Ben Bernanke, Chairman of the US Federal Reserve may be ready to cut interest rates again in hopes of keeping the US economy afloat in recessionary waters. In addition to cutting rates, banks are pumping liquidity into the financial markets. A consequence of these actions results in the value of the US currency approaching third-world status. With the weak dollar, crude futures are used as a hedge against the decreasing value of the greenback. Hence, the price of oil has inflated to record levels creating yet another bubble. This time it’s a resources bubble. The lowering of interest rates in conjunction with the liquidity inundation will result in one thing: high levels of inflation. Augmented inflation can only be adjusted back to equilibrium by implementing higher interest rates. Interest rates cannot stay this low forever. When the US Federal Reserve raises interest rates in the future to reign in inflation, the Bank of Canada will follow suit.
If you’re a Calgary home owner who bought during the last two years amidst bubble economics, you are not cheering for Ben Bernanke. The more interest rates are cut, the higher interest rates will have to rise in the future to correct the current economic mess. Any consequential increase in mortgage rates would spell financial disaster for many owners who have recently paid for bubble properties, especially when home values decrease. Most first time home buyers who opted for 40 year mortgages (or other creative mortgage vehicles) should be worried, as they were “tricked” into affordability a la subprime. The general rule of thumb for real estate affordability is 25% down for 25 years (single income preferred).
Initially, low interest rates, a hyped up real estate market and a false sense of affordability sucked up many home buyers. As debts accumulate/increase far beyond salary capabilities, a life of financial serfdom becomes life itself. It’s the perfect trap, a life of constant running and sprinting on the financial treadmill with no ability to get off.
Have a good weekend everyone!
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