Interest Rates And Economic Outlook

There is no question that interest rates are going to rise. If you have refinanced since the beginning of the year, you have already experienced this.

The bank of Canada has raised interest rates already by 0.25% in the past month and the US federal reserve announced a 0.25% increase on Wednesday. This is the first rate increase since 2018.

The question is, what is the real economic situation and more importantly, what are the geopolitical factors that will affect our business in the coming months and years.

The biggest wild card is China. Days before the invasion of the Ukraine, China was seen as partners with Russia in a friendship that knows no limits.

Philosophically, Russia and China see the west as an ideological adversary.

Last week I spoke with a business owner who sources 100% of his product manufacturing in China. In his words, “There was no other option.”

Our world is fully interconnected and that economic interdependence is supposed to bring global peace. For the past 50 years the world has seen a period of relative peace.

Wars between major powers have been limited to proxy wars. Each of these wars has resulted in failure for the super power that has attempted to subject the country to their will.

The US failed after 20 years in Vietnam. Russia failed after 10 years in Afghanistan. The US failed in Afghanistan. The US has largely failed in Iraq.

The question is, what would happen if your primary supply chain was to be severed for the next 10-20 years. What would you do?

If your business relies upon construction materials, what would you do? 90% of the hardware for doors in North America is manufactured in China. Most of the sinks, toilets, plumbing fixtures, electrical outlets and switches all come from China.

We have learned that in a matter of days, the world order which we have relied upon and taken for granted for decades has been upended.

The question is whether the central government in Beijing would risk their own economy by having an economic confrontation with the west.

It seems too far fetched to consider.

This next period is going to test policy makers and economists. The traditional theory is that an orderly economy will go through natural cycles of expansion and contraction. This is the result of the lag between reactions to changes in supply and demand.

When the variables are simple, expansion of supply, versus short term demand, the economists levers of interest rates and liquidity are an effective tool for accelerating or cooling the economy.

It takes an artificial disruption to create an economic contraction at the same time as a cash surplus creates inflationary pressure.

We have just gone through four cycles of artificial economic disruption as a result of the pandemic. China has implemented another series of strict lockdowns in order to stem the spread of the more virulent 0micron variant. This will disrupt the supply of manufactured goods from China yet again, putting more price pressure on manufactured goods and increasing lead times.

We are now going through another round of economic disruption as a result of the invasion of the Ukraine.

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Host: Victor Menasce

email: podcast@victorjm.com