Low Interest and Cracks

I’m watching the news last night after dealing with a LONG day of meetings, so I’m tired, but even I did a double take when they announced that the US Fed’s target rate is now 0 to 0.25%.

Sniff, can you smell that desperation is in the air?  Basically having money at just about free and expecting that rate to stay there for a while gives me the creeps.  It’s not so much that fixed income rates suck or the massive job losses that are creeping me out, but rather that feeling of history repeating itself.  Correct if me if I’m wrong, but didn’t really cheap interest rates for a long time in the US help start the last bubble? Could we just end up repeating what happened all over again unless some people are very careful in the US?

Perhaps something else I’ve noticed recently is the shift on the ground here.  I’m starting to see cracks in the little steam engine that is Saskatchewan’s economy, which was supposed to lead the country in 2009.  My former workplace now has rumors that there will be a wage freeze in 2009.  A guy that is building his house now suddenly has trade’s people, that were ignoring him for months, calling everyone looking for some work.  The provincial government was drowning in cash last quarter points out they may need to borrow some cash out their income stabilization fund next year to balance the books.

The gravy train that was the great boom for Saskatchewan is starting to slow down and I’m not sure what that is going to mean in the short term.

So what’s happening in your neck of the woods? Are you personally worried? Please share your thoughts.

10 thoughts on “Low Interest and Cracks”

  1. We’re worried – We are in the Toronto area, my husband is in investment banking. He is losing colleaugues to “re-organizing” left, right and centre. We’ve been lucky so far.

    I am also nervous at reports that the US is printing more money. Deflation can be as damaging as inflation if it gets out of control.

    We have a friend who is a contractor. He does most of his work for “Ultra high net worth families” he tells us that they are now either delaying projects or scaling back the scope of large projects. For the first time ever, he says he may not have enough work to keep all his crews employed through the winter months.

    We are sitting tight, and focusing our savings contributions on cash and cash equivalents as well as paying down the mortgage. (Though I have made a couple of cheap equity purchases – I couldn’t help myself – cwi.un is yielding over 16% right now).

  2. Tim I’m curious if you have read Crash Proof by Peter Schiff or watched any of the videos of his predictions & interviews that are floating all around the internet? The guy is a bit of a nut but he’s got a solid argument. I’m curious if you take those type of predictions seriously?

  3. Yes, I’m personally worried. My husband was laid-off last month (He worked for a luxury travel company. Not a lot of people interested in luxury travel these days). I was at a work-related Christmas lunch yesterday, whereveyone talked about how worried they were.

    We’re trying to ramp up our savings.

  4. You are wrong and confusing the federal funds rate and the prime lending rate. When the fed cuts interest rates, it is in reaction too inflation, their money supply, currency, monetary policy, etc. This rate is used to settle the difference between large institutions for overnight lending; it is often refereed to as the overnight rate. The federal funds rate is linked to the prime lending rate(is not the same rate as the federal funds rate), but will not move in equal amounts to the federal funds rate. A lower prime lending rate could led to lower borrowing rates(costs) for business’s, people, etc; should create economic growth since funds are now cheaper to borrow. However people are still based on their credit and the spread between the prime lending rate and their rate is unlikely to change. Fixed rate mortgages will not be affected since they are based on long term rates, however adjustable rate mortgages could be slightly affected(hopefully creating fewer foreclosing s)

  5. Both my company and my husband’s are busy and seemingly doing well. I got a nice bonus last month and we’re having our holiday party at an expensive restaurant (which I see as a good sign), although we have a raise-freeze until we see what shakes out. Our only income affected now is L’s weekend bartending job, because so many Xmas parties aren’t happening. I’m still socking away a fair bit of cash though, because fear is contagious and because you never know.

    My cousins in Regina are doing well too. After being broke students throughout the boom their rock band has really taken off in the last few months … so there’s a potential career change for you Tim.

  6. East Coast Vancouver Island

    The building boom of view homes higher up on the hill has come to an end. Many lots sitting empty. Condo projects in town delayed etc. Hundreds of layoffs in the local forestry industry. A high number of existing homes for sale. Home prices down. “new price” wording added to some home sale signs.

    On the plus side…we still live in one of the most beautiful places on earth.

    CM

  7. I was on the phone with a business associate in the U.S. today and I asked him when the Federal Reserve would start throwing money off the roof-tops of buildings…

    I hear two schools of thought in Toronto: (1) people are scared and nervous and (2) people are waiting for the bottom to hit and then start buying. What school you belong to comes down to how leveraged you are.

  8. At a time when the fed should be encouraging people to save they are reducing interest to encourage people who are already broke to spend.
    I think they are just trying to postpone the recession that needs to occur

  9. My wife and I both work in the Ontario manufacturing sector and we are watching it crumble before our own eyes each day. There is not a week that goes by that I have some supplier calling about unpaid invoices. Demand is collapsing. I’ll be amazed if we make through the year at this rate.
    I have had four pay freezes in the last eight years as competition is tight. Don’t feel bad if you are looking at your first pay freeze.
    We are in total save mode, not because of debt as we have none, but because of a fear for our jobs.
    Too much debt and generally poor balance sheets are the root of much of our current economic problems. Low interest rates in an effort to increase spending and create more debt is not the way out. Until people, companies & countries clean up their finances (time) a sustained recovery is hard to fathom.
    The business cycle is a valuable thing as it purges the excesses every four years and prepares us for the next phase of growth. Now we are going to have the mother of all recessions to make up for it.

  10. MM,

    I’m doing something similar. I’m saving some and investing some.

    Jordan,

    No, I haven’t read anything on that. I’ve requested the book from my library so I’ll do some reading and address it later.

    Billst,

    No I didn’t confuse the two. I understand the bank prime is higher than the Fed rate. All the same I’m concerned by it. But thanks for clearing it up for everyone.

    Guinness416,

    Ha! Now there is a career change that is never happening. I have near zero musical talent.

    Magic,

    Actually the problem is so much of the US economy was based on consumer spending that now that is gone there isn’t much to keep things going. I agree there needs to be a new sustainable level reached but first we need people to get rid of some of their debt first and live a bit more in their means. In the mean time things are going to be painful.

    Bill,

    Actually I won’t likely face a wage freeze. My last workplace is likely to have one, not my current workplace.

    I like your summary of the issue you nailed the fact that we collectively had too much debt and need to clean up everything.

    The issue is that is going to take some time and going to be hard to do with things tight and people are fearful for their jobs. In a nut shell things are a mess and likely to stay that way for a while.

    Tim

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