In last Friday's post, Enthusiasm and Euphoria, I talked about our real estate market conforming to the classic bubble pattern and that it will be rising interest rates that finally prick the bubble.
Dennison's of the Village on the Edge of the Rainforest simply cannot comprehend the looming implosion that will devastate our hamlet on the wet coast.
Many will concede the devastating impact that double digit interest rates will have... but almost to a mortgage holder, they are adamant that interest rates will never climb that high.
For three decades now capital has become progressively cheaper and more easily available. Many people have come to believe that low interest rates now are the norm as they have gone their entire adult lives knowing nothing else.
For those innocent souls the current shifting sands will be nothing short of a paradigm shift. Even those old enough to have watched how the Internet transformed society (a paradigm shift on a scale not seen since the printing press transformed civilization), oblivion reigns supreme.
As noted in a report by the McKinsey Global Institute since 1980, differences in the cost of capital in most countries have converged as financial markets globalized and risk premiums in developing countries fell.
- Capital became plentiful, and long-term interest rates declined too — primarily as a result of falling investment in assets such as infrastructure and machinery. Global investment fell dramatically, creating a decline in the demand for capital substantially larger than the growth in supply created by Asian current-account surpluses.
In other words, the “saving glut” so often cited as a cause for low interest rates really resulted from a decline in global investment.
Today, however, this trend is reversing. Across Africa, Asia, and Latin America, rapid urbanization is increasing the demand for roads, water, power, housing, and factories. Global investment demand will now rise considerably up to 2030, reaching levels not seen since the postwar reconstruction of Europe and Japan.
The global appetite to save, however, is unlikely to rise in step, for several reasons. China plans to encourage more domestic consumption. Spending will rise as populations age. Even increased expenditure to address or adapt to climate change will play a part. As a result, the world will soon enter a new era of scarce capital and rising real long-term interest rates. Such rates will in turn constrain investment and could ultimately slow global economic growth by as much as 1 percent a year.
Interest rates will be going up.
And while government has gone out of it's way, particularly since the early 1990s, to supress those rates artificially as a means to stimulate the economy, those days are coming to an end.
Our problem is coming to grips with that fact.
It is expected, nay... considered a right of entitlement, that government will be able to continue forever with that rate suppression.
Does the prophet see the future or does he see a line of weakness, a fault or cleavage that will be shattered as easily predicted events unfold?
As posted here we have read how Mark Carney, the Governor of the Bank of Canada, has warned us about what is coming.
Likewise has Alan Greenspan, former Chairman of the US Federal Reserve.
Even most well known Canadian blogs are detailing rising interest rate warnings this week.
The harmonics inherent in this particular act of prophecy are not all that hard to discern.
Ignoring them is nothing less than an act of defiance in the face of overwhelming logic and evidence to the contrary.
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