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Low interest rates not fair for all

By John Hargreaves - 11 May 2015 45

house-stock-roof

When the Reserve Bank announced it was dropping the interest rate and the banks, to some degree, followed suit, there was some joy out there in the community.

The economists said that softening the fiscal environment was good for us. They said that the drop in the value of the dollar was good for trade and that it should fall further.

But hang on… While I’m no economist, I reckon I have to pay more for everything because what I could get for a dollar yesterday, I have to pay more than a dollar today. In simple terms, my dollar isn’t worth as much.

One good aspect though is that for people wanting to get into their own homes or those on crippling variable mortgages, they’re going to be a little bit better off each month. So for the great Aussie dream, it is good news. When I was a young parent, with a mortgage of 17 per cent, any reduction was meaningful in our lives.

Have you noticed how the prices for overseas goods like clothes and white goods have gone down because the dollar has dropped? Me neither!

Drops in interest rates appear to impact three parts of our community: the working young; the middle group where salaries and wages are ok, the finalising of mortgages is in sight, disposable and discretionary income is ok and the quality of life is reasonably good; and the retired cohort either on fixed pensions of self-funded retirees.

For the purpose of this view, I’ve ignored those on high incomes and those below the poverty line dependent on pensions, because the rich don’t think about prices (they just get what they want when they want it) and the people on benefits never have enough disposable income.

I’m a bit mystified as to how people are better off when they have a lower mortgage repayment eaten up by deterioration in the purchasing power of the mighty dollar. One would hope that they come out at least even and maybe a bit in front. This seems to be the lot of the working young.

The middle cohort are usually in a financial situation where they can ride out the fluctuations in fiscal fortune and cut their cloth or expand it out whenever the economic fortunes wax and wane. When I was in mid-career in the public service, I didn’t take that much notice of the global financial situation, I didn’t take much notice of how the dollar went up or down, I just noted that bread, petrol and smokes went up every year. That was how it was but my life style didn’t change all that much and I wasn’t on a high income either.

Now that I’m in my advanced years I associate with a number of people who are self-funded retirees. Many of them are articulate, well read and their views are to be taken seriously. I also see from time to time seniors’ journals and newsletters discussing the lot of retirees of both types.

Older citizens are either on the pension, live off superannuation at an income level considerably less than they had when in the workforce, or spend the returns on investments such as SMSFs or the share market. Some live off the returns on real estate investment, but not many.

Those on the age pension are at the mercy of the government of the day when it comes to the cost of living adjustment. Setting the pension at CPI increases or AWE increases still means pensioners don’t have any control over their pensions, the government of the day does.

Superannuants are in a similar position to “the pensioners”. The schemes dictate the percentage rise each half year. The others depend heavily on the market place where interest rates are pivotal. If the rates stay low, the income of the self-funded retiree stays low.

The interesting bit now is that we have an increasing ageing cohort who are living longer and have reasonably high health costs. Often their lifestyle is less expensive but their health costs are significant. Funnily, this same situation faces the working young families. Their lifestyle is less expensive because they don’t have a lot of disposable income and the costs of raising children (how I hate that term – it’s like cattle) are high and also have attendant high health costs.

But the governments of the day trumpet the benefits of low interest rates which are helping the young working families but evade the truth of the deterioration of quality of life for the retiree cohort. I don’t know where the middle ground is and where all three cohorts can get a fair share.

Perhaps I should have studied economics instead of defence and strategic studies, politics and history.

What’s Your opinion?


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45 Responses to
Low interest rates not fair for all
chewy14 12:34 pm 11 May 15

dungfungus said :

chewy14 said :

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

Have you seen how volatile the share market is?
“Blue chip” bank shares have plummeted in the past weeks and while they are still paying franked dividends this may not be forever.
Most super funds have now clawed back the capital losses that were incurred in 2007-2008 but they will never claw back the investment returns that were lost since then.
I was appalled to hear several of my friends say they were happy having bank shares in their super because they would be the first to be paid out if there was a corporate failure. I could not convince them that they were totally wrong and the guy who cleaned the toilets in the banks would be paid before them and there is usually nothing left for the shareholders.
Most retired people do not want to take chances with their money in retirement – stellar investment return while exposed to chances of losses is not as important as preservation of capital which should be drawn down commensurately with ageing (you can’t take it with you).

That’s my point, Super funds have produced those returns over the long term including the periods of the GFC and other crashes. You say they haven’t clawed back their pre GFC returns but these 10% + returns were clearly above average. Most people are retired for 20+ years, the idea that they need to be so conservatively invested is simply wrong.

rubaiyat 12:29 pm 11 May 15

dungfungus said :

rubaiyat said :

chewy14 said :

I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, which includes the period of the GFC.

Not true. Blatantly not true. The super funds went painfully backwards over those years exacerbated by the fees for “advice”.

The growth has come from the mining boom, which is petering out now, speculation which is subject to radical change if the bubble bursts and Government handouts.

This is the most sensible comment you have ever made.

THAT you have agreed with. Therefore ipso facto, is “true”.

I like to go beyond that initial gut feeling.

chewy14 12:28 pm 11 May 15

rubaiyat said :

chewy14 said :

I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, which includes the period of the GFC.

Not true. Blatantly not true. The super funds went painfully backwards over those years exacerbated by the fees for “advice”.

The growth has come from the mining boom, which is petering out now, speculation which is subject to radical change if the bubble bursts and Government handouts.

So, you claim my statement isn’t true but then you admit it is true.

