Wednesday, March 31, 2010

Inflation means higher interest rates, eh?

With this week's uptick in term mortgage rates and new federal qualification rules aimed at keeping unprosperous people from entering the housing market, I decided to bring this article back to the top. The subjects, worthy of reconsideration, are:
  • interest rates,
  • inflation and,
  • income distribution.
Interest rates have always been a key tool of economic management but, in my view, often manipulated with too little consideration of social consequences. (I can still remember the pain of our mortgage renewal at 18.5% some years ago.)

For example, the Bank of Canada considers that one of its first weapons in fighting inflation is higher interest rates. However, if we are experiencing cost-push inflation, is that effective? In the following article, first posted March 25, my argument is that government action is the single largest factor causing inflation and not restrained by higher interest rates.

I also believe that the graph shown below demonstrates a dreadful economic trend that, taken further, will cause social disruption. If the richest 1% of the population continues to gain wealth disproportionately, as it has done in the last few decades, unrest and repression are certain to follow.
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News reports today suggest we will soon be faced with interest rate hikes because the Bank of Canada believes inflation is rising. Well, I can't argue with the latter point.

The cost of living is definitely going up. Bus passes increase 10% next week, parking taxes are rising to 35%, medical premiums (BC's head tax) climb 6% soon with more later and property and school taxes move only in one direction.  ICBC had half a billion stripped, so car insurance will increase to rebuild those reserves. Days ago, BCUC approved a 13% increase in Terasen's gas commodity price and BC Hydro is implementing 25% increases over the next while. Metro Vancouver warns that cost overruns on filtration and distribution mean that water rates are about to increase. And, the carbon tax is rising and the cable company needs to charge $10 a month more so broadcasters can earn better profits. BC Ferries increased its rates and so did Canada Post. Road tolls are being implemented and they're predicting a vehicle levy for transit subsidies. And, Premier Campbell promises a completely new tax to start the Evergreen Line while my kid's post-secondary tuition just increased, again.

The barber says I'll have to pay him another $3 because of HST which also applies to everything else I need, from bicycle and shoe repairs to cappuccinos and golf greens fees. The person who cuts the grass needs to charge 12% HST and wants another $10 a week for herself. I tried to buy a 59 cent light bulb the other day but they can't sell those anymore. The new money-saving one cost $5.00 plus taxes, of course. The language school I signed with to learn 100 words of Spanish is going to charge HST and, regardless of whether I have my old shirt mended, or buy a new one, the price is going up because of HST.

I, for one, am glad we have the Bank of Canada and Colin Hansen looking after us, worrying about inflation and taking protective action. I guess if my cost of living keeps going up, they will keep fighting by raising interest rates and taxes even more. If they fight inflation hard enough, I won't be able to pay the mortgage.

Then, instead of the cost of living, I'll be worrying about the cost of leaving. And, that will attract 12% HST too.

ADDENDUM

From the New York Times, Income Inequality, Writ Larger:
The rising economic tide is lifting a bunch of yachts, but leaving those in simple boats just bobbing along.

. . . It takes an optimist to find good news in the fact that the top 1 percent have steadily increased their haul while the other 99 percent haven’t . . .

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5 comments:

  1. Please explain how higher interest rates will keep government from pushing up taxes and utility prices?

    ReplyDelete
  2. Why worry? According to the media, we are under the best economic managers possible. Both federal and provincial. So sit back and enjoy the ride Canadians. See you all under the bridge.....

    ReplyDelete
  3. By the way, in this contest, Regressive Taxes lead Progressive Taxes, 9 to nil.

    ReplyDelete
  4. Even, canned vegetables, the bland and nutrient deficient staple of the poor, has risen from .99 to $1.40. Along with everything else. Regressive taxes is right! Maybe we'll fight back from under the bridge, pay the troll! Great article, Norman.

    ReplyDelete
  5. Thanks again Kim. I know what you mean about rising food costs. I've never been able to accept Stats Canada reports about inflation being minimal while watching grocery prices rise. If the jar of peanut butter that cost $4.50 now costs $6.75, I wonder why. A staple such as potatoes that used to be readily available for 40 cents a pound now cost 99 cents a pound. I wonder why prices for imported electronics don't go down when the Canadian dollar goes up. Why should we pay 30 or 40% more than Americans for the same products?

    Well, I know the answer and it has to do with competition laws written to favor companies, not consumers. And, when Colin Hansen says pre-tax prices will soon be lower, I know he is being untruthful. Since he is not dumb, the only possible conclusion is that he chooses to lie.

    ReplyDelete

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