Category Archives: in the news

Regarding the Bank of Canada Interest Rate Decrease

Stephen Poloz and the Bank of Canada shocked markets this week by dropping the target overnight rate by 0.25%.  In my previous post I spoke about all the reasons that the BoC would likely be raising the rate at some point this year; you can go back and read that if you like.  This is a long post so you might want to go get a beer before you start reading.

Bank of Canada’s Policy Shift and Stephen Poloz
Before we get into the effect this is going to have we should say that on page one, paragraph one of the “How to be a Central Banker” handbook it says do not shock the market.  Mark Carney made a habit of being boring and predictable and everyone praised him for it.  They liked it so much they drafted him into the big leagues at the Bank of England.  Avoiding this shock alone was a good enough reason to delay this rate change.

Forward guidance is the term used for when a central bank indicates ahead of time what it is likely to do in the near future and in the long term.  It helps markets decide what they are going to do in response.  Calm, collected responses.  When the US Fed says it will not change rates until unemployment is below X%, that is forward guidance.  Poloz has said that risk assessment is the new way forward for the BoC.  Yes, forward guidance has worked well for us in the recent past but now we are going to try something new.  In October he might have dropped a hint that most people (including myself) missed.

Some of you may be wondering why we aren’t being more specific about the likely future stance of monetary policy. Let me answer by saying that forward guidance remains a key element of the policy tool kit – but one that we will reserve for times when we believe there are net benefits to its use. There will no doubt come a day when we will offer forward guidance again – but not this day.


But more importantly he said this in September.

We have begun putting our growth and inflation forecasts in the form of ranges rather than points, and have given even more prominence to uncertainty and risks in the Monetary Policy Report. We have refined our analysis of financial stability risks and raised the profile of our Financial System Review. And, we have begun to offer a more fulsome description of how those risks are entering our policy deliberations. These changes have brought more transparency to policy decision making, and our policy narrative has shifted from one traditionally seen almost as “mechanical engineering” to one now characterized as “risk management.”

Why is that important?  Well with the rate changes today it indicates that possible or perceived risk is now the most important  thing when the BoC makes policy decisions.   In this week’s announcement press conference Poloz said this.

Accordingly, we decided that it was appropriate to take out some insurance against that downside risk in the form of a lower interest rate profile. Policy insurance is a logical part of our risk management framework. Today’s action is intended to reduce the risk that our inflation path might move materially to the downside, as well as cushion the impact of lower oil prices and facilitate the economy’s sectoral adjustment to its new circumstances. The Bank has room to maneuver should its forecast prove to be either too pessimistic or too optimistic.  

So now interest rates are an insurance policy against possible future risk and this is the new framework, got it.  Also, you will notice that this statement basically says that lower rates are not out of the question.  I would hope at least they have a model that is predicting this and that their nice precise model would tell them how much of a cushioning effect this rate cut would have.  Because thinking that a central bank has a great model that lets them see things that the commoners do not is part of the game they must play.  What does Poloz have to say about this?


Please, for the love of god, STOP CALLING IT INSURANCE!

Although mortgage rates should follow long term bond rates rather than be tied directly to the overnight rate we can expect to see lower mortgage rates sometime next week.  It only takes one bank to set everyone off.  Ratehub is currently showing 2.18% as the best 5 year variable and 2.69% as the best 5 year fixed rate.  This means that we could be seeing sub 2% variable rates.  If you are looking to buy a house this is good news.  If you are at the CMHC and you are trying to cool the real estate market with tighter lending rules, sorry, you can go to hell.  All those predictions of bubbles bursting in Vancouver and Toronto will have to be pushed back again.  Calgary could certainly run into some problems in real estate so maybe his is a good thing for them.

From the press conference this week.

