I agree with Bernard

I've been watching the income from my savings decline, month-on-month, as interest rates head steadily lower. It's very clear that the Kiwi who collectively have billions of dollars in savings accounts and on-call accounts have already suffered a decrease in their returns by almost 40%. I was receiving 8.3% interest on my savings in June and it's now down to 5% and headed lower.

Meanwhile, the 80% of home mortgages (in NZ) that are on fixed-rate interest won't see a decline for months or years unless the mortgagees pay the penalties and break those agreements. It may well be worth it, but you need cash up front to do it.

Credit card interest is still around or over 20%, the reason being given for that now is these facilities are more risky for banks......not less...as people come under financial stress. One wonders what they might see if they opened both eyes.

The picture forming here is that costs to banks are falling rapidly while costs to their customers are not. Perhaps the equivalents of our Reserve Bank around the world are doing this to give banks some breathing room to accumulate some capital by effectively widening their margins for them. The overall effect appears to be to cut the incomes of most savers now while - much more slowly - reducing the cost to borrowers (if at all - as in credit cards)

Whatever. If you missed it, Bernard Hickey's blog on Stuff on January 26th covers many of the same things that have plagued my own thoughts in recent weeks. If you missed it, here's "Five reasons why Alan Bollard should not have cut the OCR".

"Meltdown Monday" on financial markets

Giant US investment bank, Lehman Brothers, has filed for Chapter 11 bankruptcy under US law after the US Treasury refused to bail it out and no buyers came forward to provide additional capital.

At the same time, fellow giant investment bank, Merrill Lynch, has been bought by the Bank of America, itself a very large investment bank.

Events are moving rapidly and the details are changing by the hour as financial markets scramble to deal with the fallout. Suffice to say, there is going to be a lot of turmoil in the weeks and months ahead as other institutions caught short by the failure of Lehman Brothers find themselves tottering on the edge of the abyss.

I don't profess to be an expert in these matters, but it has been apparent for some time losses from the sub-prime market collapse and the string of dominoes that set tumbling over have been aggregating toward the remaining centres of financial strength. Lehman was one of them and Merill Lynch another, but both have been overwhelmed.

The US Federal Reserve, the US's privately-run, heavily regulated collection of central banks,  has moved to over funds for equity to firms who need cash. In effect, they are a buyer of last resort for financial firms who would otherwise fall over for lack of capital from any other source.

We live in interesting times....and with elections in New Zealand, Canada and the US only weeks away, the calculations will be furiously worked and re-worked in the days and weeks ahead.

How interest rates can avoid going up is hard to see. With risk now arguably greater than for a very long time,  reducing interest rates would look like walking naked in a blizzard.

US inflation at 17 year high

The BBC reports US inflation is at a 17 year high.

US inflation accelerated at its fastest pace in 17 years in June, official figures have shown, driven higher by surging energy prices

Consumer prices were 5% higher than a year ago and rose 1.1% on a monthly basis, the Labor Department said.

Federal Reserve boss Ben Bernanke has warned that the threat of rising inflation has intensified recently.

With inflation here tracking similar rates of increase, it's hard to see how our own Reserve Bank can lower its OCR on July 24th. They would appear to be doing well just to keep it where it is.