. Government spending beyond our level of savings is the single most important cause of higher interest rates.  And as long as government continues to spend money that it doesn’t have, interest rates will continue to rise.

The trouble with all that “free” stuff that the government likes to give out (and away) is that it isn’t really free at all.  The same notion applies to the latest rapid expansion of the public service.  Someone has to pay the money back and with interest.  That someone is us; and we will have to pay back the government’s recent largesse via higher interest rates and taxes/charges.

Rates are rising because the government is using resources before they have had a chance to reach the private sector.  The government may be able to provide school halls, insulation, paid maternity leave, potentially a national broadband network and even give $500 million of our money to Indonesia.  But again, if you think you (and they) are getting all of this for free, you should take a long look in the mirror and think again.

Our central bank has been raising interest rates because the government is taking up domestic savings (remember our surplus and future fund – it was just three short years ago) more rapidly than we are able to generate those savings through productive activity.

Adding insult to injury, our productivity has dropped like a stone in the past three years and it would not surprise readers that Australia ranks a dismal 63rd in the world for ease of obtaining a construction permit.  Taxes (when totalled together) already gobble up almost half (47.9%), according to the World Bank, of the profits made by Australian entrepreneurs – 5% more than other western countries.

To repeat, in this economy, at this time, the government is the single most important cause of rising interest rates. The RBA is only doing what it can to ensure that resources available for investment are properly priced.

Now you can agree that during the GFC the government’s spending helped, but you can also disagree with the way it was spent.  We wrote a few weeks back that government must stop spending money – and quick.  Right now we have fiscal policy at odds with monetary policy.  What should have been temporary, and yes, better targeted fiscal stimulus has gone on way too long.  The government is now hooked on spending and that is why they are so desperate for new sources of revenue.  The upward pressure on rates (and also on taxes/charges) will persist as long as the government continues its relentless take-up of our resources.

If you want someone to blame for higher interest rates, chase down your local councillor, state pollie or federal member. Better still, if you are a Queensland resident, ring Anna Bligh and tell her what you think.  Apparently she’s never been happier.  Just like the rest of us, hey.

And whilst we are at it, those public servants – you know the ones, living high on the hog and milking the system for all it is worth – shouldn’t escape your wrath either.

Them versus us?  You betcha!

Source: Matusik Missive


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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