Long term bond rates and the state of the economy | Page 2 | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

No permission to create posts
sp_Feed Topic RSS sp_TopicIcon
Long term bond rates and the state of the economy
August 19, 2014
11:39 pm
Jon
Member
Members
Forum Posts: 365
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Jack Manning said

Loonie, I remember about 10 or 11 years ago working at a different office that many of my coworkers were saying how falling mortgage rates were a good thing and would benefit many consumers.

I told them that falling interest rates, mortgage rates in this case was a sign of a slowing economy and bad, worsening economic conditions.

They scoffed at me and said that lower inflation is the main reason why interest rates were dropping.

Now we are in 2014 and salary, wage increases are shrinking and getting rarer plus like I said before, the last 5 or 6 years many are working for less and less. Since 2007, many things are way more expensive, maybe 20% to 25% more on average.

You are right, as an amateur economist, I know price level/inflation are negatively correlated with unemployment while price level/inflation are positively correlated with economic growth, so a lower inflation generally imply a bad economy that is not using its resources (they are land; and the natural resources underneath it, labor, capital, as machinery and entrepreneurship). However, there will be exception to this rule when resources available reduced, which will lead to stagflation (high inflation and high unemployment at the same time), like during the oil crisis.

And in regards to what you mention about the slow economic growth, you can correlate that to income inequity. As wealthy people spend smaller portion of their income (lower marginal propensity of consumption), income inequity will lead to less consumption in the economy, which is the largest sector in GDP (the others are investment (direct, stock market not included), government expenditure (exclude welfare and wealth redistribution system) and net export (export minus import). And personal, as huge amount of jobs in the middle lower and grassroots job which are low pay are being replace by small among of high tech, high pay job, the situation is only going to get worst.

August 20, 2014
10:56 am
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Jon, another problem that could come up in the next few years is people are piling on too much debt. This is mostly from vehicle loans, mortgages with credit card debt growing as well.

As people get small pay raises, pay cuts and more may become unemployed or switched from full time to part time work, the real estate market and the economy could suffer more making interest rates fall even more.

An economic domino impact happens that is difficult to stop.

August 20, 2014
11:43 am
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I agree with Jack.

And now it's not just wages being lowered or not keeping up with cost of living. Now apparently pensions are increasingly at risk. Case in point was news coverage a day or two ago re: protests in Montreal over threats to cut back pensions.

The best defensive strategy is to stay out of debt.
If you can't do that, pay it off as quickly as possible - act like someone was chasing you!

The Gail Van Oxlade TV show, the name of which I don't remember, where she counsels people who are over their heads in consumer debt so that they can get back on track, is very educational - and alarming.

August 20, 2014
12:05 pm
xxxx
Member
Banned
Forum Posts: 338
Member Since:
June 29, 2013
sp_UserOfflineSmall Offline

Loonie said

The Gail Van Oxlade TV show, the name of which I don't remember, where she counsels people who are over their heads in consumer debt so that they can get back on track, is very educational - and alarming.

Her name is Gail Vaz-Oxlade and her show is Til Debt Do Us Part. She is apparently quite wealthy - a good role model in that Canadians (young and older) ought to be much more entrepreneurial and not depend on govt for their financial security etc.

August 20, 2014
1:22 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Brian, I have seen many of her shows but I don't ever recall her talking about saving money in TFSA's but she does always mention saving for many years, decades in RRSP's and how it will grow to hundreds of thousands of dollars.

August 20, 2014
1:23 pm
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

According to Wikipedia, Gail was "born to a wealthy family in Jamaica".
http://en.wikipedia.org/wiki/G.....Vaz-Oxlade

August 20, 2014
1:37 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I don't know how safe or stable Jamaican banks and other financial institutions are but I saw a 1 year deposit rate of 6.95%. I'm sure inflation is higher there but food, gas, electricity, property taxes, insurance, water, heating costs etc. are getting pretty expensive here too.

August 20, 2014
1:43 pm
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Gail came to Canada in 1977 with her parents.

See http://www.theglobeandmail.com.....le1424785/ for details on family background. It says, in part, "Born in Jamaica, she grew up 'in great privilege.' Her father and grandfather owned a hardware and lumber business as well as gas stations. A chauffeur drove her everywhere. She lacked for nothing."

