The world desperately needs an alternative to the economic system now enslaving it.
Could Steem be part of the solution?
I spend most of time trying to keep property investors from making dumb investing mistakes made possible by the ridiculously low borrowing costs available today. And there's no end in sight.
The Reserve Bank of Australia (RBA) just slashed its cash rate to an unprecedented low 1.50 percent.
The Federal Reserve is now feigning a more hawkish stance, but has little choice but to eventually return to a 0 percent federal funds rate, and perhaps venture even farther south.
The Bank of Japan and European Central Bank are both flooding their bond markets with newly printed currency to drive down yields and push interest rates into negative territory.
Greedy and power-hungry central bankers are robbing future generations of wealth and prosperity right out from under our noses, and no one seems to even notice. Most people remain ignorant of economics and the pain that current central bank policy will ultimately bring. As a culture, we celebrate artificially low interest rates and use low borrowing costs as an excuse to leverage ourselves into oblivion.
But there are no free rides. While low borrowing costs may bring some short-term gain to mortgage holders and exporters who benefit from a devalued currency, ultimately the entire rigged system will collapse like a house of cards.
At least RBA Governor Glenn Stevens tells the truth:
“…although popular commentary just regards lower interest rates as always better, that is not really true for significant parts of the economy; it is actually bad for significant parts of the economy.”
Here are six “significant parts of the economy” that are being ravaged by artificially low interest rates:
1. Retirees Living Off The Interest Of Their Savings Get Kicked In The Teeth
Retirees depend on income from low-risk investments to fund their retirements. In 2009 in Australia, investors could earn 8 percent in a term deposit. Now that figure is closer to 2 percent, meaning many retirees have lost three-quarters of their income.
Two years ago, Glenn Stevens said…
“Right now, the savers are feeling the pinch of very low rates of interest on the safe assets that they hold and they are being prompted in many cases to accept a little more risk to get the return they are seeking… other than under the most extraordinary circumstances, one might think that there may be some point at which you do not want to keep punishing the savers too much further.”
Apparently we are now experiencing those “extreme circumstances.” Retirees are being kicked in the teeth, forced to assume greater risk to get a descent reward. In light of world currency wars, retirees may soon be unconscious on the mat.
2. Unskilled Investors Take On Greater Risk To Get The Same Return
In addition to bank deposits, savers sometimes park assets in low-risk government bonds. Lower interest rates lead to lower bond yields.
As interest rates decrease, investors tend to transfer a higher percentage of assets into the share market in search of higher yields, exposing themselves to greater risk. These transfers can push up the value of the share market, even when the underlying companies are not performing well and not fundamentally strong enough to justify their values.
This, in turn, leads to an asset bubble in the share market, which heightens investor risks all the more. When the bubble eventually bursts, investors who couldn’t see the writing on the wall could end up losing everything.
3. First Home Buyers Find It Harder To Save For A Deposit
Lower interest rates also lead to asset bubbles in the real estate market.
When the cost of borrowing is diminished, investors and home buyers become more motivated to buy, which pulls forward demand from the future. Investors speculate, homeowners upgrade to nicer homes, and first home buyers try to enter the market.
This creates greater demand for housing, which lifts property prices. Sydney, Australia now has a median house price of over $1 million, with a median home price to income ratio of about 12 to 1.
The more expensive a home is, the greater a deposit the buyer needs, which squeezes most young first home buyers out of the market. They find it increasingly more difficult to compete against those who already own a home and who’ve benefited from a few decades of strong capital growth.
4. The Gap Widens Between the Haves and Have-Nots
As asset prices are inflated by investor speculation, the rich become richer and the poor become poorer.
A report from Oxfam Australia suggests that the richest 10 percent of Australians owns more wealth than the remaining 90 percent combined. Of all the additional wealth accrued by Australians since 2000, the richest 10 percent captured more than half, while the poorest 10 percent captured so little of this extra wealth that their share is almost zero.
According to research by the National Centre for Social and Economic Modelling, Australia’s wealth gap grew by 13 percent over the past decade and is projected to widen by a further 10 percent over the next 10 years.
This is happening all over the western world where central bankers are suppressing interest rates and stealing from future generations to line the pockets of the elite.
5. Stuff We Buy Gets More Expensive
This is called inflation and is tied to the value of our money. Central bankers say we need inflation in small doses, and so they seek to moderate the consumer price index through the manipulation of interest rates.
To decrease interest rates, central bankers increase the supply of money, which makes our currency less valuable. We in turn need more of the new money to buy stuff. Looking back over the past few decades, we’ve seen this devaluation in all fiat currencies relative to gold.
Sometimes we feel inflation immediately, like when we buy stuff online directly from overseas. Other times, it takes a few months before importers pass on their costs to us, the consumers.
As long as stuff increases in price gradually, and wages go up at the same time, no one really complains. But if inflation spirals out of control, and wages do not follow, there will be pain.
6. Short-Sighted Home Buyers Overextend Themselves
As property investors and owner-occupiers are drawn into the housing market by historically low interest rates, they fail to think long term. Forgetting that rates will inevitably rise, they get caught up in the euphoria of a rising market and base their household budget on today’s rates.
In Australia, there is no such thing as a 30-year fixed rate mortgage. When the RBA raises rates, households feel the cash flow pinch immediately. All financial variables tend to revert to their mean. In other words, over time, interest rates will tend to move back toward their historical average.
The average standard variable home loan rate in Australia between 1990 and 2015 is about 8.5 percent. Go back farther and the average will be higher. What would happen to the average person in Australia if their mortgage interest payments doubled? I predict pain.
What's the answer?
My hope is that Steem specifically, and cryptocurrencies in general will be part of the solution. I also hope it doesn’t take a full-scale economic collapse to open people’s eyes.
What do you think? How do you see Steem solving this problem and freeing the world from the abuse of economic power?
(I originally shared some of these thoughts in an article I wrote at PropertyInvesting.com in early 2015 when the RBA cut the cash rate from 2.25 to 2.0 percent. It is even truer today than it was then.)