Judging only by gyrations in world financial markets, ordinary investors are concerned if the US Federal Reserve proceeds with its slated intention to increase US cash rates gradually by up to 0.75 per cent a year.
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Presumably market participants consider this action will kill off recovery of the US economy.
Even if US cash rates were to increase by this full amount, US investors would still be receiving less than 1 per cent interest on cash and short-term bank deposits. The reality is that for several years conservative investors have been propping up governments and a banking system brought to its knees by the GFC.
Restoring the US and other countries to properly functioning economies requires providing investors, particularly people funding their own retirements, with risk-free returns in excess of inflation. The Federal Reserve postponed the first 0.25 per cent increase in rates last week.
Even though US share markets have fallen from record highs, the economy is performing well and unemployment is now at target levels. The Reserve has indicated that inflation, already reduced by falling oil and commodity prices, is not a problem demanding immediate action.
This suggests that their priority remains to support financial institutions and the share market rather than to encourage and reward savers. Australian investors are more fortunate than their US counterparts in having access to higher interest rates and dividend returns on shares because of the imputation credit system.
However, with the recent 10 per cent downturn in share prices and the growth in company earnings tapering off, future investment returns are likely to be much lower unless interest rates start to rise. It's difficult to see how even a 1 per cent rise in US interest rates, which won't occur for some time yet, would be sufficient to trigger an increase in our interest rates.
Indeed, given the slowing of the economy due to the fall in commodity prices and reduced growth in property investment, higher US interest rates would help by reducing the need for further interest rate reductions here. Also, higher US rates would help by leading to a weaker Australian dollar and thereby help with the needed restructuring of the Australian economy.
In short, a modest increase in US rates is not a threat to Australian savers and investors even if it leads to further gyrations in the share markets. The Australian economy is fundamentally sound and APRA's recent initiatives have strengthened the financial system.
The most serious threat is an extended property boom fuelled by historically low interest rates. The sooner the US and other major economies start reducing the large subsidies to borrowers and rewarding savers the more certain our future economic performance will be.
Daryl Dixon is the executive chairman of Dixon Advisory
