How would an interest rate increase affect you?

[Dave A]

I see the general analyst sentiment is that the increase was unexpected. Goodness knows why. The narrow mandate of inflation targeting made it entirely predictable.

Tito and team have been consistent. They may have debated other factors, but the deciding factor for them is the inflation rate. And until that mandate is broadened, they don't have the space to maneuver.

At least everyone seems to agree that the economy is cooling off.

[duncan drennan]

I’ve been investing money for forty years now and believe me, history repeats itself with monotonous regularity.

Graeme, I'd be interested to know what your thoughts are on the markets movements yesterday....

[Graeme]

I don't think we will see the end of the repercussions for months, or even years, but life goes on and already the equity values of the sound companies upon which the world economy depends are returning to their former values; except,of course,for many banks.

The bail-out of the banks was vital, and was handled very well. We could feel that the banks should have been severely punished for what they got up to, but that could have been ruinous to many countries' economies.

As far as interest rates are concerned, I don't believe that the answer to inflation necessarily requires an interest rate squeeze - there other ways of cooling off the banks' lending, one of which would be to increase the amounts that the banks have to have on deposit with the Reserve Bank. The horrid thing about interest rate increases is the way that ordinary mortage holders get squeezed and business suffers. Economists are far from convinced that inflation may only be controlled by interest rate escalations.

[Dave A]

Business conditions are clearly tightening. The following two stories give hard evidence of tough times ahead.

The Gauteng economy is slowing down as several industries experience a drop in business-activity levels, said the Gauteng Business Barometer (GBB).

Spokesperson Mike Schüssler said the GBB for September dipped by 7% to 140 index points when compared with the same month last year.

Schüssler said: "The index also shows a marginal 0,1% decline when compared with activity levels in August.

"September's performance echoes a continuing downward trend from the beginning of the year, mainly due to higher interest rates and inflation," he said.

According to the GBB, the Gauteng economy is feeling the strain due to the higher interest rates.

Schüssler said: "The GBB has foreseen the slowdown and negative effects of higher inflation and interest rates.

"Several sectors such as the broad trade and manufacturing sectors remained strong, but some sectors, like the financial and business-services sectors, experienced significant declines in activity levels," he said.

GBB's economic stress index shows a decline in the province's economy, from 5,6% in September last year and a 1,3% decline when compared with August.

"This means business conditions are becoming less favourable and that businesses should look at other opportunities to boost income levels," said Schüssler.
full story from M&G here

And then an indicator from the motor industry.

New vehicle dealers are under severe pressure because of a steep downturn in retail car sales which is expected to lead some to close.

Eric Scoble, the chairman of the National Automobile Dealers' Association, said yesterday that sales figures from the National Association of Automobile Manufacturers of SA (Naamsa) created a misleading picture of market conditions.

Scoble said dealer passenger vehicle sales reported to Naamsa last month were the worst since December 2004, comprising only 23 000 units out of a total market of 32 257 passenger vehicles reported.

The figure was 19.9 percent lower than in September 2005 and 20.1 percent lower than September last year.

Scoble said the non-dealer market, comprising sales to car rental companies, fleets and the government, along with manufacturers' internal fleets, had concealed the true dealer picture.
full story from Business Report here

I see major consequences ahead. Growth is desperately needed for the transformation that government desires. And we look to be heading in exactly the opposite direction.

[Dave A]

I don't think we will see the end of the repercussions for months, or even years,

You're not kidding. Some big dominoes are starting to look shaken.

Fear and mistrust gripped Wall Street on Monday after Citigroup's CEO quit in the wake of mounting credit losses and an influential money manager called the subprime mortgage market a "$1-trillion problem".

Charles Prince's resignation from Citibank on Sunday -- the second high-profile Wall Street CEO ousted in less than a week -- came as the largest United States bank said it will write off as much as $11-billion in losses tied to subprime mortgages.

US stocks followed European shares lower, while safe-haven bonds rallied and even the downtrodden dollar ticked up as skittish investors wondered which bank might be the next to disclose substantial losses.