Finally, we discussed the risk that by moving today we would surprise financial markets. We generally prefer that markets not be surprised by what we do, and believe that transparency around our analysis of the economy will minimize the scope for surprises. In that respect, we took comfort from the observation that the consequences of the drop in oil prices appear to be well understood, and that the possibility of a rate cut had begun to enter markets in the last couple of weeks. Moreover, given the magnitude of the shock, we concluded that the benefits of acting now rather than waiting would outweigh the costs of any short-term market volatility that might arise.

Our dollar dropped 3 cents versus the US dollar immediately.  So  the markets had not already priced this in. At all. We are glad you discussed it though.

We will have to wait until this month’s total data is in for the CERI fluctuation but I imagine the Canadian dollar dropped everywhere.  (Less so against the Euro)

Trade and Local Prices
A weaker dollar means that all of our exports are cheaper.  This is good for our GDP.

It means that we will not see gas prices as low because our weaker dollar buys less on international markets.

Inputs to manufacturing are more expensive assuming they come from other countries.  Any capital investments in machinery or other equipment that need to come from other countries is now more expensive.

Almost all consumer goods are more expensive.  Electronics, clothing, some food. Anything not made in Canada is now more expensive.

Conspiracy Theory
If I was a journalist (Like, a real one, not a guy with a website) I would probably put in a freedom of information request for all communications over the last few months between the government and the BoC.  Why?

Government delays budget because oil prices are sagging and they need more time to balance the books. If only there was a way to boost exports to pick up the slack from those low oil prices to help reach the promised balanced budget.

BoC drops the interest rate when markets are expecting a hike within the year and what do you know, the currency tanks.  This is good for exports!  What a coincidence.

The BoC would never manipulate the currency like that.  After all in September Poloz said,

A floating loon is a thing of beauty, and so is a floating loonie, at least from this economist’s perspective.

How can you not trust an economist that talks like that?

Household Debt
When interest rates are low, people take on debt.  When interest rates are low for a long time people take on a lot of debt.

That is why on December 10th Poloz said.

Let me just add a few comments specific to the most important risk discussed in the FSR: the difficulty that highly indebted households would have servicing their debt if they were to face a sharp decline in their incomes or a sharp rise in interest rates. This situation raises the risk that a shock to the economy could trigger a correction in house prices. The probability of this risk materializing is low, but if it did occur, the effect on the economy would be severe.This risk would be greater if house prices were judged to be overvalued relative to fundamentals. … Although there is considerable uncertainty around this question, various approaches – including our own – suggest that there is some risk that the housing market is overvalued, and our estimates fall in the 10 to 30 per cent range.

Yeah so Canadians really need to get their debt under control.  Now lower interest rates should allow you to pay down more of your debt but unfortunately most people see it as a chance for cheap borrowing.  But since this is all caused by lower oil prices what did Poloz say about that this week?

 Canadian consumers will spend less on energy, but they could save some of the windfall rather than spend it

Fools!  You are trying to save the money you are not spending on energy since the price in oil dropped? Well that is bad for the economy.  Lower interest rates! Borrow more!

The fact that he sees money not spent on energy as a windfall says a lot here.

Currency War
We’re in one.  More on that in a dedicated post to come later.

Final Thoughts
As mentioned, shocking the market is not a good move for any central banker unless you have a specific goal in mind.  I do not think this is a great move but I do not have access to the data sets or models that the BoC does.  Their 25 page Monetary Policy report reads as if it was written with a rate freeze in mind and then edited at the last minute so it made more sense with the rate decrease. I would really like them to try to justify their decision a little more clearly but then again I think there are only a handful of people that read the MPR when it is released anyway.

Personally, I was floored by the announcement.  I really expected a freeze.  I will be keeping an eye out for lower mortgage rates and if I see something at or below 2% then it will be time to call my banker.

2014 in Review and a Look Ahead to 2015

Once again I am writing my final post of the year at the last minute so please forgive the inevitable grammar and punctuation mistakes. I am just typing it and posting it.

