Rate cuts too little too late
Posted on January 22, 2008
Filed Under Business |
TheStar.com | Business | What the experts are saying about rate cuts
The US Fed made an unscheduled rate cut of 75 basis points. Bank of Canada wasn’t informed about it (on puropose or just international ignorance on the Feds part, you decide) so it had to stick with its planned 25 point cut today. What does all this mean? It means that the institutions that are supposed to lead and steer the market are lagging it. I have not doubt that some of the great economic minds at both didn’t see it coming, but they refused to really show their hand in order to prevent the mass hysteria selling we’ve seen over the last week.
The problem is that saying we’re not in trouble doesn’t make it so, it just makes trouble worse when a critical mass catches on. These rate cuts should have gone up long before they did to prevent the unsustainable growth they caused. Now low rate will return, but don’t expect that to stimulate anything. The US has been in crisis mode long before the August Credit Crunch. The writing is literally on the wall.
The personal savings rate in Canada and the US has been near or below zero for years!!! The image shows that on January 14, 2008 the National Debt per US citizen is almost $100,000. Over 40% of that debt is owned by China and Japan alone. Then add in the personal debt of all the people that have been living beyond their means and not saving anything. In Canada, we’re doing a little better but not by much. The recent tax cuts are pushing us in to deficit for the first time in almost a decade.
Where to from here… lower interest rates are coming. I don’t see it stimulating any growth though. Enough people have been burned by living beyond their means and it is time to pay up. Low rates will help then do that, but it will be more like the decade of stagnation in Japan than a repeat of the early 2000’s. Short-term the bottom hasn’t been reached and there is no quick way out of this hole. Thanks to overly aggressive politicians (making war) and economists (making the unaffordable purchaseable) the US might actually go bankrupt if China’s growth slows down and it comes calling for some of its capital back.
So if you’ve been properly saving and living below your means (as Warren Buffett taught you), these time of low rates is a good time to acquire captial through good debt. If not, it is a good time to stop spending and start to pay off those debts.
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