Alan's Finance Blog

How Do Interest Rate Rises Affect Australian Investors?

How Do Interest Rate Rises Affect Investors?

You hear a lot about interest rates at the beginning of each month when the Reserve Bank of Australia meets to review their official cash rate. So, what is the cash rate, why do you have to care and what can you learn from following the movements of interest rates in Australia? Interest rates affect everything from your job and your home, to your shopping bill and your savings account and following is an explanation of how and why.

Why Do Interest Rates Change?

Interest rates go up and down in response to inflation. So what’s inflation? Inflation is a natural rise in the overall cost of living, and a small rise each year is considered normal. If inflation rises too much, the RBA will raise interest rates to slow spending.

So how does spending affect inflation? When there is too much spending, demand outstrips the supply of goods and services and these goods and services then have an inflated value – they cost more than they are actually worth because suppliers know there is a high demand and they can charge whatever they like. When an economy grows very fast, there is a rise in inflation and as spending exceeds production, the value of the dollar decreases because you need more money to buy the same things.

Economic growth does slow by itself and the demand decreases and the supply can again meet the demand comfortably. When the spending does not slow by itself, the RBA will increase interest rates to slow spending because when your mortgage and credit card repayments cost more, you have less disposable income to spend.

How Do Interest Rates Affect Savings Accounts and Term Deposits?

Depending on the investment and how savvy you or your financial advisor is with regards to inflation and interest rate rises, investors can actually benefit from interest rate rises.

How savings accounts benefit from interest rate rises:

· When the cash rate goes up, the high interest on savings accounts goes up. High interest savings accounts offer flexible savings options by allowing savers to deposit as much or as little as they like into their account and access those funds whenever they like. As a result, savers can benefit from the flexibility of interest rate rises too, because the banks will base the interest of a savings account on their standard variable rate, or on the RBA’s cash rate, so high interest savings account holders can benefit from rate rises.

How savers with a term deposit account can make sure they benefit from rate rises:

· Term deposit investors need to account for inflation from the beginning. Term deposit accounts are opened to secure long term returns, however, term deposits can easily make a negative return if they don’t keep up with inflation. Inflation is the general cost of living and so in three years time, the cost of living is going to be higher, so you’re going to need more money to live in the same way – therefore, your term deposit account needs to grow at a rate which outstrips inflation over the term of your investment.

· Banks factor in interest rates and inflation when calculating term deposit returns. In a world and an economy which is just recovering from a financial crisis, everyone can expect interest rates will continue to rise in the foreseeable future; the banks know this when they calculate the interest rates they offer on their term deposits and that is why an interest rate on a longer term is so high, to make sure the rate of a five year term deposit is in line with what the economy will be doing in five years time.

How Interest Rates Affect the Local Economy

So we know that when interest rates go up, it is to slow demand and reduce the inflation rate, but what other effects does the interest rate have on the local economy outside of consumer spending?

Interest rates and unemployment:

· Finding the cause and effect relationship between unemployment and interest rate rises can be like trying to decide whether it was the chicken, or the egg which came first. However, both unemployment and interest rates (like the chicken and the egg) are part of the same equation; to choose the starting point of rising unemployment, it increases in cases of financial insecurity or a slow economy (like during the Global Financial Crisis), when people are spending less and business need to cut costs, so they cut jobs.

· The economy can also be slow when inflation is slow, and if too many people stop spending, there is no economic growth.

· When the economy is slow, and unemployment rates have gone up, the interest rate will tend to come down in response. The aim is to stimulate spending, and reduce the mortgage stress on those Australians who may have already lost their jobs.

Interest rates and property:

· The effect of rising interest rates on property may be obvious because as interest rates go up, so too do mortgage repayments, making housing less affordable to the masses.

· When property is less affordable, there is less demand for it, and property prices will come down – this is where property investors can often reap the rewards of interest rate rises.

· Interest rate rises can also mean that some home owners can no longer afford to pay the mortgage on the house they already have, and need to sell the house quickly before getting in to more financial trouble. Quick (and often desperate) property sales in times of rising interest rates also means the property prices fall and for long term property investors this is not an issue as the market will eventually even out, but for property investors wanting to cash in their investment in a property downturn, they can make a loss on their investment due to decreases demand.