Last year’s predictions ended up being almost entirely wrong.  I had underestimated the ability of the American government to delay things so the Keystone XL pipeline was neither approved or denied.  It is still in limbo. So no predictions there this year other than I think they have to come to a decision.

The overnight rate of the Bank of Canada remained at 1% for the entire year so that prediction held up. We are now looking at 2.1% core inflation which is slightly above the 2% target.  This by itself does not mean that the overnight rate is going to be raised but there are a few other things the BoC will be keeping an eye on.

Oil prices are extremely low as you have probably noticed as you purchased gas 40% cheaper than you did last year.  This will drag the Canadian dollar down with it.  A weaker Canadian dollar means that all of our exports become cheaper to other countries.   Canada does sell a lot of oil but it only accounts for about 3% (in 2009) of our GDP.   Overall, then, we should see a good growth rate for the economy.  This means that companies will start to spend the billions in cash they have been sitting on for the last few years, traditionally this would lead to inflation.   With the inflation rate already over target I expect we will see an overnight rate increase this year.  Poloz (BoC Governor) has made some comments about the strength of the Canadian dollar but that is just central banker talk. It is not the policy of the BoC to try to defend the price of the Canadian dollar so they could not mention that as a factor in the raising of rates. Raising interest rates makes your local currency stronger, but since you are a reader of this blog, you knew that.

Mortgage rates are always a topic of concern in Canada.  People have been talking about the real estate bubble in Vancouver for 10 years. Mortgage rates normally follow long term bond rates rather than the overnight rate but you can expect a rise from the BoC to have a knock on effect on all Canadian lending markets if it done early in the year.

Last year I predicted that Russia would crack down severely on terrorists and that maybe this would lead to some countries boycotting the Olympics.  None of that happened. Instead, Russia annexed/invaded parts of the Ukraine and is still currently involved in fighting there.   NATO has done nothing militarily but did apply sanctions on Russia.  When oil prices dropped so did the Russian currency, by 40% or more.   Their central bank decided the best way to defend the value of the rubble was with their control of the interest rate.  The first move was to 10% and then to 17%, a massive, massive increase.  The currency seems to have stabilized for the moment.  All the Russian companies that are holding debt in Euro and Dollars are going to have a really rough time this year. Expect to hear of at least some defaults.   As a reference, the last time the interest rates in Russia were this high was in 1998, right before the government defaulted on all its debt.

For our neighbours to the south this should be an interesting year.   Democratic Obama now has to deal with both the Congress and the Senate run by the Republicans.  I think we have already got a little glimpse of this plan for the next two years.  If he was smart he would continue to push these huge issues to the Congress and Senate for the next two years.  Education reform , military spending, entitlements.  Huge issues that have been completely deadlocked.  If the Republicans try to block everything he does then they will easily lose the next election.  They will be forced to concede on at least a few issues.  Not only that, the Republicans will have so little time to properly build their feigned outraged narrative and catch phrases for each individual move they will probably have to drop back to some nonsense about King Obama and the only people believing that will always vote Republican anyway.  I really hope they do something positive down there. Their political system has looked pretty ridiculous for a number of years now.  It is time for them to gain some self awareness and fix some of their issues.

Wow, this is getting to be a long post.  Ah well.

There will be a federal election in Canada this year.  Low oil prices will drop a few billion off the revenue side of our balance sheet this year.  The Conservative government has pulled a pretty smart move with their recent income splitting changes.  This will reduce the amount of surplus, if there is even going to be one this year.  This is smart because in an election campaign there is nothing that opposition parties like to do more than to tell everyone how they will spend the extra money that is sitting in government coffers.  Low oil prices and income splitting should eliminate any extra money so any promises made during the election will have to be offset with a cut to another program.  Not that this will stop anyone from making vague statements like “this will be paid for by savings generated by making X process more efficient” but there is not much we can do about that.

That is it for me this year.  Thanks for reading for another 365 days.  Until we meet again in 2015, have a happy new year.

