It was a big day for the Aussie market yesterday. Stocks blasted to new, post GFC highs, with the ASX 200 surging 1.6%. This is all thanks to the RBA cutting rates, with the expectation of more to come, and ongoing robust nominal economic growth.
This means the market is firing on all cylinders. Resources, banks, industrials, property trusts, telco’s and gold — to name just a few sectors — have all surged in recently.
One stock that didn’t enjoy the party yesterday was the Star Entertainment Group Ltd [ASX:SGR], the casino operator. Thanks to a decline in high-roller activity, the stock slumped nearly 16% to a four-year low.
I can’t say I’m upset. There is nothing more grotesque than the thought of the uber wealthy gambling hundreds of thousands of dollars on the roll of a dice, the spin of a wheel, or the turn of a card.
Don’t get me wrong, people can do what they want with their money, the rich included. But to have such indifference to and a lack of respect for money, to want to have your ego stroked by the casinos, who only want to help you part with your cash, is a little disgusting.
I’m sure someone said this before, but with great wealth comes great responsibility. Throwing licks of it away on an egotistical whim shows contempt for wealth and the society that helped create it.
What interest rate cuts mean for savers
Meanwhile, those who work hard for their money and have respect for how it’s spent are getting screwed. Even the Australian Financial Review can see this. It has an article today with the headline; ‘Why savers are being screwed’, and the following sub-heading:
‘Savers have battled deposit rates fractionally above inflation since 2016, and the RBA cut means depositors are now going backwards in real terms. But the RBA says their pain is for the greater good.’
Conventional economic thinking has lost it.
How can penalising savers and the virtue of thrift be for the greater good? When in history has that ever turned out well for a society?
Let’s break this down. Interest rates are simply the price of money. In a free market for money, this price fluctuates to create an economic structure that balances out the needs of savers and investors.
When interest rates are high, it’s a signal that money is scarce. High interest rates encourage saving over consumption.
High interest rates also reflect high rates of return on investment. The entrepreneurs and capitalists see this potential and borrow to invest in the projects that offer good risk/rewards outcomes. They borrow the funds from the banks where the households or businesses have deposited their savings.
When the capitalists start to deploy (invest) these savings, it creates an increase in the supply of goods and services. This results in a decline in interest rates, as the economy has satisfied its investment needs for now and doesn’t need savings as much.
In turn, a decline in interest rates encourages a return to consumption over saving, which then creates demand to absorb the supply of goods and services coming from the recent round of investment.
After a time, the economy requires more savings and investment again, and interest rates rise to encourage saving and discourage consumption.
That’s how interest rates should work in a free market for money. But, of course, it doesn’t work like that.
Think about the current situation in the world. There is debt everywhere. Debt represents future consumption brought forward. In a free market, the tendency now would be for interest rates to rise and encourage saving over investment.
But no, we couldn’t have that, could we? It might cause a slowdown. So our wise central bankers, who know much more than the invisible hand of the market, push interest rates down by increasing the supply of savings in the financial system. How do they do this? By creating more money out of thin air!
Who needs your hard-won savings when central banks can create their savings with the press of a few computer keystrokes?
As a nation, we are not savers. That’s why we have net foreign debt of $1 trillion. In effect, foreigners are subsidising our standard of living. It’s why the RBA thinks its rate cuts are ‘for the greater good’.
Another article in the Australian Financial Review today says that savers will be slugged $1.3 billion if banks pass on the full rate cut. That sucks if you’re a saver. But as a nation of debtors, there is a net benefit to an interest rate cut.
I mean that in a purely monetary sense. The longer-term damage from such short-sighted policy making — which effectively encourages excess consumption via an increase in debt — is so dumb that a high school kid with a part time job can see it.
It’s only when they go on to university and get ‘educated’ (indoctrinated) do they begin to see the world of the absurd. And then they work their way into positions of power…
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