Fear has returned to the economy.
On Thursday markets fell a heart stopping 4 percent, reminiscent of the dark day of 2008 and early 2009. In just two weeks the TSX has erased all its gains made in 2011. This time the risk is coming from the biggest economy in the world, the United States of America. Whereas last time markets were concerned about bad mortgages and housing prices this time the concern is entire nations are teetering on the edge of financial collapse.
The words, double dip recession, are now on the lips of every financial journalist in the world.
On Monday, the U.S. Government made an 11th hour decision to raise the U.S. debt ceiling almost 900 billion dollars. A band-aid fix to a country whose problems are two decades in the making. The U.S. is broke; it owes more money than it can afford to pay back. The worst part, the money owed is on items it can no longer sell. Things like, war, bank bailouts and expensive government incentives. That’s how the U.S. government has been spending its money.
It’s akin to you carrying 10 times your salary in consumer debt. You’ve spent your money on dinners at restaurants, luxury holidays in the Caribbean and designer clothes. You can’t get that money back. On top of that the debt is accumulating interest on your credit cards.
This is the situation in the U.S. The saying throwing good money at bad could never be as true as it is today.
Canada’s unique geography to the economic powerhouse continues to raise concerns among investors that our recovery will be affected. But there is a good news story here.
The Canadian dollar saw its most dramatic one day drop, falling more than 2 cents on Thursday alone to settle just above a $1.02 U.S. Good news for the manufacturing sector that has been struggling to be competitive with our expensive Loonie.
Variable interest rates will likely remain low, as the Bank of Canada cannot take the chance of derailing any economic growth by raising them right now. Now, some economists say there will be no interest rate hike until 2012.
Bonds are getting more expensive, pushing yields lower. And this means fixed mortgage rates will be coming down as well. They are directly tied to bond yields. So if you are in the market for a mortgage you can expect better rates in the immediate future. Lower bond yields also indicates investors continue to see Canada as a safe and strong place to invest.
Canada is prepared; we knew this recovery from the great recession would be difficult. Governments have already started trimming back and taking a hard look at services.
So what is an investor to do? The markets are now officially in a correction. Meaning they have fallen 10 percent since their peak. All projections made by economists a week before the debt ceiling deal are now irrelevant. Because, the deal was made, the ceiling was raised, and the markets still plummeted.
The best advice is, keep working on reducing your own debt. Find extra money to put away, save for the rainy day, because the clouds are getting dark. And please if you have a job in Canada, keep it. Don’t risk your financial future by moving to the U.S.
Writer for RateSupermarket.ca