INTEREST RATES AND ECONOMIC GROWTH

I have this theory that interest rates and unemployment rates are linked. I call it the national financial constant or NFC. It is perhaps different for each economy / country, but in short as interest rates go up unemployment goes down.

Interest = R

Unemployment = U

NFC = R + U

Furthermore, total Economic Growth must also be evaluated. Interest rate is the amount of value added to the cash assets in a confined economy. A little different to CPI an index that looks at the growth of true wealth and assets in the same confined system of interest.  Therefore Economic Growth must increase as Interest rates increase BUT be adjusted for unemployment rates.  This also prevents economies with massive interest rates from being marked as high growth where the runaway interest rate has lead to massive down turn in employment (high unemployment rate)

Where an economy has high interest rates that are sustained by low unemployment it follows that high growth is present.

This can be extended from macro economy to micro economies such as private companies, bounded by small staff sets.

Growth = G

G = 3/2 R – 1/2 U

I am sure that this can be mapped also to CPI, but I want to look at the two indicators used in the Australian Political vernacular, rather than quote a slow moving derived index as CPI (often called inflation of the natural drift in pricing over time).

Negative Gearing and Positive Gearing in the Australian Political and Financial market. You want a house so buy something nice, buy something you like and can afford. There are a few great blogs and papers on the battle between renting and buying. There is also my complete book and associated financial disclaimer in the Pony Principle available on this webpage. You can also get investment only loans where you only pay the interest on the loan and then sell the property to cash in on the capital growth (if any) there are many strategies. You can negatively gear properties where rental losses are deducted against income to minimise tax (but this does not minimises income with respect to child support and alimony or other income assessed payments so beware and be informed). You can also positively gear the house so as the income is just more than the losses and you make money. You need to accept that this income has appropriate tax liabilities appropriate to your circumstances.

10 blokes go for beers after work, 1 earns a heap of money the other are spread in income down to the last who is on minimum wage. The one with the highest paid job (and highest tax) pays for drinks for everyone, week after week. But soon he has to move town to follow his true love. So the nine gather around and are ready for drinks and bar snacks, the next in line pays, but really this is starting to impact his bottom line so he leaves the group, this repeats until the last one is in the room on his own, enough for one shout and no one to socialise with… This is one useful story to understand the tax system that we use in Australia. It is not a level playing field. The wealth pay not only more tax overall, but more tax as a percentage of earning. I will note that there may be a series of smart financial management tools to lower this tax liability, but that money still needs to be spent somewhere on houses, retail, hospitality and other areas that eventually create employment for others.