Friendly Word of Warning, the BoC Does Not Determine Interest Rates!

They do when the bond market has faith in governments’ finances. But if/when you lose the confidence of the bond market you’re toast and no longer making decisions. The yields on your bonds skyrocket which means the rates the Feds are paying on new debt skyrockets.The ONLY way the BoC can do anything about that is by buying up literally all the new debt issued by the government and therefore monetizing it. If you’re doing that in a scenario where fixed income investors have lost faith in your ability to repay you’re going to see double digit inflation. For that reason the Feds would decide it would be better to implement painful tax raises and spending cuts to try to assure the bond market they’re serious. This is exactly what happened in 1994 resulting in Martin’s 95 budget. That will stop a runaway scenario but leave yields at a high level. Your mortgage will be significantly more expensive upon renewal.All this to say, I keep seeing it repeated on this sub over and over again that “The BoC will never raise rates, the Feds can’t afford it! Look at their debt pile!”This is totally and completely wrong in exactly 180 degrees. The more debt the Feds rack up the more they’re playing with the confidence of the bond market. When the confidence cracks investors on Wall Street determine what your interest rates are not the BoC.Is this guaranteed to happen? No, Japan shows you can keep the confidence of bond investors with ever higher amounts of debt. But it can happen, it happened in the UK in 1976, in Canada in 1994 in South Korea in 1997, in Brazil in 1997, in Iceland in 2008, in Greece in 2009, and in Ireland in 2010. All to say you’ve been warned. via /r/PersonalFinanceCanada https://ift.tt/3g3yDST