We have a very diverse economy both from a socio/economic perspective and also on a state basis.NSW for example was just beginning to grow last yr particularly in the building industry.Now with 11 consecutive interest rate rises,it will again decline.The mismanagement of NSW is just mind boggling.

We have a two speed economy whereby an upper middle class have so much wealth that rates will not affect them and the masses who are struggling to pay the mortage on often over inflated house prices.

If rates continue to rise,then we in NSW are looking at recession and the rest of the country may follow.

Kevin Rudd is stepping up to the plate by reducing Govt spending,however much of this inflation is driven by fuel/food price increases by the food/fuel oligopolies such as Caltex/Woollies and not by consumer demand.

Rather than across the board sledge hammer reactions,both Kevin and the RBA need to target the source of the inflation.

Arjay, it is fairly pointless trying to shoot the messenger.

Fact is that there is something like 1.5 trillion globally, being
shifted from energy consumers to energy producers. Russia, the
Middle East, Venezuela, etc, etc. are all making a fortune.

Producing food consumes lots of energy, in the end somebody has
to pay. If not the consumer, who do you think should pay?

The point of interest rates rises is to stop those who don't
have it, to slow down their spending. Credit card debts, Christmas
shopping etc, have all been at record levels.

Yes yabby has it right no excuses we are in trouble Rudd is trying but it may be out of his hands.
Two cases that highlight our problem in my view both true.
A mate earns $60.000 owns 80% of a home worth $280.000 it can earn him $300 a week rent.
He paid $125.000 for a block of land is paying $240.000 to build on it.
Has two new cars is considering a pool, is committed to pay 67% of his total income including the rental if he rents.
But what if he lost his job? or the house failed to rent? or he buys something else? he is thinking of it!
Another bloke borrowed $150.000, to invest in shares! he has lost $40.000 so far!
It is not all in Rudd's hands.

Perhaps banks need to take responsibility too and make the lending criteria more realistic and in line with ability to pay. Too often you hear stories of banks offering more credit to those who cannot really afford to take this on. I am all for personal responsibility but as a society surely we need to provide a mechanism that would protect those most at risk especially in a rising housing market.

Someone once told me that banks don't acutally use their own money for loans but produce a line of credit on paper. I would like some more information on this if anyone can direct me to a good source. I imagine that the bank must be able to balance up their credit/loans with the amount of money stored otherwise wouldn't this be like printing money which is illegal.

It is a shame that for one sector to do well ie. superannuation returns that another sector has to take on the burden ie. large mortgages, rents and the threat of interest rate rises. Tis a funny system to be sure.

Yes Pelican,
The banks don't really have any money at all.
They get it from credit with the Reserve Bank and depositors and by
borrowing on the money market.

It all points up something that seems silly to me.
The Reserve Bank raises interest rates, the banks raise their rates
and the mortgage payer has to put in more money.
The bank puts up the rate to depositors, but creams off some of it as it goes past.

The depositors then have more money to spend on whatever;
Errrr wasn't that what the interest rate increase was supposed to stop ?

Or is that too clever for the treasurer ?

I think we all agree that money is just too easy via credit cards and retailers offering 3yrs free interest.This is an area that could do with some regulation with the exception of business loans.

Perhaps we should look at a more flexible tariff system whereby certain luxury goods such as plasma TVs have a variable tarrif according to economic conditions,then interst rates will have the edge taken off them.I think we need an international agreement whereby any country is allowed to raise tarrifs in accordance with their balance of payments,much the same as households do.We should not be importing more than we export.Our balance of payments deficit is now $540 billion,or $50,000.00 for every working person.This is why we always have higher interest rates than any of the other western countries.

It is time for the RBA and our Kevin 07 to think outside of the conventional parameters of economic dogma.

perhaps you should ask yourself first, what is the use of talking about politics, when you have no power to control the political environment?

even if you knew what to do, you can do nothing.

put your heads back down on the grass, and let the real people in parliament get on with buggering up the nation.

Demos ,this is about economics,the most fundamental thing that affects all our lives.If the masses dare not question or try to understand,then we are doomed to repeat your fatalistic scenarios.

This interest rate policy has always been a totally inefficient, & complete misdirected. It has very little effect on those who drive inflation, those with a large discretionary spending capacity. What it does is attack only those with very little discretionary spending capacity, who have no chance of driving inflation.

It attacks small business, farmers, & home buyers, in the lower end of the market. These are the people who are the backbone of the country. Those working hard & trying to do their best for their families.

