Chapter 7 Blog: Money and the Canadian Banking System

Article: http://business.financialpost.com/2011/05/05/profit-taking-window-opens-in-bond-sector/


Summary:
The article that I read talked about how investing in treasury bonds could be profitable because they have reached a very low percentage yield. The lower the yield is the more profitable and preferable it is for bond traders. Here is an example to explain the situation. Let's say you buy a $1000 bond and you get 10% on return. However, when the bond drops to $900 they will have to increase the rate to 11.11% in interests so it matches up to the previous $1000 bond that you bought. So, if this continues you will be earning a lot in interest. If that's the case what determines the percentage yield of the bond? Inflation is a key factor in determining the yield of the bond. As inflation rises, the bond's profitability decreases. Due to economic instability, both the US and Canada are reluctant to raise interest rates and cause inflation, so this is a good time to cash in those bonds. Here are some hard numbers about ten year US treasury bonds; they have hit an all-time low yield of  3.22% on Wednesday May 4. This will also benefit the Canadian bond market, because there is a lot of uncertainty in the US economy. The ten year government bond for Canada was at yield of 3.211%, so you can see why it would be more favourable over the US treasury bond.


Connections:
This article relates to the book in terms that it talks about a type of bond, treasury bonds. To start it off, bonds are like purchasing the government's debt. However, there is a bright side to it! When, you purchase a bond, they promise to pay all of it back on a certain date called the maturity date. To top it off, they will pay you a specified interest rate on your money, so you will get richer as an incentive to lend them money. Banks usually sell bonds to they can decrease the purchasing power of the people. This will lead to less buying, less production, less jobs, and higher prices for goods. By doing this, the bank would have reduced the money supply in the country. There are also treasury bills, which are promissory notes that promised a certain amount of money. This are short-term "bonds" that hold no interest rates, so you won't benefit from them.

Reflections:
After reading and analysing bonds, I think that they might be a worthy investment to uptake. If enough people are willing to buy bonds, especially in developed countries that have a lot of debt, the whole economy would benefit from it. When the economy prospers, it will lower inflation rates which will increase the profitability of the bonds. At the end, you might end up richer than you started since the treasury bond's interest rate will increase to match up to your previous bond amount in case a rise in inflation occurs. However, there are some people that are risk takers. When the percent yield is low, they still wait for it to be lower before they are willing to cash in their bonds. Even if bonds are a worthy investment, you have to have an understanding of the economy and keep on top of it to earn the most profit on your bonds. So consider purchasing a bond, who knows you might be in luck.

Virtual Wallet

http://business.financialpost.com/2011/04/23/smart-phone-money/ (Article)

1. How long do you think it's going to take to get to all virtual cards? How many years? (1 point)

I think it is going to take a very short period of time to get all credit/debit cards, even ID's,  virtually into phones. I'd say it would take about 30 years for there to be a widespread use and availability of virtual cards all around the world.

2. Why? (1 point)

1311 years ago coins were created (http://www.wdfi.org/ymm/kids/history/the_first_coins.asp).
150 years ago money (bill) was created (http://answers.yahoo.com/question/index?qid=20081210143310AATRc2U).
61 years ago debit/credit cards were created (http://history1900s.about.com/od/1950s/a/firstcreditcard.htm).
As you can see by the chronology, it takes less and less time for the type of legal tender to change and be accepted by everyone because we live in a fast-paced world. Therefore, it wouldn't be illogical to assume that it would take 30 years (less than half of previous time) for debit/credit cards to become virtual.

It will also be so soon because there are so many evolving technologies in our fast-paced world that are created everyday. It is the same case with e-mail, it took about 40 years  for it to be so widespread (http://www.livinginternet.com/e/ei.htm). People are already working on RFID's for phones so stores recognize you and you can pay with your phone. There already is an iPhone Swipe app that allows merchant to allow them to carry out credit card payments (http://globalmerchantservices.com/iPHONEPhoneSwipeFAQandDownload.html).  As you might notice this virtual frenzy might become possible in our lifetime.

