Category Archives: Inflation

Economic Theory Run Amok

For economics buffs out there (is there really such a person?) and those of you who are really just trying to figure out why the world is so messed up, I have to recommend a paper by Dan Ciuriak and John Curtis called What if Everything We Know About Economic Policy is Wrong?

Ciuriak and Curtis take a look at the current global economic situation and examine how Economic Policy has failed. They contrast the promises of Trickle Down Theory with the actuality of recession, high unemployment and government debt.

Download the pdf here for free.

I recommend that you print off a copy and hand deliver it to your local member of parliament, congressman or other favourite member of the political beau monde.


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Filed under Economics, Economy, Employment, Finance, How It Works, Inflation, Regulation, Uncategorized

The Consequences of Debt

The US government is in the process of learning one of the key lessons of the debtor.

The Creditor calls the tune.

The Chinese who hold trillions of dollars in US are not happy, and they are not afraid to let the US know that they need to shape up and fly right. Let’s hope that this credit downgrade is treated as a wake-up call, and the US uses the opportunity to get their fiscal house in order.

But don’t count on it.

The disfunctional houses of congress are too busy stabbing each other in the back in a pointless and self defeating series of internecine battles.

If the US doesn’t sort this out, expect more dire consequences in the future.

In the meantime, use this dip in the Dow to snap up any high quality blue chips while they are on sale. Just make sure you go for quality, look for income in the form of dividends to  tide you over until the markets recover.

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Filed under Dow Jones, Economy, Finance, How It Works, Inflation, Investing, Recession, Stock Market, Uncategorized, US Debt

Financial Train Wreck

Stephen Roach, chief of Morgan Stanley’s Asia unit, says that Asian economies will not be able to withstand the “Tsunami” of American cash which Bernanke is flooding into the financial markets.

American fiscal policy is a train wreck that is set to sideswipe the rest of the planet. The little guys are likely to get squashed.

I see inflation becoming a threat before the global economy has had time to fully recover from the recession. We could be facing a period of stagflation which would be as bad or worse than what we have seen so far. It would most certainly drag out the jobless recovery in the US for a very long time.

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Filed under Economy, Employment, Finance, How It Works, Inflation, interest rates, Recovery, Stock Market, Uncategorized, US Debt, US Dollar

Get Ready for Inflation

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.

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Filed under Economy, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

Rising Mortgage Rates

I have to admit I was a bit shocked today when someone asked me if they should lock in the interest rate on their mortgage .

Shocked mainly that they hadn’t already done it.

Historically mortgage rates have run in the 6% range, I’m talking 100 year averages here. So I consider it a general rule of thumb, that if mortgage rates are below 6% you are in bonus territory, and should lock in for as long as possible.

We are now just beginning the process of making a transition from a period of falling interest rates into what I think will be a fairly protracted period of gradually rising interest rates.

Now, I am not saying that I see rates rising to the levels we saw in the mid-eighties (god forbid) unless some unforseen financial crisis hits (of course that’ll never happen, right). But it is not unreasonable to expect to see mortgage rates climb into the 6-8% range in the next few years.

It is possible that there will be a political imperative which keeps rates lower than this, but honestly, with the mess the deficit mess the US is in, and the bumpy ride the Euro zone is going through, I can’t see the current low rate environment continuing indefinately.

So what to do?

Generally, in a rising interest rate environment you want to be locking in the low rates as long as you can, for as long as they exist.

In the opposite case, in a falling interest rate environment you want to be in short term, variable rate mortgages so that you can take advantage of savings as they occur.

But both scenarios have end points. This is where you must make a personal judgement call based on your own comfort zone. For myself, I called 5% the bottom, and considered anything offered less than 5% as bonus territory. This is probably true of many of us who struggled with 14 and 16% mortgages years ago.

But when mortgages are rising, when do I want to stop locking in, and go short term in hopes that rates will begin to fall again? This is tougher. What happens if you go variable and the rate shoots up to 16%? What a killer that would be. But do I take the chance on a variable if rates are 12% and I think they will fall?

