Credit crunch and interest rates

Mark Kleiman at the Reality Based Community gives a small sign that the inevitable credit crunch in the US has lurched another step closer: even with new anti-consumer laws putting bankruptcy out of reach for those who actually need it, credit card companies are getting nervous about the ability of even well-off people to pay off debts.

Meanwhile, here in Australia, the media has finally re-discovered the majority of Australians. Oh, they're still singing the same old tune of our booming economy, which I for one am skeptical about, but they're starting to notice those who have missed out on the boom.

It isn't that I doubt that on average we're better off now than ten years ago, but the word "average" can hide a lot of sins. E.g. if Uncle Rupert's income climbs from ten million dollars to twelve million, while Marge and Homer's incomes both fall from one thousand dollars to nine hundred, Uncle Rupert can honestly say that on average the three of them have increased their income by almost 20%.

But I digress... over the last couple of months, the Australian media have finally discovered something I've been complaining about for years. (Not in writing, more's the pity.) The government's rhetoric about Australia's booming economy is mostly illusionary:

A recent survey by NEWS.com.au in June revealed 42 per cent said their financial situation was worse than it was a year ago due to higher living costs.

So, despite all the joy being reaped on the stock market, mainly by higher income earners and retirees with super, the bulk of Australians are battling just to keep their heads above water.

Cheap DVD players and big screen TVs, but food, rent and medical costs are all up:

• The consumer price index (CPI) was 1.2%, but that was modest compared to some increases:


• Fuel costs up by 9.1% over the June quarter.


• Fruit costs increased by 8.4% in the June quarter, and vegetables by 6.1%.


• Medical costs increased by 3.4%.


• Over the quarter, house costs increased 1.0%, and rents 1.6%.


• Over the full financial year, house prices increased by 2.7%, rents by 5.2% and property rates and charges by 5.6%

Taken altogether, my back-of-the-envelope calculation suggests that the average person might be spending $70 a week more just a necessities now than they were a year ago.

Most interesting, the media have also opened their eyes about interest rates, after years of blindly parroting the government's party line. And right at the time when it will hurt the Prime Minister the most, before an election, tsk tsk tsk. (One wonders if John Howard forgot Rupert Murdoch's birthday?) The Liberal Party has been beating the ALP over the head about interest rates and home loan repayments for years, based on the high rates during the 1980s Recession. It is true that interest rates are lower now than then, but housing prices have blown through the roof, and the average (that word again) monthly repayment is a far greater proportion of income now than it was during the worst of the Recession. In other words, home buyers are doing it much tougher now than they were during the Bad Old Days when Australia was climbing out of an economic crisis -- and record bankruptcy rates are reflecting this.

Despite the ALP's apparent lack of interest in taking the fight to Howard on this matter, the media seems to have realised that Howard's promise-that-wasn't-actually-a-promise that interest rates wouldn't go up under his watch was an untruth. And it only took them five interest rate hikes since the previous election in 2004 to notice.

I note that three years ago the former head of the Reserve Bank scoffed at claims that the Liberals would keep interest rates down, pointing out that they must think people are gullible to make such a claim. Right on three counts: yes, the Liberals were unable to keep rates down; yes, they thought the voting public was gullible; and yes, they were right.

And, still back in 2004, it was pointed out that Howard's governments have been running what business leaders call "a lazy balance sheet" -- ignoring opportunities for growth and investment in favour of a timid, short-sighted and miserly approach:

Any fool can sell assets to reduce debt, but it is a way of becoming uncompetitive and eventually going out of business. Since 1996, the Howard Government has sold infrastructure and cut spending on higher education. Its stock of assets has depreciated at a faster rate than gross investment, and programs designed to upgrade industry, such as the 140 per cent R&D allowance, were slashed - all in the name of reducing the deficit.

For the want of a few hundred million dollars a year to maintain these programs, business R&D, which was growing about 18 per cent a year in the decade up to 1996, has now slowed to a virtual standstill and the deficit on Australia's trade in elaborately transformed manufactures has blown out.

As a consequence, Australia's external current account deficit now stands at 5.4 per cent of GDP, and foreign debt is far larger than any other major industrial country apart from the US.

Three years later, things are if anything worse. Howard's bribing the electorate with tax cuts (and at long last, even the bottom half are getting something). While a tax refund is always welcome, I'd rather a booming economy and a well-paying job with high taxes than a slowing, fragile economy with low taxes. Better to keep 70% of a lot than 80% of a little.