On the Events in Ottawa Today.

Cpl. Nathan Cirillo was shot and killed in Ottawa today.

When I saw the news breaking this morning the details were very limited.  One thing was clear.  A reservist standing guard at the National War Memorial had been shot.  There were pictures of him receiving medical attention. One picture in particular of a woman giving him mouth to mouth while others performed chest compressions stirred some emotions in me that I was really not prepared for.

I thought This was a follower of Islam, again. This time they have gone too far. We need to get  them.  

I was so angry.

But get who?  It was only minutes later that the reports starting rolling in that the gunman was dead.  Probably exactly as he has planned.

At this point it was not even clear who the shooter was or what his motivations were.  Reporters were making the link to Islam as they kept talking about the radicalized convert that had killed a soldier in Quebec two days ago.  Always insinuating the link, never saying it outright. I started to think of how people would react if it was a radicalized Muslim versus just a crazy person with a gun. As if it made a difference.

And now 8 hours later I am still angry but I even with this small passage of time I have been able to take some time to reflect.

I used to live near Parliament Hill and would visit often; the security presence was visible but very subtle.  According to the National Post the first 911 calls came in at 9:52am.  There are images coming out of the suspect on the ground, likely dead, at 9:56am.  Four minutes. If there is a positive we can pull from today it is the professional and efficient response of the parliamentary security, RCMP and Ottawa City Police.  They maintain a open, public space with effective , non-intrusive security. They do a great job.

Now comes the hard part for many Canadians.  We need to figure out if anything could have prevented this, see what went wrong in the reaction and improve it. What we do not need is to lock down all public spaces with heavily armed security guards.  The systems we have in place have been effective up to this point.  Should we be on the lookout for more attacks on soldiers? Of course we should.  But we do ourselves no good asking to live in a police state fueled by fear.

To anyone that says that parliament needs to be locked down from now on please understand that that the War Memorial is not on Parliament Hill, it is outside the surrounding fence, across a public street.  The only way more security would have prevented this death is if the entire downtown core of Ottawa was made a secure area with both vehicle and personal searches of everyone entering the zone. That is an Ottawa that I do not want.  Here is an image I took on Canada Day two years ago.  The steps to the War memorial are about 20m away; just off camera to the left.  That building on the right is the East Block on Parliament Hill.

Canada_DayThis is the Ottawa I know.

My initial desire for revenge, fire and brimstone have calmed.  Canadians should take a moment to think about how we fit into this dangerous world.  Think about how we want our government to react.  We should not be out for blood.

Stephen Harper had been scheduled to give honourary Canadian citizenship to Malala Yousafzai, winner of the Nobel Peace Prize, today but the event was cancelled because of the shooting.  Is it related? That is not clear at the moment. When Ms. Yousafzai spoke in LA in August she said this:

“You cannot kill terrorism. Violence only breeds more violence. The best way to fight terrorism is with books, pencils, and education.”

Do I think that the world’s problems can be solved without ever using military force? No, I don’t think anyone is that naive. But I also do not think that instantly reacting to the natural human desire for revenge will solve things in the long run.

Today has been a rough for Canada  I hope tomorrow we wake up resolved, confident and alert but overall, not much different from an average Thursday.  We must resist the urge to awake fearful, angry and bloodthirsty because that would certainly make us less Canadian than when we opened our eyes this morning.



Temporary Foreign Workers: Explanations and Solutions

Temporary foreign workers (TFW).  Love them or hate them, they are here to stay. The program has been around since 2006 and continues to gain strength.  We will not go over the entire system  because there are thousands of sites that do it in very fine detail.  Wikipedia is always a good source.  What we will do is look at the effect TFWs have on a labour market.  You can see it in the latest Youtube video here.

