What the Bank of Canada Rate Increase Means for YOU

Like us, when we spend money, we've got to have the income coming in. And government's only form of income is taxation, which is taking pieces and chunks off of what you do and your labor and effort. If they're not getting enough revenue, the only way they can do it is increase your taxes on you so that they can collect more revenues.

All right, join together with my amazing friend Henry Wong. Today we shoot the breeze a little bit on the recent bank of Canada announcement. Announcement that happened today. Ooh ah. People are losing their minds. Chicken Little. The sky is falling. I'm gonna post a link from the bank of Canada website on their announcement. So yeah, there's a little bit of a rate increase and it was kind of anticipated. People are expecting a rate increase yet again and we're up 75 basis points. So that's another 0.75% on the prime rate and I guess the overnight rate we should say. So walk me through. What are some of your initial thoughts on the announcement, Henry, and really want to talk to people about today and how that impacts them and more importantly, just the manipulation, I guess, of rates in general by the folks over at the bank of Canada.

I don't know if it's manipulation, but it's control. And it's important to understand who the source of control is, which is them. It's very mind blowing. I think when it comes to people building their wealth, you know, everybody thinks about just going about their day, doing their job. They go into their grocery store store buying things and you know, prices go up and people realize, they see that. But when it comes to prices of the thing that they're paying for that are going up, the other aspect of it is your pay doesn't go up. If you're an employee, your employer is not going to adjust your pay through inflation, especially in that quick and that frequency. So you know, what I kind of want to talk about today is a little bit diving into that clarity of what I think. There's a lot of discrepancy in terms of understanding. There's different schools of thoughts when it comes to, to economics and what I initially learned in terms of economics from my post secondary education, once I graduated and learned a little bit more on my own, realized the economics that I was kind of taught many disconnections, I'll.

Put it that way.

So. And interest rates is definitely one of those levers that I didn't actually really realize what was driving that until I kind of got a little bit more mature in my journey.

That's Interesting. I like how you, I guess circle it back to your education going through post secondary. And I'm actually very happy to say that I'm not university educated. I think I would have lost my ever loving mind had I gone to a post secondary education like that. I don't know if they would have been able to contain me in the walls of the building. But being in an accounting profession, the types of classes that you would take, it would have been obviously economics involved in a lot of that. Give us some perspective on what were some of the things that came up in the courses that you took, what, what kind of teaching was happening there and then kind of vault forward to today and what you've been learning since, you know, exiting that post secondary institution.

I think what I've at least come down to in my learning is a lot of what I was taught in post secondary university was, yeah, we had our mandatory courses and those included micro and macroeconomics. I won't go too much into the microeconomics, right, but that's talking about things like utility, but there's macroeconomics. And people may hear some things around macroeconomics, but how macroeconomics is defined is actually quite important. So the formula that I've actually learned in terms of macroeconomics was GDP is a function of consumption plus investment, plus government spending plus exports, minus imports. So if you kind of just look at that standpoint, the benchmark that the economy is evaluating is how is our GDP growing. But if you look at that formula, consumption is measured by how much money you are spending, how much money the government is spending, how much is being exported out of our country. So it's all based on output. It's always about output. But sometimes output is not always the important thing. Sometimes you have to do things like investing and take a short term sacrifice for a long term bigger gain. And some of those include building bigger capacity in a warehouse, making better tools and efficiency so you can generate bigger output. But there's a short term cost in terms of that larger output in the future. And whenever people look at gdp, it's always like, you know, our GDP has shrunk, our GDP is growing at X rates. And you know, everybody always expects, oh, it's supposed to be going up, up, up, up, up, up all the time, but it shouldn't. And so there's a disconnect because it's always just one equation. It's always measuring against just GDP and whether you're meeting those GDP numbers and what I kind of distilled that down to was like there's all these like other schools of thoughts when it comes to economics. Like, and so that's called Keynesian economics. And then there's another one that I've initially started to dive into and learn during, after I graduate was called Austrian economics. Now there's also other types of economics. Everybody gets very powerful, passionate when you talk about economic schools of thought and how the economy runs. All that I really dive into and really distill it down in very simplest form is supply and demand. So when we look at supply and demand, then we look at the players in the economy. You have, well, the consumers or the citizens like us. And you have other aspects of it like business. And then you also have government. And what a lot of people actually don't really realize is actually in, in school what we learn is government spending is a good thing. And, but that's another separate. That's not part of the topic.

I feel like there'll be, there'll be comments that happen just with that statement alone. Government spending is a good thing. Like kind of, you know, have you ever seen a dog staring at a ceiling fan? You know, it's just these are the.