I can only fall back on historical averages again. Personally I would probably only lock in for a year at a time once rates get higher than 8%. If rates go over 10% I am going to be looking to a variable mortgage, knowing that I am going to have to ride the rollercoaster until the rates fall again.

But you can be sure that once they fall, and eventually they will, I will again lock in for as long as I possibly can. Because I know, that one day interest rates will rise again.

And if you ever needed an argument for paying off your mortgage as quickly as possible – this is it.

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Filed under Economy, How It Works, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

More on the Loonie

The Bank of Canada announced today that they were keeping interest rates the same for the time being. The Canadian central bankers have been on a campaign to talk down the Loonie, which has been rising against the American dollar, yesterday closing over 97 cents. Inflation is under control, commodity prices are stable, and the GDP forecasts are on track for a sustainable recovery. 

There is concern that the rising Loonie could impact the price of Canadian goods on foreign markets which could stall the momentum of our economic recovery.

At least part of the worry is because the increase in the price of the Loonie has been uncoupled from an increase in the value of the commodities like oil, gas, minerals, lumber which we produce and export. An increase which is driven by speculators betting on the direction of the currency, and not on true economic value could have very negative consequences when the speculators turn to play in another area, and abandon the Loonie for richer pastures, leaving us to pick up the pieces and repair the damage to our economy.

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Filed under Canadian Dollar, Finance, Inflation, US Debt, US Dollar

Rising Loonie, Falling Dollar

Hi, just a few thoughts about the rising Loonie. Another instance of happenings south of the border, affecting us here in Canada.

Last year we saw the loonie rise past $1 US, and watched it put a dent in the posted value of US denominated investments you held. Once again the Loonie seems to be on the rise, now passing the 96 cent mark. While this makes shopping and vacationing in the south more attractive, it will have a negative effect on some things closer to home. Purchasing power does not rise in lock step with the loonie. It takes 6-9 months for prices to equalize, although pressure is often placed on Canadian retailers to match their counterparts across the border, by the time the effect of the higher loonie works it way through the system, it will likely have settled back down, and any perceived advantage will have been lost.

The value of US denominated stocks and mutual funds might drop on your statements. The dollar conversion may not offset the rising US stock market. It is quite possible for the price of an investment to be rising in US dollars as their stock market continues to rebound (the Dow is once again closing in on the 10,000 mark). And yet because of the rising loonie, your stocks or mutual funds have stayed flat or even decreased. This should be corrected when/if the loonie returns to an equilibrium state.

Will the loonie drop back? Historically it does tend to trend towards equilibrium, and usually drops back to a normal range after a spike. Is this time different? Maybe. The US is in a difficult situation, they have a great deal of debt they must deal with at a time when their unemployment rate is still over the odds, and their tax receipts (government income) are falling. When their economy turns around their tax receipts will increase, and they should be able to reduce some of their recession induced spending (one would hope). If this is the case, then we can expect them to get their house in order.

However – and there are two big howevers. First the US government historically has been good at increasing spending and very poor at pulling in the reins on special interests once the situation changes. They also have a very poor record of increasing tax receipts (income) by raising taxes in the good times, in order to pay off debt run up in the bad times. Secondly, the Chinese are a wild card in all this. They currently hold a very large proportion of US debt, and are making noises about shortening the reins. We can only hope that they do not want to do anything that would devalue their own investments, and so will not undertake any precipitous actions.

Regardless, even if everything goes along as expected, without any major disruptions, it is quite conceivable that the only realistic way for the US government to get out from under the burden of debt they currently carry will be to allow inflation to rise. Inflation will devalue the dollar and the concurrent debt. So they will be able to pay back today’s debts in tomorrows inflated cash. Good for anyone currently carrying debt, bad for the purchasing power of your savings and RRSPs. Keep this in mind for the future, and when you are thinking about future savings decisions, and planning options.


Filed under Canadian Dollar, Finance, Inflation, US Debt, US Dollar