How Interest Rates Affect Wider Markets and Investments

Interest rates in Australia don’t necessarily affect international export markets or shares, by they can be indicative of movements and trends in these wider markets, and investors should take note.

Interest rates and exports:

· When interest rates rise in Australia it is because the economy is getting stronger, and this includes the dollar becoming stronger – and worth more. As a result, our exports are less competitive with other international markets whose currency may still be weaker.

· Instead, as interest rates in Australia go up, foreign investors want to lend money to Australia and get in on the extra interest they can earn from Australian customers. However, to lend money to Australians, the foreign investors need Australian dollars, this creates more demand and maintains a higher price.

· A higher dollar is also good for imports as a stronger Australian dollar will buy more raw materials such as oil and produce, which can then be charged at a lower price to Australians.

Interest rates and the share market:

· Investors demand high returns from the share market to make their investments worth the extra risk.

· One less risky investment option is a 10 year government bond, which can indicate the movements of the share market.

· A 10 year government bond is a very safe investment of funds, invested with the Federal Government for the next decade, and the interest rate on this investment can indicate where the RBA’s interest rates are headed.

· For example, in January 2009 a 10 year government bond was offering investors less than 4.00% interest. In June 2009 the rate had jumped to 5.80% meaning the government is expecting the official cash rate to increase in a more stable economy.

· Therefore, investments in shares can be expected to offer returns higher than 5.80%, to make up for the risks of the trade.

Investments and interest rates are intrinsically linked and if you know where to look you can find information about where you should be investing and whether cash, shares or property will offer the best return in the future.

Fred Schebesta writes about saving money at Savings Account Finder, he helps people compare and the right savings account to get more interest.

Common myths about offshore banking

Legislating from 31,000 Feet…

Common Myths and Misconceptions About
What Global Banking and Investment can Do for YOU

By Patrick Bove

“This must be what it feels like to be a Congressman.”

So said my seatmate on the flight from Dallas Fort Worth to Los Cabos, Mexico, home of the 2009 Offshore Advantage Academy.

“From 31,000 feet, everything looks so simple… Entire states blend into each other. Towering mountains are flecks on the horizon. And Americans’ most pressing concerns are inaudible. (Except for the guy three rows up who wants extra peanuts.)”

He had a point. From this vantage point, you can see everything – and nothing.

And here’s the scary part…

If your perspective was “fixed” at this giddy height – you might start to act like a Congressman too.

From this perch, there’s no problem that can’t be solved. No “micro” that should go unmanaged.

It Makes Sense When You Think About It…

No wonder Washington’s bureaucrats, Senators and Congressmen are so intent to tell us where to invest, how to live… and (who knows what’s next) when to breathe?

They’re thinking and acting at 31,000 feet… while causing massive uncertainty on the ground.

And as a result… we are threatened by one grand delusion after another. Which has led us to massive national debt, a devalued currency… and the “genius” idea that more spending will actually save us money.

Meanwhile, medical costs are exploding, Social Security is about to dip into the red and unfunded pensions are forcing millions of Americans to re-think retirement.

I know it’s not just me. Odds are you’ve cracked open the newspaper this week and said to yourself, “They did WHAT?”

And you’re not alone…

According to our research, 11.1 million Americans have asked that question one-too many times. They’re fed up and they’ve decided to leave the country.

Some are picking up everything and going offshore. Others are simply investing in a safe-house-slash-vacation-home or moving their assets to safety…

There are a couple myths about the offshore world that get circulated each year, and they’re way off base!  So let’s go ahead and dismiss them with a 1-2 punch:

Myth #1: You should make your first million… or three… before thinking about going “offshore.”

Wrong! Most people believe the “offshore world” is reserved for millionaires and billionaires – but nothing could be further from the truth! There are benefits to going offshore that can benefit practically anyone – from the average investor to the tycoon.

Case in point, a man I know of – I’ll call him Carl – has relocated his family offshore, for the simple fact that his elderly mother requires live-in assistance. Today, she enjoys this high level of personal care and it only costs Carl $160 a month. (A similar setup in the U.S. would set him back nearly $5,500!)

Myth #2: You need to quit your job, hire six lawyers, thirteen accountants and a magic eight-ball to set-up an offshore investment or bank account.