Small things that you just don't pick up when you're like a sponge in school. And you're like, government spending the good thing. Okay, but, but when you kind of take a step back and look at it, well, okay, you have to spend, but you have nothing to spend. Where do you create it? Like us, when we spend money, we've got to have the income coming in. And government's only form of income is taxation, which is taking pieces and chunks off of what you do and your labor and effort. If they're not getting enough revenue, the only way they can do it is increase your taxes on you so that they can collect more revenue. So what's also really important is how those components and pieces connect together. And so when the government is spending, if they spend more than that, they bring in, they have to get that money from somewhere. Where do they get that money from? This is where we introduce that central bank. The central bank starts creating all these convoluted arrangements to helping the government finance these spending. Now they say there's an independent relationship between them. I can't prove it, but I've watched some of the political debates. But it's very clear that the person who actually has a lot of power and wields the control in the decisions that the bank of Canada makes is actually the deputy finance minister. So those are the marching orders you can say that they're independent. Yeah, there's two different people. There's the head of the bank of Canada and then there's the deputy finance minister. And they're clearly, they work together when they go through these things. So when push comes to shove, there's all these kind of decisions that get made. But where I am essentially going with that is we went through a very challenging time where governments put lockdowns on a lot of citizens and they needed to support citizens. And so they, because there was no money that they could collect for more taxes, they decided to print more money so that people had more money in their hands so that they could spend it and instead stimulate the economy and give that GDP number that boost that it needed. So government spending was helping boost that?

Yeah. I think it's interesting that, you know, you talk about that the formula and that government spending is a, is an ad. It's a plus or a positive in that gdp, you know, relationship. And when you think about formula, well, there's, there's multiple pieces. And if you want to increase the equal it equals blank. And if you want equals blank to go up, well, then you have to, you know, whatever, you know, this one has to go down or these other ones have to go up. And so if one of the things in order to increase the end result or GDP in this case is to increase government spending, well that, then that could happen at any point in time to effectively, you know, skew the number to some degree. And we've talked about this before, Henry. The only way that the government can bring in revenue is, is basically through tax revenue. The other thing that they can do is they can effectively borrow money. Or the way that they do that is they, they basically issue bonds to some degree. And then it's basically like you're saying, hey, here's some of our debt. Go ahead and buy some of our debt for a bit, you know, and we'll make payments to you. But that's not really revenue generating. That's just like bar. That's like the government borrowing on a credit card. To a degree. There's the idea of raising income, but. Or raising tax revenues by increasing tax rates. And the other possible option is to say, okay, in order to increase the revenue, what we actually need to do is we need to increase the total incomes of the society. And if we allow the free market to, to increase jobs or create more revenue for jobs or have more jobs overall, we might get less, say, tax revenue per person. But because there's more persons or there's, or there's now a higher overall income even though we have maybe a lower tax rate. There's more people actively engaged in, in employment activity which actually increases overall revenue. So there's, there's a couple of different ways that they can do it. It's just a matter of whether it'll work and then if other economic factors will allow that to happen. But you know, one, one is definitely more of a allowing the free market to facilitate the improvement of those overall incomes which would then increase total tax based revenue for, for the country as a whole versus just saying we're going to increase the tax rate, right?

Yeah, they can either increase the tax rate or get a higher amount of collection across the amount of bodies that they tax.

So it's funny because this is, now we're talking about it from a government level. We're talking about the conversation which we discuss a lot when we talk about infinite banking is rate versus volume. So you can increase the tax rate or you can increase the tax volume. And the way that you would probably have a higher probability of increasing the volume is to decrease the tax rate to increase the tax volume. So that same type of a conversation overlaps a lot in what we, what we discussed in Nelson's teaching of becoming your own banker, where the focus, you know, a lot of people spend their life focused and their brain is attuned because we've been trained over time to think in terms of rates, whereas we're not trained to really think in terms of volume. Like as an example, you have your mortgage, you make your payment, you just got the loan, you bought a house today and you took possession. You make your first mortgage payment whenever the mortgage payments 3,000 bucks a month on that very first payment. Now with the, with the increase in the bank of Canada's rate, a lot more of that payment is going to go to the interest. But let's, let's just say that 2,000 bucks is the interest. Well, the volume of interest is $2,000 in the $3,000 payment. Now your interest rate might be 3 1/2% or 4% on the loan. But what you're doing is you're paying 3 and a half or 4% on the entire balance of money that you owe in that year and then it's amortized. So the effect, you know, the total amount of interest that you pay in the very first year is probably closer to somewhere in the area of 45 to 60% depending on as the rates begin to rise. Like the bank accounted announcement today, people are going to find themselves where the volume of interest, yes, the rate rises there, but the key impact is going to be the volume of interest is actually what's going to ramp up as well. And when we take into consideration the growth the real estate market in the last five, six, seven years in major markets like the Toronto marketplace and the GT area in Vancouver, the lower mainland and so forth, as we, as we think about those increased property values, if we just isolate that one sector of the economy because real estate is a big format of the Canadian economy, then because those values have ratcheted up so high, now we have a higher volume of real estate, which means a higher volume of loan, loan capacity. Now we put, we add the extra lever of an increased bank of Canada lending rate and now we're going to see an increased volume of overall interest flooding to bank coffers which you don't own and control.

