What is done with the extra money borrowers pay when rates rise? Does the RBA stockpile it?

I have been thinking the same thing, for some time.

Back in the 50s, & 60s, we used to have a credit squeeze from time to time. Liquidity was reduced, & with less money sloshing around, it was quite hard to borrow money. Only those able to pay a high deposit had access to borrowing.

This had the effect of slowing the economy, & probably saved the less prudent from over borrowing.

What it did not do was harm the less affluent home buyer. Housing interest rates stayed at 4.25%, yes thats right, not a miss print, 4.25% was the housing interest rate. It makes me smile when they talk of record low interest rates of 7+%.

These less affluent home buyers spend almost all their income on housing, food, & transport. They have little or no extra driscretionary spending capacity, & therefore no effect on inflationary pressure.

For the more affluent these rate rises are merely a minor annoyance, & has little effect on their spending, & inflationary impact.

Of course, it sends good farmers & small business men to the wall, & destroys the lives of too many other good people. To say its a bloody blunt instrument is putting it far too mildly.

It is the type of pollicy one could expect from a horrible bastard like Keating, but Howard should have fixed the inequality of this inefficient policy, years ago.

As he has not, he deserves what he is about to get. However, I'm not sure we deserve what, I fear, we are about to get. I'm very glad I am too timid to get into debt.

Arjay, have you looked at where incomes are growing the most?
I'd wager that much of that "unaccounted for" $200 billion has wound up lining the pockets of our richest %1, and certainly of those that own investment property. I'm not sure figures are available comparing 2007 to 2005, but certainly in the last 10 years wealth disparities in Australia have increased considerably.

Rojo,some of the money the RBA takes from the Banking system goes back to the Federal Govt as some form of dividend.I do not know the proportions.Rememeber that money has no intrinsic worth so I assume the RBA just sits on it until such time inflation falls and they lower rates,thus it is released back into the economy.

The main thrust of my argument is that the RBA should put tougher regulations on the loaning of money via credit cards and non bank institutions.Just look at the sub- prime mortage debacle in the US.We are in better shape because of our more disciplined system,but the RBA can do better.

Wizofaus,I agree,I don't think the wealth has been distributed well at all.Some of it has been used by the Federal Govt as a carrot to win the next election.The $56 billion in promises will add to inflation and put more pressure on interest rates.The money would be better spent on fixing our infrastructure ie water,transport,etc rather than seducing minority groups in marginal electorates.

"I agree,I don't think the wealth has been distributed well at all.Some of it has been used by the Federal Govt as a carrot to win the next election.The $56 billion in promises will add to inflation and put more pressure on interest rates.The money would be better spent on fixing our infrastructure ie water,transport,etc rather than seducing minority groups in marginal electorates."

Arjay sees the light!! There is hope yet.

Q&A,if Labor had been in power for the last 11 yrs,there would have been no wealth to redistribute.I'm not beyond critising all Pollies.There is an evil side to this Globalisation I don't like.We lower our tarrifs so industry moves to where labor is cheapest,both the left and big business thought this was a brillant idea since it gave employment to poor counties and access to our markets.

Now due to the dropping of tarrifs many small business in Aust have become extinct.Big business has taken up the slack in places like China but because of their market domination they make enormous profits.Wollies and Coles are good examples.The US is presently suffering because of the dominance of China who refuse to float the yen because it's true value would see their exports drop.

Now since we have decimated our manufacturing sector our balance of payments deficit blossoms.To counteract this the RBA always has our interest rates higher than the US.IR reform is about making us more competitive with China/India,but the reality is that real living standards will fall for those in white and blue collar jobs.

Now by bringing China/India into the consumer world there is now enormous pressure on energy and resources.In the short term we benefit by selling them resources/energy but the price of these commodities in the long term will increase enormously.In reality the West will be worse off since cheap energy above all else,underpins our living standards.The capitalist system assumes boundless,cheap energy supplies.The West has been too smart by half.

Both the major parties support Globalisation and the continued lowering of tarrifs,but at least the Coalition are being honest about the reality of IR reform and the need to keep industry here,since the day will come when the resources/energy are gone.

Enjoy the present,since the long hard times are coming.