It does not have much effect on large business, the wealthy, or the young, & not so young, singles. All of these have the capacity to spend large amounts of money, in inflation driving areas.

It has no effect on the very large section who are subsidised by the tax payer, & before all you bleeding hearts start screaming, I am a pensioner, but why should it be only my kids that are effected.

It is because of its misdirection that it always takes so long to have the economists desired effect. An immense amount of damage has to be done to lower middle australia, before this ridicules policy starts to effect those who have to be effected, for it to succeed. Are our leaders really so stupid that they can't see this.

Back in the 50s, & 60s we had a much more benign way of controlling inflation. It was called a credit squeeze. A reduction in liquidity made it hard to borrow money, & reduced the inflationary pressure. It had no effect on our home lone rate. It stayed at its 4.25%, yes thats right, 4.25%, & that interest was tax deductible.

And whats so wrong with a bit of inflation? Many who are now very comfortable, paid off their 1960 loan with 1970 inflated earnings. [Adjust for your decades]. It made paying the house off, a much less painful process. Its only the lenders who gain from low inflation, particularly with a floating exchange rate.

So, yes, its about time they started pulling some different levers.

*Back in the 50s, & 60s we had a much more benign way of controlling inflation.
And whats so wrong with a bit of inflation?*

Hasbeen, a couple of snips from your post. What you had was the
Nanny State, it didn't work and still causes us some problems today.
You forget the law of unintended consequences. When Govts try
to put out one fire, they usually accidentaly light a few others,
solving nothing, just creating even more problems.

A bit of inflation means that it goes up on a spiral, as it does,
so do interest rates. Thats exactly why we landed up with 18%
and it was not pretty.

Fact is that Australians are bad savers, for good reasons, our
tax policy. Invest 100k in the bank, the Govt takes half in
marginal rate tax, inflation takes the other half. So people
don't, they prefer to borrow and buy houses or whatever.

The net result is that our current account deficit is huge, unlike
our trading account, which is not so bad.

The Nanny State can't solve all that, that's exactly why Keating
changed to market economics, but that means that people have
to become responsible for their actions and feel pain if they
don't.

I know people who earn 100k and still can't manage their money
and are in debt, others cope quite well on a pension.

If people blow it all at the pokies, if they pay far too much
for their house, if they run up huge credit card debts and pay
a fortune in interest, they need to learn to change their ways,
the Nanny State will not solve it for them.

It is nonsense to suggest that only the poor get it wrong and are
suffering. I saw an article the other day on the Eureka report,
which showed how many houses in Palm Beach are for sale. All due
to relatively wealthy people borrowing too much, losing it on
margin trades on the stock market and now paying the price.

Fools and their money are soon parted, be they rich or poor.

Yabby, the difference is that the poor do not have at their disposal the income to be able to adapt to abrupt changes in interest rates. Those selling off their house in Palm Beach because of foolish decisions wasted the advantages and benefits that their higher incomes afforded them.

The poor and the working poor are not frugal by choice, it is a condition imposed and as such the impact of rising interest rates is much greater ie. there is not much room to move on the domestic budget.

I always wonder who is doing all this spending - it certainly cannot be with real money given the large level of personal debt in this country.

Would it be too cynical to suggest there might be other interests or motives at play in over-emphasising the importance of increasing interest rates to control inflation in monetary policy?

Yabby, Who was talking about the bl@@dy poor. I was talking about the lower middle class, who aspire to home ownership, & something put by for their kids.
If you had read what I said, you would see that with even modest homes, there is not much left for these people to drive up inflation.

If they or anyone else, run up debt they deserve to pay the price, but they don't deserve to be the ONLY ONES paying the price for bad government, which is how this policy, in facy, actually works.

Yes Pelican, it is the lenders who have most to gain with this policy. Their repayments are made with ful value money, not money devalued by inflation.

Just one other thing Yabby, if the 60s were a nanny state, just whatdo you call today. We had very few "SERVICES" back then, thank god. We paid our own way, but were protected from rip off banks.

Of course, we only had to drag one tenth of a public servant around behind us, not the half of one we have today.

Pelican, if you really want to help the poor and working poor, then shut down
all pokies tomorrow. That should save them around 6 billion$, IIRC.

The whole thing about increasing interest rates is to get people to think
twice about spending, or bidding even more on that house. Our economy
is frankly overheated and needs to slow down, that’s why interest rates
will work, when the pain is large enough.

Nothing is imposed on the poor, they make choices in life, as we all do.
Australia is full of opportunities for those who want to grab them.

