Low interest rates help economic growth and sustain low inflation rates but they cause other problems. They have contributed to underfunded pensions, losses by insurance companies, excessive household debt, high real estate prices and a bias toward high-yielding equities and risk-taking, says Paul R. Masson. He is the former special advisor to the central bank and author of a recently released report by the C.D. Howe Institute. Masson is promoting the need to gradually raise interest rates to stop the financial imbalance.
Seniors have been particularly hurt by low interest rates. They worked hard and faithfully saved a nest egg for retirement. Now with yields of less than two per cent on investments, their income doesn’t cover basic living expenses.
Other seniors have taken the plunge into riskier investments to hopefully bump up their income, often with poor results.
Still others have fallen into the reverse mortgage trap, giving away equity in return for survival—and slowly but surely turning their children’s inheritance into bank profits.
A rise in interest rates could save corporate and government pension funds. Yet the chosen solution has been to slash and gut pension plans, rather than change our loose monetary policy. Pension plans give future retirees stability and definitely save the future taxpayer from subsidizing the aged.
But it’s not just seniors who will suffer? It’s everyone from young to old who have been seduced into risky financial behaviours because of sustained low interest rates. Canadian consumer debt is through the roof. We now owe $1.65 for every dollar we earn.
Insurance losses hurt those who pay the premiums. With record extreme weather and insurance payouts, combined with investment losses, there is only one way insurance premiums will go – up!
Finance Minister, Jim Flaherty has been warning for months that our real estate market is overheated and a “housing bubble” is on the horizon. It has to come — we have bought more real estate through debt than our incomes can sustain.
Masson argues that nobody likes interest rate increases, and certainly the Bank of Canada would be unwise to raise interest rates quickly. But he believes that a gradual increase in interest rates is needed to soften the economic troubles that are gathering on the horizon.
Sustained low interest rates have led to risky borrowing behaviour by Canadians and like our American friends learned the hard way, it just can’t go on forever.