And that you can explain away those figures as solely to do with the mining boom?

I could equally claim that the mining boom has been a drag on the rest of the economy and subdued growth in other areas. If you want, you could choose a much longer timeframe to remove short-term fluctuations, the results will be similar.

dungfungus 12:28 pm 11 May 15

The RBA is blindly following what the rest of the Western world is doing (almost that is, they haven’t started printing money, yet).
When there is no appetite for business borrowing money it doesn’t matter what the rate is because it will not be taken up. It is business that creates wealth and jobs.
Fiscal stimulus is a furphy also as “borrowing” from tomorrow’s activity leaves a gap that will never be recouped going forward.
The result of the UK elections shows that governments who chose austerity after the GFC are the ones that people want running the place.
A pox on the rabble in our Senate who are ruining Australia’s last chance of recovery by blocking legislation needed to get the economy under control.
The time to “bite the bullet” is now.

dungfungus 12:12 pm 11 May 15

rubaiyat said :

chewy14 said :

I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, which includes the period of the GFC.

Not true. Blatantly not true. The super funds went painfully backwards over those years exacerbated by the fees for “advice”.

The growth has come from the mining boom, which is petering out now, speculation which is subject to radical change if the bubble bursts and Government handouts.

This is the most sensible comment you have ever made.

rubaiyat 12:08 pm 11 May 15

VYBerlinaV8_is_back said :

High interest rates are fair for all either. What should we be doing about that?

People are irrational about most things, you only have to change the name of the subject and they are lost all over again.

Money is an asset. Call it a mortgage and it becomes something sacred.

Why should money be cheap when the thing it buys is not.

Why should you be able to help yourself, via various institutions and the Government, to other people’s hard earned savings, when you can’t be bothered putting anything aside yourself?

Why should HOW you hold that money be either granted a Government subsidy or stripped away?

What is different between the car you hire, the house you rent, the holiday you pay for and the money you borrow to get them?

Apparently it is the money that should be cheap, so you can blow it, and the debt disposable when the bubble bursts.

The Government has gone beyond conning people into saving, with Super it has forced them into putting the money where they can’t get at it, but other people latch on to it, like leeches, to play with it as if it is their own.

rubaiyat 11:53 am 11 May 15

chewy14 said :

I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, which includes the period of the GFC.

Not true. Blatantly not true. The super funds went painfully backwards over those years exacerbated by the fees for “advice”.

The growth has come from the mining boom, which is petering out now, speculation which is subject to radical change if the bubble bursts and Government handouts.

dungfungus 11:48 am 11 May 15

chewy14 said :

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

Have you seen how volatile the share market is?
“Blue chip” bank shares have plummeted in the past weeks and while they are still paying franked dividends this may not be forever.
Most super funds have now clawed back the capital losses that were incurred in 2007-2008 but they will never claw back the investment returns that were lost since then.
I was appalled to hear several of my friends say they were happy having bank shares in their super because they would be the first to be paid out if there was a corporate failure. I could not convince them that they were totally wrong and the guy who cleaned the toilets in the banks would be paid before them and there is usually nothing left for the shareholders.
Most retired people do not want to take chances with their money in retirement – stellar investment return while exposed to chances of losses is not as important as preservation of capital which should be drawn down commensurately with ageing (you can’t take it with you).

VYBerlinaV8_is_back 11:45 am 11 May 15

High interest rates are fair for all either. What should we be doing about that?

vintage123 11:36 am 11 May 15

Dividend Imputation.

chewy14 11:21 am 11 May 15

rubaiyat said :

chewy14 said :

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

That’s a laugh! The investment advice that tells them to buy the products that provide the advisor the right kickback?

What can the advisor advise anyone to invest in, when the economy and investment returns have been so depressed by this government?

As usual the brazen faced hypocrisy rules. The best advice would be ignore the stupid suggestions about saving, instead do what everyone else is doing; speculate, borrow and negatively gear!

Worked for the GFC when the people who use other people’s money, in Thatcher’s words “eventually ran out of other people’s money”.

Thanks for example exhibit A.

I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, which includes the period of the GFC.

rubaiyat 11:10 am 11 May 15

btw the Principle inflationary cause on the Property that “no-one can afford” is the low interest rates themselves. It compounds at a much higher rate because the compounded figure to be paid off grows faster than the repayments.

The only way we have been getting around that is the luckier children are tapping into their parents’ savings to throw at the problem and so make abad situation even worse.

The best thing we can do for housing debt is to raise interest rates, no first home owners grant, which goes straight to the builder, and put a limit on housing prices by restricting the money available to spent on it.

Just wait for when the cycle swings back and interest rates rise again on those who borrowed cheap and then hold houses worth less than the massive debt. Exactly what happened in the USA and they are still struggling to escape from.

rubaiyat 10:56 am 11 May 15

My advice?

Become an “investment” advisor.

But don’t listen to your own advice.

rubaiyat 10:52 am 11 May 15

chewy14 said :

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

That’s a laugh! The investment advice that tells them to buy the products that provide the advisor the right kickback?

What can the advisor advise anyone to invest in, when the economy and investment returns have been so depressed by this government?

As usual the brazen faced hypocrisy rules. The best advice would be ignore the stupid suggestions about saving, instead do what everyone else is doing; speculate, borrow and negatively gear!

Worked for the GFC when the people who use other people’s money, in Thatcher’s words “eventually ran out of other people’s money”.

chewy14 10:07 am 11 May 15

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

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