03/08/2015 - 14:23

Speeding towards a financial black hole

03/08/2015 - 14:23


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Banks and their customers are eagerly awaiting the next move on official interest rates in the US.

Speeding towards a financial black hole
CONCERN: The slide in the Shanghai stock exchange is sending ripples through markets across the world. Photo: iStockphoto

Lower interest rates for some borrowers, higher interest rates for others.

That’s one of the more interesting changes likely to occur in Australia over the next few months as markets around the world collide and investors get ready for the biggest event since 2008 – a rise in official US rates.

Guided by the Reserve Bank of Australia, the local move has already started, with banks such given the all clear to ratchet up the interest rates on loans made to residential property investors.

Owner-occupiers could be the next target for higher rates on their mortgages, though that’s not a certainty.

What the RBA wants to do is squeeze the bubble that is the residential property market, while finding a way to engineer a fall in the value of the Australian dollar.

Until now, there has been a direct connection between official rates and all forms of housing mortgage, with every attempt to drive the dollar down matched by a fresh move up in residential property values – especially in Sydney.

A two-speed interest rate system could break that nexus, slowing speculative interest in property while helping exporters. It would also deliver a boost to the profits of the commercial banks at an opportune moment, given the financial storm warnings in China and Europe.

If there is an objection to what’s happening in a sneaky way it is that higher rates for some investors (and lower rates for others) is a form of credit rationing not seen since the 1970s, when getting a bank home loan was impossible for even the most credit-worthy customer.

However, by encouraging commercial banks to attack one section of the residential property sector, the RBA will be free to cut its official interest rates.

When the next round of official rate cuts starts, perhaps as soon as next month, the RBA might be able kill three birds with one stone:

  • aid exporters, especially hard-hit miners and farmers, by creating a climate for a sustainable fall in the exchange rate;
  • slow the speculative property investment boom; and
  • boost the profits and capital base of Australia’s commercial banks ahead of what could be a financial storm blowing in from China and Europe.

With the move to a two-priced interest rate system already under way, the next likely step is a series of official interest rate cuts, perhaps totalling as much as 0.75 per cent over the next six months.

How investors and home buyers react to the changes is one of the unknowns in a financial world stuffed to the gunwales with unknowns – including known unknowns and unknown unknowns, as a former US Defence secretary Donald Rumsfeld ham-fistedly tried to explain in 2002.

Unknowns keeping investors, bankers and government ministers awake at night include:

  • the latest crash in the Shanghai stock market and whether that is an event preceding a Chinese version of the 2008 GFC, which started with a New York crash;
  • the collapse in most commodity prices, as measured in US dollars, which are destabilising the currencies of commodity exporting countries such as Australia; and
  • the return of a threat to expel Greece from the EU, with the potential for widespread economic and political ructions.

Overlaying those events is the great uncertainty of what will happen when the US starts raising its official interest rates, and the world is forcibly weaned off the stimulus of near-zero rates.

In a way, what the financial world needs is someone to explain how all of these seemingly disconnected events are linked; a sort of economic equivalent of Stephen Hawking’s The Theory of Everything, in which the highly awarded physicist has tried to unite all scientific events in one mathematical formula.

But if Professor Hawking had his work cut out in science, imagine trying to connect the effects of: rising US interest rates with a falling Chinese stocks; falling (and rising) Australian interest rates with collapse in commodity prices; soaring global debt levels; and the potential break-up of the EU.

As has been said before, when we reach a point of great unknowns (such as now), hang on for a wild ride.


Power plays

As if we don’t know enough about the changing nature of the financial world, a dramatic shift in national energy policy has been proposed by the Labor Party, which wants 50 per cent of electricity generated by renewables by 2030.

Like motherhood and apple pie (to borrow and American expression), it’s hard to argue against a target that theoretically cleans up a small patch of the world’s atmosphere.

On a practical level, where most people live, the 50 per cent renewables target will be impossible to attain, not merely because renewables are proving to be an enormous disappointment to early adopters such as Germany, but are also vastly more expensive than other forms of energy, including coal, oil, gas, and nuclear, all of which have been ruled out as unacceptable by climate-change zealots.

The German experience, however, is the sobering case that renewable advocates need to study carefully before sending Australia down the same blind alley.

Massive government subsidies (which come straight from the pockets of taxpayers) have created a renewables industry in Germany that is failing on multiple levels, with the worst result being sky-high power prices and the start of a shift by big manufacturers to countries with cheaper power.

Australia’s manufacturing sector, already weakened by the high dollar, risks being finished off by higher power costs.


Driving sales online

Most things can be bought over the internet, and if you think back to the early years of the online revolution there was even an attempt to sell cars over the net.

What failed 15 years ago is making a return in a number of start-up e-commerce website such as Carwow in Britain (https://www.carwow.co.uk/) – a development that might explain why some of Perth’s better-known car dealers have decided it’s time to opt out of their industry before the next internet revolution lands in their car yards.


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