This video is content from the day before, July 12th.

The written post below is ~60hrs of thinking & writing since the news of the 1% hike dropped.

***Updated July 19th***

Why a 1% hike on July 13th?

What will happen on Sept 7th?

What about between now and then?

And the ultimate question…

Who’ll blink first, consumers, businesses, or the Bank Of Canada?

I’ve the answer to the first question, but from there it gets trickier, especially on this last matter of blinking.

The Bank Of Canada (BOC) had no choice July 13th, because there’s just two ways to slow the spending that is driving inflation.

Option #1 – We all politely agree to stop buying things.

A bit like Jimmy Carter’s (failed) strategy in the 70’s. Carter asked Americans to ‘please stop spending’, or else… rates.

The ‘pretty please’ strategy is a strategy of hope, and as we know – hope is not a strategy.

It didn’t work then, it won’t work now.

It also cost Carter the next election, today’s politicians keep track of that sort of thing.

Option #2 – The BOC pushes interest rates up fast enough and far enough that it scares us into standing still.

Because for the BOC Canadian’s being a bit worried about inflation isn’t enough, the BOC needs each of us to fear inflation just as much (if not more) than they do.

The BOC’s real fear, more than of inflation itself, is a justifiable fear of Canadians accepting inflation.

Acceptance leads to a dark place.

As such still stronger action from the BOC is inevitable, at least until inflation reports show a downward trend which will be a result of CDN’s taking the action of, well, no action.

In a way the BOC is playing a game of ‘chicken’, which if you saw the movie Footloose, the scene with the two tractors being driven head on toward one another – that’s a ‘game of chicken’.

Who’ll flinch first, who’ll hit the brakes?

The BOC needs to drive interest rates up, fast and furious, in the hopes that consumers will voluntarily stop spending.

This of course is difficult when spending was already stopped involuntarily for the better part of two years, during which CDN bank accounts ballooned by three-hundred-billion dollars.

So we’ve got two tractors headed toward one another, one with the full weight of the Bank Of Canada’s superpowers… well their one superpower loaded onto one.

The other piled high with 30M+ CDN’s looking to recapture a year or two of lost living, aka spending, who collectively have 300 billion more dollars than previous to the pandemic.

Thus the BOC has no choice but to push onward and upward with rates, due to the very real risk of a fully employed, cash flush, inflation-accepting, wage-increasing, overloaded tractor headed straight at the economy itself.

The BOC must curb the forward momentum of these crazy Canuck consumers before the end game.

The losing version of this game being entrenched inflation.

Entrenched is the new buzzword in Ottawa.

Last year it was ‘transitory’.

Alas the halcyon bygone days of the summer of ‘21.

We were between covid waves, released into a heat wave, a spending wave, a dating wave, an investing wave, so many warm wonderful waves…

Waves like few other waves ever seen before.

Leading us to today…

With our new watchword ‘entrenched’ now firmly… well… entrenched, in our collective consciousness.

An example of entrenched inflation is on display in the modern museum of ‘world powers of the past’ a.k.a. the U.K. where during a 25 year period leading up to 1992, inflation ran to 750%.

An entire generation, the ‘inflation generation’ grew up with all the cool things perpetually just beyond reach, or if posh, perpetually just within reach.

The rising tide lifted all yachts, if not all boats, leaving an entire class hollowed out – the middle class.

If you’ve been to the U.K. anytime in your lifetime then you’ve seen prices that seem absurd.

Tenner’s flying from ones hands for every little thing, a fruit cup, a ’99, a warm pint of beer.

As for petrol prices, the UK has today’s prices here beat before the turn of the century. It’s all old news there.

Car manufactures rub their hands together with glee as they review sales reports from ‘Treasure Island’ (as they refer to the UK) because the exact same cars here, over there, are double to triple the price.

Because why?

Because how?

Because entrenched.

For UK residents all of this is normal, it’s accepted…

…it’s entrenched.

We’ve long been the land of milk and honey from the U.K. perspective.

Is this about to change?

Not under the current BOC’s watch if they have anything to say about it.

Because while it’s relatively easy to manage an economy through and out of a mild recession, it’s incredibly difficult to change the course of an economy in the midst of sharp or worse still, runaway, inflation.

And this is why the BOC is fighting the good fight to try and basically trigger a mild recession.

To get our attention.

To create greater fear of inflation than fear of recession.

To have a mild recession is to have a mild cold.

To be diagnosed with inflation, is akin to being diagnosed with cancer.

It’s more serious, but still has a very high survival rate, if we act soon enough and aggressively enough.

