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EDMONTON, Alta. /Troy Media/ – Charlie my boy, you’re a wisenheimer, tell me what’s going on here.
What’s the problem uncle, I thought you were floating on air these days.
Well, I thought I was, too, until my financial adviser called â€¦ told me I should lock in my mortgage rate, and quick. Apparently the Americans are starting to raise interest rates and pretty soon we’ll all be paying more, maybe a lot more.
Ah, he must have read the same Wall Street Journal headline I did: U.S. employment figures released by the Labor Department Friday â€¦ the Federal Reserve meets to consider a rate increase.
What has the U.S. Fed got to do with my mortgage here in Canada?
“Well, I’m sorry to be the bearer bad tidings uncle, but when the U.S. Federal Reserve put its rates up, it affects all other interest rates, including mortgage rates in Canada.
But why are they putting up rates now? I thought you said we couldn’t afford to pay higher interest rates. You said lots of people, young people in particular, are in over their heads on property deals and would go broke if mortgage rates went up.
Well, the sad news, uncle, is that bankers on Wall Street will make a lot more money if rates go up and the Fed has been looking for an excuse to give them what they want for years. And it looks like they found the perfect excuse in the better-than-expected employment figures in the U.S.
I don’t get it, what the heck do employment figures have to do with interest rates?
Well, it’s a long story. I’m sure you remember the ’80s – there was pretty nasty inflation. To combat that inflation, the Fed pushed interest rates up, sky high. In Canada at the peak, we had 21 per cent interest rates. It hurt a lot of people.
You’re tellin’ me – it was a killer. Are they going to do it again?
Could be. Fact is, Federal Reserve chairmen are like old military generals. They prefer to fight the next war with the tools that made them successful in the last war.
Unfortunately during the inflation of the 1980s, the Fed changed course from its traditional position of supporting full employment to blaming union power and COLAs (cost of living adjustments) for driving up the cost of living.
Yeah, I remember that â€¦ prices were getting out of control.
Regrettably, the Fed decided that rising prices were largely driven by wage growth that they believed was exceeding productivity growth. Whatever the truth of it, it’s now a governing reality for reserve bankers in the U.S. and around the world.
So what does it all mean?
Well, it means that fighting inflation is no longer about controlling the supply of money. Fighting inflation is all about price stability and that means holding the line on workers’ wages.
You’re kidding, right? No wonder so many people voted for Donald Trump. I know you don’t like him but at least he’s standing up for the average Joe.
Well, we’ll see about that. If Trump is really standing up for the little guy, he’ll get the Fed to dump the NAIRU point!
The nar-what point?
NAIRU, it’s the Non-accelerating Inflation Rate of Unemployment. It’s a theoretical point that economists and central bankers use. They believe it’s the lowest rate of unemployment that can be sustained without causing inflation. NAIRU is important for the Fed because if the unemployment rate falls below the NAIRU, it’s supposed to generate excess demand for workers. As a result, wages could start to rise and, by the logic of the Federal Reserve, wage increases will push up inflation.
That’s insane – the economy starts going in the little guy’s direction and they slow it down to keep wages low? How does that help anyone?
It doesn’t but that’s the logic of the Fed. And if they follow through on present trends, rates might go up a lot.
Seems crazy to me son, but I’d better go lock in that mortgage rate pronto.
Jump on it. And we’d better hope against hope that Trump follows through on his promise or we’re all in trouble.
Robert McGarvey is chief strategist for Troy Media Digital Solutions Ltd., an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave. Robert is included in Troy Media’s Unlimited Access subscription plan.
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