The Bank of Canada lowered the prime lending rate this past week, in a move that garnered very little attention in the media. For the better part of a generation, interest rates have been low, so a move from almost zero, to a little closer to zero raises few eyebrows. As my livelihood is closely and visibly tied to people’s willingness to spend borrowed money, I notice these things. It is easy to take cheap money for granted, but it would be prudent to at least acknowledge, that things can change even when we cannot imagine it.
My first mortgage bore an interest rate of 13.25 percent, on my first home in 1988. While that seems astronomical by today’s standards, I was grateful for what I considered a low rate. Afteral, we were only a few years removed from interest rates in excess of 20 percent. A business neighbour of ours at the time, Martin Hoffman, (Hoffman’s Small Appliances) would often come in, borrow from our coffee, and share his views of the world. As I was only 21 at the time and far smarter than I am today, they rarely meshed with mine. We disagreed, usually amicably, about most things but one subject stands out. Interest rates, according to Martin, would soon be coming down, and according to him, as low as 6 percent. I can’t recall the specifics of the conversation, but an accurate summation of my feelings about it would go something like this: He was wrong, he was crazy, I was right, (if for no other reason than I was 21 and I knew more than him!). History has recorded a fine account of who exactly was the fool! An honest retrospective self examination leads me to conclude that the only reason I thought he was incorrect, was that I lacked both the experience and imagination to accept that maybe, just maybe he was right. Throughout my brief economic consciousness, interest rates had not dipped below 12 percent, 6 percent was inconceivable. Today, on average, they are less than 3 percent, and a whole generation would find 12 percent equally inconceivable, not to mention unaffordable.
There is no doubt that we have become addicted to low interest rates, and like any addiction, the convulsions that occur when the drug is withheld can be severe. When that may occur, is far beyond my willingness to speculate. However a general awareness that interest rates are on a scale that slides in both directions could protect a lot of us from unnecessary risk. The Canadian economy, certainly in a global perspective, has been more or less robust for a period of time long enough to allow many of us to conclude we are doing alright financially. Lest I begin to feel too comfortable, two thoughts reverberate in my mind. First, a rising tide lifts all ships. Secondly, the Warren Buffet quote, only when the tide goes out, do you see who has been swimming naked.
Thanks for reading,