History always repeats or does it. | GIC discussions | Discussion forum

Mark M said
I'm in the camp of history repeating itself at least once in a lifetime whereby chances are we get to live through a similar event.
Depending how old you were last time interest rates were in the teens could us oldtimers be in the mist of a historical repeat of the late 60's early 70's interest rate rocket?
Are there any historians here that can draw similar parallels to the events that occurred 50 some years ago to todays rising rates?  

It's a great question. The first GIC I bought was in the early 80s...a one year GIC from Eaton Trust, at 18.5 percent. I thought I had everything figured out...save some money, and live off the interest! Not so much, as it turns out. I see signs that inflation is going to be really sticky, and rates should go higher and stay there for a while. But things are different in some ways now. So many people have bought overinflated real estate, particularly in the last couple of years. Raising rates much more might see record numbers of delinquencies, and could crash a lot of markets beyond just real estate. I really dunno. I'm thinking that it must be leading to many sleepness nights for central bankers. Love to hear other's thoughts, even if we all know it's speculation.

The cause of the inflation in the late 1970's was because the U.S. printed money instead of raising taxes to finance the Vietnam war.

There's no truth to that.

According to the second article, the monetary policy contribution to inflation was not money supply but the "even-keel" policies:

In order to avoid monetary policy actions that might interfere with the funding plans of the Treasury, the Federal Reserve followed a practice of conducting “even-keel” policies. In practical terms, this meant the central bank would not implement a change in policy and would hold interest rates steady during the period between the announcement of a Treasury issue and its sale to the market. Under ordinary conditions, Treasury issues were infrequent and the Fed’s even-keel policies didn’t significantly interfere with the implementation of monetary policy. But as debt issues became more prevalent, the Federal Reserve’s adherence to the even-keel principle increasingly constrained the conduct of monetary policy (Meltzer 2005).

That's right. The US Federal Reserve used to not change interest rates while the government was issuing bonds!

Then, there were the two oil price shocks:

A more disruptive force was the repeated energy crises that increased oil costs and sapped U.S. growth. The first crisis was an Arab oil embargo that began in October 1973 and lasted about five months. During this period, crude oil prices quadrupled to a plateau that held until the Iranian revolution brought a second energy crisis in 1979. The second crisis tripled the cost of oil.

Oil going from $2.90 a barrel to $11.65 and then to $35+ will cause lots of inflation.

The timing of the two spikes of CPI inflation in the graph of the article, first to 10%+ around 1975 and then to almost 15% around 1980, matches the two oil price shock events.

The US federal budget deficit has not really changed that much.

Nominal deficit numbers are meaningless without reference to the size of the budget or GDP.

$200,000 is a lot of debt while a person is studying in medical school earning less than $20,000/year. But, it's nothing after the person completes internship and is a practicing surgeon earning $500,000+ a year.

Those who actually lend money understand that. That's why lenders, like RBC, offer medical students up to $350,000 to fund medical school.

History has shown that debasing one's currency is the single largest cause of inflation.
Example: Roman coins.
Example: 1930's Germany
Example: 1980's Brazil, Argentina, etc.

In May 2022, C. D. Howe Institute did a 30-minute interview with two former Bank of Canada governors:

Inflation with David Dodge and Stephen Poloz

What happened with inflation in the 1970's and earlier last year was discussed.

CRA union leaders are "livid" and ready to strike during tax season unless they get 30% increase over 3 years. I believe, mainly due to widespread public support for public sector unions, they'll pretty much get what they want.

This is significant to me as this is what I watch for wage inflation indicator. Once one public sector union get pay increases commensurate with the recent higher levels of inflation, i.e. they have abandoned the governments' requests to view current inflation rates as transitory when making wage requests, then the wedge has been inserted and there will be no excuse not to accord the rest of the public sector unions, teachers, police, etc across the country similar settlements. Then we're off to the race with wages inflation.

So I see this as a strong indicator of much higher wage inflation to come, i.e. re GICs, I'm not sure locking in money for years at today's rates is that good of an idea (true, I never really think it is anyway). Just my view.