Most of us have an interest in interest rates, one way or the other.
For example, the current record low rates, negative in some countries, mean that those with mortgages and other loans rejoice while those who live off their investments don’t fare as well.
Consequently, one question looms: when will interest rates rise, and by how much?
On the surface, it appears as if our politicians and central bankers hold the answer. However, upon closer inspection, you’ll find that a deeper underlying force determines the rates.
Ostensibly, central banks or governments set the base rate as an instrument to stimulate or dampen the level of economic activity. In most developed countries the rates have been strongly pushed down since 2008 to fuel growth.
However, you only need to glance at the headlines to reveal that it hasn’t been working. Economic growth remains sluggish and experts expect another round of financial and economic turbulence to strike soon.
What has changed to render this once effective economic tool mute?
While banks and governments set interest rates, the actual determining factor for their levels relates directly to business expectations for the future.
If advancing technology, scientific progress and government assistance to foster growth create the expectation of an increase in production and productivity, businesses will borrow to invest with the hope of benefiting from the expected economic expansion when it arrives.
Inversely, when the opposite expectation prevails – that things will remain the same or get worse – borrowing money to make an investment becomes unattractive.
Unfortunately, policy makers in advanced economies (including Australia) keep denying the reality that presently businesses don’t want to borrow money for investments-no matter how favourable the terms. They no longer see a clear path to employ the money to generate new value.
Why does this perception exist? Has scientific progress and technological advancement run out of puff?
Not really; quite the opposite. Commercially viable innovations proliferate endlessly, but most advanced economies have become infected by a man-made disease I term “structural sclerosis”. Dulled growth manifests as its primary symptom. This infection has gotten so bad that it practically nullifies the massive advances in technology, science and manufacturing techniques that we witness nearly daily.
Australian, American and European economies suffer from over-regulation, ever-growing and complex taxation, as well as increasingly stringent regulations, which constrain businesses and their ability to run smoothly.
In particular, employing people has become a significant risk and burden on employers. As a result, the laws enacted to protect workers have the opposite long-term effect, gradually making them extinct as businesses frantically work to reduce their dependency on employed labour.
If the Australian government wants the business community to gain momentum again and generate solid economic growth, serious structural changes must be made. Only by treating the underlying structural sclerosis can the general well-being of the country start to improve.
Extremely low interest rates won’t work on their own. The time has arrived for the Australian government to realise that the mule has been so badly beaten with the stick, it no longer has an appetite for the carrot. Australian Opposition parties should make an effort to understand this, too.