By MoneyMorning.com.au
Thanks to the Reserve Bank of Australia’s (RBA) interest rate cut (i.e. the manipulation of the interest rate market) yesterday, savers will earn 0.25% less in interest. It may not sound much. After all, on a $20,000 deposit it’s just $50 per year.
But for someone in retirement who may have cash savings of say, $500,000, it means $1,250 less per year in income… or $104.17 less per month. And if half a million is all you’ve got to see you through the next 30 years of retirement, well, $104 makes a difference.
So, what else could you do with the cash? Buy a “safe” investment property perhaps?
Not likely.
As we recall, rental yields on housing are below 4%… even for a cash buyer. And with little to no prospect of price growth over the next 10 years, only a madman would buy a property for rental income.
But where else can you stick your cash for safe returns?
The stock market perhaps. Well that’s hardly what you’d call a safe investment. In fact, right now the stock market is about as risky as it’s been in three years.
The problem is, if the experience overseas is anything to go by, the RBA has just kick-started its own version of interest rate stimulus…
That is, they’ve spied a potential economic problem on the horizon (a problem we’ve pointed out here for a long time – a slowing Chinese economy) and decided the economy needs a boost to try and avoid the problem.
That means lower interest rates.
And it means forcing savers and investors to take bigger risks to get the same return. Exactly what the folks at major trading firm MF Global were trying to do. They’ve now gone into Chapter 11 bankruptcy protection.
You see, whether you’re a regular 9-to-5 worker or a hot-shot Wall Street trader, your goal is the same, to earn a living. In most cases you try to earn as much as you can with as little effort (and risk) as possible.
But when obstacles are put in your way, sometimes you have to work a little harder just to get the same return. For a 9-to-5 worker it may mean doing a bit of over time in order to cover the increased cost of fuel… or higher school fees.
However, even though you’re earning more, the net result is the same because your costs are higher. In other words, you do more work to achieve the same result.
But for a hot-shot Wall Street trader, when interest rates are close to zero they’ve got to find new ways to make money. And for traders that usually means making bigger bets and taking bigger risks.
The fact Wall Street trading giant, Goldman Sachs last month reported a third-quarter trading loss of USD$393 million should have been a warning sign.
If even these guys can’t make a buck, what are the odds on lesser trading firms making a buck? So when MF Global went belly-up this week after making a “$6.3bn bet on European sovereign debt” it wasn’t because the firm was riddled with so-called rogue traders…
It was because the firm had to make bigger bets and take bigger risks just so it and its traders could make the same money they used to make from smaller bets and smaller risks.
The big trading firms are no different to the average worker in that respect. It’s just that when a big trading firm makes a bad bet the damage has much bigger consequences.
Ultimately, the fault isn’t with Goldman Sachs or MF Global. Rather it’s with those that lay the groundwork for these big bets – the central banks that manipulate interest rates lower and the governments that aid and abet them.
But as usual, they’ll get off scot free. In fact, our bet is there will be a call for more regulations and supervision to protect investors from the likes of MF Global. And who will be given the honour of regulating and protecting?
That’s right. Agencies appointed and monitored by central bankers and governments.
How’s that gonna work out? We’ll tell you…
Get ready for more of the “same old, same old.”
Cheers.
Kris.