You'll forgive me, perhaps, if I don't quite know how to work this background into my role modelling efforts. Some of us lack for nothing. Others lack for pretty well everything. And that's why we have government benefits.

August 20, 2014
5:55 pm
xxxx
Member
Banned
Forum Posts: 338
Member Since:
June 29, 2013
sp_UserOfflineSmall Offline

Loonie said

You'll forgive me, perhaps, if I don't quite know how to work this background into my role modelling efforts. Some of us lack for nothing. Others lack for pretty well everything. And that's why we have government benefits.

Very simple Loonie - Gail could have chosen to do nothing much and just live off the family money, as many do from similar background, but she had initiative - she wrote books and developed her TV program and is a respected name. I personally think that is admirable - and a role model for our youth and others.
There are of course many individuals who start off with nothing at all and succeed through hard work and perseverance - these are definitely role models.

I have been involved with volunteer work related to United Way and other charitable organizations. For sure, there are those who are in circumstances who really need help (as you say there are those who lack everything), but sadly enough, I ran into a fair number of people who try to suck whatever they could out of the system, whether from the charity, or from the govt - "get something for nothing with the least effort" attitude - they could actually work and do much more for themselves - I am not impressed with these types - these are not role models. I trust this explains what I meant by role models.

As you say "there are government benefits" for those who have nothing, but bear in mind governments are now deep in debt, so there may need to be a rethinking of these "benefits" - taxes at all levels in Canada are already high - anyways that is another subject.

August 21, 2014
7:03 pm
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

To me, a role model involves more than simply financial success, but that would be a much longer discussion.
There are always people who try to "milk the system". I have worked my entire life in the charitable sector and have met all types. The majority have genuine need. Some of the more "entrepreneurial" types figure out how to get a bigger share of whatever is going. I have to admire their ingenuity, and wish that they could apply it more productively. But, then, I look at their general circumstances and see how difficult that would be.
By far, the bigger concern about money draining out of the public purse comes from corporate giveaways and such like. Over and over again governments give money to corporations without even requiring them to show that it was well used before they give them even more, let alone getting it back. One interesting case revealed in the last few weeks has been the humungous executive bonus pensions at Hydro One in Ontario, paid for entirely by the taxpayer, no contributions from the executives themselves. Apparently this has been going on for some time. There is far more money wasted in these kinds of initiatives than is ever disbursed to individuals who are working the angles to try to get a little more money out of "the system", be it charity or gov't.

August 21, 2014
9:19 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I think a good way to make the working poor and others truly trying to better themselves is to do some type of match.

For example, a 15% match up until the first $30,000 earned from employment income which would be $4,500 maximum.

Also, a higher personal amount of say $20,000 for everyone that earns $30,000 or less a year.

These are just ideas but this would benefit to a maximum of $6,300 a year tax free or about $121 a week tax free.

August 21, 2014
9:29 pm
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

A liveable minimum wage would go a long way. It's not possible to get anywhere on the minimum wage, at least in the big cities.
The problem with a match is the question of where the money comes from. Assuming it would come from the public purse, we are up against the same problem of taxes etc., against which one can always count on a huge hue and cry, reasonable or not. Seems to me that a liveable minimum wage puts the cost on the shoulders where it belongs, namely the employers. At this point there is always a great cry about small businesses and mom-and-pop operations that "can't afford it". Any business that can't provide a living wage to its employees is not really viable. And many of the lowest paying jobs are to be had at some of the most "successful" businesses whose leaders no doubt provide "role models" for many.

August 21, 2014
9:36 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, wouldn't the $121 a week tax free give incentive to many people on public assistance to work.

This would reduce government expenses by collecting more taxes of all types and not paying public assistance, benefits etc.

August 21, 2014
9:48 pm
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I'm sure it would work for some of the people some of the time, but I think it depends on a lot of "if's". Probably too big a discussion for this forum.

August 21, 2014
10:08 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, it is not the solution to the problem but maybe a step in the right direction. Governments of all types need to reduce expenses or at least slow the growth of them and increase revenue by more people actually working and contributing paying taxes etc.

August 22, 2014
8:54 am
Jon
Member
Members
Forum Posts: 365
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Well done Jack! You come up with the idea of negative income tax/NIT which was praised by Friedman and it is a great idea because it retain and promote people's incentive to work while it is inexpensive to administrate because it share the same system use to collect tax. In theory, this system can completely eliminate the need of "...minimum wage, food stamps, welfare, social security programs and other government assistance programs...".

