following the 2008 global financial
crisis it was hoped that low interest
rates would act as the temporary
stimulus for lagging economies ever
since they have been cited as one of the
factors fueling the housing boom in the
Greater Toronto and Hamilton area and in
Vancouver and now eight years into these
historically low rates experts are
warning of potential long-term
consequences joining us now for more
here's James Marple he is senior
economist and director at the TD Bank
Group and James nice to have you on our
program for the first time great to be
here let's just check a look at the
monitor over there and is gonna see what
happened to has happened to interest
rates since the year 2006 this graph
pretty well sums it up relatively high
several years ago coming straight down
and have stayed low pretty much under 1%
almost ever since can you give us your
sense of what you think the impact is
long-term of these very historically low
interest rates sure well I think first
it's important to recognize that the low
rates have been helpful in facilitating
the improvement in the Canadian economy
and obviously the Bank of Canada cut
rates in response to the global
financial crisis and they have kept
rates low in order to try to stimulate
economic growth sort of as you mentioned
but I think the side effect of that has
been obviously a large increase in debt
levels relative to income and we've seen
not only debt growth been relatively
strong but income growth has not been
quite as strong as it's been
historically so you put the two things
together and you've had debt to income
levels for Canadian households have
broached 155 percent they've increased
sort of over the last decade you know
that that chart was going by about 30
percentage points and they did about the
same in the decade prior to that so
we've had quite an expansion in debt
levels and obviously that increases the
vulnerability of the Canadian economy if
ever interest rates are to rise or if
there is another downturn in terms of
people's ability to maintain their debt
stop you there for sure because I want
to follow up on the debt in a second but
but you said that the low interest rates
for such an extended period of time have
really helped the economy and have
helped keep growth rates where they are
and I look at growth rates and I say
what do you mean there's less than 2% in
these places well I think there's two
things one there's I mean there's
secular things that are keeping great
economic growth lower than it is
historically we're well into sort of the
years when population aging is beginning
to weigh on the potential growth rate of
the economy and we've also seen that
productivity has slowed relative to what
it's been in the past so I think there
are things that are weighing on the on
the rate of economic growth you know
outside the level of interest rates in
the level of interest rates I think is
more reflective of some of those factors
that is keeping interest rates low
rather than sort of rates being low
artificially I really think they're a
function of where the economy is at but
you know we don't know the
counterfactual if for example the Bank
of Canada was to you know be overly
worried or Hearst think that they had to
react to something other than you know
they're all look for inflation which is
their primary driver I think probably we
would have had even lower economic
growth potentially and potentially lower
inflation and a bank that has been less
successful in hitting their target
gotcha okay let's go to dead levels are
you concerned about the amount of debt
that either governments and/or
individuals are carrying in the country
today
yeah I think it's it's worrisome both in
terms of the the absolute level or
average level of data you know as I said
one hundred fifty five percent of
disposable income but you also see that
that has not been even across across
groups some households older households
who you know bought homes for example
when prices were lower have not taken on
nearly as much debt there was a study
that looked at sort of the increase in
debt sort of the distribution of it and
you see that households that have five
hundred percent just booked debt to
disposable income that has gone from
three percent of households to 11
percent in 2012 so there's been a big
increase in in in you know a minority of
households still just 11 percent of of
all households but they've seen a huge
increase you know in debt they have 500
percent what's an allocation of that
well the implication of that is that as
if I mean we're just more vulnerable to
either an economic shock or an interest
rate shock and those households would be
vulnerable to being unable to make meet
their debt payments if all of a sudden
especially if they have a variable rate
product rates were to rise or if there
is a downturn where they lose their job
for any period of time as you look back
let's look back decades
have we had a moment like this in
our financial history well you kinda
have to go back to really the 30s to see
interest rates even comparable to this
and even then we didn't I think we've
passed even those levels certainly
globally and you know looking at mate
rates going negative in Europe and and
below below the rate of inflation in in
North America that's really
unprecedented and if you kind of think
of the experience of you know people
over the last 50 years rates were very
high in the 1980s and since then they've
been they've been coming down I think of
my parents every time they had to
refinance their mortgage it was into a
lower rate and that has really been
