Ever since, they have been cited as one of the factors fueling the housing boom in the greater Toronto in 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 from or Here's James Marble.

He is senior economist and director at the TD Bank Group and James Nice to have you on our program for the first time.

Let's just check a look at the monitor over there is going to see what happened 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 a strong as it's been historically.

So you put the two things together and you've had a debt to income levels for Canadian households have approached 155%.

They've increased sort of over the last decade.

You know that that chart was going by about 30% 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, um, you just stop you there because I want to follow up on the debt in a second.

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 a growth rates and I say, What do you mean?

They're less than 2% in these places?

Well, I think there's two things.

One.

Does that mean they're secular things that are keeping great economic growth lower than it has been?

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 productivity has slowed relative to what it's been in the past.

So I think there are things that are weighing on the rate of economic growth 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, too, uh, you know, be overly worried or think that they had to react to something other than you know that they're all look for inflation, which is their primary driver.

I think probably we would have had even lower economic girls potentially and potentially lower inflation and a in a bank that has been less successful in hitting their targets.

Okay, let's go to debt levels.

Are you concerned about the amount of debt that other governments and or individuals air carrying in the country today?

Ah, yeah, I think it's It's worrisome both in terms of the absolute level or average level of debt, and, you know, as they said, 155% of disposable income.

But you also see that that has not been even across across groups.

Some households older households who you know I 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 500% disposed debt to disposable income that has gone from 3% of households to 11% in 2012.

So there's been a big increase in in, you know, a minority of households still just 11% of of all households.

But they've seen a huge increase.

You know, in debt they have 500%.

What's the implication of that?

Well, the implication of that is that, as if, I mean, we're just more vulnerable to either an economic shock or uninterested 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 kind of to go back to really the thirties to see interest rates even comparable to this, and even then we didn't I think we've passed even those levels Ah, certainly globally and looking at make rates going negative in Europe and and below below the rate of inflation in North America.

That's really unprecedented.

And if you kind of think of the experience of people over the last 50 years, rates were very high in the 19 eighties, and since then they've been they've been coming down.

I think of my 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 been maintained really over the last 30 years.

Where is when I was your age?

I think interest rates were around 20% 23%.

Something like that, right?

So we're in a very different existence now.

Absolutely, uh, 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 a CZ 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 in 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 debt expand for younger people.

We've seen Dad expand for lower income people relative to their income, and those are the people that are more most vulnerable and probably need the highest level.

Aah!

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, sort of a correlation with the same groups that have taken on high levels of debt.

So I think that correlation being a being that have the lowest level of financial yeah, 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 having financial education 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 found, very foundational skill set.

We think of literacy and numeracy is something that you really have to continue to build up year after year on.

And it's and it's obviously very important.

I think financial literacy is something like that we should think of as a found a foundational skill set.

And, uh, you know we have an education system that has kind of brought it in pretty late in the game in terms of, uh, you know, great 10.

And afterward, he's got some right now.

We do way.

Absolutely doing there have been.

I mean, there have been moves to incorporate it more into the education system, even at an earlier age, and I think that's good.

Plan forward.

If, for example, we really made a commitment to improving the financial literacy, starting in a minute, maybe starting in elementary school and then continuing it through high school.

Take us 10 2030 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 have to do.

It's not a pen, Isi.

I think they're potentially other thing policies that are important in terms of, you know, people have cognitive biases and things that increased 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 potentially less vulnerability and less vulnerability to economic shocks and interest rate shocks.

Were those to occur?

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 happened.

Mark.

Mark, it's going nuts the night of the alleged.

You all.

Yeah, I was.

I mean, it was kind of fascinated me the night of the election.

You saw futures market selloff, Thought we'd wake up in the morning and there would be sort of, ah, a bit of a financial comeuppance.

Even in stock markets, that didn't happen.

There was 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 trump presidency.

But where we really have seen a reaction is in the bond market, and it's been really quite a cute.

If you look at 10 year Treasuries in the United States have gone up by about 50 basis points in Canada, we haven't done.

And nothing has changed in terms of policy in Canada except ah ha relationship with our largest trading partner and that, um, we've seen yields in Canada go by both 30 basis points.

Uh, 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 they're 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 ah, policy of much lower tax rates, lower marginal tax rates and a Nen FRA structure spend of, you know, he's talked about it.

A trillion dollar isn't which is 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, three infrastructure plan is not all new government spending, new debt.

It's it's largely it's sort of at least, the policy proposal of his advisers.

What if you follow 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 the longer term yields.

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 78 years in a row.

Now do you see low interest rate policy?

I mean, nothing's permanent 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 isn't as we mentioned.

And I think over time, um, 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, too.

I think we'll probably see rates in Canada over time over the next few years, go out maybe, Ah, 101 150 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.

We're probably not going back to that level of interest rates, and I think they're Let's be clear when you say 100 or 100 50 basis points, you mean one or one of the 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 203 104 100 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 00 lower bound uh, which, you know, has implications for policy responses to the next downturn.

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 tool kit 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 tool kit to deal with the repeat?

Well, they've certainly had to expand their tool kit 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, uh, forward guidance in terms of telling investors and financial markets that they will keep interest rates lower.

Ah, for longer.

We've seen in Europe that central banks have had to move into negative interest rate territory.

Charging, you know what that means is charging certain depositors toehold 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 toe hold in 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 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 further 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 in huge amounts.

Yeah, um, and that, you know, feeds through the lower interest rates for mortgages and things that hopefully lead to two faster, but maybe inflationary as well.