Ben Bernanke’s comments today underline my hunch that the US would try to inflate their way out of their fiscal mess.
Don’t take the Fed’s low interest rates policy at face value. In the long term this kind of policy causes inflation, and eventually we will see that higher interest rates will be necessary to bring the inflation it creates under control.
If you are a saver you will be penalized, as your savings and investments become devalued. People invested in Bonds and Bond funds, and GICs are especially in the firing line. It appears that the best strategy for the next little while will be to think short term. Don’t lock your investments in to contracts longer than 12 months.
Mortgages should be treated the opposite way. If you are not planning on selling, lock in for as long as you can. If inflation gets out of control, it isn’t unreasonable to expect mortgage rates to pass the 10% mark some time in the next 2 to 5 years.
Right now interest rates and mortgage rates are being held down by the lasting dregs of the recession and the appalling housing market in the US. But this will not last.
In Canada the housing market is relatively healthy, prices have not dropped, and anyone with a large mortgage at the high end of carrying capacity will be vulnerable to large jumps in interest rates.