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YES WE HAVE NO BANANAS

 

So the gnomes in the Reserve Bank decided to put up the price of everything.

 

Petrol is going up at an exponential rate so we can expect another interest rate rise next month as well.

 

There is something dramatically wrong with economic thought when the only tool the Government has to rein in high levels of borrowing are to put up interest rates, thereby effecting every one, including those who are prudent.

 

It's like the rain that falls on both the just and the unjust.

 

What the Reserve Bank has done this week is  used a sledge hammer to crack a nut.

 

The problem is banks running amok lending money to anyone who puts their hand out. You could stop that immediately by manipulating the deposit people needed to have, in cash before they bought a house or a car.

 

Raising the deposit level for large capital items would immediately put the brakes on access to easy credit and force people to start saving.

 

When people start saving they stop spending for a while. Economy slows down. We stop sucking in $3B worth of plasma screens and DVD players a month.

 

When Keating floated the currency he stopped before he'd finished the job.

 

The Government left the Reserve Bank in charge of the economy but didn't give it the tools it needed to do the job properly.

 

In fact it has only one lever that it can pull, when for the most part it needs a bag of tools, levers, scalpels, hack saws, shovels, the lot .... in order to both hack and fine-tune the economy.

 

The Government has the tools but won't use them for fear of an electoral backlash. That's why the country is awash with credit and the national bankcard goes up another $3B every month.

 

Either the Government gives the Bank the whole economic kit and caboodle or let the Government get on with the job it was elected.

 

The Treasurer has fallen asleep on the job. The Opposition is in a coma. The country's going to hell in a hand basket.

 

The real barometer that either the Treasury or the Reserve Bank needs to keep a watchful eye on is the balance of payments. If it's in the red for any one month it puts the brakes on and makes it harder for people to get access to the credit they need to make discretionary purchases. You don't do that by putting up interest rates by .25 percent.

 

Once people get the message that they need a cash deposit of 20 % to purchase anything over $1000 they'll start to knuckle down. Their grandparents did it. Their parents did it. They'll get used to going without for a while without dying. They'll stop spending on junk and trinkets. They'll do with the old one for a bit longer. They'll think carefully what it is they really need. They'll appreciate it when they finally get it.

 

There is one small thing the Government can also do to encourage savings - exclude the first $1000 received in interest earned on savings from taxable income. To slap a tax on after tax earnings is a dreadful disincentive to save.

 

Last word

The last time I looked I was paying 11.5% on my business over draft, 18.75 on my credit card and 24% at Myers. What are Myers going to be charging when interest rates hit 20% again?

 

If the Government does want to do something to protect its mug tax payers it could set not only a prime wholesale rate, but also a prime retail rate - being a maximum of 10% above the prime rate. That's quite sufficient a margin for GE Money and their barking dogs to turn a quid.

 

It's bunkum.

Frank Blunt

Syndicating columnist

Bunkum.com.au

April 2007