Just kind of take a step back for a bit because when we go back into that equation, governments will have spending. So there's fiscal spending and then there's monetary spending. And people, the government spending that they spend is fiscal spending. But the monetary now is kind of what we're going to talk about is that where they can adjust the interest. That's what actually learn in school. They can adjust the interest rate, but it's the bank of Canada that does it. But they never really talk about the relationship between the government and the bank. But going back to now, let's talk about that impact. So one of the tools or levers that the government talks to the central bank or influences them to do is that when they increase that interest rate or they adjust the interest rate, government and the central bank has a direct influence in your behavior and how you use your money. If they give you lower interest rates now you're going to talk about people are going to move towards bigger purchase price tags for things, more borrowing and.

Increased borrowing because.

More volume and money being pushed out in the economy for lending. I'm not even talking about fractional reserve banking, but all of those things around more money now getting introduced to the economy to purchase those things. You know, purchasing a house normally for a household was seen as like a major big purchase. Now it's seen like which where the volume is a lot lower now because the rates were so low. It stimulated people, it intrigued them to now I need to jump on this bandwagon or there's a huge fear of missing out and it can change those homes to become more like inventory where like you're selling as Supplies. Right. But you're just now leveraging yourself to enter into. So a lot of people who are into that real estate market who are leveraged up very heavily because the normal behavior pattern is whatever you buy it at, whatever the purchase price is you, let's say you put down payment at 20, 20%, 80% is the, the bank owned by a mortgage and there's a huge burst in pricing. And it's not because the fundamentals tell you that oh, this house is renting more for whatever reason. Now if you realize Canadians incomes have generally tapped or many Canadians are generally struggling right now. So rent income is not going up. So the only reason it's going up is speculation because there's that fear of missing out, demand pushing up where the supply is not meeting it. So if I'm selling a house, which I have, you know, have done during these times, selling a house, who am I obviously going to sell to? I'm going to sell it to the person who's going to give me the highest offer. And then if you look at the surrounding neighborhood, when real estate agents look at comparables to see, oh, this is the fair market value of where it is right now, they look at the most recent comparison parables and like, yeah, that one sold for a million. So I'm going to push it up for 1.2 million and create a bidding war whatever they do. So the real estate prices go up. So those prices go up. Then they're like, oh, I've got new equity in my home so I'm going to leverage it again to another 80%, take that money and start putting it. And then they try to repeat that cycle over and over and over again. So anyway, so the people who are going through that, I'm not bashing real estate, I think it's great. I just think there's going to be some challenging times to be depending on if you're over levered with a very challenging outlook that's coming based on what the bank of Canada is doing but going back to it. So the bank account is increasing, the interest rate, mortgage payments for Canadian households is a very big portion of that. And now if you're, if that base of your dollars that you earn is spending and going to mortgage payments and now that payment level is increasing, not to mention the goods that you buy. We haven't even talked about, about the quote unquote money printing that the central bank does where the supply of money is also so high and there's also less goods now because of supply chain shortages or Supply chain shutdowns, especially in certain countries where they've locked down even more. And so if goods are a lot less, the same demand and supply is going to happen. If demand of, if the supply of goods are low, the quantity of money is so high, more money is going to try to chase that. So those goods, those prices are going to go up again. Like, if I need lumber for some project I'm going to do, I don't want to pay it, but if it's really important for me, I will pay it. Whatever those prices are to get, you know, whatever that object is or my cost of it is going to get higher. What's worse is the carbon tax that the government put in, where they put input costs to bring those goods over cost even more. So in order to make a profit, the prices go up even more. So it's just layers upon layers upon layers. But if you add up all those.