3. Who will not be on board with this new virtual wallet? (2 points)

Seniors citizens, who really can't handle technology, will be really annoyed with this new-fangled technology and have trouble trying to pay for their purchases.
Young children or people who don't have a phone will have trouble trying to buy things.
Money collectors might get annoyed at not having more things to collect anymore.

4. What companies are going to be affected negatively by this? Name 3. (3 points)

Wallet making industries, such as leather industries, will experience a downfall on their sales since people won't be needing them (http://www.craftstomakeandsell.com/LeatherWallets.html).
Industries providing material for printing money and making coins would experience a decrease in sales of their materials. Bank note producers would go out of business since paper money no longer has any value attached to it (http://www.bank-banque-canada.ca/en/banknotes/facts.html).
Small businesses will have to update all their equipment to adjust for this new type of payment (http://www.barcodesinc.com/cats/rfid-readers/) and it will be quite an expense on them to keep up with all the changes made to legal tender.


5. Who is going to make money form this? Name 3 industries not companies (3 points)
    
Cell phone companies that sell iPhones with NFC technology such as Apple will make money if money became virtual (http://www.phbeta.com/apple/the-apple-iphone-5-features-and-price-expectation/).
Wireless Internet providers will be needed to connect all the debit/credit you have so you will be able to use make purchases.
Hence, this will lead to the importance of the app creators as a form of advertisement for major businesses (http://www.studio1c.com/blog/17-internet-marketing/156-internet-marketing-iphone-money.html).



Great Depression versus Current Recession

Assignment

Great Depression versus Current Recession

Questions to answer:

1.      1. How did the Great Depression start?

There were a chain of events that occurred during the “Roaring 20’s” that would eventually lead to the Great Depression of 1929. During this time, many people were investing in stock markets as a popular medium to get rich fast. However, some of them did not have the money to purchase the stocks, so they went to the bank to get loans. Back then, the banks only required a ten percent down-payment on the loans they made.  So when the stock prices started falling, everyone started to cash in their stocks. However, that was a huge mistake because banks did not have any money to give the people since most people had gotten loans that emptied the bank. Then, the stock market crashed in October 29, 1929 which plunged the world into the Great Depression for the next twelve years. That day became known as Black Tuesday.

2.      2. How did the current recession start?

The current recession happening in the United States was brought about by the crash of the housing market. This started with inappropriate lending of money to people who could barely afford to pay it back to purchase a home, otherwise known as subprime mortgages. This idea is similar to the stock market crash of 1929, because people buy things without the money to pay them back. So when interest rates rose, people could no longer afford to pay back the minimum monthly payments back to the bank for the loan. Therefore, banks had to seize all houses as the collateral for the loans. Now the bank had insufficient funds and lots of empty houses people would not buy. Then, several banks went bankrupt and sent the world spiraling into another major recession.

3.      3. How did the government take part following the event? Were/ are they successful attempts?

In the stock market crash of 1929, the government quickly set up protectionism policies that heavily taxed imports to protect their own economy, but this action worsened global trade. Then, Roosevelt introduced the New Deal policies that would slowly help the economy recover.  The government and private charities started out by helping out the homeless and unemployed by providing relief programs. The New Deal also reformed the financial system in the United States to avoid future crisis. Suddenly, the whole country was plunged into WWII. Many people were enlisted as soldiers and others got a job at factories to make guns and ammunition.

During the current recession, the government helped several companies by giving out bailouts. They helped the companies such as General Motors and Chrysler. This ensured that the unemployment rate wouldn’t skyrocket since these types of companies have many workers. However, the government couldn’t help everyone so some companies, such as the Lehman’s Brothers’ investment bank, went bankrupt. Despite that, the economy is slowly recovering and the future is still unclear.

4.      4. What factors are present now that were not present during the Great Depression? (ie. banking, online resources, etc.)

