Why is there all this talk of doom and gloom?

For those with a job and a decent income, surely life has never been better? The cost of food, petrol, and clothing is reasonable. Rent in the major cities may be high, but it is affordable.

Then why is there so much negativity? Why are we unwilling to loosen the purse strings and spend for the good of the economy, particularly when interest rates are at historic lows?

Rather than spend savings from our mortgages or the petrol pump, we are choosing to pay down debt at a faster rate than ever before. In fact, the CBA says that more than 75% of mortgages are now ahead on scheduled repayments, many with a buffer of 2 years or more.

Why haven’t low interest rates raised confidence levels, stimulated spending and the economy? Why is there concern that lowering rates further will not work as intended? Why are we choosing to save? Why is confidence so low?

Perhaps it’s because unemployment is edging higher or that the mining sector appears to be in real trouble. It could be the price of iron ore that is collapsing with increased supply coinciding with reduced demand from a weakening China.

It could also be concern that the government seems unable to get its own budget in order or contain its spending and its ever increasing debt levels. Perhaps it’s because the government sees the looming problem and is now signalling cuts to services and benefits while looking to scrap superannuation incentives and increase taxes generally.

All these factors affect confidence

Meanwhile, individuals who feel they are already paying their fair share of tax watch while the government grapples helplessly with multi-national companies who shift profits offshore and pay comparatively little tax.

On top of this, individuals are expected to save for a retirement that may never come, as well as paying additional amounts for health care, schooling, universities, tolls etc etc etc. One could argue we live in a “user pays twice” system.

And despite all this, individuals are left feeling the government always wants more!

So it is not surprising to see people with little confidence will choose to save, rather than spend any benefits from low interest rates. Clearly they perceive the world in which they live could get far worse before it gets better!

And this tendency to save in the face of uncertainty may be our undoing and the reason why interest rate cuts alone may not have the desired effect.

As Interest Rates and the $AUD Fall, What Can We Expect to See?

Lower interest rates have succeeded in bringing the $AUD from parity to about 77 cents. This is close to where the RBA said it wanted to see the local unit. But now, with the collapse of commodity prices, and in particular the price of iron ore, the RBA seems intent on driving the dollar to 70 cents and below. And it is likely they will achieve this by further interest rate reductions which are now seen as a virtual certainty in May.

If that occurs, Australian exporters should become more competitive and Australia should become more attractive & affordable for local and overseas tourism. There may also be some easing of the pain in the mining sector.

On the other side, as most businesses have some exposure to overseas suppliers, one might expect the cost of goods to increase as input costs surge. This could see inflationary pressures build and it seems this is what the RBA may be trying to achieve.

What if Confidence Doesn’t Improve? What if Spending Remains Weak?

If rates fall again but money continues to be saved rather than spent, economic activity may further contract which could send the economy into a downward spiral that will inevitably lead to business bankruptcy, company liquidation and personal insolvency.

If this occurs, and the economy heads into recession or worse, then it’s over to the government once again for further quantitative easing, increased government spending or decreased taxation.

What’s your view?

Did it work last time? If so, will it work again? It’s nearly a decade on from the Global Financial Crisis – has anything changed? Are we really better off? Has the system been fixed or have we lost a decade?

If you’re facing tough times, call The Insolvency Experts for help and options.

 

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Disclaimer
This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.