Layers, attacks on attacks on attacks, and a lot of it's hidden in the. And. And the end result is the consumer pays for everything. The consumer always pays for everything. Nelson Nash used to talk about the story where he was, you know, he would be driving to a seminar to deliver a seminar for somebody, and he was following on an interstate highway behind a big truck. And the truck had a, you know, like a kind of like a bumper sticker on the back. It said, last year this truck paid $17,432 in taxes. You know, he says, you follow behind a truck long enough on a long stretch of highway, your brain starts to think and you begin to ruminate on it. He's like, then it hit me like a ton of bricks. That truck didn't pay any taxes. I paid those taxes, you know, because first of all, a truck can't pay taxes. But whatever that shipping cost is and whatever, you know, that that truck was doing, whatever goods are being shipped, the stuff that's on the truck, plus the price of the fuel, plus the price of the tax on the fuel, plus the price of the carbon tax on the fuel on the tax on the tax on the fuel for the truck is all baked in there. And then that has to get paid, that has to get charged to whoever is getting that stuff shipped. It's going from point A to point B and someone's paying for that. And it's going from, let's say it's a farmer over now to the grocery store. And that's the wholesale part of it. So that's, it's getting paid there now in order for the person who's wholesaling the grocer. In order to get enough profits, they got to increase the price on the item that you're buying on the grocery shelf. So the. You're paying for that truck's taxes, you're paying for that increased cost of fuel to move it through the supply chain all the way to your fridge. This is how things happen. And so, you know, don't be mad at the grocery chain and don't be mad at the guy driving the truck and don't be mad at this and don't be mad at that. Be mad at how the system in the back end is being manipulated to set you up to fail to some degree throughout the whole process and you have very little control over it.

Most people have this misapplied anger and frustration towards the frontline people who are actually doing the work and you know, doing the things to survive. Just the stores and you know, I love small businesses. Those people are feeling the biggest brunt of it. But what they don't realize is the core of, of who's causing all of these problems is from the bank of Canada deciding how to move the interest rates and whatever they decide that makes sense to them. And same with the volume of money that they print that they've saturated the economy with and that creates with you have a lot more money in your hand, you're not going to get it, let it sit there. Especially if the interest rates are low, you're going to deploy that money to some place that gives you the best return return. And for a lot of people, that was stocks, that was crypto, that was real estate, that was anything that they realized that there was pressure, value of going up and that's why those prices were going up in a very similar circumstance. So anyway, going back to the core of who's driving those problems are the talking heads in Parliament.

Now, you know, we talk about, you know, funny buzz terms and whatever and so that, you know, they talk about quantitative easing, which is them, you know, turning on the money press. You know, again, these are like we're, they don't really actually physically printing the money, but. And then now they're saying this is the interest rate increases, a form of quantitative tightening. Okay, so again, you know, these stupid buzz terms and, but this, this interest rate pressure part of the bank of Canada, there was a video, I think it was probably about two years ago. It was a, it was a discussion in Parliament and there was an MP who was asking very specific questions to the, the bank of the whoever's Running the bank account at that time and saying, okay, so when interest rates, when we, you know, when the economy is doing well again, and when interest, you know, when we need to start raising interest rates or we start to see inflation happen, how will you combat that? And the guy's like, oh, well, the way that we would combat that is to rise interest rates. But we won't be doing that anytime soon. That was like two years ago. Okay, well, I don't think it's two years soon. I think it's soon. It's reasonably soon in a normal period of time. And now we're seeing this increased pressure. And the bank of Canada's method of combating inflation is to do that is to raise interest rates. So it, it causes this correlated effect. And that's the only real trigger they have. But a lot of the curbing of the inflation that they're doing is inflation that they themselves have created. So create a problem, solution to the problem is painful for the population. Implement the solution to the problem, make everybody really upset, sort of kind of fix the problem, bring it into alignment. Problem got too big. Now we've, now we've ratcheted up too high. Now everyone, you know, can't put food on their table. Oh, you know what we're gonna do? We're just gonna bring the interest rate back down again. Get that spending happen in the economy, and then, boom, we're back into the cycle. The cycle's happening all over again. So the Austrian mindset of economics teaches us about what this, this, this process, which is for good as the business cycle and how this happens. It happens in a normal way, but it happens usually over a much longer, extended period of time. What causes it to be amplified and manipulated is the tweaking at the Federal bank institution level of the interest rates and so forth. So it's interesting. There's not really a whole lot that you and I could do about it. There's, you know, you can exercise a vote whether that'll do anything or not move. Who, who's to say? I suspect it won't do a whole heck of a lot. But the other thing you can do is try to put a barrier, insert a barrier as much as is reasonable between you and your personal economic world and the more broader macroeconomic world of the country and how it intersects with your personal economy. So the way that we would recommend people do that is to start implementing Nelson's mindset, this concept of becoming your own banker. And is that going to happen overnight? The answer is no. But that's this is a way to move towards a peaceful solution and you can voluntarily begin to unplug yourself to some degree from this financial system that I personally don't believe is set up to support you in your future endeavors.