This system appears to have been introduce in Manitoba before, after I do a small search in wiki

Personally, I think keeping people working (busy!) are very important as it give people routine and structure for their life and push people away from chronic unemployment which will gradually destroy someone mentally and make them suffer from alcoholism and mental illness which lead to crimes.

August 22, 2014
9:14 am
Jon
Member
Members
Forum Posts: 365
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Jack Manning said

Jon, another problem that could come up in the next few years is people are piling on too much debt. This is mostly from vehicle loans, mortgages with credit card debt growing as well.

As people get small pay raises, pay cuts and more may become unemployed or switched from full time to part time work, the real estate market and the economy could suffer more making interest rates fall even more.

An economic domino impact happens that is difficult to stop.

You just mention Ratchet effect in economy and it basically means when people income reduced, people still maintain their previous spending profile for a short period of time by saving less or take up debt. However, I sincerely disagree with you as household in most developed countries are saving more of their income than ever before ever since the financial crisis in 2008 (except for Australia). As a result, companies are less willing to invest which will both contribute to current income as investment in current GDP and productivity for the future. This is the blame for our slow rebound of economy; we have problem of spending too little money rather than spending too much money

August 22, 2014
10:49 am
Loonie
Member
Members
Forum Posts: 6411
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Jon said

You just mention Ratchet effect household in most developed countries are saving more of their income than ever before ever since the financial crisis in 2008 (except for Australia). As a result, companies are less willing to invest which will both contribute to current income as investment in current GDP and productivity for the future. This is the blame for our slow rebound of economy; we have problem of spending too little money rather than spending too much money

If this is true, and it may be, then I think we have a really sick basis for our economy. If the thing that makes it keep chugging along is spending, and people can't afford to spend or don't want to buy more stuff that they don't really need (and have the wits to realize this) or they don't want to spend because they are concerned about using up the world's scarce resources on more stuff, then we need to find a better way of organizing our economy. Those of us in the developed world use far more than our share of the world's resources already, and we have the garage sales and dumpsters to prove it. I, for one, have developed the habit of buying less over the last few years, and feel better about this choice than I did when I spent more, because I am now going through the process of getting rid of stuff and realizing that a great deal of it was misspent money.
We all hate it when merchandise doesn't last as long as we think it should, and we know that manufacturers make things that won't last as long as they should in order to get us to buy more frequently. Enough already!

August 22, 2014
8:16 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Jon, the problem is not spending too much or too little money for the economy but it is that people are going deeper and deeper into debt which costs more interest and in the case of housing, real estate, autos etc. inflation increasing expenses at much more than the C.P.I the government states.

For examples, gas prices, water rates, electricity rates, heating costs, insurance, property taxes etc. plus H.S.T and other taxes that make many living expenses cost much more.

Future spending decreases when our incomes does not rise in line with inflation and taxes plus all the extra debt and interest costs, fees that piles up pulls future spending to now in the present and gives a much slower economy in the future when most people are just trying to survive by paying off their debts.

August 22, 2014
8:31 pm
Jon
Member
Members
Forum Posts: 365
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Loonie, I agree spending is hardly the most environmentally friendly things, (is quite the exact opposite actually). But before you turn to the morale side of things, have you think about the fact the the current problem with lack of spending is simply the effect of us spending too much money before the financial crisis and we are simply "de-leveraging" by increasing savings right now? So it may actually be a good thing in the long run because as our saving rate move up, business will have more fund to expand their business through financial intermediaries (banks, insurance company, trust, investment etc) or the financial market (stocks or mid and long term bond market) . When this combine with the fact that our spending habit become "normal" again as we finish our " de-leveraging"(probably still lower than the before crisis level). Business will actually want expand their scale instead of just investing in cost saving measure which in the long run, increase our production capacity in which it is the only thing that determine our economy in the very long run.

So in the end, I can conclude I still hold a pessimistic view of our economy in the short run (lack of spending in the next 5/6 years) and in the long run (replacement of low end jobs by small amount of high end jobs which yield less consumption), but I am pretty optimistic in the midterm (the 20+ years after the low tide have past)

No permission to create posts

Please write your comments in the forum.