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Does government borrowing affect consumer interest rates?


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#1 pappes

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Posted 29 July 2010 - 12:44 PM

I have seen in a few threads now that interest rates are high because the government has borrowed so much money. This would be based on the notion of supply and demand that assumes if demand increases without an increase to supply then prices (rates) go up. But I ma not sure that Treasury and the commercial banks use the same source of funding. I am fairly sure that the RBA monitory policy which is based on inflation targets is immune to any affects of government borrowing but I am not sure if government borrowing has some effect, no effect or massive effect?
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#2 iamthemaxx

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Posted 29 July 2010 - 12:46 PM

I would have thought the same thing as well regarding their borrowing suppliers. But still the spending does involve money being injected into the economy, which would require rates to go up to offset inflation.

#3 Rybags

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Posted 29 July 2010 - 12:54 PM

It does. If the government wants to borrow more money in the form of Bonds, then obviously they need to jack up the official rate to make them attractive to investors. Also, the government borrowing money from foreign sources puts pressure on a finite resource, so obviously demand will dictate that interest rates will rise accordingly. I forget the link, I posted it a few months ago. Interest rates here are higher than practically all of the top 30 industrialised economies. Also, home loans can't necessarily be sourced from local funds, so the banks have to look elsewhere for the money. Funnily enough (if you can call it that), plenty of local Super Funds got burnt because they had lots of employee contributions locked up in the US sub-prime market.

Edited by Rybags, 29 July 2010 - 12:55 PM.

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#4 grazer

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Posted 29 July 2010 - 12:54 PM

Yeah. Government spending gives more money to consumers to consume, making inflation increase and interest rate rises probable.

#5 Pomky

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Posted 29 July 2010 - 01:01 PM

Well considering the multiplier effect of government spending it can have a huge effect upon the level of the interest rate if spending is contrary to the goals of the RBA they will change rates in accordance to minimise the effects of governement spending. So yes they can affect consumer interest rates through greater spending(via borrowing) or not spending sufficient amounts.
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#6 Director

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Posted 29 July 2010 - 01:02 PM

http://www.lewrockwe...ul/paul334.html

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans Australians the most. Simply put, printing/borrowing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real – the individuals who suffer most from cost of living increases certainly pay a “tax.”

Unfortunately no one in WashingtonCanberra, especially those who defend the poor and the middle class, cares about this subject. Instead, all we hear is that tax cuts for the rich are the source of every economic ill in the country. Anyone truly concerned about the middle class suffering from falling real wages, under-employment, a rising cost of living, and a decreasing standard of living should pay a lot more attention to monetary policy. Federal spending, deficits, and Federal Reserve RBA mischief hurt the poor while transferring wealth to the already rich. This is the real problem, and raising taxes on those who produce wealth will only make conditions worse.

Borrowing money to cut the deficit is only marginally better than raising taxes. It may delay the pain for a while, but the cost of government eventually must be paid. Federal borrowing means the cost of interest is added, shifting the burden to a different group than those who benefited and possibly even to another generation. Eventually borrowing is always paid for through taxation.

The third option is for the Federal Reserve RBA to create credit to pay the bills Congress runs up. Nobody objects, and most Members hope that deficits don’t really matter if the Fed accommodates Congress The House of Reps by creating more money. Besides, interest payments to the Fed RBA are lower than they would be if funds were borrowed from the public, and payments can be delayed indefinitely merely by creating more credit out of thin air to buy U.S. treasuries. No need to soak the rich. A good deal, it seems, for everyone. But is it?

The “tax” is paid when prices rise as the result of a depreciating dollar. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low- and middle-incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy. Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating.

The transfer of wealth comes as savers and fixed-income families lose purchasing power, large banks benefit, and corporations receive plush contracts from the government – as is the case with military contractors. These companies use the newly printed money before it circulates, while the middle class is forced to accept it at face value later on. This becomes a huge hidden tax on the middle class, many of whom never object to government spending in hopes that the political promises will be fulfilled and they will receive some of the goodies. But surprise – it doesn’t happen. The result instead is higher prices for prescription drugs, energy, and other necessities. The freebies never come.

The moral of the story is that spending is always a tax. The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer.