Yeah, no, I agree with you. It's, there's a banking system which is centralized and controlled by the central central bank distributed across the other larger big banks and you know, the medium sized banks. And that's a system that they've created to coordinate the flow of money between them and you know, receptively receive the money that you earn and you put, you introduce it into their system and they do things that they do to do what they do with it. And the better thing that we, the process that we, we talk about is to build your own independent banking system instead of relying on someone else's banking system and going through these crazy announcements. You have your own independence where those impacts and what they do have less of an impact to your own financial circumstances. So this is what really personally gets me very excited when clients of mine see these opportunities that they, they realize how important it is to have their own independence instead of depending on some centralized governing body that, where you don't have in my opinion much of an impact to make any decisions on them. Like if I'm frustrated at something, good luck that they're going to make a change.

Yeah, right. Totally. Part of what prompted this conversation was recently we did some, some, some other videos on the bank of Canada and like the, in just the increase in the money supply in Canada during the last five years. And I there, I mean it's fantastic when we, you can go and see what, you know, what Henry showed as far as bringing up the balance sheet for the bank of Canada. But what's interesting is it really prompted from a recent announcement about all the bonuses. The crate was like $45 million or some ludicrous amount of money that was paid out in bonuses to, you know, the know, bank of Canada employees. And I'm sure they, they did their job. But did, did overall as an organization, did they do their job maybe on an individual level some people really stepped up to the plate and they deserved a bonus. But if the organization's mandate is to maintain a normalized moderate level of inflation at around a key target of 2%, you know, or, or under, and you failed miserably at that job, why on earth would you get $45 million of bonuses? So what I'm, I'm wondering, and my question for the people listening in is what do you think will happen now that they've rapidly increased the borrowing rate for the country and putting the squeeze on Canadians, is that $80 million of bonuses next year? What are they going to do for, for that? You know? So, like, I'm just curious, you got a big boatload of bonuses for basically screwing up and not doing what you're supposed to. Are you going to get even more bonuses next year for making it even worse?

Well, I would say based on the amount of money that's in the economy and how if, you know, I don't work at the bank of Canada, so I don't know, but if there's any mechanism of design based on the quantity of money that's out there that is being loaned to the government of Canada, if the interest rates like right now are increasing and how the bank of Canada earns money is the interest interest rate it collects from the government, which collects from our taxes. If that goes up, then it only makes sense if their bonus scheme is based on net profits. Their net profits are going to go up. So that means their net profits and their bonus are actually going to go up even more because of these interest rates. Normally, you know, what sounds really nice is, oh, we're going to increase the interest rates to make people spend less, but the goods right now are even more, more expensive. So Canadians, there's, there's no like, change in lever. It's, it's going this way and going this way. It's just going up and up. So there's a misalignment in how the people in bank of Canada are compensated in terms of the performance of the organization, and the organization's performance is misaligned to how its mandates are to serve society.

Well, there's, there's another pretty big misalignment and that's that, you know, so at present, and I, I don't know the numbers. I do, I do know that they're the largest that they've ever been because we've incurred such dramatic increase in the, in the government of Canada debt load based on the spending, you know, during COVID and, and other things that have been happening in the last, say, five years, that because that debt load is so high. Well, we ratchet up the interest rate. It doesn't just ratchet up for the Canadian citizen, it ratchets up for the Canadian coffers, the government's coffers. So now we have all this debt load and we're actually putting a lever on what that's going to cost. So just the interest payments are also increasing for the country and who has to be responsible to pay those interest payments well it's the government of Canada except the only place they get their revenue again is from us so now we're again just thinking that chain of events through we're looking at attacks on the tax on the tax on attacks to pay for the interest that on the manipulated money by the collusion of you know governing forces and like it's mind boggling to think that this is the way that the modern world operates but hey we're here so maybe get yourself some of that high caliber high cash valuable life insurance separate yourself from the rest of the world's problems a.

Little bit with the mutual insurance company where you are a co owner instead of somewhere else.

Totally. Well hope you guys enjoyed this Leave comments and your thoughts below and and as always Henry I appreciate our good conversations about stuff of this nature It's a ton of fun a lot of fun.

My pleasure. Thank you for having me.