As in the video, it seems that for most part this program is being used to keep wages down which was not its goal.  The entire system is under review at the moment and one of the current suggestions is to make the program be accessible only to firms in regions that have extremely low unemployment rates.  This is a very good idea. A low unemployment rate is a good indicator that maybe a company legitimately cannot find a Canadian to fill the position. If the region has an unemployment rate of 8% then there is little reason to bring in foreigners to do the work.  That single change would make a large difference.  Although, there have been reports this week that workers are being hired to work in one city and then being moved to another as soon as their application is approved and they move to Canada. This type of behavior cannot be allowed to continue

All cases of worker exploitation must be eliminated.  These workers should have regular check-ins by mail, email, a website or in person by someone from the labour ministry to ensure that they are not being abused or exploited.  They should not be afraid to lose their job if they report abuse of the system.  If abuse is reported and confirmed then they get put on top of a list for the next available position.  Most of the jobs are low skill and if one company in a low unemployment region is having problems finding enough workers there are likely more in that same region willing to take a worker that has already passed through the application process for a discounted or no fee.

There is a lot of red tape in these proposed changes. The costs for the administration should be covered by the fees that firms pay when they apply to hire a TFW.

The next few months will reveal how the government is going to deal with all the recent negativity.  I would like to see them implement the changes listed above and discuss making the TFW process a path to citizenship.

Facebook Buys Oculus Rift for 2 Billion

Recently Facebook purchased the virtual reality (VR) company Oculus. Oculus is one of the big success stories of Kickstarter. They managed to raise a couple of million dollars in order to get their VR headset off the ground with over 9,000 people contributing to their campaign.  If you donated around $300 then you received the first version of their development kit; basically an advanced, working prototype. The reviews for the first version of the prototype were extremely positive with many reviewers implying that this might be the dawn of a new medium (No one counts the VR setups from the 90s).  The purchase of the company by Facebook came as a shock to most people and an overwhelming majority of the immediate online feedback was negative.  So today we will look at two things.  One, as a Kickstarter backer what rights do you have regarding the resulting product?  Two, is the purchase of Oculus by Facebook a good thing?

What rights do you have as a Kickstarter backer to control the direction of the company after the campaign is complete?  None.  What are the responsibilities of the people running the campaign to their backers? Only what was promised as an incentive.  If you pledged $300 to get a development kit and you got that development kit, your deal is done.  If you pledged $25 you got a t-shirt, your deal is also done.  Kickstarter is not a source of venture capital (VC).  Backers are not buying shares in a company.  It is more like an elaborately disguised pre-order combined with donations. It is actually a pretty sweet deal for the people running the campaigns.  With traditional VC Oculus would have to sell a percentage of the company to get the start-up cash. So while many people feel betrayed because the little VR company that everyone supported got purchased by the big bad Facebook, there is nothing supporters can do about it.  People asking for their money back are wasting their time.

This event will likely change the way people select the campaigns they support in the future.  It will also change the way people market their campaigns.  The outcome will either be that campaigns start to give out small amounts of shares as incentives or people will start including things like “We guarantee we will remain an independent company for X years” in their summaries. Although, when Mark Zuckerberg walks through the door with a couple of billion dollars it has to be hard to stick to your convictions.

Is this purchase a good thing? Facebook is not interested in the hardware that Oculus makes.  It is interested in VR as a medium.  Facebook values user data above all else.  They want to build a huge customer base so they can segment the market and sell targeted ads based on user behavior. This is why they paid $2 billion for a company that has what they think is a very promising new technology with tens of thousands of users but $19 billion for WhatsApp, a simple messaging program with 450 million users.

Both Oculus and Facebook have said that the VR company will continue to operate independently in the near future and if that is true then this purchase is a good thing.  The main fear I had personally was a VR world covered in ads that also tracks everything you do online.  However, with the backing of Facebook Oculus should be able to ramp up and expand this technology much faster and that is good for everyone.  Games are the first place that this tech will be used and playing games in a full VR environment is going to be great. Beyond that we can expect VR hangouts (Hey! Come to my virtual apartment and look at my virtual pictures on the virtual wall above my virtual couch), tours of famous places, training  and educational material (Hey! You are the size of a blood cell, let’s take a trip through the circulatory system), and many other uses. All of this is good.

