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July 20, 2018 | The Fly

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Poor savers. Interest rates have jumped four times in Canada, yet the needle hasn’t budged much for high-interest accounts or those brain-dead GICs. Mortgages cost more. Lines of credit are higher. Credit cards, business loans and consumer borrowings are all dearer, and yet people sitting on cash have seen their wealth wither.

That continues.

The inflation rate, we heard Friday, is now 2.5%, the biggest number in six years. Gas, food, clothing and accommodation all cost more. If the burgeoning trade war gets out of control, US-imposed tariffs will jump the inflation rate further. We can only guess what your next Harley will set you back.

So here’s the point: banks want spreads. That gap between what they pay on deposits and the interest they collect on loans is called profit. It can never be too wide, and these days savers have absolutely no clout. Nobody cares.

By the way, here are the best high-interest savings accounts rate in Canada, as compiled by the nerds at RateSpy:


Notice that none of these offerings equals the inflation rate. Put money in any, and you lose. Of course, outside of a TFSA, all interest earned is 100% taxed at your marginal rate. That means an even bigger loss for savers. Besides, that 2% teaser at the National Bank is temporary, while Alterna Bank is the go-to lender for weed companies – which seem to be wildly overvalued. Sigh. So many conservative, risk-averse people pushed into such a shadowy embrace.

So is there any relief on horizon for those misguided souls who think that avoiding stocks, bonds, trusts, ETFs, funds, preferreds and every other marketable asset means no risk? Can anyone reasonably expect to build a retirement portfolio by stuffing their cash into only interest-bearing investments? No, and no.

Now, Friday’s numbers did raise the odds of a further Bank of Canada increase in October – adding another quarter point to the cost of a variable-rate mortgage and home equity lines of credit. Plus economists expect a couple more in 2019, even with trade wars on the horizon.

But there is a yuge fly in the ointment when it comes to the potential course of monetary policy. This week, fresh off embarrassing himself on the world stage with his Putin-poodle routine, Donald Trump lashed out at the US Federal Reserve, saying he opposes further interest rate increases. They boost the dollar, he argues (correctly), which makes American exports more expensive and less competitive. Higher rates also restrict consumer spending, which accounts for over 70% of the economy. And since Trump’s all about growth, expansion and inflation, higher rates are bad. Furthermore, the guy is adding boodles to the national debt with his corporate tax cut, so Fed hikes just make it more expensive to service that debt. That money could be sued instead to employ hubcap workers in Flint.

Thus, he hates ‘em.

What can Trump do about the Fed other than Twittering it into submission?

Quite a bit, as it turns out. Currently there are three Fed governors and four vacancies. Of the three, two are Trump appointees. Two more are Trump guys waiting for Senate confirmation. After that he can nominate two more – and end up with six of the seven decision-makers in his pocket. Interest rate decisions are made by the Fed’s Open Market Committee, which has 12 seats, the majority of which may soon be Trumpers.

Of course, the Fed was always designed to be fully independent from government, acting (like the Bank of Canada) to set monetary policy in the best interests of the wider economy, and not the leader or the party in power. Throughout history, this has mostly been the case, with presidents (and prime ministers) doing little more than bitching about bank decisions after they were made.

But this prez is different. Unlike all those who went before, he knows everything. Immigration policy. Foreign relations, Military strategy. Fiscal planning. Entertainment biz. Budgeting. And, of course, monetary policy. The odds of him at least trying to take over the Fed seem formidable. The consequences could be incredible.

The Fed’s main role – after saving the economy from the black hole of 2009 – is to corral inflation so things don’t run too hot. Without higher rates, it’s argued, the US will go into an inflationary wage-price spiral weakening the dollar and, if accompanied by highly protectionist policies, propeling America into a growth orgy. In other words, just what the president wants. Debts will get easier to pay, taxes can stay low and incomes jump. For a while – until the piper plays.

But that will be for the kids to worry about. The Donald will be gone.

So if you think the stock market’s rich now, just wait. And may God have mercy on your high-interest savings account.

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July 20th, 2018

Posted In: The Greater Fool

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