After the recent cut to interest rates, people are out in full force predicting a Bank rate as low as 3-percent. These same people are thinking it is going to be an economic saviour.  We doubt it, because if we do see rates that low, it will cut consumer spending and exacerbate our housing problems by pushing prices up because one will be able to borrow more.  Let’s hope this does not occur since affordability is one of the main issues in our economy.   

If interest rates do fall to 3% it will mean our economy has entered a recession and unless interest rates drop south of the border, our dollar will probably fall to 70 cents U.S., thereby creating inflation which makes Canadians worse off. Ottawa and most current Western governments do not understand that it is savings that build the economy. Without it our financial system would collapse. If anyone questions this, provide a country that has prospered without household savings.  One cannot because it does not exist.

Yesterday’s economy was based on record consumer debt that is now restricting today’s GDP growth. This is why rates today should be used to reward savings and protect the dollar, nothing else. It makes more sense to allow those with savings a minimum $5000 in low-risk passive income annually per $100k than to save those on the edge of insolvency a few hundred per month.  These savings in interest will do little for the economy because it will most likely be forced towards paying off debt rather than being productive and work its way through the local economy like higher passive income will do. No matter what, those who are being squeezed by higher rates today will still be in trouble with a bank rate two-points lower. They are pooched and will only be valuable to our economy with a clean financial slate.  

We predict that sometime during the fall deflation will become more obvious.  Led by a continued housing correction, prices for most goods and many financial assets will fall. Housing demand is there but few can afford today’s interest rates and prices.  The latest numbers show the average family income has fallen slightly to $112,000, which means people can qualify for a CHMC loan of $340,000.  This is enough for maybe a condo in small town Maritimes or the Prairies but nothing in the main centres across Canada where prices range between six-and-eight hundred thousand dollars, with Toronto and Vancouver costing over seven digits.

There is an acute shortage of tradespeople, and these positions are not being filled even with excessive immigration. This is just adding more flames to the housing market.  For 2024 it is now estimated there will be only 200,000 new housing starts, down from 230,000 last year because of a shortage of skilled labour and newly enacted laws that deter speculation. Here in B.C., it seems like the government is the largest developer. This is not a surprise since it can take up to three years to get the needed building permits.  It is the speculators that will fulfill the demand for housing but only if they can make money in a timely manner.

If you want to see what low rates do to an economy, look across the Pacific to Japan. Their economy is finally starting to recover from decades of contractions created by an exploding real-estate bubble that was followed by a period of excessively low interest rates.  As the chart above shows, accommodating the borrower by sheltering them from higher rates does not fix an economy.  It does more harm because those who are drowning in debt no longer contribute to economic growth no matter what rates are. This is why it is so important to reward the saver. 

Squeezing the indebted into bankruptcy speeds up a recovery since the process lasts only seven years at which time their credit record is wiped clean and a new one can be rebuilt. As harsh as it sounds, it is better to strangle the indebted and force a recession that may last a few years rather than decades as Japan’s economy has proven over the last 35 years. It was not until this last February that Japan’s major stock index, the Nikkei, broke the last high set in 1989 because of an irresponsible monetary policy that kept interest rates low and punished the saver.  

If a country wants to maintain a population, there needs to be 2.1 births per female.  Like most wealthy nations, we do not fall into this category and are thankful that foreigners choose Canada as their new home.  However, this policy is only productive when managed properly. An immigration policy that allows for a population growth above 1% annually creates chaos across the economy because there is not enough time for it to adapt, like what we are witnessing in Canada today. Ottawa is going to allow 488,000 people into Canada both this year and next even though the housing shortage was 500,000 units last year.  If we want to reach a balance between housing demand and population growth, we must limit immigration to 200,000 people for a few years.  

The only solution that will allow Canada to reach its potential is to have a government that puts the saver first, allows our businesses to develop, and let the labour market dictate our immigration policy for the time being. Without these three, the economy will continue to be lost. 

Chart from www.tradingeconomics.com