Not by any stretch of the imagination do I think that Facebook is going to let everyone use their technology without gathering their data and serving them ads but if this gigantic influx of capital into Oculus pushes the technology as a whole forward and causes other big companies to follow up with their own alternatives, then I am all for it.

Closing out 2013 and looking forward to 2014

Happy New Year to everyone! Since I like to do at least one post a month and I have been slacking in December today I will take a few minutes today and quickly talk about what we can expect in 2014.

In Canada inflation rates are at very low levels. The surge in inflation that many loose-money critics have predicted has not appeared. This is good because it means that the Bank of Canada does not have to decide if we are going to increase interest rates right away. It would be hard to argue that rates need to increase when we are only at 1.1% core inflation and 0.9% CPI. In fact, if the rates start dropping further then the BoC will start worrying about deflation. Despite their constantly optimistic DSGE model, it is possible that they will actually need to decrease rates in the next year, although this is extremely unlikely. The most likely outcome is that the target overnight rate will be unchanged throughout the year. The only thing that could cause an increase is if the US economy really starts to take off. If they start seeing growth over 3% then we could see a small increase of 0.25 – 0.5% by the end of the year.

All of you cross-border holiday shoppers probably noticed that the Canadian dollar is lower than we are used to in the recent past. It is currently sitting at about 93 cents US. Although we have been sitting at near par levels for some time this change is likely caused more by a stronger American dollar than a weak Canadian dollar. We have briefly discussed the CERI in the past; it is the exchange rate index that the BoC uses. Instead of just measuring our exchange rate vs. the US it includes our six largest trading partners and uses the magnitudes of our trades with them as the weights to come up with an index number. This number uses 1992 as a baseline (100 level). The most recent CERI index is 115. For reference, since the beginning of 2010 the CERI has been as low as 113 in February 2010 and as high as 124 in June 2011. So we are currently on the low side of the last three years but it isn’t a disaster.

The good news is that Canada has maintained growth while our currency has been in slight decline. This is a good thing because a cheaper Canadian dollar means that our goods/services/commodities become cheaper for the rest of the world to purchase. With the US buying about 75% of our exports a weaker currency will actually work out quite well for Canada if the US can manage strong growth this year.

With the derailment and explosion of a train carrying crude oil yesterday in North Dakota I think we can expect the Keystone XL to be approved.

The Olympics will take place in Sochi, Russia. Canada will be attempting to defend its “most gold medals” title. With two suicide bombers in the last week in Russia we can expect some major security changes from Russia. Not known for their delicate handling of terrorists, Russia will likely crack down brutally in the months leading up to the opening ceremonies. As a result, it is possible that we will see a few countries drop out in protest of their methods.

As for, it lives on for another year. 2014 should see lots of new posts and videos with a focus on videos covering more advanced economic topics.

This is a type-it-and-post-it kind of day. Please forgive any errors, and I will see you all in the New Year.

What Happens if the US Hits the Debt Ceiling?

The shutdown continues in the US and now we must consider the possibility that the US government will not only fail to pass a new budget but will also fail to raise their debt ceiling before October 17th.  This is the estimated day that the US will run out of cash to pay for existing programs and debt interest. If congress does not raise the debt ceiling, which is an artificial limit imposed on the maximum amount of total debt the US holds, government spending will need to be cut by about 20% instantly. This is because the US borrows about 20 cents of every dollar it spends.

In Canada when the government passes a budget and spending plan it is automatically authorized to spend that money.  In the US it is a two step process. The government passes a budget in a vote and then must vote to authorize the borrowing that goes along with that spending.

