Cash - Safe But not King
A natural reaction of late, especially since the strong falls on share markets across the world through October, has been a flight to safety namely cash. The Australian government guarantee of cash deposits has solidified at least one area of the market. This looks pretty attractive when most other asset values, even residential property based on data out today, are falling or have already fallen significantly.
Unfortunately, interest rates on these cash deposits are also falling. Central banks around the world (whole heartedly supported by their respective governments) have cut interest rates in what has been viewed as a coordinated response to the looming downturn in the global economy. (Some would say slashed but I think emotive language such as this coming out of the media has been less than helpful and is in a small degree responsible for the scale of the falls on markets. I’ll get off my soap box now.)
The economic theory behind these moves is that through reducing interest rates, access to credit becomes more accessible and at the same time fewer resources are needed to pay back outstanding debt. This in turn leads to more money being freed up by and for consumers and companies to spend in the real economy. This in turn leads to higher levels of economic growth. The economic term to explain this policy move is loosening monetary policy. The sooner this is done the better as economic theory suggests the time lag between a cut in interest rates and for this to lead to a stimulation of the economy can be up to 18 months in duration. Let’s hope the impacts are felt sooner rather than later!!