A recession can be repaired quite quickly with a mild to medium drop in interest rates, the sort of medicine that goes down easily.

Mmm, lower rates.

Inflation, requires a much less appealing treatment, and the longer it’s left to fester the more aggressive the medicine required, yes… aggressive enough that the treatment may seriously harm other parts of the host.

The longer we wait, the greater the risk.

The primary medicine today being an increase in the Prime lending rate, which is (typically) adjusted on 8 preset dates per year.

One tool.

Eight dates.

And with 6 weeks between the last dates, June 1 – July 13th, it was, for the BOC, a lot like a childhood drive to Disney… ‘are we there yet, are we there yet, are we there yet?!?!’.

July 13th couldn’t arrive soon enough, given all that was happening economically.

Our old nemesis, hindsight, looms large these days as well, screaming in our ears that the BOC waited too long to make the first move (March 2nd) and then didn’t move far enough. Easily pointed out Mr. Hindsight – thanks so much.

Every teenager in a movie theatre has had these same moments,

do I,

don’t I,

dare I,

dare I not…

The too-little-too-late narrative drove the recent ‘super-size me’ style rate-hike.

1%

Time is money

And the time, 6 weeks, between meetings began to cost too much, value of, money.

Speaking of time, the next meeting is 8 weeks away, this is a longer stretch still, with not one but two inflation reports between now and then.

What does this suggest?

Should the BOC have gone up 1.50% or even 2% and just thrown a gigantic cold wet blanket over our overheated consumers psyches?

Arguably yes, if this is the only tool in use.

It’s a powerful tool, a bit like a flamethrower.

Yes running through the house with a flamethrower is risky, if one is chasing a mosquito.

However it increasingly appears the BOC isn’t chasing a mosquito, they’re chasing the scary-ass clown from Stephen Kings It,

And It ain’t good.

It has got to go.

Sitting on their hands is what the BOC is now being accused of.

So now they play catch up, and ‘getting in the game’ may involve a degree of overkill.

We can and we will endure it.

We will adapt.

It’s what we do.

At this moment in time the overnight rate smack dab in the middle of the BOC’s self-described “neutral zone” at 2.50%

The zone being communicated as 2% to 3% for some time now.

This 2.50% overnight rate translates into what you and I really care about

Bank Prime @ 4.70% as of July 13th, 2022.

Will the BOC hit the outer limit, 3.0%, with another 0.50% hike in September?

Count on it.

Will they go further?

Watch the inflation reports for July and August, but it seems likely they’ll have no choice but to exceed it.

All the way along the reality of our nations success is working against the BOC’s success.

Canada is a country at full employment. Nearly every last Canadian that wants a job has one. And we will have 1M unfilled postings on top of that!

Canada has 500,000 new immigrants annually, which is a good news story. This’ll put a dent in current job postings.

So while on the one hand we have doom and gloom regarding inflation and rates, on the other we have a populace that feels a little like they’re #livingtheirbestlife

• Full employment
• A labour shortage
• Record immigration
• Strong construction numbers

It all leads to what? Well after a long week of swinging a hammer, or tapping on a keyboard, people do what?

They go out for a bite to eat.

They spend some money.

The live that best life.

And most can afford a version of this even today, because the BOC rate movement hits so few households in a direct, immediate, and material way.

Fewer than 5% are in an adjustable rate mortgage for instance.

Virtually all consumer debt is set to fixed interest rates.

And the vast majority of people have, or feel they have, job stability.

So yes, everyone is headed out for a bite on Friday night! Maybe not to the exact same sorts of restaurants, but everywhere we look there’re help wanted signs, line-ups, and often reduced hours.

Admittedly I turn up mainly at Smoothie shops and Chipotle, my kind of fine dining.

And so the Bank Of Canada is stuck with an incredibly challenging problem to solve.

They need to stop our spending.

And the old-school tool of interest rates seems somehow wrong for the job.

Can they put away the flamethrower and get out a scalpel?

Can they get more narrowly targeted somehow?

Is there a way to remove the cancer without harming the patient?

Here’s the only answer, the only good news that I can deliver today, July 19th.

There‘s no more action due from the Bank Of Canada until after summer vacation.

Alost, figuring out these answers and next steps is their problem not yours.

So get out there and enjoy your summer, ideally without spending any money… pretty please.

Can we just agree to stop paying over-ask for cars, trucks, boats, etc.

Ease up.

Hold off.

Allow the supply chain to catch back up.

Ya, I get it… you want what you want.

We all do.

My conclusion is this;

Make the most of the summer!

DW