Many people are reporting that if the debt limit is not raised that the US will default on its debts, something that has never happened.  This is not entirely accurate. I do not know the exact number but approximately 7% of US government spending is debt repayment, the rest is spending on government programs.  The government could try to prioritize the debt payments to keep them from defaulting while cutting the 20% elsewhere. The main problem is that the US is a big place and their national accounting is supremely complex. This is the reason why they say that October 17th is most likely the day they run out of funds, the flows of money to and from the government are not constant and are difficult to pinpoint.

A default on debt repayment would cause a financial freeze far worse than what we saw in 2008-2009. During that crisis when things were going bad everyone rushed to US treasury bills. The interest rates on these bills are super low because they are considered safe.  That is, the possibility of the US government not paying their debts is almost zero. If default starts to look like a possibility then interest rates on those treasury bills starts to climb.  This causes all interest rates to climb as people start getting worried about risk throughout the market. This means higher mortgage rates, higher personal and commercial credit rates, higher rates all around. This also means that when the US tries to roll over old, expiring bonds into new bonds (this occurs once a month normally) bond holders will either just cash out or they will want higher interest rates.  So the government would be paying higher interest on their current debts which means more government cuts because the ceiling would still be in place to limit borrowing.

So, is it possible that a few Republican crazies will cause the US to hit the debt limit? Yes.  Will it cause a financial apocalypse? Possibly. Even if the government can arrange to prioritize debt payments with their remaining money they will be making massive, instant cuts to government programs. This means tens (or hundreds) of thousand of laid off workers, decreased income tax revenue and an increase the need for social benefits. It would be an economic tranquilizer.

This situation is going to reveal just how much the Tea Party is willing to damage the US in order to push their agenda.  Normally, does not make dire predictions but if they refuse to raise the debt ceiling for any significant period then both the US and Canada will drop into recession. If the ceiling remains in place long term then the US is headed for a depression and Canada will not be far behind.

Countdown to Idiocracy: Pending U.S. Government Shutdown

Unless politicians in the U.S. can come to an agreement before midnight tonight, 800,000 government workers will find themselves locked out of work tomorrow. The original plan was to write a long detailed post about what departments were going to be affected but The Washington Post has compiled all the information you need right here.

The Republicans are insisting that Obamacare be essentially killed in any deal they will accept. Obama has said that he will veto any bill that tries to kill the new healthcare.  So now it is a waiting game.  If everything gets resolved by midnight then everything goes back to its normal broken state. If not, then those 800,000 workers will not be getting paid starting tomorrow.  It is probably worth mentioning that politicians are not among the 800,000, they still get paid. The people that are causing the shutdown will still get paid.  So tomorrow we could have 800,000 unpaid, angry Americans watching on TV as politicians that make $175,000 year talk about how it is a tough situation all around.

800,000 unpaid workers means 800,000 less consumers.  This would have a massive knock-on effect.  It has been mentioned many times on this site but I will mention it again; the U.S. buys 75% of our exports.  If the US economy stalls because of this then Canada’s will not be far behind.

If the shutdown happens then the next big date is October 17th.  This is the day the government will run out of money.  If nothing gets resolved tonight then I will post about the possible consequences of the US defaulting on debt payments.

Canadian Wireless Code of Conduct: Consumers Finally Win the Right to Pay Higher Prices

In January we looked at the proposed changes to the rules that govern wireless service providers in Canada.  Those changes have now been implemented and Canadian wireless providers are no longer allowed to offer 3 year contracts, 2 years is the maximum. In a surprise to no one with any understanding of how a business works, all the major providers have announced that their rate plans are increasing in price and that phones will now have lower subsidies and will therefore be more expensive. Thank you CRTC. Thank you for making cell phone service in Canada more expensive.  Two possibilities exist. Either the people at the CRTC are completely incompetent or they are malicious. Let’s explore the first possibility as I would like to think that the government is not just straight up trying to cause harm to consumers.

