That Japan happens here.

The problem with low interest rates is that once you've cut them to zero, you can't cut them again. Your ammunition, your firepower, your ability to excite the market is gone. Nor can you raise rates — not if the economy doesn't gain traction.

Years of near-zero interest rates.

That was Japan’s reward for not dealing with their bubble. And it made life very difficult for the country’s retirees and savers, who saw their post-retirement fixed income dwindle to nothing. Nor did it help equity holders, with the stock market still 70% below its 1989 peak.
Japan's experience taught Asia — which went through its own financial crisis in 1998 — that sometimes the best for cure for a boom is a bust. Investors will never invest when they're waiting for the shoe to drop. Sky-high interest rates there forced bankruptcies and flushed the crap out of the system, paving the way for recovery.

Is the US doing the right thing with zero interest rates?

One thing I know for sure right now — there's got to be something seriously wrong with an economy when at zero interest rates, borrowers don't want to borrow, and lenders don't want to lend. Bank lending has continued to contract in the US in recent months.

But it's not the US that scares me. Canada has been piggybacking off US interest rate policy. An interest rate policy that may have been inappropriately low for us. So our asset prices have not adjusted downwards, just the opposite.

At least when this is all over, and US rates start to rise, the United States will have adjusted. It will be globally more competitive with a markedly lower dollar and property prices some 30-50% below peak levels. But what about Canada? When interest rates start rising, the Canadian economy may be in a world of pain. And it won’t just be the recent home-buyers who get burnt with 30-40 year mortgages, but all the retirees who’ve taken on excessive risk because they could no longer live off their GICs.
Bruce Freedman
Weigh House Investor Services
June 29, 2010

No comments: