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June 1, 2010

Bank of Canada raises interest rates

CANADA - The Bank of Canada has raised its influential overnight interest rate to 0.5%, up from 0.25%, despite reports that Canada's household debt is skyrocketing.

The Canadian economy is expected to grow 6.1% in 2010 if economic activity continues at its current rate. Employment growth is such that the Bank of Canada feels confident its time to increase interest rates in an effort to boost investment from overseas, which is important for continued economic recovery.

However Canadian household debt has been largely ignored by the Bank of Canada.

Canadians despite the financial crisis in the United States and overseas in Greece having been living pretty "high on the hog" and gorging themselves on credit cards, mortgages and personal debt. So much so that the combined household debts of adults Canadians has reached $1.41 trillion CDN as of December 2009.

The problem however is that with increased interest rates that huge debt load now becomes a liability. $1.41 trillion divided amongst Canada's 29.7 million adults = an average of $47,475 CDN each in household debt. Doubling the interest rate from 0.25% to 0.5% on that amount of money is a big leap.

True, some people are paying a much higher interest rate anyway, either in the form of a mortgage or worse a 19% credit card interest rate. Canadians would be well advised to tighten their belts and pay off their debts quickly if they can or find ways to reduce the amount of interest they are paying (ie. by transfering their credit card debt to a personal line of credit).

Obviously some Canadians will have no household debt while others have $200,000+ in debt, depending on how big of a mortgage they have.

Some people have adopted a lifestyle of debt, putting everything on credit and only paying the minimum amounts. This is however unsustainable and eventually it leads to market collapse and people paying way more than they intended for even small items, especially if you overdraw on your account and get charged a $35 overdraft fee. Its what The New York Times calls "the $40 cup of coffee."

Economists also point out that the banking system has become corrupt. It used to be that people stored their money in banks, the banks paid people interest out of money earned by loaning that money to businesses and it was a win-win situation for both bankers and the people storing their money there.

These days however interest rates and banking fees have become so imbalanced that its now more worthwhile to store your money "under your mattress". Its become a lose-lose situation because people know the banks are ripping them off and they're looking for other places to store their money. The banks meanwhile (as a matter of survival in an effort to maintain profits and keep stock market investors happy) keep raising banking fees and lowering interest rates.

Thus there's not a lot of point in storing your money in a bank these days. The banks just slowly steal your money through fees anyway. Its really no surprise that society has decided to spend, spend, spend instead since that gives both instant gratification and the knowledge that at least you're doing something with your money. The concept of growing a nest egg is very difficult these days since the banks charge you $1.50 just to use an ATM.

Its reached a point wherein banks need to redesign and reboot the system so it becomes win-win again or face the possibility that in the future the system will collapse due to an overburdening of debt... like when the subprime mortgages in the USA failed.

North Americans are addicted to credit and spending like there's no tomorrow. The problem however is that tomorrow there's usually hell to pay.

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