5 Mar 2008

Kids Go Hungry in the Name of Prosperity

By Alan Thornhill
The way that we fight inflation is fundamentally flawed, writes Alan Thornhill
Is it fair to take food from a hungry child and give it to a prosperous retiree?

This is not a trick question - the answer is obvious - yet this is exactly what is happening right now as a direct result of the way we fight inflation. Higher interest rates take money from family budgets. Yet when rates rise, retired people who have money in the bank get bigger interest payments on it.

Back in 1990, in a typically bold statement, Paul Keating vowed that he would never allow unelected officials to control monetary policy. "I will not abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation," he said.

But unelected officials, on the Reserve Bank board, do set rates now.

The highly respected National Centre for Economic Modelling (NATSEM) has just reported that 1.1 million Australian families were already suffering "financial stress" before this week's rate rise. These mostly young families with dependant children were spending more than 30 per cent of their combined income on home loan repayments and other housing costs. This has to hit the food budget.

There will be more families in that plight soon. The new recruits will arrive when the latest rise - and whatever the banks feel like adding to it - come into effect.

The Federal Government, which commissioned NATSEM's research, is pleading with the banks for restraint. But the banks' idea of restraint and that of the Government (and public) are far apart. These families are trapped. If they give up their expensive homes they will find themselves paying exorbitant rents - if they are lucky enough to find a rental property.

It is probably not fair to blame the Reserve Bank's board entirely for all this. Even though it seems to be styling its recent announcements on old John Wayne scripts.

Under the new system, which evolved gradually in the 1990s, successive governments gradually gave the Reserve Bank the job of fighting inflation. That was finally formalised in 1996, in documents signed by the then Treasurer, Peter Costello. But the Government gave the Bank only one weapon with which to fight inflation: the right to adjust interest rates. That's a blunt instrument if there ever was one.

The politicians thought this was a great idea - it gave the public someone else to blame for unpopular decisions. But the public saw through that and quickly began blaming the politicians, quite rightly, for allowing situations to arise that made rate rises necessary. 

There are advantages in the present system. Before it came along, politicians could delay necessary rate rises for political reasons and in the months approaching an election. But the real issue is that it transfers cash from young families with big mortgages and hungry children to well-heeled retirees who have money to invest.

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David Grayling
Posted Wednesday, March 5, 2008 - 18:44

Speaking as a 'well-heeled' retiree who has struggled over the last five years because of low interest rates, I find this article rather distasteful and very unbalanced.

While I was struggling to live on the interest from the money I had, other people, taking advantage of the low interest rates, borrowed themselves silly. They were assisted in this by the Howard Government (We keep interest rates at record lows, they skited) and the banks. All the time, real estate prices rose and rose (demand outstripped supply) and people borrowed and borrowed whether they could afford it or not.

Now, when interests rates are a bit higher, so are all the prices so I'm still struggling to survive week by week. <strong>And the people who borrowed more than they could afford are now struggling as well.</strong>

The only ones who aren't struggling are the really wealthy, the ones that Howard made even wealthier!


Posted Wednesday, March 5, 2008 - 23:35

A retiree and superannuant (though not what I'd consider "well heeled") I find the opening statement that food is taken from a hungry child and given it to a prosperous retiree, very very offensive - as well as utter rubbish. In fact the whole idea of blaming the RBA for what rampant credit-card financed consumerism and over-blown (and financially unaffordable) expectations have created, is irrational and a case of misplaced blame. "The fault", as alway in a prosperous peaceful society "is in ourselves".

Like many retirees, I grew up in a large family struggling to rebuild after losing house, car etc in the Depression. The standard house was 12 squares with 3 bedrooms and 1 bathroom. In a sole-breadwinner working-class family, money was a constant problem, and every bill paid off, a bit each pay-day. Yet my parents paid for health insurance and we all went to fee-paying church schools; even had sport, speech and music lessons - and this in the pre-Whitlam era of no government subsidies, no free universities, no Medicare (in Queensland we did have free general hopitals).

Social conscience I learned from my family, teachers and the plight of even poorer families, especially those who had lost everything during the war (many of whom are also now retirees supposedly snatching food from starving children's mouths). Politicised politically by Vietnam and Women's Lib; as a unionist and civil rights activist by Bjelke-Petersen, I worked myself through full-fee past-time and external university under- and post-grad degrees that ate up almost half of my salary (as did so many of my generation). Like most of my contemporaries, I was active in trying to give others what we had scrimped and saved to provide for ourselves,

We purchased our current home when interest rates were 6%. In less than a decade, they were more than twice that, although Fraser froze wages and barely thawed them (& taxation was savage). We were still paying it off when "Greed is good" crashed the stock market and up went interest rates again! What we saved was attacked by soaring inflation and high taxation. No sooner was the house paid off and we retired, than interest rates collapsed, as did the dollar, greatly depleting superannuation lump sums already savaged by even more taxation. Now you're trying to make me wallow in guilt because it's all my (and similar retirees') fault that kid are starving!

Get real! How, in an era of welfare, safety nets, medicare, child-care subsidies, education subsidies and so on, can Australians think that they are worse off than my parents' generation, or a generation of post-war immigrant families from bombed-out Europe and Consentration Camps, or refugees from later wars' killing fields, or boatpeople?

The real problem lies in "I want it all and I want it now" consumerism on credit: 2 cars, more bedrooms, toilets TVs than people MacMansions, and a belief that tax-payer "support" should be provided for just about everything, including what our species has aways done. Tonight on TV a group of new mothers whinged about the "lack of support for new mothers". I wonder how our migrant settlers of the last 220 years managed to survive; how migrant generations, or itinerant public service/ bank workers (I was one) posted far from home, managed without "support for new mothers."

I'm more than happy to contribute, through taxation, to those who, through no fault of their own (usually natural disasters, or family illness/ handicap) truly need assistance. I'll continue to support health & educational subsidies. But the rest?

Try living as your grandparents and great-grandparents lived - within your means, with a hard-saved nest egg for the future. And I never did hear them blame anyone for their situations. They were too busy being responsible citizens. If they could do it, what's wrong with today's whingers?

Jonah Bones
Posted Thursday, March 6, 2008 - 13:41

Dee Cee I think you got it in a nutshell :)
The new mobile phone every 12 months generation !

Posted Thursday, March 6, 2008 - 14:36

You hit a nerve, Alan, and they're screeching.

"Try living as your grandparents and great-grandparents lived".

If only we bloody well could. When our grandparents bought homes, they cost three times the average wage - For example, when the median income was just $1,000 per annum in the early 1960s one could buy a basic house on a basic block of land for $3,000.

But at the end of 2007, the average salary of an Australian wage earner was $53 940 and the median house price in Sydney $753 000.

This is why, "in an era of welfare, safety nets, medicare, child-care subsidies, education subsidies and so on", we say we're worse off. A house now costs nearly 14 times the average wage.

"The real problem lies in "I want it all and I want it now" consumerism on credit: 2 cars, more bedrooms, toilets TVs than people MacMansions, and a belief that tax-payer "support" should be provided for just about everything"

Rubbish. I have friends who'd be really happy to be able to buy a small apartment close enough to the city that they can get to work on public transport - even that is beyond many people my age. If I can have a decent-sized house for $162,000 in a reasonable location, you can have the first home owners' grants and so-called baby bonuses, and any other money the government wants to take away from me in taxes and give back for things they approve of.

We own one TV (not a plasma), no cars (we couldn't afford one even if we wanted one, with the mortgage we're paying off), and live in a very modest two-bedroom apartment. Perhaps the reason why people are spending on credit is because they don't see the point of trying to save for a house when it's so clearly beyond their reach - partly due to the fact that the older generation has invested heavily in real estate.

"Tonight on TV a group of new mothers whinged about the "lack of support for new mothers". I wonder how our migrant settlers of the last 220 years managed to survive; how migrant generations, or itinerant public service/ bank workers (I was one) posted far from home, managed without "support for new mothers.""

They didn't manage without support - they lived in much more cohesive communities. They had support from the people around them - now most people don't even know their neighbours, and it's not like there are heaps of women at home to visit mums with new babies and offer advice, or a home-cooked meal, or just a chat. Social isolation is one of the reasons women get post-natal depression, and of course there should be measures to address that - if not for the sake of the women then for the sake of how much PND costs the taxpayer.

And as for "a new mobile phone every 12 months" - the only person I know who has a new mobile phone every six months is a baby boomer.

