Remember when the central banks were tapering their asset purchases in the belief that the economy was strong enough that interest rates could “normalize”? There’s a reason why this narrative has disappeared down the memory hole. It’s not just because of Covid.
As Economist Daniel Lacalle points out in this article, economies that are addicted to rising debt eventually find themselves unable to tolerate what historically seem like tiny increases in the rate of interest.
“What happens when the central bank makes the highest-quality and lowest-risk asset extremely expensive? That savers take more and more risk for lower yields in other assets and that the perception of risk is clouded, driving investors to take too much risk in equities and bonds because the central bank is manipulating the most important risk signal: rates.”
“A mild increase of US 10-year bond yields to 2%, a more than logical move considering inflation expectations and the recovery of the economy, may cause a financial crisis not because of this modest rise, but because of the massive level of risk built in the economy from the prior artificial depression of those yields.”
I have to disagree with Lacalle on one point: I think the economy will be hit by a wave of debt default long before we see rapidly accelerating prices for consumer goods. The main concern of many folks will not be the price of a steak, but their ability to make the next mortgage payment on a million dollar home.
Million dollar, super sized homes, loads of appliances drawing on the Hydro outlets but still supporting ‘Global Warming’, ironic, eh ?
No shit,
It really is going to get bad in a couple months…
Alot of other factors are going to take effect as well.
Inflation…hyper Inflation possibly…
The writing is sure on the wall. Lots of money out there and arguably less shit to spend it on.
A million dollar home is now a tar paper shack. Literally.
It won’t be the base mortgage payment on that home that will crush people, it will be the increase in property taxes (ie, escrow) that will make a once-tolerable monthly payment into a monthly gutting of the pocket.
Very well said. The unknown, like property taxes, hydro rates with “carbon taxes”, and other new “innovative” taxes, like storm water taxes will crush these poeple. Here in town, the official valuation is 50% less than the going market rate, because the MPAC values in every 5 years. The next valuation comes this year, I think. That is a 50% increase in property taxes.
I partly agree Rich. However that will only last for one civic election cycle until which will boot out the progressives because the property tax paying sheeple will actually get peeved enough to do something other than virtue vote. But then services will be slashed and civic employees furloughed or simply laid off. A city like Calgary, for instance, cannot have a half empty downtown without a cascade of consequences negatively affecting its citizens. I actually talked at length with a potential candidate for mayor and quizzed about their views on double digit tax increases for homes and businesses, stupid projects like bike lanes and $30MM footbridges to nowhere, the 1% art tax on projects, making transit and parking more affordable, reducing traffic fines, etc. Their answers were common sense enough for me to sign their candidacy form. So if some responsible people can actually get elected into leadership positions some much needed fiscal restraint will happen. Some silver lining is that reduction in services might actually help bring back the backyard burning barrel!
BINGO! If you have a fixed rate mortgage and you don’t need to relocate, you are actually being paid for your debt. E.g. a $1MM note at 2% with a true inflation rate of 6% is not a bad deal. But if your taxes are indexed to market value you are screwed.
I hope it hangs on just long enough for me to cash in my chips and leave Onterrible. By chips I mean the house I paid $190K for back in 2000 that chumps from Brampton will now line up to pay a million. I hear Costa Rica is nice this time of year.
Yep, sold my larger home last year and bought a mini-home on a rented lot, I’m living in half the space with almost no over head and loving every minute of it. Most of our friends have homes that are on golf courses and are around 5000 square feet. Good luck selling those when the market crashes.
The Chinese will be happy to buy them, which, I think, is the whole purpose of the Left’s exercises.
Why, this all sounds like Trudeau the First.
The Banks have no cares.
After “Too Big to fail” they have been free to “risk” whatever they want,for their servants in Federal Government will socialize all losses ,while allowing them to keep all profits.
Behaviour that gets rewarded,continues.
That socializing of the losses is the “Great Reset”.
I agree about the banks.
The government debt the banks want to keep in place like they did to Greece and suck every government asset we have.
After all a debt is a debt exception being banks.
As we have only $100,000 in protected savings to our bankers.
The great reset will not be a nice period of time for Canadians.
Dennis has no idea what he’s talking about. Lacalle’s prognostications are pursuant to the US economy. Tiff Macklem with the Bank of Canada signalled last week that lending rates will not be increasing anytime soon which will push RE prices even higher across the country including Vancouver and the GTA where the experts have been predicting a significant meltdown for over thirty years. As far as the markets are concerned, investors who who balanced, diversified and liquid with bonds, dividends and equity funds can weather any financial storm. Covid has been very good for investors.
That is because they are narrowly focused on current market and ignorant to any future problems in the near future.
Claiming ignorant is bliss when a blindsided activity occurs.
It’s called covering your ass.
What you don’t want to know you can’t speculate on.
A blindsided event like Ontario fuels shutdown would truly upset future marketers to bail as fast and quickly as possible ahead of this.
@ jojomeatheadboy
You are one of the reasons that Canada is doomed.
Awakened you mean…
It just took our government to try in knocking the elderly off to confirm it.
Take the experimental shot yet?
Is our government honest?
Are any of our Canadian politicians honest?
The media can have any of them, bend a knee, jump through hoops or cry on demand to be on the News.
What is reality when the government and media try shaping it to this fake reality we currently are in?
I’ve noticed this phenomenon over the past thirty years here in Australia with its ridiculous, chronically overheated residential housing market. Interest rates would move cyclically, so when low, anyone who could would be tempted into the market, then as rates moved back up the foreclosures would start. This was simply seen as collateral damage of an otherwise healthy and viable loan-shark industry, but eventually each time saw the foreclosures start earlier in the rising cycle, until we’ve reached a point where so many people are marginal on their loans at any given time that any rise at all leads to rashes of repayment failure, but the biggest problem stemming from this is the local Banks (four major and a number of regionals) whose valuations are dependent on sustained overpricing of homes, meaning they can’t now support even fairly small downward revisions in prices without threat to their solvency.
The only question is when – IT will happen.
We are beginning to see the rise in consumer prices now with the basics – eggs, bread, most diary products.
Yes, mortgages will be the first to feel the impact. For those who don’t have a mortgage (most retirees) it will be the ever increasing property taxes and other mandatory ‘fees’ that dig into their fixed incomes. Cities fail to realize they they are rapidly running out of sources to support their bloated bureaucracy but refuse to adjust accordingly and instead just keep increasing fees and taxes. On my crescent, at least two widows who should have been able to stay in their houses (their health was generally good and with some services such as cleaning and lawn mowing they would have been fine) can’t because of increasing property taxes and various fees. They have a very fixed incomes (likely their spouses’ CPP, OAS, GIS and maybe a small annuity from investments). Their adult children have been filling the gap but are no longer able to. So the mum gets moved to a care home and the house goes up for sale (usually to an invester who turns it into a rental unit) to fund the last years of their mum’s life. All the while, city workers continue to get huge salaries for any jobs that really are non-essential. Good times (well for some)!