Sheesh, when I married in my early 20s, we were stony broke. It was
a 40$ wedding dress, no wedding rings and 6 people, its all we could
afford. Such is life, you cut your cloth to fit. The biggest problem today
is that people think that if they are not millionaires, they should be miserable.
Rubbish!

Hasbeen, I remind you that State and local Govts load up new land for
housing with something like 100K$ in taxes and charges for infrastructure,
something you did not have to pay. No wonder that new homes are more
expensive, for these costs are passed on to young families when they buy
their block to build on.

Today we have a nanny state in terms of social services etc, but not
economically speaking. There is a large difference. Huge amounts
of Govt money are paid to those on lower incomes, from baby bonuses,
childcare, etc. etc. Take a look at where the 90 billion$ is spent.

Economically speaking, everything changed with the deregulation
of the monetary system. In the 70s it was almost impossible to obtain
a loan. Now any 20 year old with a trade, can borrow to start their
own business. In the 70s, only the very rich owned property other
then their house, today its common. Today, the bank spread between
borrowing and lending is about half what it was then, consumers
benefit. People can now borrow freely, but they can also get into
financial trouble. User beware!

Well said Hasbeen.I don't know about the other states but NSW has chronic shortage of housing.Govt taxes and charges account for 37% of a house/land package and thus investors have deserted the market.
Rents are increasing and this will result in many people just moving to other states.Interest rate hikes will only accelerate this trend.

We have so much wealth,yet the ordinary punter is far worse off than 25 yrs ago.With the Global warming zealots pushing their barrows,things will only get harder.

Yabby I don't know whether to take you seriously or not. You can't believe that the working poor and the poor (ie. those living on meagre pensions) are in dire straits because of the pokies? Sure there will be always be those who waste money in this way from all socio-economic levels.

I do agree that we have become greedy overall. But our heightened consumerism and inability to 'wait' for material possessions, or do without, makes it difficult for those choosing not to don't buy into this lifestyle.

It may be that the Australian Dream of owning your own home will go but even if you cannot buy a home you still have to rent and we are in a tight rental market. I wonder if those who bid more than they should believe it is better to purchase rather than paying out huge amounts of rent which is dead money. Most people don't qualify for government housing and there are not enough rental properties to go round.

It is a great concern when as a society we accept abysmally low pension payments where the elderly, the disabled and their carers are barely surviving. And I mean putting food on the table not out buying plasmas and swimming pools.

Pelican, if you don't realise the signficance of gambling related
to poverty, then feel free to kid yourself.

Australians are the world'd biggest gamblers. The State of NSW has
more poker machines per capital then any place on earth. Aussies
lose around 1000$ a head on gambling, more in NSW, less in WA, as
we don't have pokies.

http://news.bbc.co.uk/2/hi/asia-pacific/6313083.stm

Renting is certainly not dead money. Its a service provided.
Houses require insurance, rates, repairs etc. In many parts of
Europe, renting is normal. So what?

Land is the biggest cost when it comes to housing and Australia
is not short of land. Its Govts who have made land expensive to
people who want to build homes, with their taxes and charges.

Yabby you are purposely misconstruing what I have said to suit your argment. Does gambling cause poverty? Yes of course it does but not all poverty is due to gambling or do you wish to ignore all the other factors that cause poverty?

The difference in renting in Australia and in Europe is supply. I have relatives that live in Europe and rental accommodation is plentiful (not in all places I know) and rents are controlled in some apartment complexes. Not so here in Australia where the market will determine the rent even if there are massess that cannot afford to pay, some even becoming homeless. You might be paying for a service but if there is limited supply then chances are you are paying too much and may as well purchase a house if you have to come up with this amount of money on a monthly basis anyway

No Pelican, of course not all poverty is caused by gambling, but blowing 13 billion
on gambling does not help!

Sometimes I just get pissed off by people constantly grizzling and of course its
all the Govts fault. I really don’t think that Australians appreciate how lucky
they are, in a relative sense.

Meantime other Aussies are thriving, under the same conditions. A couple of
Nights ago there was a pensioner on Today Tonight, complaining about her
miserable pension of 280$, so they went shopping with her. She spent
111$ or so on food, including the most expensive toothpaste ( 8$), then
148$ on Vitamins! Sheesh, no wonder the budget does not add up.

Fact is that you could increase pensions by 50$, some would still blow the
lot, others would cope as they cope now, some quite well.

As to housing, Govts spend 4 billion$ a year, helping 1.5 million households
with various housing assistance.

http://www.news.com.au/story/0,23599,23256626-421,00.html

But no matter how much Govt helps, some individuals will get it wrong,
buy houses they cannot afford, not allow for Murphy’s Law and land
up as hard luck stories on tv.

