As housing prices and debt levels continue to rise, there is increasing pressure on the Bank of Canada to raise interest rates.
As reported in the Financial Post, “Economists worry that leaving low rates in place for too long could encourage too much borrowing and leave the economy vulnerable if growth slows or house prices drop, while investors have seized on recent hints of risks to financial stability.”
We know that interest rates must go up at some point, but any quick rise could cause big economic problems.
Our economic growth has been concentrated among a small elite, and even that growth has been built upon a shaky foundation. Massive debt and an out-of-control housing market can certainly grow an economy for a while, but without real underlying economic strength, a serious recession is inevitable when cheap debt runs out and the housing market corrects.
A solution: Cut taxes and regulations as interest rates go up
The government does not have direct control over what the Bank of Canada does. While higher interest rates will slow growth, there are things the government could do to mitigate the damage.
With debt at record levels, and many people counting on the value of their home, there is a serious risk that consumption would decline as interest rates rise. People would lose confidence as they saw the value of their home declining, and those with high levels of debt would lose money to interest payments.
However, by bringing in large personal and business tax cuts – and cancelling the carbon tax – the government could keep more money in the pockets of Canadians. This would help counter the loss in consumption and growth caused by rising interest rates.
Unfortunately, the Trudeau government shows no signs of taking steps to mitigate the inevitable rise in interest rates. Instead, we’re watching as they push their carbon tax nationwide – with plans to increase the carbon price every single year.
You can see how this ends up: We’re going to have rising taxes, rising interest rates, and declining home value all at the same time.
This will not end well.