Wednesday, October 22, 2008

It is the best of times, it is the worst of times

Before I launch my latest tirade, I have a "contest" in mind. It is open to anyone (GTA area) who can reasonably and logically answer a simple question for me. The winner gets lunch with yours truly at one of the GTA's fine diners, and an opportunity to vent and scream to their hearts content. Please reply in the comments section or email me your response.

QUESTION? Name a product or service that when the price drops by 40%, you would be less inclined to purchase it (assuming you need it and it is an identical product or service) and would prefer to pay full price.

On to the news...

The other day I went to the bank machine to withdraw some money and the screen indicated "insufficient funds".

I wondered if that meant them or me.

There seems to be a perception that because of problems with banks in the US and globally, that Canadian banks may be in trouble. In reality, this could not be further from the truth. recently, the International Monetary Fund identified the Canadian banking system as the most stable and well positioned in the world. Yet when debit systems were not working on Tuesday, I wondered if there would be a run on banks.

This morning, Finance Minister Jim Flaherty announced Canada's government has pledged to temporarily guarantee banks' medium and longer term borrowing in a bid to keep pace with the multi-billion dollar financial rescues offered by other countries over the past couple of weeks. “This is a proactive step,” Mr. Flaherty told reporters. “There is this concern that our institutions could be disadvantaged competitively.” Canada's government has had to do less than other nations to salvage the financial system because the countries banks are relatively sound.

If our banks are sound, then why has the value of the Canadian dollar plummeted over the past month. In fact, it's values have dropped for two main reasons - increase in value of the US $ and Canada's economies being tied to natural resources. When a recession hits an economy, people buy fewer things which means they need less materials to make them. The continuing downward spiral of the price of oil also impacts our economy.

Lest you think we are in bad shape, John Williams, founder of the website Shadow Government Statistics, which offers alternative economic data to what the feds release, says the United States can expect to enter a period of hyperinflation sometime between 2010 and 2018, thanks to the copious amounts of money the government has put into the financial system.
"Federal debt is roughly four times the size of the GDP, and the government (US) has no way of paying this. They're not going to default on debt, so what most countries do when they're in this kind of trouble is rev up the printing presses and pay back obligations with debased dollars."
It doesn't help that 80% of America's net treasury issuances have been bought by foreign investors. But Williams expects foreign investors to unload their bucks soon. "We will see a flight from the dollar to a dumping of the dollar," he says. "That will spike interest rates as foreign-held securities are dumped and the Fed has the option of letting rates rise or buy securities. They will effectively monetize debt and that leads you to hyperinflation. I would look for a massive decline in the US dollar."

One person who believes that we are going to eventually head in the right direction is Derek de Cloet of the Globe and Mail. In today's column, he states "This is not necessarily a good time for the stock market. The stock market is a crummy place to be. But this will prove to be a very good time to buy stocks, if you view them as pieces of businesses and stick to the best. That's the lesson of '74. Those who find them, buy them and hold them should do just fine. Those who haven't got the guts have no business owning equities in the first place".

This is my fourth installment - I expect these to become less often in the future (perhaps twice weekly) and not only welcome, but really would encourage your feedback and suggestions on ways to improve.

Oh, by the way, here's a question to ponder.

What is the capital of Iceland?

Roughly $6.87 at last count.

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