Recently, technology just keeps getting better and better that we can easily communicate with others across the world in an instant. Now we can do all of our banking online in the comfort of our own homes if we like. We can also carry our credit cards and shop till we drop. However, these comforts come with their own dangers. It is easier for strangers steal money from you by hacking into your account or stealing your credit card. Credit cards also have very high interest rates that will eat at you if you miss a payment. Many people have the wrong impression upon credit cards, because they think that there is no limit to what they spend when in reality they could be driving themselves into bankruptcy. There are also many new social reforms that help people going through hardships. As you can see there have been many changes that could be positive or negative.

5.      5. How did these two affect United States’ GDP?

These two occurrences really damaged the US’s GDP by reckless spending and loans. When people think they can buy when they really shouldn’t it can bring about an economic downturn. As you have seen, they have caused consumers to stop spending and start saving money which decreases total consumer spending. In turn, unemployment rate soars due to lack of work in the workforce because companies are struggling to keep themselves together. Therefore, families will have less income to spend on luxuries and even necessities. This cycle will continue until the whole country is in chaos if there wasn’t relief. So as I have mentioned, decreased consumer spending and decreased income caused a drop in GDP of the country.

6.     6.  Reflection: In your own words, tell me which one has made more of an impact on the world.

I think that the Great Depression was worse than the current recession because the Great Depression was way longer and more severe. The Great Depression affected many countries around the world and drove them into despair. Every country started to enact protectionism policies which not only worsened global trade but exacerbated their own economy even further. There were many riots and protests toward the governments who could only do so much. Even job creation programs and relief wasn’t enough to put the economy on track. The worse part of this situation was that it lasted a long time. Imagine yourself being stuck in a time where you couldn’t even afford to feed yourself. Well that must be pretty bad. This impacted the world so badly that it allowed psychotic dictators such as Adolf Hitler gain power. Even sadder than that is that WWll is the only reason why countries were able to get out of the depression. Many lives were sacrificed, but it helped the economy through job creation. The solution for the Great Depression was really twisted. I really hope that never happens again.

Resources:

·         http://en.wikipedia.org/wiki/Great_Depression

·         http://www.nps.gov/archive/elro/glossary/great-depression.htm

·         http://eh.net/encyclopedia/article/tassava.WWII

·         http://www.marketoracle.co.uk/Article383.html

·         http://en.wikipedia.org/wiki/Recession

·         http://fpc.state.gov/documents/organization/7962.pdf

Marking:

·         Please use 5 resources

·         Insight of reflection

·         600 words

Chapter 6 Blog: Gateway pipeline a crossroads for Canada

http://www.financialpost.com/news/Gateway+pipeline+crossroads+Canada/4548023/story.html

Summary

This article by Patrick Daniel discusses how Canada’s energy industry completely relies on the United States as its sole customer for petroleum as they import around two million barrels of oil per day. This is a profitable relationship brought about by the strong ties and close proximity of between these two countries. However, despite the advantages it may offer, Canada still suffers from lack of alternative markets for their vast oil supply while the United States have plenty of other options to choose from.This factor is the hindrance that prevents Canada from becoming a major economic superpower. So Canada has been contemplating on the Northern Gateway pipeline project which will allow safe transport of energy to the West Coast and open up new markets for oil in the Pacific Rim nations. It would considerably raise Canada’s GDP by $270 billion over 30 years by providing more work for people. This would definitely strengthen Canada’s economic status as a world leader in the future.  

Connections

This article relates to chapter 6 because there are factors that will relate to Aggregate Demand. One of the factors is disposable income because the more money they have the more they will be able to spend. As a result, a raise in the Gross Domestic Product levels will occur. The Northern Gateway pipeline project will help by opening up many new job opportunities, because the construction of this project requires a lot of labor. So if more people had work, the level of spending would increase because more people would be able to afford buy goods and services that they would not have been able to afford previously. Another factor that would change would be that oil prices would be lower due to mass production and available markets. Lower oil prices mean that people and countries will purchase more oil. As you know, exports are an injection to the economy and the increase of sales will raise the Gross Domestic Product of the country. To kick-off this project, there will be a demand for company invesments in the energy industry to build this pipeline which could do a lot of good to GDP. So it seems like results of this project would be improve the economy.