something that has has you know been
maintained really over the last thirty
years whereas when I was your age I
think interest rates were around you
know 20 percent 23 percent something
like that right so we're in a very
different existence now absolutely talk
to us about financial literacy and how
important it should be for all of us
going forward in an effort to understand
what's happening right now sure well I
think as we said this context is very
important the increase in debt levels
the low level of interest rates the
potentially lower level of economic
growth changes you know rules of thumb
and the paradigm for how much people
have to save for retirement and if you
look at sort of the debt levels as I
mentioned those vulnerabilities we've
seen that expand for younger people
we've seen that expand for for
lower-income people relative to their
income and those are the people that are
more most vulnerable and probably need
the the highest level of financial
literacy and if you look at some of the
measures that we have in terms of levels
of financial knowledge comfort with
financial decisions sort of knowledge
about budgeting and how much people you
need to save for retirement you see a
sort of a correlation with the same
groups that have taken on high levels of
debt so I think that correlation being a
being I have the lowest level of
financial yeah give sort of objective
measures of financial capability are
lower in those groups so that compounds
I think the vulnerability so what do we
do about that well I think a good place
to start is is having financial
education in the in the school system
and really try to build it up over time
like we do with literacy and numeracy
and really make it a found out very
foundational skill set
we think of literacy and numeracy is
something that you really have to
continue to build up year after year and
it's and it's obviously very important I
think financial literacy is is something
like that we should think of as a fund a
foundational skill set and you know we
have an education system that has kind
of brought it in pretty late in the game
in terms of you know in grade 10 and
afterwards we've got some right now we
do we absolutely doing there have been I
mean we there have been moves to to
incorporate it more into the education
system even at an earlier age and I
think that's good play it forward if for
example we really made a commitment to
improving the financial literacy
starting in I don't know maybe starting
an elementary school and then continuing
it through high school take us ten
twenty thirty years down the road how
would things look different if people
had more financial savvy yeah well I
think it's it's one it's not the only
thing we you have to do it's not a
penisy I think there are potentially
other thing policies that are important
in terms of you know people have
cognitive biases and things that
increase financial education maybe won't
solve all of those problems but I do
think that if people had a better idea
of you know what they need to save to
meet their retirement goals what tools
are available to them that we would have
a potentially less vulnerability and
less vulnerability to economic shocks
and interest rate shocks were those to
occur gotcha
let's talk about obviously what the
biggest story in the world has been over
the last several weeks and that is the
new President of the United States who
will be coming in on the 20th of January
what do you think the impact of his
policies could be in terms of interest
rates here in Canada
sure well we've actually already seen
that market reaction it was very
interesting watching what happens bak
markets gone nuts the night of the alive
I was I mean it was kind of fascinating
I mean the night of the election we saw
a futures market sell-off it thought
we'd wake up in the morning and there
would be sort of a bit of a financial
come up and sivan in stock markets that
didn't happen there was you know
conciliatory approach Trump gave a
speech about infrastructure spending and
the narrative quickly turned to what the
potential upside could be from to the
economy from a term presidency but where
we really have seen a reaction is in the
bond market and it's it's been really
quite acute if you look
ten-year Treasuries in the United States
have gone up by about 50 basis points in
Canada and we haven't done any leave
nothing has changed in terms of policy
in Canada except a relationship with our
largest trading partner and that we've
seen yields in Canada book by about 30
basis points that will be passed on to
mortgage rates we've already started to
see that so we've we've already had a
bit of an interest rate shock just on on
expectations for what may happen and I
think there you know we've seen the
financial move even before we've seen
any of the policy come through and it is
highly uncertain what policies will be
enacted we know that you know Trump has
campaigned on a policy of much lower tax
rates lower marginal tax rates and an
infrastructure spend of you know he's
talked about it as much you know as much
as a trillion dollars I think once we
get the details of that it looks a
little bit less than meets the eye in
terms of the potential economic impact
the infrastructure plan is not all new
government spending new debt it's it's
largely it's sort of a at least the
policy proposal of his advisers what if
you follow it through does it look like
it's heading towards higher interest
rates yes I think I'm sort of
unambiguously just on the fact that
we've had if you have any kind of fiscal
