A reason interest rates may not stay lower for longer

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link may be locked – but there is a free trial available)

The Household Debt Machine only works while some of the new money, created by the household debt generated by RBA ‘bait rates’ and sunk into the housing bubble, leaks into the hands of real people who then spend that leakage.

The problem the RBA faces is that the Debt Machine is producing a lot less leakage than before (even though the RPM red-line is being pushed). So while house prices keep rising the impact of debt (driven by record low bait rates) on the level of economic activity in the broader economy is diminishing.  The Household Debt Machine is blowing smoke merely holding the line against more generalised deleveraging across the economy. RBA “bait rates” have now become a matter of survival rather than a sure fire way of pumping money through the economy.  The RBA Governor all but acknowledged this at the last Governor Grill by committee.

In order to avoid economic collapse some way has to be found to get money out into the real economy and circulating other than via the RBA Debt Machine model.

Infrastructure might be a goer if the government can stomach the public debt that it would involve. But we know they cannot because they keep rabbiting on about PPPs and how much they need to keep the public debt issuance as low as possible – just like a household.

The other possibility is to just print the deficit (i.e avoid the trailing commissions that come with debt issuance) and spend it by public expenditure (infrastructure etc) or by increasing the tax free threshold.

Either approach will get cash where it NEEDS to go – into wallets of real people who will spend it.

In short if we have low interest rates for an extended period it will only be because we are sleepwalking into economic recession or depression.

My hunch is that when the message gets through that clinging to the Household Debt Machine model is a disaster, we will get about six months full of stories explaining why QE for the People is not only much better than the QE for Wall Street that we have had to date but there is NO ALTERNATIVE.

It will take a bit of effort to soothe the frightened ponies and their stories of Weimar and wheelbarrows for potatoes – but explaining how that was mostly the result of private banks and their money printing efforts and features unique to the situation of Weimar Germany might help.

We are starting to see signs of that sensible discussion is starting to get a hearing but the main stream is proving even thicker or dumber (ref Gunna) than I would have imagined possible.

Then we will get some inflation and higher interest rates because as sure as night follows day our pollies will over do it thinking they have found a new magic pudding (happy Flawse :) )

…and this

Yes – my generally sunny optimism about human nature aligns with Peter.

I think that the public can be brought on board and as the Debt Machine model is broken and will eventually collapse there is no real alternative anyway.

Good ideas eventually win out and in these days of instant communications and ready access to unfiltered information it is much more difficult for the peddlers of myths and bad policy to avoid exposure by the incessant drip drip drip of electronic graffiti artists – all present company included.

The MSM and the pollies keep dissing and whinging about social media for a reason – they know it is a real competitor to their narrative machines.

If a civil attitude to LGBT issues can develop in little more than a generation (yes still room for improvement), a more rational approach to public finances will be a doddle.

We shall overcome!

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