2 Economies

[Darkre]

Saw this interesting article, although I may have only found it interesting because it basically states what I've argued for years. It's about the US but the same principles apply to Canada. Basically it states that the Federal Reserve, and thus the government, needs to consider the US as having 2 economies when setting economic policy. Policy should be made that best serves the bottom 60% of earners as any monetary policy changes have the greatest effect on them. The top 40% are better able to absorb any changes, and due to the increased spending capacity the top 40% are artificially inflating the economic picture when things are looked at on a national scale. I actually feel there should be another consideration added to the equation and that is regional situations.

Our economy in Canada is driven by regional powerhouses while other areas languish behind. The interest rate hikes have helped with out of control pricing in Vancouver and Toronto but there were already areas, like the Maritimes, where despite repeated price drops homes already sat on the market for over 6 months on average and in many cases a year. The rate hikes there are only going to make things worse.

Economists see that people are borrowing more money than ever before and the Bank of Canada believes low interest rates are driving this. By viewing the economy through a national Macro lens this is the answer you will develop when looking at the raw data. However if you divide the economy into the top 40% and bottom 60% as suggested in the article you get a different picture. Low interest rates may be driving people in the top 40% to spend but many people in the bottom 60% are borrowing to survive. I personally know a few people that own their own homes and have lost their main source of income. They've sold some toys off and have borrowed money to make ends meet until the economy picks up and they get a better paying job again or they can sell their house without losing too much money. I also know a few people that have been forced to rent an apartment above their means in the GVR. Again they are borrowing, through lines of credit and credit cards, to make ends meet. Even minor increases in the interest rate greatly effects people that are struggling.

It only takes a snowball to start and avalanche. If our economic decision makers don't start adjusting the way they view the national economy certain regions and economic sectors of the economy are going to be facing very difficult times in the very near future. If people get too far behind or owe more on their homes then they are worth, and they only see more rate increases on the way making their lives even more difficult, we are going to see a sharp increase in bankruptcies.

http://business.financialpost.com/investing/ray-dalio-makes-a-case-for-viewing-the-u-s-as-two-economies?google_editors_picks=true

[Darkre]

http://vancouversun.com/news/local-news/rising-interest-rates-put-many-in-b-c-on-edge-of-bankruptcy

Another article

[Thinktank]

divide the economy into the top 40% and bottom 60%

That's why it's so hard to know what's happening. The top 40 seem be doing just fine.

The bottom 60 - not so hot.

[hobbyguy]

Methinks it isn't quite that way. Changing demographics mean that the measuring stick is off a tad.

A fair number of older folks, at least the responsible ones, will be asset rich and income poor. So for those folks, who may well be in lower 60%, and interest rate increase may be a good thing.

In essence, there are many more divisions.

Not the least of which is the divide between savers and borrower/spenders. If you have no debt, then rising interest rates are to your advantage, regardless of income.