My latest column in The Queensland Country Life.
Elon Musk’s controversial Tweet caught my attention last week, “It has been raining money on fools for too long,” and “There’s a rude awakening inbound!” and it got me thinking about interest rates.
In the 1980’s, interest rates skyrocket to around 18-20%. There were both winners and losers. Those with debt struggled and those with savings flourished. It was the ‘normal’ of that time and any suggestion of rates getting below 10% was met with, “You’ve got to be dreaming, mate.”
Today, we have just lived through a sort of goldilocks period with the lowest interest rates on record. The RBA has flooded the economy with cheap printed money and pushed rates to artificially low levels. Most people can’t imagine rates pushing 10%, because borrowing below 3% has become our new ‘normal’.
On one hand, cheap money in the form of low interest rates coupled with rising land prices have provided significant opportunity to build wealth for many families, which is great news for part of society.
But what about the retirees who have struggled to earn anything on their savings? What about our kids who have been welcomed into adulthood with the idea of farm or property ownership being possibly beyond their reach?
Extremely high or low rates are generally unsustainable and often lead to costly imbalances. Skyrocketing asset prices, flat or declining real wage growth and the cost of things rising steeply (inflation) are all symptoms of an economy out of balance. Both in Australia and abroad we are experiencing all three, which strengthens the argument that rates will need to return to more sustainable levels.
In economics, just like in nature, balance is necessary and anyone who forgets or ignores this fact, will ultimately be in for a rude awakening!
In farming, seasons are a fact of life. Droughts eventually break and the good seasons always end. The same is true for the economy: there will be times when interest rates are high and times when they’re low.
You might be thinking, “The government won’t let rates rise too high, Ben.” Arguably with Australians more indebted than ever before and borrowers being so sensitive to even modest rate increases there is some truth to that.
However, we must keep in mind that interest rates are a complex system and heavily influenced by what’s happening overseas. That’s where the old saying comes from, “America sneezes and the world gets a cold.”
Like a string of 10 good seasons in a row, only a fool would think rates will stay low forever.
I reckon the best idea is to be get prepared for higher rates. Update your budgets, know your cashflow, work out with your bank what you can do to keep rates as low as possible and consider getting a broker to shop around for you.
Cheers,