Wrong! That’s what the keepers of the “status quo” would have you believe! In reality, it’s a breeze to check the financial stability of an offshore bank… transfer money overseas… and invest in a bevy of legal opportunities that can smash the S&P 500. You just need to know the right questions to ask… who to trust and which offshore entity is right for you. And that’s exactly what you’ll learn in lessons one through three.

Until next time, I wish you all the best!

Patrick Bove

Austria Gives Up Bank Secrecy

For a little while there, it looked as if little Austria would be the mouse that roared.

As I previously reported, on July 9, Austria’s Parliament failed to approve a resolution relaxing the country’s strict banking secrecy laws as the OECD demands.

But yesterday, September 1, the parliament approved a law to ease banking secrecy in the last EU country on the Organization for Economic Co-operation and Development’s (OECD) “gray list” of tax havens. It was a challenge to assemble a two-thirds majority necessary to weaken the law, but Austria’s leaders persuaded legislators of the importance of Austria getting off the OECD’s odious list.

Under current law, Austrian authorities will only release account data to foreign authorities if a criminal proceeding is underway in that country against a named individual. In addition, authorities must convince an Austrian court to order the data to be released.

This simple and common sense system will be replaced with a network of new tax treaties and tax information exchange agreements…

The agreements will call for Austria to release information on financial accounts held by a foreign investor at the request of foreign tax authorities. The request may be in regard to any tax inquiry – civil, criminal, or administrative. However – and this is very important – the inquiry must be about a specific investor. Austria is under no obligation to comply with wholesale “fishing expeditions,” such as the infamous “John Doe subpoenas” invoked by the U.S. Internal Revenue Service against banking giant UBS.

Even so, this is a significant setback for banking secrecy.

Nearly a decade ago, the OECD’s bastard stepchild, the Financial Action Task Force (FATF), issued a “money-laundering blacklist.” The countries on this list, in the FATF’s opinion, weren’t doing enough to prevent their financial system from being used by money launderers. Among other requirements, the FATF demanded that these countries (Austria among them) eliminate all opportunities for anonymity in the banking system.

However, the new anti-laundering rules mainly inconvenience legitimate customers. Money launderers long ago began using less traceable methods to move money. It’s almost certain the OECD’s new rules for greater transparency in tax investigations will have the same effect, driving the criminals further out of reach at the expense of personal liberty and financial privacy.

Yours truly,

Mark Nestmann, Wealth Protection & Privacy Consultant

Source: Sovereign Society

Swiss private bank puts US on the Blacklist

This Wednesday morning, I received a phone call from Rob Vrijhof, (right) our long time investment and banking associate in Zurich and a member of the Sovereign Society Council of Experts.

Rob called my attention to the announcement today by the venerable Wegelin & Co., Switzerland’s oldest private bank, that it will stop doing business in the United States and with Americans.

Founded in 1741, the St. Gallen-based bank, said their decision was a response to stricter measures introduced in the U.S. against tax evasion and projected changes in U.S. estate tax laws, which could make some non-U.S. citizens liable for U.S. taxes if they inherit U.S. securities.

The bank did not mention new U.S. government demands that offshore banks giving investment advice to U.S. persons must register and qualify under SEC rules…which is itself a blatantly illegal attempt to extend American law well beyond its normal jurisdictional area (which ends at the U.S. border, regardless of what the feds may have you believe).

So drastic have the IRS/SEC extraterritorial measures become that even members of the U.S. Congress have protested they go too far.

“Untenable Position”

In their letter to investors, Wegelin bank said Swiss banks were being forced into “an untenable position,” and in all fairness, they make a good point…

Given the lack of clear definitions in the IRS proposed rules, Wegelin believes the imposition of being expected – by the IRS – a to know which clients were liable to pay U.S. taxes is “an impossible undertaking.”

“The danger of inadvertently making false declarations to the U.S. tax authorities will be too great,” the letter went on to explain.

The bank gave the United States an added zinger, saying it believes the U.S. government overestimates its attraction as a financial center, thus Wegelin is advising its clients to pull out of all U.S. securities investments.

So the inevitable question, then…Are more banks going to follow in Wegelin’s footsteps?

Yours truly,

Bob Bauman, JD
Legal Counsel for The Sovereign Society

Article Source:  Sovereign Society