I have come to the conclusion that some people just like complaining,
its easier to blame everyone else, rather then ourselves, for our problems.

But usually the solution is ourselves. Some facts remain. On average
Australians are earning more then ever before, are richer then ever
before and are spending far less on food then 20 years ago or 50
years ago. Its our selective memories that are the real problem.

I am not completely disagreeing with you Yabby in that I also believe people have to take personal responsibility but where the government comes in is that they are elected to represent all sectors. This means creating equal access to opportunities that allow people to help themselves. If people don't 'grizzle' then democracy fails us, it is up to us to let the government know if we believe money is not being spent in the right areas.

Naturally you cannot please all the people all of the time but a government should not selectively serve one interest group at the expense of all others. We have to make governments accountable, you can call it grizzling if you like.

I saw that show about the pensioner with her $8 toothpaste but if you listened she had no choice but to buy the Sensodyne as it is the only toothpaste she can use due to a severe allergy. This was explained clearly on the show as well as why she needed to buy vitamins.

Gambling is a big problem and while it makes money for the operators it can be devastating to the addicts and their families. I don't know what the attraction is to gambling (or smoking or binge drinking) myself but it is a huge problem and there are many charities now providing financial and personal support to both the gambling addicts and their families.

*We have to make governments accountable, you can call it grizzling if you like.*

Pelican, I fully agree that discussion is a good thing, thats
why I take part in a forum like OLO.

OTOH when people go on and on about the Govt solving everything
for them, I think its not a bad idea to point out that the
best person to help us is ourselves. I see plenty of people doing
it every day and doing well.

I have no problem with Govts helping people to help themselves.
But I also know the realities out there. If I want work done,
there are any number of people on invalid pensions, offering to
do it for cash. I've been told by various others, that if they
are smart enough to screw social security out of the system and
avoid working, why should they not do it? That kind of
pisses me off, as I'd rather see more money spent on those who
are prepared to get out of bed and have a go, but just don't get
paid much.

Some of the people screaming loudest about wanting more from
Govt, are in fact quite selfish IMHO. For many of them feel
they have a right to screw the system if they can and feel
some kind of entitlement to a cushy lifestyle, at the expense
of the rest of us. Sorry, but I disagree with that ideology

I agree that there are those that will always exploit the system and will not behave with honesty or integrity.

A good system would have failsafe mechanisms to reduce these incidences but I know nothing is perfect. The difficulty is in trying to balance the rights of the genuinely needy with checks and balances to prevent abuse. This is not easy, maybe in a society that believes in the welfare safety net we have to accept that sometimes some will get away with it. If someone came up with a system that would prevent this we could sell tickets.

I don't want people out there exploiting the system and making things harder for the honest hard working people out there. I am with you on that one Yabby, but I don't want to see people who for no fault of their own are struggling beyond what we would think fair.

I have had a grand idea for reducing inflation - what if we link politician, executive, CEO and public servant salaries to CPI just like pensions are and then those who are really spending the money will be curbed. Inflation controlled. (tongue taken out of cheek now) :)

Pelican, the present rise in inflation is going to be more difficult
to contain, for its causes are global and quite different.

For the last 50 years or so, commodities got relatively cheaper
and cheaper over time, to the point of the ridiculous. In the late
90s, oil was down to 10$ a barrel for instance. Australia was
considered a backward economy, for relying on commodities.

What has now changed is that the easily mined stuff is largely
gone. Its not just oil, its from oil to phosphates to gold,
to you name it. Things like oil and phosphates are built into
our every day costs like transport, food etc. Somebody has
to pay for the increased costs and the question is who?

The same now applies to carbon. Introduce a carbon tax and
somebody has to pay. Companies won't pay, they will pass it
on, for they won't operate at a loss. If you want electricity,
fuel, food etc, it won't be there if people are making a loss
providing it. In a sense we are now paying a price for having
driven commodities down to ridiculously dirt cheap prices for far
too long.

More and more, we are seeing pensions not as a solution, but more
as a safety net for some. Our wealthiest generation on average,
are in fact the grey nomads/ oldies. They have sold their businesses/
farms, own alot of shares bought for a song a long time ago,
own ever increasing real estate. Its not uncommon for them now
to own houses worth over a million $, purely through the good
fortune of their location. Many have superannuation, but not
all of course.

Given all these assets, its only fair that taxpayers provide
a safety net, but if they want to live it up, its only fair that
they tap into their lifelong accumulated assets, rather then
leave the kids filthy rich one day