Interest is the price of money. If that's true, and it is, money isn't worth much. If money isn't valuable what's the point of accumulating it? If the dollar doesn't hold its value it's far better to spend it, isn't it? If inflation is higher than the interest being paid to a saver/lender you'd be crazy to keep, save or invest. Highly likely.
There is a point where individuals make a decision for themselves, to satisfy their wants and cravings before their purchasing power shrinks and disappears.
Which leads directly to a very important point. Allow me to exaggerate. I'm 23 and just into my first year as a lawyer, electrician, banker, broadcaster, whatever. All my short life I've loved cars. Not just any cars but flash cars. Zero-100km/h before you even start the engine. V8s especially. Forgive me, but I'm a bloke. The first V8 has just gone into a Maserati SUV and I'm in love. I want one desperately so I start to save from my meagre earnings. The top model is a bit shy of $300,000, actually about $287K. So I'll settle for the one-step down version in the $240s. There you are, I saved $40K already. Now to work on the remaining $240,000.
In reality, it's not worth even getting out the calculator. Probably still be making loan payments after the Maserati is retired. So, let's make whoopee while we can.
What I'm attempting to convey is that the age group one belongs to will likely dictate attitude and if you don't have enough this week to afford what you're dreaming of, you may as well spend it anyway. Smashed avocado, morning coffee, evening drinks and 3am taxis. All that spending may help the economy but won't contribute to that long-term but unachievable Maserati. Or maybe a house, you know, for the kids.
And then the new Governor of the Reserve Bank, Adrian Orr, goes petulant and drops the official cash rate by 33 per cent. That's one big man-made manipulation that should be governed by market forces, like supply and demand. Good old reliable market economics that respond naturally to the science of economic gravity.
What went wrong? Start with the Global Financial Crisis.
Hardly anybody saw it coming. But as one individual said, it's not what happens to you, it's what you do about it. Unfortunately, the post-GFC management was not handled well, which is partly why we are where we're at.
The interest rates of yore will not return soon for New Zealand, and I'm tempted to say never. But that would be foolish. Fortune favours the brave but not everyone has that capacity. We are not alone.
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Since the GFC, global debt has continued to accumulate at a considerable rate. The introduction of quantitative easing, aka printing money, was insane, and if it wasn't that, then the expectation of continued QE was.
A letter to the Financial Times in 2015 from a professor of economics at London University, Jeff Frank, stated the obvious, "It isn't bold to print money. It will be bold to withdraw it later."
There are numerous other "facilities" discussed to repel the laws of nature, i.e. helicopter money, a debt jubilee. Unfortunately, the term to best describe these is fake policies.
In 2014, Bloomberg nominated, as one of the 50 most influential financial thinkers in the world, Sydneysider Satyajit Das, author of The Age of Stagnation; Why Perpetual Growth is Unattainable and the Global Economy is in Peril. In an interview about his book, he said: "Low rates discourage savings…….stimulus from low-interest rates is temporary. Demand reverts to normal levels when rates are normalised. Once this happens, high debt levels are harder to service, requiring the diversion of income to meet larger interest bills, which reduces economic activity."
And, "In reality, low rates create zombie economies." Finally, this, "Low-interest returns and central bank monetary methamphetamine, encouraged asset price bubbles."
It's reading advice such as this that disturbs my sleep over the cavalier spending by Auckland Council, knowing that its way of bailing is to rate us out of house and home. Reserve Bank Governor Adrian Orr referenced the possibility of negative interest rates. That means that rather than you being paid an interest rate, you pay the bank for the privilege of your money being held. It is an insult to intelligence but it's happening already in some parts of the world.
This idea that low/negative interest rates make sense has a sibling policy, i.e. that of a low exchange rate helping the economy via exports. Then Mexico or maybe Romania would be the wealthiest country in the world. If you want to build New Zealand and its citizens' wealth, do not tax savings until retirement or withdrawal. Question of the week, Adrian Orr, genius or zombie?