Interesting Developments…

…emanating from the Great White North, a/k/a Canada.

First, it should be noted that the widely held belief that the Canadian banks were much more responsible than their US counterparts and correspondingly well prepared to weather the global “financial crisis” is…a myth.

But it’s interesting that the Bank of Canada is signaling that it will soon begin raising interest rates.  It’s a pet theory of mine that I haven’t seen anywhere else:  economic decision making is forward looking, thus a falling interest rate environment ironically discourages borrowing, because prospective borrowers may believe they can borrow cheaper at a later time, since interest rates are falling.

On the other hand, a rising interest rate environment ironically encourages borrowing for the same reason in reverse:  prospective borrowers have a sense of urgency about borrowing because the cost of borrowing is getting more dear.

So the dogma may be wrong once again.  The idea is that keeping interest rates near zero encourages borrowing because it makes borrowing cheap; but it will only look cheap if and when interest rates start to go up.

Perhaps there are other reasons for keeping interest rates at or near zero, such as favoring those who are already creditors, because of course their “assets” become less valuable in a rising interest rate environment.  Bondholders get really mad when central banks screw them over like that.  But remember this:  everything a central bank does favors someone and screws over someone else.  Can’t be helped.

But never mind.  It seems many Americans are getting off this train before it hits any more stops anyway, buying safes and stuffing mattresses.



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