As mentioned in a number of posts, I have no love for my service provider.  Interacting with them is one of the most frustrating things I can do on a regular basis because it seems like they are actually trying to anger customers with every policy implementation. Any time they make a change to my account it is done incorrectly and a second phone call is required to fix it. However, I have been with them for over 10 years because I know that it is absolutely not any better at the other providers.  I know this because I worked for one of their competitors, in the call centre, taking calls about people’s bills.

With the 3 year contracts a customer had some power to negotiate a deal every three years.  So that tiny window every three years is the one time that Rogers, Bell, whoever you are using, cares to listen to you.  That power is now diminished.  Now you can sign up for a maximum of two years which means less guaranteed income for them and less power for you when you are negotiating a deal.

Back to how the CRTC thinks the world works. Cell phone companies are now going to lock people into 2 year contracts.  Each of these new contracts is 1 less year of guaranteed income. When the Rogers’ accountant is balancing the books he now has one less year put into the net present value of a new contract.  Less NPV, less posted profits.

Take a customer that stays with the company for 10 years. Here is an extremely high quality infographic to show the hardware upgrade cycle.


The phones represents when the company will offer a hardware subsidy to the customer.  I will allow you to draw your own conclusions on how this might affect a company’s profits.

With less guaranteed revenue and more frequent payouts of hardware subsidies the cell phone companies raised their prices. If you hear someone say they are surprised by this then that someone either lives in a fantasy land of benevolent corporations or they run Canada’s federal telecommunications regulator.


Broken Window Fallacy: Alberta Flooding

Alberta has recently experienced massive flooding.  If you would like to donate $5 to the Red Cross’ efforts there you can text “ABHELP” to 4664.  It really is an easy way to help out your fellow Canadians in their time of need.

Alberta is one of Canada’s “have” provinces.  What that means, is that they (net) pay money to the federal government rather than receive payments. When the flooding started it was inevitable that people would start talking about how this was going to affect their economy. I thought this would be a good time to talk the Broken Window Fallacy. If you are looking for information on the “broken window syndrome” then you are in the wrong place and you should check out a criminology website instead.

The original idea goes something like this.  A window is broken in a shop and the shop owner needs to call a glazier to replace it. He is, of course, upset that he needs to replace this broken window.  To try and make the shop owner feel better someone points out that if windows were never broken then the glazier would never have any work to do; implying that it is a good thing that the window was broken because it helps money change hands. This ignores the fact that the money would have been better off used on something else rather than on replacing the window.

This is one of the issues with many methods of calculating GDP. If someone remodels their bathroom because they feel like it, then it adds to total GDP as they purchase supplies.  If they need to rebuild their bathroom because it was destroyed by a flood then they are also buying supplies and that too increases the GDP.   In the first case however, the house value is higher overall. Unfortunately, in most cases existing home sales are kept as a separate statistic and it is new home sales that push up GDP. So for this type of GDP calculation it makes no difference that the original bathroom was destroyed.  Flood repair fallacy would seem a more appropriate name in this case.

So the money spent on these repairs is money that would have been spent elsewhere.  That is one downside.  The other thing to keep in mind if you see anyone claiming this will actually boost the GDP of Alberta is that overland flood insurance does not exist in Canada as far as I am aware.  If your drains back up and your basement floods then maybe you would get an insurance payout but if the water comes in through a doorway or window then you will not be covered, this is overland flooding. What this means is that many of the repairs are going to be done with borrowed money.  The money borrowed today is obviously money that cannot be spent tomorrow. So if there is a bump in construction material sales during the rebuilding period you can assume that there will be a slump afterwards as the money that was used to repair everything is being paid back, with interest.

So over the next few weeks or even months keep these things in mind as people talk about the cost of repairs.  Finally, for the $5 donation you made after reading the first paragraph of this post you could also get 5 Wild Rose pink sprinkle doughnuts at Tim Horton’s, the proceeds of which are being donated to the flood recovery. It is unclear where charity doughnuts fall in GDP calculations.