The power of Influence.!!

Yes the power of Influence with a capital I. As promised here comes the continuation to yesterdays first ever installment.

The Reserve Bank of Australia, the big fish. that's where I left off. For any of you who have been following the Reserve Banks rates actions will know things have not been the way they used to be. The big four banks are not passing on the rate cuts, while they very happily reduce the interest payments that they pay those who have savings. The follow the leader link seems to be disappearing between the Reserve Bank and the major banks. And what does this do? Expands their already massive profits of course. They even have the nerve to raise their loan interest rates regardless of the Reserve Bank not moving rates, up or down.

This makes me think about the conversations I used to have with my Dad to do with Finances and how it all works. The fact that the world's economies essentially run using rates of debt, in order to create growth. This is only possible with new money that essentially no one owns, or it could be argued that everyone owns it. The interest paid on the debts creates the growth. With this in mind, put simply, if the RBA raises interest rates they are attempting to slow growth and if they lower them they are trying to stimulate growth. Translates into: raising the interest rates, they are trying to slow down the amount of loans being taken out because the growth is too fast (inflation), lowering rates, they are trying to suck more people into borrowing more to get the growth going again.

So what's going on now? Well as I'm sure we would all know, mainly because the RBA rates decisions are big news, that interest rates play a massive part on how things go down here. From the cost of paying off a home, to the running of a business, to the raising in the general cost of living. We here in Australia have some of the highest rates of interest in the world at the moment. And our dollar is trading high compared to where it used to sit with many other currencies. This adds to the cost increases we see here.

So what has happened recently to cause the RBA to slash the official cash rate by 0.50%? The single largest rate cut since like 2009 or something. Well the big story is nothing much has changed. This is a rate cut that has been needed since the start of the year. They held off and off till now because markets have been recovering. But something very big has not changed all that much in relation to the growth of some markets. Consumer borrowing, and even more importantly consumer spending. Consumer borrowing isn't too much the issue here I don't believe as I read recently we as Australians own a total of $1.256Trillion worth of debt. OUCH.!! Therefore I would suggest that the amount of borrowed money here, and the interest being paid, isn't causing the slowing of the tide. Just think of all those free dollars the banks are earning (stealing?) from all of our fellow Australians, who have no choice but to have a loan to live somewhere. Or even more so those who can't afford a place to live because of the high cost of just the interest alone with no hope of ever getting from underneath a loan. GRRR.!! The bank profits just keep getting bigger.

Consumer spending.! Here's the point I wanted to reach for tonight. One very major reason I can see that has affected the RBA decision is the influence I wager you may never have thought you had any hand in. Due to the increasing cost of servicing loans and just living Australians have been largely reducing their spending, in order to attempt to pay off their debts sooner. Consumer spending has flow on effects to the businesses like retail for one such example. The retail sector is massive and with lower spending while still employing people to work there, the margin of profit is a lot less. Big business might be able to absorb this to a point, but small businesses are struggling. Their owners make less and so therefore spend less. Can you see how it flows on to everyone eventually? This is possibly the main reason why the Treasurer was so strong towards the big banks to pass it on to loan holders. While he won't say straight out, I'm sure he is aware that we need rate cuts now or risk job cuts and closures of small businesses. Not a good mix.

Our lower spending people! It's having an impact that I'm going to guess many don't understand. There are so many things we can do without even if it's for a short time. Lesser spending from here will put serious pressure on the big banks, and the big fish ha ha. Let's see if the RBA will reduce further sooner rather than later. And while cutting back even more on our spending, if we move to the banks that pass on the full or closer to full rate cuts, we place the pressure on the others to lower their rates too! We as a collective do have some serious power of Influence if the last little while has shown. Even if most of us Australians hadn't thought about till now.

Till next time.