Reflections

I agree with the article when it says that Canada’s economy is too dependent on the United States because the decisions made by them constantly influence Canada’s economy.  Canada has vast resources, such as oil and wood, since it is such a huge country. However, Canada does not have enough economic power and trading partners to use its resources to the best advantage. So I think that the Northern Gateway pipeline project will be a great opportunity for this country to expand its rich energy resources to other markets.  However, I wonder what the budget for the construction of the pipeline would be because if it is too expensive, it might cause a major impact on the government’s budget. Then, we might receive a poorer quality of services because they might use the tax dollars towards this project. What about the environment? Will it be affected by oil leakages and damage the wilderness? I really hope not, because I think that this idea could bring out a potential stable future for Canada.

Chapter 5 Blog

Oil surges on rising crisis in Libya

http://www.theglobeandmail.com/globe-investor/oil-surges-on-rising-crisis-in-libya/article1915255/

Summary:

This article discusses how political conflicts in Libya are causing the oil prices to soar in many countries these past months. The last time that something to this scale happened that affected oil prices was in 1970 when there was a war between Israel and it Arab neighbours. These disruptions are causing many energy companies to pull out workers or suspend their drilling plans “to manage and secure safety” of their employees or shut down the whole production. Therefore, it will cut Libya’s output down by 6% which is equivalent to 100,000 barrels a day, because Cyrenaica is where 90% of exports occur and the heart of this recent revolt . Since Libya produces 2% of the world’s daily oil consumption, it will have a profound effect on the world’s economy.

Connections:

This article relates to Chapter 5’s economic indicators in various ways.  First of all, these disruptions have caused many people to lose their jobs at the drilling sites. This will probably raise the unemployment rate, an economic indicator, if those people meet the criteria and are still continuing to look for work. Most people will start to experience structural unemployment due to troubles in Libya, so even if there is plenty of oil no company is willing to put their workers in that situation.Then, increasing oil prices will definitely affect the Consumer Price Index of many individuals since most people will use some sort of oil dependent transportation method or heating system. Therefore, the inflation rate, another economic indicator, will increase for many people around the world. Lastly, it will affect the overall GDP of several countries, because less oil will be imported. Thus, increasing prices that result from its scarcity will make people stop consuming as much gasoline. This will affect businesses and hereafter the GDP of the country.  So as you can see, a conflict political that might somehow strain the economy can allow you to analyze the economic situation using various economic indicators. 

Reflections:

As of right now, from the perspective of a teenager, this crisis doesn’t seem to affect me too much because my parents pay for everything. As you can see, there are a percentage of people who would not be affected by increasing oil prices. However, most of working force population will somehow be affected by this political strife that occurs in the Middle East and North Africa.  Right now, only Libya is causing a disturbance in oil prices, but many are afraid that this chain would continue to other oil producing countries. If this chain effect continues then, many more people will experience structural unemployment. This is a terrifying thought, because it could lead to another global recession even though we recently experienced one caused by car manufacturers. 

Chapter 4

Summary: B.C. minister briefed on HST before election

http://www.cbc.ca/canada/british-columbia/story/2010/09/01/bc-hst-documents.html

The article that I read was about how the BC government lied about the HST (Harmonized Sales Tax) by claiming that “it was not on their radar” before the provincial election in May 12, 2009. However, there is evidence suggesting otherwise that they had already been discussing and making decisions on it for a long time through government e-mails and in briefing notes. The BC Liberals had already made a deal with the federal government to introduce the tax after winning the election. The federal government agreed to help with the transition with funding. The bureaucrats have also discussed the advantages and disadvantages of the HST. The main advantage was that it would improve the economy in the long run which would take at least after five years or longer. However, the disadvantages pointed that it would cause a loss in GDP and an increase in unemployment even though the economy is just slowly starting to heal from the recession.