Posted Thursday, March 6, 2008 - 15:21

It should not be beyond the wit of economists to devise a better way to dampen down spending to fight inflation. The tools used could reduce discretionary spending (petrol, cigarettes, alcohol, luxury goods etc). The Reserve Bank could direct the government to hike these taxes/excises/tariffs on spending (or reduce them) and not have to rely on interest rate changes so much. The money raised could be stored in a Future Fund for later use on "rainy" days. Other tools could be payroll deductions for taxes on higher incomes, transaction fees for sharetrading, bank fees etc. The Reserve Bank should also aim for a growth rate of 2-3%, not just an inflation rate of 2-3%

Posted Thursday, March 6, 2008 - 19:20

Not "hit a nerve", rebekkap; just outrage at what is a poorly/ non-researched, irrational outburst reminiscent of News Ltd's "Blame the Baby Boomers for everything" generation envy. (Note, Baby Boomers are born post-war -1946+. I clearly remember the atom bombs' being dropped, and VE & VP Days - a "war baby", as stated.)

To gain the perspective to react rationally to the current crisis (& learn why no one who "does her/his homework" would buy a house during a price boom) you need to research three other similar periods in Oz post-war period. Although there was, in each, a shorter period of manic rise in house prices, out-of-control inflation and credit tightening (& rent stress, inc a great many people living in tents & sheds in the first two crises - we did sheds twice) the trend-period is the 5 years from 1 Jan of: 1949, 72, 89. The current crisis is still a fair way from the peak of each of these periods. Some state-based stats are available; although the most reliable way to check is through file / microfiche copies of newspapers, researching comparative costs of similar houses in similar streets of the same suburbs over the 5 year period.

You also need to know that, before bank deregulation, <u>borrowing limit<u> (not the cost of the house) was <u>2.5 to 3 times the male's salary<u>. In early 1973, when I was doing the rounds of the banks, the borrowing limit for new houses was $9000 (variable interest rate). One was expected to own the block of land + have in the bank at least 10% of the cost of the house (although 25% was preferred). Hence a house & land package did not "cost 3 times"; it was more like 5-6 times - and that was for a very basic 12 squares, "do your own car tracks, kitchen, floor-coverings etc". Building societies would lend more, but interest was an additional 1%. Borrowing for existing houses was tighter.

Note: Interest on those loans would double in a few years, and reach 13.5 (capped for existing loans) in the early 80s; we paid double-digit interest for c half of our 25 yr mortgage. Inflation of take-home wages / salaries (a period of major unemployment) had not quite doubled between Jan 1973 & Oct 82 (I still have wage slips 1/73 to 10/82).

I should add that also documented is the length of time couples in 49 and 72 put off weddings so they could pay off land and save deposits (at least, by 72, thanks to the pill, one could put off having children as well).

In 1972, our tiny first home went from $7,500 to $12,000 (sold due to transfer). Our new block of land (b. Jan 73) would more than treble in value in less a year and treble again; would in fact, reach 10 times the original before falling back to just over 2. Luckily we had a fixed-price contract for a house (took a year to build due to labour & material shortages). Without a fixed price, it would have doubled in cost (no wage change). In the 1990 breakout, a friend's house that cost $120,000 in May 91 would be resold in 1994 for $82,000 (and go lower). My son's house would almost double in price in 18 months at the beginning of the current boom - he won't be buying again until it's over. Research into Menzies' infamous first term shows the same pattern.

Between booms, prices remain fairly stable (except for "gentrifying" areas) for quite a few years (since the early 70s, about a decade). Currently, house prices are falling, and should be back to c2000 prices about 2009. If the economy slows, interest rates will also fall.

The moral of a bit of decent research into reliable sources (eg newspapers etc which give wage levels & house prices) is that there is nothing unique about the current housing crisis. The same goes for the rental market, as research through rental ads will show. Further research into housing conditions in Oz from 1930 until the early 50s, and a touch more into the really bad days of the Depression of the late 1880s & the 90s, that spawned the AWU, the Shearers & General Strikes, and the birth of the Labor Party, ought to cure you of generation envy.

I wonder what the visionary men and women of the struggle for the 8 Hour Day, Workers' Rights, Social Justice for the poor and downtrodden; who followed Ben Chifley's "Light on the Hill" (he was a victim of 1890s bank collases) through conservative eras, lobbying for a comfortable retirement and better future with accessible universities & health care for all, would make of being the objects of Generation Envy. Or those who lost everything during Depression and the war.

Somewhere between my outrage, and smirky invitation to try living as they did for a few years, I expect.

