Interest Rates – again

we like helping people
December 5, 2022

Speculation about which direction interest rates will be going is rife.  The IMF has urged the US Fed to keep raising rates, saying that the USA “owes it to the rest of the world” to keep interest rates going higher until inflation cools off.  The Bank of Canada has lost $522 million in the third quarter of this year, the first loss in the Bank’s history, but generally operates in lockstep with the US Fed.

What does this mean for you?  Basically, it means that the central banks must raise interest rates in order to recoup their losses.  Unlike real businesses that produce something worthwhile, tangible, or otherwise, banks contribute little more than a grossly overpriced service to society, but they have the power to manipulate markets to preserve the interests of their shareholders.

The Bank of Canada has suggested it may slow the rate of increase, at least in the short term.   Meanwhile, Elon Musk has stated that the Fed must reverse its strategy and start cutting rates to avoid a deeper recession.  How do you sort through these conflicting messages? 

I take the view that bank economists are completely out of touch with reality, they rely on models that have proven to be disastrous time after time.  If bank economists ever understood the economy, given their reach and influence, we would never be in a recession.  Musk, on the other hand is an entrepreneur and has built multiple companies with high levels of success, raising himself from a middle class background to become the richest man in the world

Interest rates have, historically, never been so low for such a protracted period of time as they have in the last decade.  It is low interest rates that has fueled inflation, causing people to take on more debt than they could realistically afford to repay.  And it is low interest rates that have contributed, more than any other single factor, to the housing bubble

In the midst of interest rate increases an increasing number of Canadian homeowners now must renew their mortgages, some will find they no longer qualify and could lose their homes.  Banks could renegotiate to extend amortization periods to reduce monthly payments and avoid defaults.  The real estate market will undoubtedly, at some point, flip from a seller’s market to a buyer’s market which will make housing more affordable to people who can buy with cash. 

Paradoxically immigration is projected to double, with the Federal Government planning to bring in 500,000 immigrants annually.  Not all newcomers will be refugees, and many will be able to buy real estate.  The irony being that governments across the country have already passed legislation to limit foreign purchasers of Canadian real estate. The impact on a pre-existing housing shortage will be immense, while competition for the short supply may be fierce, only the top 15% of Canadian income earners will be able to afford a mortgage.

The government, working with the Bank of Canada, first changed the rules limiting how much Canadians can liquidate from RRSP assets to secure mortgages at low interest rates – then flipped the interest rates to higher levels making the debt unaffordable.  We can only speculate that this strategy will lead to higher levels of insolvency. We have discusses in depth on other blog posts the problem with exchanging RSPs for (tax) debt in order to obtain even more (mortgage) debt.

Protect yourself by reducing or eliminating unsecured debt, this can be done by making aggressive payments or through a proposal or a bankruptcy.  Stop liquidating RRSPs and Insurance polices – you can file a bankruptcy and keep these assets for future financial security.  Shop smart, do not make superfluous purchases, especially using credit.  Postpone home renovations and upgrades, put off buying new vehicles, take in a family member or boarder to help reduce expenses.

Be mindful that there are only three things you can do to get your budget to balance, you can 1. increase income, 2. decrease expenses, or 3. do a little of each.  Consider a part-time job to augment your family income.