Connections:

This article connects to the contents in chapter 4 because it is about the Canadian government, taxes, and how the taxes are is used to help citizens with more services. We have quasi federalist system in Canada. The provincial government is responsible for their own province, such as being able to decide on whether or not to impose the HST. Meanwhile, the federal government has to deal with things that affect the whole country, like helping BC with the transition of the HST with funding. The increase in taxes that are imposed could be explained with Wagner’s law of increasing state activity to explain that the government is trying to get the businesses to help the economy by providing more employment through their benefits of the HST. Now we will have to pay 12% in HST rather than our previous GST and PST on our goods and services. Therefore, it has caused many of our goods and services to increase in price due to an increase in the retail service tax. Since most people have middle or low income ranges, it affects them by taking a higher percentage of their income as compared to the people with high income ranges. Thus, it is a regressive tax.

Reflections:

I think most people would be outraged by such a sleazy move on behalf of the BC Liberal party to decide on such an important decision, the HST, behind closed doors when we are supposed to have democracy. Politicians should not lie to its citizens and consult with them on such drastic choices. Anyways, this tax could really cause a hindrance on our slow and steady steps out of recession since it would cause a loss in GDP and could possibly lead to an increase in unemployment. However, it sure sounds good if you look at a future with a more stable economy and improved services by using the extra tax money collected from the HST as Wagner’s law of increasing state activity indicated. My own opinion on this matter is that they should have delayed the tax increase until after the economy stabilizes to a certain point and they should have also asked what the citizens thought about it. This would help avoid the frightening concept of the government doing things behind “closed doors” to materialize. Therefore, it might have been possible that the Harmonized Sales Tax would not have been nicknamed, “the Hated Sales Tax.”

Chapter 2

http://www.vancouversun.com/business/fp/Quebec+sellers+seek+price+limits/3673578/story.html

Summary

Small independent gasoline retailers are demanding the government to set price limits on the petroleum prices at the pumps. This will help in creating more stability in their market that might reduce the chances of unemployment and bankruptcy. The Association Québécoise des Indépendants du Pétrole think this will protect consumers and retailers from constant price swings. 82% of Quebecers agree with setting price limits on gasoline. This group of Quebecers includes both retailers and consumers. Quebec already has the “below-cost” laws that restrain the retailers from selling below the minimum price. However, they still want to set a minimum and maximum daily price that takes into account the operating costs of the retailers. If that doesn't happen, a price war will occur that will threaten competition. In order to prove that, Quebec has had the lowest gasoline prices before tax for the past three years in Canada according to statistics.

Connections

If government set price controls into the gasoline industry, it will create shortages and surpluses in the market. For example, when they set a daily maximum price on petroleum, they will be lower the original price of petroleum from some retailers that sell it at a price that is too high (too expensive). Therefore, this will prevent them from charging unreasonable prices to consumers. An excerpt from the article states this fact, “…prices that are too high …would penalize consumers…” This will create a shortage because more people will buy more gasoline as compared to before because it is cheaper. The price decreases and the quantity increases. On the other hand, when the government sets a daily minimum price, it will create surpluses. That is because the government will raise the price from some retailers that sell it at a price that is too low to a higher price. This will help the retailers to not lose too much money and go into bankruptcy because it will also include operating costs of the gas station. It creates a surplus because less people will demand it if the price is higher. A negative effect of low prices in this situation is if “...prices that are too low …threaten competition.”
 

Reflection

I agree that setting price controls might help both the consumers and especially the retailers. The 7.8 million consumers won't have to pay unreasonable prices for their gasoline since it is a necessity if they have gasoline cars. Also, the retailers won't have to lose money by driving down their prices for the purpose of competition. And then, go into bankruptcy in the process of trying to get more customers. This will help keep the economy as a whole doing a lot better because the small gasoline retailers will not have to fire employees and cause the unemployment rates to increase since there are about 3,459 gas stations in Quebec. However, I wonder if those gas stations will be satisfied with the price limits after a long time if those limits are set in place. Or will they create new reasons to get rid of them (like they don’t want government involvement in their affairs)? I truly wonder…

Graph for shortage and surplus due to price controls