Mark Carney, governor of the bank of Canada this week issued a broad warning that the economic crisis is far from over, that consumers need to ‘rein in’ their appetite for cheap money. Carney said that household debt is too high(increased 7% in 2010 vs. a 3.5% decline in the U.S.) and that ‘inevitably’ there will be a ‘Day of Reckoning’.

This rather ominous warning along with the suggestion of the need for higher cost money, leaves us not only a little bit ‘miffed’ but quite frankly, ‘suspicious’ of Carney’s motives as well. Firstly, the Bank of Canada sets the prime rate based on ‘inflation’, which continues to remain very low. Secondly, the B of C is handcuffed in that if they increase rates, the loonie will very likely soar, hurting an already weak export market further, thereby increasing unemployment etc., further weakening the Canadian economy which he has made it clear, is struggling more than expected. Thirdly, the U.S. federal reserve interest rate policy is for no increases in prime, until at least 2012. Fourthly, the U.S. economy remains extremely weak, and is expected to take several years before it truly recovers. Unemployment there is now considered ‘structural’ meaning that unemployment will continue high even after the economic recovery occurs, perhaps stay high permanently. Many see any real U.S. recovery as being years away, perhaps 4 to 5 years away, and since Canada is inextricably tied to the health of the U.S. economy, growth here should remain sluggish for years to come. These are the primary reasons that prevent Carney from increasing the prime rate, although he would clearly ‘like’ to.

We find it ‘suspicious’ of him to make such statements on the one hand, while on the other he is now ‘encouraging’ our banks to “tighten lending requirements, even in a low inflation environment, to discourage risky behaviour”. Funny how the government wants us to spend to sustain tax revenues which we now have the dubious distinction of being the ‘highest in the world’, while at the same time wants us to reduce spending without incurring debt, when most Canadians cannot save because of excessive taxation, and excessively high credit card interest rates. The big banks profits continue to boggle the mind, yet Carney is now asking them to charge more on loans to curb lending and spending which in turn will make them more profits. We have to wonder if the banks have him on their payroll? We would like to suggest to Mr Carney that it is high credit card rates that are getting Canadians into trouble more than anything else, and that in fact, it is these rates that should be reduced instead. He should be attacking the banks who can borrow at 1% from the B of C, and turn around and charge between 18 and 29 per cent on credit cards. The government wants us to spend but only with savinbgs, which few can because we have a hard time saving with excessive taxation of every description, and ‘usurious’ interest rates charged on credit cards.

It is our opinion that ‘overall’ that the B of C cannot and will not increase prime, much if any, and worst case only 1% in 2011. Even in the long term ‘prime’ should remain low, relative to historical rates. So today’s low interest rate environment will continue for several years yet; except for ‘fixed’ rates, that is, which just increased due to recent pressure from the North American bond market where the banks raise funds to finance mortgage loans to consumers, as investors dump bonds and rotate cash into the rising stock market(for better returns). This has forced the banks to pay higher rates on bonds to win investors; hence fixed mortgage rates went up this past week.

Bottom line folks is this. It is an opportune time to get your financial ‘house’ in order; to eliminate high interest debt, by using ‘home equity’ to pay off credit card debt by replacing it with ‘good’ low interest debt. Debt is debt, yet we meet many people who ‘think’ they have equity in their house that they want to preserve, yet while paying ‘insane’ rate on consumer debt which they cannot get rid of. In doing so, your future purchases can be made out of ‘savings’ instead of incurring high interset debt, which is inherently evil and sinister by nature. After all, this is what Mr Carney would like you to do.

Why not call us today for a professional review of your finances, and some invaluable guidance on how to manage your credit. We will help you save, and we will help you with budgeting(as required) with the goal of helping you become financially stable, secure, and to build ‘wealth for your retirement. as you can see, we are much more than mortgage ‘arrangers’.

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