Recession inevitable, rates cut or not: economist

By: Paul Sharp
Submitted: 2008-10-27 18:00:36
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The Reserve Bank of Australia is doubtful of curbing interest rates, whether it raises interest or not, still it would not avoid a recession. It is felt that shortly Australia would be surrounded by an economic plunge due to disproportionate debts.

In November, 2006 the retail market had slumped causing a recession. One percent slide in the retail market has caused the fall in June. The retail market boom was due to spending of the money borrowed, but now it is pay back time and ultimately it would result in recession. It is also appears to be that the Reserve Bank has bungled and miscalculated the economy without taking into consideration the debts.

Why is Recession inevitable, rates cut or not: economist say, the private debts had increase by fifty nine billion dollars in the year 2000, which funded 9% of the total demand. By the year 2007, the debts had risen to two hundred and sixty billion dollars and the demand to 19%. Finally, the additional debts have stopped but the demand has fallen.

The Reserve Bank should reduce the rates but instead what is happening is just the opposite. With inflation moving up, the rate of interest too is going up and once the inflation is down we cannot expect the rates to fall immediately. It is also predicted that the Reserve Bank of Australia would cut rates from late 2008. In spite, of all the precautions taken by the Reserve Bank, recession is inevitable.

What is the Finance Ministers reply to Recession
Lindsay Tanner, The Australian Finance Minster has totally rubbished the charges that Australia is heading towards recession. The retail spending has definitely come down which has caused the panic about recession. In spite, of the slowing economy the financial system is in good shape feels the minister. A recession is possible only when the growth rate is moving in the opposite direction, but he claims that figures claim a positive growth. The minister’s opinion may be convincing but Recession seems to be inevitable.

Why people spend less
Economist had already anticipated that the debt has grown huge where a household income is spent mostly on debts, whatever little is left is spent on retail sales, which is the main reason for slump in retail markets and this could lead to a financial crisis. In spite, of all the precautions being taken, the next recession is likely to occur sooner or latter. So increasing interest rate will not work. The rates were increased from 6.25% to 7.25% which has caused a burden on the household. It may have contained inflation but this concept never works. Covering debt with debt is another disaster, using credit cards to buy groceries and mortgage payments are another cause for this depression to come.

Under the circumstances economist think that the Reserve Bank has realized this and that the rates may be reduced. It is also sensed by the economist that a 50 basis point slash is required. But cutting rates also may not fully solve the problem. The debts were taken keeping in mind the increase in stocks and housing values, but this trend has reversed, the reason the fall down is going to be vital.

The debt to GDP ratio is twice the Great Depression and it is thought it may not go higher further.  Thus recession seems inevitable..

Article source: Expert Articles