Prince's departure came just days after Merrill Lynch & Co CEO Stan O'Neal was kicked out following an $8,4-billion write-down.
full story from M&G here

[The Duck]

I believe that what the States are experiencing is being experienced by all Western countries with largely capitalist ideologies . Over the past decade big business has taken over global politics and they generally control economic policy . Governments are mere puppets of global companies allowing them to exploit labour to such a degree that the average individual's disposable income has shrunk to such a degree that more and more people are buying basic goods on credit. Wage increases are kept as low as possible allowing big board directors to report bigger profits to the shareholders so that they can earn that fat incentive bonus.

Economists are not even sure about the policy of increasing lending rates , which I believe forces people at this point to go more into debt. Since the middle of last year the repo rate has gone up by about 600 basis points . Homeowner's with bonds of aprox R 1million are now paying R 2500 P/M more.

In SA the population group that suffers the most are the emerging black middle class who invested in property about a year ago. More and more people are putting their homes on the market because they are battling to finance their bond repayments.

Yes , in short I agree that it will take many years to improve as the big guys will refuse to acknowlegde that the capitalist ideology is the cause of our current problems.

[Dave A]

Every now and then I've noticed we get these posts that lay the blame on capitalism. In most instances it's linked with some specific disaster, such as the sub-prime issue. Whilst rejecting capitalism on a narrow issue is akin to throwing out the bath with the bathwater, I question these protests on a more holistic level.

Here's the problem with these statements as I see it. Capitalism is only a part of any particular socio-economic model. For example, if you are going to condemn capitalism because of the sub-prime issue, you also need to condemn democracy, freehold ownership of property and perhaps even social welfare. Because those were the contributing elements that provided the environment for the problem.

The other question is if we do away with capitalism for our economic model, what would we replace it with - socialism? Now think about that for a moment. What does that mean exactly? When you get down to it, instead of individuals who have carved their ownership stake, ownership now rests in the hands of the state.

Are you that confident that the state will use its ownership position any better than private individuals?

We have enough trouble pursuing balance with economic power sitting in private hands and social power sitting in the hands of elected officials. Can you imagine if both power bases were sitting in the same hands?

[The Duck]

Possibly out of my league here - but I am not proposing that we throw out the bath with the bath water. In most healthy economies there is a mix of socialism and capitalism .There needs to be certain checks and balances to stop the haves exploiting the have nots. In my laymans reading of our current situation - people are buying more on credit as their disposable incomes are reducing.

Why ?- because big business is allowed to keep salary increases low in order that they achieve their profit targets. Salary increases in general have lagged behind increases in cost of living. To stop this I believe that government should not allow this to continue and that directors should not be able to qualify for their performance bonus if they achieved it by keeping salary increases low. I have heard that one of the European countries have already enacted a regulation to stop big business .In the current system the rich get richer while the poor get poorer and the gap just gets bigger. A recent news article compared South African executives disposable incomes with other countries and with the exception of the USA our guys disposable incomes were bigger . Interesting...

But listen I am not a business professional I am a mere real estate agent so what do I know? In my simple knowledge I just do not see how increasing the interest rates is going to stop people buying on credit. In my industry people are prioritising their spending - If there is no other avenue they are disposing of assets or getting out of the property game because they are struggling to finance their bonds. So maybe the inner circle should rather focus on reversing the crunch on the average Joe's disposable incomes.

[Dave A]

Possibly out of my league here -

You're definitely not out of your league here. You raise lots of very valid points. In fact I personally agree with every point, except that the culprit in chief is capitalism.

In most healthy economies there is a mix of socialism and capitalism.

Exactly. Done correctly they are not conflicting conditions. There is a healthy balance between social and economic priorities.

More back on point, what do you see as the responsible solutions to the property market crunch?

[Dave A]

I always enjoy reading Bruce Cameron's articles. This latest, tied with The Duck's comment about the '97/8 interest rate hike and the way the property market bled then, had me thinking that perhaps the best thing is to have a full blood-letting.

Only two weeks ago, the potential losses from the crisis were estimated at US$600 billion. This week, they were up to US$1 trillion.

The problem is that the corpses are still being hidden and so it is difficult to assess the full impact of the crisis. One thing is certain: the consequences of the irresponsible lending to people in the US will be felt by individuals around the world, including South Africa, as, like the Black Death of 1347, its effects ripple inexorably outwards.

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The only answer to the sub-prime mortgage debacle is for the full pain of the crisis to be absorbed now - and it will be severe.
full story from Personal Finance here