Australia now has one of the highest official interest rates in the world but many economists still call them low, New Zealand’s are marginally higher.
So what’s high and what’s low? In most developed countries, the official interest rate sets a benchmark from which mortgage, credit card and other loan rates are set. If interest rates are “low”, individuals, businesses and governments will borrow to invest or increase consumption. We buy more DVDs, cars and property whilst companies expand production and governments build infrastructure. If rates increase, we put off buying and investing and the economy slows down.
Raising or lowering rates is always likely to be controversial because the decision will be based on imperfect data. It takes time for statistics to emerge and show what the economy is doing. And often there are flaws in the data or the figures conflict with each other.
Using interest rates as an economic tool is not an exact science.
Cutting rates too quickly could trigger a recession and moving too slowly could allow inflation to get out of control. In theory there should be a “neutral” interest rate that will keep the economy ticking along nicely. The Reserve Bank says this is between 5.5% and 6.5%. The problem with growing too fast is that demand outstrips supply and prices start to rise. Signs of this have been emerging with shortage of skilled workers, higher prices for raw materials and infrastructure bottlenecks. These problems cannot be solved overnight so the “solution” is to slow the economy to reduce demand. How well the strategy works depends on the response of individuals, businesses and governments. The economy, after all, is the result of the decisions we all make. A household with high levels of debt may tighten their belt. Alternatively, if each person holds a secure job and still feels confident, they may not change their spending patterns at all. A business may decide to defer expansion plans not just because credit is now more expensive, rather they see lower demand for their products. Another strategy could be to proceed with expansion plans and try to steal a march on their competitors. It all depends on how we personally react to the words and actions of the Reserve Bank.
TEACHING YOUR KIDS ABOUT MONEY
Teaching kids a sense of thrift in today’s world is not easy. From their earliest days they see money pouring out of machines and their parents slapping a piece of plastic on the counter to obtain whatever they want. The thought as to where it all comes from is unlikely to even cross their minds unless they are trained at an early age.
Some children like to hang onto money when it comes into their possession – others cannot spend it fast enough. Whilst teenagers and young people can enjoy their money, if they are not taught to manage it effectively when they’re young they are highly likely to have problems when they come to handling adult responsibilities.
So how do you teach them? The answer is to start young and be firm.
Children who get everything they ask for will never learn the value of money. As soon as they are old enough to understand, generally four or five years old, children should be given a basic weekly allowance – something the parent can easily afford. When the allowance is spent they get no more for the rest of the week. As they get older the amount should be increased each year in line with extra responsibilities to be fulfilled.
Other hints include:
*Talk to your children about money: discuss saving for particular objectives. You may wish to match their contributions dollar for dollar to keep them motivated.
* Let them make their own decisions: if they spend it on something frivolous and then cannot buy something they really want, this is a good lesson.
* Set up their own bank account: even if they have little in it, they will learn from the exercise by watching it grow.
* Give them a clothing allowance when they are old enough: even if you need to supervise how that particular allowance is spent.
* Help them shop for an interest bearing account when they start to accumulate some savings: and teach them the value of compounding interest.
Being tough with money in the early years may create a few hassles but your children will thank you for it in their adult lives, particularly when they are ready to buy cars and homes, and are raising their own children.
The History of Money
From 9000BC to the present day we continue the story of the History of Money.
1872 Japanese National Bank Act. American rules serve as a model for Japanese commercial banks.
1872 Paris Clearing House created. This is over 100 years after the creation of the London Bankers’ Clearing House. The backwardness of French banking prior to the second half of the 19th century has retarded the country’s economic development.
1873-1924 The Scandinavian Monetary Union. Denmark, Sweden and Norway form a monetary union similar to the Latin one but with gold as the standard for their currency.
1873-1886 The Great Depression in Britain. The British economy is in decline relative to those of the US and Germany. One effect of the so-called depression is to cause doubts about the merits of the gold standard.
1873 Dai-Ichi Bank founded in Japan. The Dai-Ichi Bank is set up by the government with the support of some of the larger Zaibatsu banks.
It is the first bank to be created under the terms of the 1872 Act.
1873 US Coinage Act. The silver dollar ceases to be the standard of value. Thus the US is virtually on the gold standard, in practice if not in law.
1873 Bank panic in the US and Germany. Lacking a central bank or lender of last resort able and willing to supply sufficient liquidity to quell crises in their early stages the US proves prone to bank panics. As in 1857 the panic spreads across the Atlantic and causes many bank failures in Germany.
v Excerpts from the book; A History of Money by Glyn Davies.
souce: morrison carr