stimulus in an environment where in the
United States you're actually pretty
close to what might be considered full
employment it's it's likely to put
upward pressure on inflation and it's
likely to need to be responded by the
central bank in terms of higher interest
rate policy we see it in longer-term
eels we're likely to see it in policy
rates as well well we remember from that
first graph that interest rates now have
been you know pretty low for going on
seven eight years in a row now do you
see low interest rate policy I mean
nothing's permanent in the world but you
know as permanent as potentially it
could be yeah so I think we have to
separate out sort of the cyclical from
the structural as we mentioned and I
think over time you know as long as the
Canadian and American economies continue
to recover we should see something of a
normalization of interest rates the
question is what we normalize to I think
we'll probably see rates in Canada over
time over the next few years go up maybe
100 150 basis points but we're still
looking at a level of
interest rates relative to that chart
where we were at 6% prior to the 2007
recession were probably not going back
to that level of interest rates and I
think there what's a bit clearer when
you show you a hundred or 150 basis
points you mean one went one or 100
percentage points that's right yeah so
that's a very different world than the
kind of interest rate hikes we've seen
historically when we've gone up two
hundred three hundred four hundred basis
points and I mean that's important for a
number of reasons one we're always going
to be that much closer to the sort of
zero zero lower bound which you know has
implications for policy responses to the
next stone downturn gotcha here's a
little excerpt from The Globe and Mail
from a couple of weeks ago in the Great
Recession of 2007 to 2009 the Bank of
Canada was able to minimize the damage
to the Canadian economy relatively
easily however the low interest rate
environment continuing to dog all
central banks is likely to make the
bank's current monetary policy toolkit
insufficient to deal with any repeat of
2007 to 2009 all right let's get into
this if we're still in a low interest
rate world going forward and we head
into another recession god forbid do you
think the Bank of Canada would have
adequate tools in its toolkit to deal
with a repeat well they've certainly had
to expand their toolkit outside of the
traditional once you get to zero or
close to zero you have to start doing
other things to put downward pressure on
interest rates and the Bank of Canada
does have some experience with that in
terms of quantitative easing in terms of
forward guidance in terms of telling
investors in financial markets that they
will keep interest rates lower for
longer we've seen in Europe that central
banks have had to move into negative
interest rate territory charging I mean
what that means is charging certain
depositors to hold deposits at the
central bank but I think certainly those
come with some side effects and some
potential risks and there are limits
certainly in terms of how far you can
take negative interest rates before you
have too many other dislocations and
people just resort to to holding cash I
mean there I know I would say we did a
whole program on quantitative easing so
anybody who watched our program knows
what it is but for those who who may
have missed it quantitative easing is
what well typically the bank will
purchase securities just in terms of
target a short-term interest rate but
they can go for
other than that in purchase longer-term
government bonds in higher number which
they do just by printing money and
putting downward pressure on interest
rates by purchasing up and my in huge
amounts yeah
and and that you know feeds through to
lower interest rates for mortgages and
things that hopefully lead to to faster
again but maybe in solution area as well
it may be inflationary I mean certainly
that's not our problem right now and if
anything the risks of of too low
inflation I think are that's the primary
thing central banks are thinking about
but over time I think importantly the
bank banks have tools to withdraw that
stimulus over time and and certainly it
could be inflationary if they don't get
that exactly right and we are in
unprecedented times and there are risks
around that but I wouldn't put that up
there as a as my first worry so let's
just finish up in our last minute on
this do you think people ought to be
concerned about the consequences of long
term low interest rates
yeah I do and I but I think it's really
a function of the world we live in
where we have relatively low rates of
economic growth that are really feeding
into that low interest rate environment
we have and I the concern that the world
is sort of in a state of secular
stagnation I think is really the
worrisome notion and and that has
worries for debt levels later on you
know we're taking on sort of debt and if
we can't get the economy to grow faster
that's where I think the vulnerabilities
and the risks really really lie but
certainly low interest rates increase
the vulnerability that we have to any
kind of economic shock it increases the
volatility in asset prices and so it is
worrisome if we what we really need is
policies that get us to a bit of a
higher growth trajectory and that should
weenus off the low interest rates that
we have well let's see what Trump's got
up his sleeve we shall watch James mark
well TD Bank Group it's good of you to
come into TVO tonight thank you very
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