Posted Thursday, March 6, 2008 - 19:28

PS to above
Sorry, I don't know why the underlining occurs. I removed the tags as soon as the preview showed, I'd done something wrong, and before I hit the post button.

I'm used to different tags.

Again, profound apologies.

Posted Thursday, March 6, 2008 - 23:28

I too am a retiree and superannuant and have to say that Alan is totally correct -- and I agree that he should use the emotive language. The current policy is totally wrong morally and we need shocking into a fresh look. Of course the Reserve Bank's stupidly unilateral policy is hitting low SES familes really hard while we get better returns. There must be a better way of controlling inflation and meantime we lucky ones have a duty to do: tithing, they used to call it. As long as the charities and causes we choose are genuinely administered and not corrupted by excessive bureaucracy and outright scams. With a bit of research, according to your commitment, you can get it right.

Posted Friday, March 7, 2008 - 16:40

I wonder, was it Alan Thornhill's intention to spark the intergenerational war of words that he has? If the premise of the article is an attempt to question the ways in which we fight inflation, then it is sadly lacking. If the way we fight inflation is fundamentally flawed, as the article claims, might it be too much to expect something a little more substantive than the throwaway line;

“that it transfers cash from young families with big mortgages and hungry children to well-heeled retirees who have money to invest”.

Is this not but a consequence.

DeeCee perhaps inadvertently hit it on the head stating “before bank deregulation, borrowing limit (not the cost of the house) was 2.5 to 3 times the male’s salary”. Regulation, could this be the key? If borrowing had been limited then house prices would have risen at a much slower pace than the explosion that we have recently experienced. Are we even asking the right questions, like who benefits from a low inflation rate? (A: banks and those who issue debt) It makes sense that a bank doesn’t want wages to rise, but who has been responsible for all of that extra money out there chasing the same amount of goods and services? A: deregulated banks. So how does the government resolve to fix the problem. Firstly, to let the banks go on as if there actions need not be restrained, as though they are bound by only the natural laws of the universe. And then, pass over to those very same banks the power to protect their interests (above all else) and deal with inflation like the tail might wag the dog. This will only punish the man on the street, who now becomes the responsible force of inflation that needs be conditioned and restrained. Nice..

Posted Saturday, March 8, 2008 - 13:54

As an aside to the above:

For a post on another Board re disclosures (07/03/08) of NAB's troubles & questions of bank ir/responsibility, I cross checked the US presidents & their Parties in the lead up to severe international depressions / major recessions / "credit squeezes" since 1888. They are: 1890 Harrison (Repub), 1929 Coolidge (Repub), 1960 Eisenhower (Repub), 1987 Reagan (Repub), 1991 Bush Snr (Repub), 2007 Bush Jr (Repub) - the last three NeoCons.

In Australia, Bank behaviour during the 1890+ and 1929+ Depressions would inform Ben Chifley's crusades for a Commonwealth Bank covering savers, home buyers and small business, and for bank nationalisation.

If, as has happened in the UK (and in Australia during the 1987-93 Recession We Had to Have) governments have to take over banks & non-bank institutions holding savings, mortgages and loans for home buyers & small businesses, perhaps it is time for a long-term, ideology-free examination of the last century and a half's economic paradigms, and their economic, commercial and human advantages and disadvantages.

The emerging global environment of on-line banking, instant cash-transfers between countries, Ebay and other on-line market places, the "death of cash" and other emerging financial practices, we obviously need something better than Industrial Revolution policies, whether Conservative or Liberal / Democratic Socialist, that have been the dominant paradigms of the last 150+ years.

Posted Wednesday, March 12, 2008 - 14:09

"But the real issue is that it transfers cash from young families with big mortgages and hungry children to well-heeled retirees who have money to invest."

How perverse, Alan.

It used to be that Deposits financed Borrowing and this was mansged by the Reserve Bank through Statutory Deposit Reserve ratios.
Mr Keating has much to answer for including sale of the Commonwealth Bank. If you swamp the share market with Super fund investments how are the Banks to compete for deposits to lend?.
They must go overseas and get their borrowers to pay "market rates". How then can the Reserve Bank control the money supply and the amount of credit available?

" Interest Rate hikes are the price of failure!"

