The interesting thing about interest rates is that people are not interested in understanding what part interest rates play in their ongoing life, or perhaps they do not understand how interest rates can dilute their spending power, or why variable interest is discriminatory and why others miss out.
Interest is the cost applied to borrowing money. We are interested in the borrowing from banks as the major lending entities in our world.
When you have a debt from these institutions, you are obliged to pay interest and payment of this interest will be enforced and reduced in front of any capital. Interest is always applied before any payment is deducted.
Interest applied by banks is allowed to be enforced in a variable manner as the contract allows. Not you, only the banks. You will be aware of banks unilaterally raising your housing loan interest rate, but you, even as a partner to that contract, do not have that authority or control. It has been said quite correctly, that, “a contract is enforceable on the weaker party”.
For many years governments have used interest rates as a control of inflation. Inflation was once described as “too much money chasing too few goods”. Nowadays inflation is a non-entity simply because it has become the whim of, say, the RBA, or Government, to simply transfer money from part of the private sector to the private banks. That transfer is compulsory and, because it is compulsory, it is in fact a tax.
If there is excess money in the system, then that excess is the fault of us all, not just those who have mortgages or overdrafts. How secure is a system that places the burden for control of a country’s accursed inflation squarely on the shoulders of those trying to provide a house for their family, or those needing a car to get to work, or a myriad of other necessities that require borrowing money. Our system does.
Of course, business is also subject to interest rate rises but there is a big difference. Business can claim interest paid within their tax returns and this reduces the impact in most cases.
Not everybody in our society owes money, yet they are not subject to any impost in relation to inflation and they may continue spending their share of excess money at will. Why is this so? Why should those who helped create the inflation not be subject to its control?
If a practice is used by the government as a monetary tool and is subject to compulsory payment, then that practice becomes a tax. Taxes are usually acquired by governments of some kind, yet in the instance of controlling inflation, the practice used is interest on money borrowed. Thus, a lender of money (or something they call money) then acquires the constitutional right of government to gather and hold onto that tax for the benefit of no one but itself.
Banks are a protected species. As the head of ANZ, Mr Smith famously told our Prime Minister, “We will set our own agenda in relation to interest rates because, as you know, without us you cannot have growth”.
Two things worth noting. In a recession you may want to borrow, but banks won’t lend unless it carries an inflated interest rate, but the criteria is most stringent.
When a government guarantees a bank’s depositors to, say, $250,000 per account it is generally an admission that the banks have not been playing by the regulations and are unsteady.
Neil Forscutt
