Yet another interest rates cut has been passed and so rates are back in the spotlight, yet I must express not disgust, but a feeling that appears as you turn down the road that will one day become disgust, at the tendency of more and more people to say interest rate cuts are bad because it means savings accounts earn less money.
Ross Gittens in this morning’s SMH called them “the silent majority”. This class into which most Australians fit that is so hard done by being forced to earn less money because of some pesky poor people slowing down the economy.
People with bank debt have so because their life circumstances are such that they cannot afford to pay for all the things that are a minimum requirement for participating in our society. Everyone needs a place to live, and no everyone can afford a house, nor can everyone rent one from someone else. Thankfully instead of thousands upon thousands of Australians going homeless, we can instead get a mortgage which essentially gives us a couple more decades to save up for the house all while living in it.
People with higher balance savings accounts and term deposits have so because their life circumstances are such that they can not only afford to pay for all the things that are a minimum requirement for participating in society, they have enough money left over that they can lock it away in a bank. These people are entitled to their interest, certainly. And as a business principal it is their money being lent to the others with loans, and interest is a more or less fair way of the bank compensating them for that use of their money.
But interest cutting both ways does nothing but perpetuate existing financial situations. The people with little money have to pay interest and so end up with even less. The people with lots of money get paid interest and so end up with even more. The rich get richer, the poor get poorer.
And this is all fair enough to an extent. Banks take on a risk every time they give someone a loan, and the interest compensates them for making that risk, just as the interest paid to customers who invest in the bank is in turn compensation for them. Of course then the bank, as a private business (as all banks in Australia now are), balances the interest and adds fees so they turn a profit to deliver to shareholders. That is a much murkier system but that isn’t what I’m talking about here.
But when we talk about interest rates going up or down, interest rates going up is the painful result, and interest rates going down is the relieving result. Rich people getting richer at a slower rate is always worth poor people getting poorer at a slower rate. This is true at any ratio of poor to rich people until such time as there are so few Australians with bank debt that the government can afford to support them individually.
If you’ve got a term deposit and there is another interest rates cut and you want to complain because now you’re making less money stop and close your mouth. You are still getting money simply for already having some. For someone less fortunate the downward spiral of financial dependence has just slowed a little.