Posted Friday, April 11, 2008 - 16:21

There is something intensely Australian about how we are all debating the issue of inflation, and in how we direct our attention to it. An Israeli pointed out to me that in any other industrialised nation, the government would just drop the interest rate and let unemployment rise. Are we so egalatarian, (in a very generalised way, that ignores indigenous people and refugees), as to be able to qualify our selves as being willing to pay a higher interest rate only so as to keep our society relatively stable by no increases in unemployment?

There is another theory about this. But it takes a hard core Marxist analysis to comprehend. It is about the "theory of the tendency for the rate of profit to decline" which is a mathematical equation proving that capitalism depends upon the rate of profit increasing. That is, not just having a profit, and not just the profits increasing, but the rate at which the profits increase needs to increase. The theory is that the whole arrangement is inevitably bound to fail because of the real limits of resources, human as well as environmental. For example, if diseases spread and many die, profit rates decline. However, then, because of the continued rate of economic growth, there are also other theories which explain why that is still possible despite the "theory of the tendency for the rate of profit to decline". Basically the position of classical Marxism, is that both wars and advertising tend to prevent over investment in the means of production, for long enough to delay the inevitable.

Now if you can wrap your head around all of that, there is also Trotsky's theory of permanent revolution. Which has a meaning alike to saying that no real socialism can begin until it begins in a domino effect, because socialist economies can not survive in competition with capitalism. The strongest example of this is how the historic empire of Islam was originally socialist, and needed to continue to expand to prove its methods of social organisation. It is well worth a socialist's efforts to study Islam for knowledge about the social methodolody. Eventually, the economy of Islam came into contact with the Far East Asian economy, and that is where the whole of the Muslim economy began to become corrupted from, away from the original socialist ideals of Mohammed. Those social conditions are today quite distinctly different, in respect of how Asian economies have coped with the tragedy of the Chinese cultural revolution.

OK, now if you can wrap your brains around all of those concepts, here is another. Perhaps, the fact that there is one modern industralised nation, who is not following suit with dropping interest rates, is the inevitable proof of the "theory of the tendancy for the rate of profit to decline". What do the Marxist economists reckon? I'm not myself fully equipped with all the textual references to get into expressing the mathematical proofs, but the logic is perfect to the heart of a Marxist social economic analysis.

Henry Reynolds, the historian, has written about how his own faith in the egalatarian nature of Australian society was depressed and shamed by experiencing the modern state of relations between mainstream Australian society, the police, and Aborigines. But really, if what I am saying is true, the maths could prove that it will be in our long term economic interests, as well as social and environmental interests, to be the first nation to fully commit legislatively to greenhouse causing emmission reductions; and it is a victory belonging entirely, to the very stable mode, in which Aboriginal Australia works to influence the hearts of all Australians, towards loving the land better.

Thanks for reading and I hope that some number crunchers somewhere might take note. The maths is available by marrying Marxist economics with the economic analysis of those Muslims who back the USA and Canadian economies.

Word Sword Sworn
At Hath
That Hat
Inshallah no poetry farce
By Solomon's Seal will my past
No word not true can last

Posted Thursday, April 17, 2008 - 19:25

Yeah yeah, grizzle grizzle from the fat cat rich retirees, good on you I say for giving them a jolly good serve of the truth, and if they are choking on their superannuation maybe they can take a boot full of armani suits down to saint vinnies as pennance.

Aside from all this hoo ha, you make a valid point:
"But unelected officials, on the Reserve Bank board, do set rates now."..this is an undisputable fact that does deserve consideration particularly as the board are captains from many parts of industry and 'conflicts of interest' seem barely to register a blimp on the political radar these days.

If interest rates are a key plank of political policy, why are the elected terms and appointments spanning across the electoral terms...Glenn Stevens (who has gone quiet) has a seven year term which means the government of Howards day is still reverberating now via a political appointment which one would suppose in a normal democracy would have no relevance, just as a fresh government sweeps the odd sods from the bureaucracy clean, why not a clean slate in the reserve bank which plays a key role in determining economic and social outcomes?

And then you quite rightly remind us that pig face said:
"I will not abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation," ....well, blow me down the same treasure-ra, did blindly follow the advice (i meant threats) of the banking association and lifted the ceiling on interest rates sending many unsuspecting investors to the wall...lesson: dont pay too much attention to what politicians say, keep an eye on what they do!

Never mind, the RBA is helping me with some research, and im combing through the archives back to 1911...and there are some real surprises in store about what the RBA says, has done, and can do! :)