July 18, 2006




Rybags,

I forget the link, I posted it a few months ago. Interest rates here are higher than practically all of the top 30 industrialised economies.


Yup.

http://www.fxstreet....st-rates-table/

OUr reserve rate is 4.5% the next closest is Canada at .75%..that's a big gap. Of course China and India at at 5.31% and 5% so maybe we will get to rule the new world order with them? :)

Edited by Director, 29 July 2010 - 01:09 PM.

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#7 Rybags

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Posted 29 July 2010 - 01:09 PM

Different link to the one I had... mine just had them listed in a table. Value of the dollar is a bit more complex... strong exports vs imports will generally inflate it's value, excessive government spending and/or borrowing can deflate it. Also, since ours is floated and open to trading by practically anyone, speculation by external forces can also affect it.
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#8 Director

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Posted 29 July 2010 - 01:13 PM

Yeah there's a few calls about to pin it back to something tangible again...good luck to them. ;)

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#9 robzy

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Posted 29 July 2010 - 01:36 PM

Yeah. Government spending gives more money to consumers to consume, making inflation increase and interest rate rises probable.

Yup, that was my line of thinking.

Rob.

#10 pappes

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Posted 29 July 2010 - 06:49 PM

OK so I get that when the govt borrows money to fund spending initiatives, that means there is more money circulating in the economy, hence more money in cusmers pockets hence cosumers are less frugal with spending and retailers can get away with raising prices and the inflationry pressures reduce the purcahsing power of each dollar, which then hits the RBA triggers for raising rates.

Presumably when the govt wants to begin repaying the debt, it increases taxes/reduces spending resulting in the opposite (less money in the economy, deflationary pressures, lower RBA rates)

Got that

SO the govt SHOULD borrow money during a bust and REPAY debt during a boom to act as a buffer for economic activity.

It does.
If the government wants to borrow more money in the form of Bonds, then obviously they need to jack up the official rate to make them attractive to investors.
Also, the government borrowing money from foreign sources puts pressure on a finite resource, so obviously demand will dictate that interest rates will rise accordingly.
I forget the link, I posted it a few months ago. Interest rates here are higher than practically all of the top 30 industrialised economies.
Also, home loans can't necessarily be sourced from local funds, so the banks have to look elsewhere for the money.
Funnily enough (if you can call it that), plenty of local Super Funds got burnt because they had lots of employee contributions locked up in the US sub-prime market.

Rybags You are applying the laws of supply and demand to the money market without taking into account RBA rate movements. The RBA have a traget rate for inflation and based on the actual spending habbits of consumers (how much spare cash is in their pockets). If people do not have much spare money or are hording it in bank accounts then businesses are less able to raise prices, hence inflation goes down and the RBA lowers interest rates to entice consumers to borrow money that they will then spend. It is not a supply/demand equation becasue the banks can borrow from the RBA and the RBA can ask the national mint to print more money.

This lends itself to Hansonite like tedancies (we can just print more moey to pay for things) but fiscal resposibility says that if cash is ballanced against assets (collateralised loans, T Bonds, etc) then the inflationary pressures are only temporary.
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#11 robzy

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Posted 29 July 2010 - 07:05 PM

SO the govt SHOULD borrow money during a bust and REPAY debt during a boom to act as a buffer for economic activity.

Iirc that was what we were told in first year macroeconomics. The government is basically one large entity that can act to try and keep the economy on the right path, which includes buffering out strays from the equilibrium.

Rob.

#12 LogicprObe

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Posted 29 July 2010 - 07:56 PM

Where's the poll?

#13 passy

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Posted 30 July 2010 - 01:48 AM

SO the govt SHOULD borrow money during a bust and REPAY debt during a boom to act as a buffer for economic activity.

Iirc that was what we were told in first year macroeconomics. The government is basically one large entity that can act to try and keep the economy on the right path, which includes buffering out strays from the equilibrium.

Rob.


Rob.

I've lurked here a a lot, and have respected your posts - but ...

"The government is basically one large entity that can act to try and keep the economy on the right path, which includes buffering out strays from the equilibrium"

I'd prefer to replace this with...

"The government is basically one large entity that can act to try and keep the economy on the right path, AND IS THE BUFFER BETWEEN THE stray(S) AND equilibrium".

Cheers!




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