It’s a promise from Ben Bernanke. He will leave interest rates near 0 percent until at least 2013. For the first time ever, the head of the Federal Reserves admits the U.S. economic recovery has stalled and he will do anything to get it started again.
The world order has changed dramatically in the last seven days.
Since last week, the U.S has lost its triple-A status, global markets have plunged to their lowest levels since 2009 and our Canadian dollar has fallen dramatically.
When it comes to the economy it’s anyone’s guess.
The only thing that’s clear is the number of issues threatening to push the world into a global economic collapse. Right now, there are sovereign debt issues in several European nations. In the U.K., looting and riots have taken over the street. Experts say Brits are frustrated with the current economy and the chronic high unemployment there.
But, consistently low interest rates are forcing, people, corporations and governments to hang on to cash. If that money is flooded into the market the fear of rising inflation spreading across the globe increases. If gold prices are any indication, some people are expecting to get to a point where the costs of goods and services would spike out of control making it hard for people to afford the basics. This week gold was trading above $1800 an ounce, a new record for the precious metal.
This is what’s happening. The U.S. is printing more money to pay its creditors. Eventually the greater money supply will drive up the price of goods and services and because the U.S. is the world’s reserve currency countries around the world could suffer. Because what happens to the Greenback impacts everyone.
Canada is in a precarious position. As long as cheap money remains in supply the U.S economy can’t move forward. And as long as the U.S. economy is stalled the Fed can’t raise interest rates and neither can the Bank of Canada. Being out of step with U.S. rates would guarantee a dramatic slow down in Canada, because it would be too expensive for businesses to operate here.
In order for a rate hike to happen, businesses have to show they are hiring again, debt to income levels have to shrink and the U.S. has to regain its triple A status.
The situation is devastating and for the first time ever there is room for a new economic super power to rise from the recession. The reaction in the markets has been exaggerated; because there are many publicly traded companies that do not deserve to have their values depleted so quickly.
But, I still stand by my previous opinion that the cheap money party will come to an end, eventually. The current situation is simply buying more time. Anyone in debt can take longer to pay back loans and not default on their debt. Bernanke realizes the economic recovery is fragile and keeping rates low will encourage people to continue spending and stimulating the economy.
Every single Canadian can make steps to protect themselves. Save more money, consolidate your loans and pay down debt. It’s so simple yet we all forget to do it. Whether a second recession is here or not, the threat of difficult economic times remains. As much as governments are responsible for cleaning up a country’s fiscal house, we need to clean up our balance sheets as well. As individuals there’s nothing we can do to stop a possible economic collapse, this time the issue is the debt of countries, not the debt of people. But we can do a lot to protect ourselves and that starts with our own home economics.
Writer for RateSupermarket.ca