The background on the US debt and why Obama is doing a good job

There is lots of Obama bashing going on – mostly fueled by Fox News.

I am not political at all, and do not comment on it in general, but economically speaking Obama is doing all the right things: keeping up government spending to fuel the recovery and cutting taxes to reduce the debt. This is textbook economics.

the Bush tax cuts are one of the biggest problems, and as you can see, the US rich are getting what they want – keeping the tax cuts.

See below, this most excellent chart, of the size of the mess that Bush handed over to Obama and what he has to work with. A pretty poor hand to start with.

Obama’s and Bush’s effects on the deficit in one graph

From the New York Times :

What’s also important, but not evident, on this chart is that Obama’s major expenses were temporary — the stimulus is over now — while Bush’s were, effectively, recurring. The Bush tax cuts didn’t just lower revenue for 10 years. It’s clear now that they lowered it indefinitely, which means this chart is understating their true cost. Similarly, the Medicare drug benefit is costing money on perpetuity, not just for two or three years. And Boehner, Ryan and others voted for these laws and, in some cases, helped to craft and pass them.

To relate this specifically to the debt-ceiling debate, we’re not raising the debt ceiling because of the new policies passed in the past two years. We’re raising the debt ceiling because of the accumulated effect of policies passed in recent decades, many of them under Republicans. It’s convenient for whichever side isn’t in power, or wasn’t recently in power, to blame the debt ceiling on the other party. But it isn’t true.

Teetering on the edge of a rate hike – not all bad news

This article below is good news for everyone with a variable rate – as it looks like they will not go up that fast.

The data below is the most accurate with out any hype that I have seen is a while.

Teetering on the edge of a rate hike

Well we have a better idea of where Bank of Canada Governor Mark Carney stands, and it appears that we’re teetering on the edge of a rate hike.

This comes as no surprise, with many analysts crying for a rate increase for some time now. The question is whether it will be at the next meeting, or the meeting after that, or even before year end.

The key takeaway is that Carney signaled that ‘some’ government stimulus ‘will’ be withdrawn, rather than ‘all’ and ‘eventually’ withdrawn. That means he’s close to pulling the plug. We are looking at growth and employment numbers for the second half of the year and if it remains strong, we may see rates move before year end.

With this week’s announcement put on the backburner, analysts are focused on where we’re going over the next several months, and they certainly have a lot to consider in their projections.

The Bank has a goal of a neutral rate, which bolsters the economy yet controls inflationary pressures. There’s no magical ‘neutral rate’, but economists figure it’s in the 3%-4% range. However, Carney seems reluctant to pull the trigger on rates, considering the likes of the U.S. economy along with the issues we see in several European countries.  If we widen the rate gap with the U.S. it will only drive the loonie up further, creating more resistance for economic growth.

Another external factor is the European sovereign debt crisis, in which Carney senses more concern over their troubles that the U.S. will default on its debt. The chances of the U.S. defaulting on its debt is slim and more of a scare tactic than anything. Don’t get me wrong, it’s a huge problem and the Obama Administration doesn’t know whether to turn left or right, but at the same time, if the US defaulted we’d be talking about a whole new worldwide fiasco.

Since the Bank of Canada doesn’t declare what a neutral rate is, it’s hard to determine when and how much rates will move when they do. By the way that Carney is talking it appears as though when rates do start to rise that they will in a controlled manner and they won’t be too aggressive. Analysts and economists shouldn’t assume that rate increases are going to be quick and steep.

Here at home our economy seems to be moving along as projected, and any sudden, high rate increases will be sure to stifle our growth. It looks like if everything goes to plan we may see a modest hike in October, but if some of the assumptions are off a bit it may be later before we see any movement.

Variable rates are still good

In a time characterized by widespread economic turmoil across the US and Europe, there was a certain comfort to be taken in the mundanity of the Bank of Canada’s (BoC) report today. As almost unanimously predicted, the BoC left overnight rates unchanged at 1%, meaning the prime rate stays pegged at 3% and the variable rate mortgage holders of Canada continue to prosper. However, there were some nods towards a rate increase approaching on the horizon.  The quote of the day being the warning that monetary stimulus “will be withdrawn”, a statement whose severity is underscored by the omission of the word “eventually”, which was mentioned at the BoC’s May 31st meeting.

However, it is our contention that we are unlikely to see rate increases at the next meeting, in September. A far more likely target would be December at earliest or, more likely, early next year. This prediction comes with a backdrop of increasing pessimism concerning the US. It is our belief that the US policies for growth, characterized by strict austerity measures, could see the US plummet into an economic purgatory from which it may find it hard to escape. This would restrain the BoC from making any substantial rate hikes and, while an increase in rate is almost certainly just around the corner, a series of hikes may not be sustainable. When you add this to the increasing likelihood of Greece’s loan default and now the potential inclusion of Italy into the economic abyss, the case for dramatic rate hikes only erodes further.

While the Bank of Canada will likely act to stem core inflation, which it has highlighted as “slightly firmer than anticipated”, the prevailing consensus remains that this is being driven by “temporary factors”. The bottom line is that we think the 40% of Canadian home owners who are now in variable mortgages can rest assured that they’ve made the right option. Obviously if you’re not comfortable with the inherent risk associated with variable mortgages there’s always the fixed option and it’s rare to see fixed rates so low, so it’s a nice option to have. 

If you should have any questions on anything you’ve read here or are interested in perhaps switching to a variable rate mortgage and would like some of our sound, unbiased mortgage advice then we suggest you give us a call today at 403-681-4376.

The case for using a broker has never been stronger, with more and more Canadians beginning to realize that savings associated with utilizing the services of a broker. We’ve included a link to this Bank of Canada report  outlining the savings on “search costs” which brokers provide. They demonstrated that “over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points.”  For all those mathematically limited soles like me, that means $1,670 of interest savings on a typical $200,000 mortgage over five years. Don’t be one of those people who let the comforts of a familiar bank name dissuade you from making the savings available to you. Call Mark Herman today!

Consumer Prime stays the same at 3% – but for how long?

Prime stayed at 3% today and as below rate hikes are coming as soon as we are past the recession for good. These super low rates are the tail end of the recession so take advantage of them while you can. Call to discuss what that means for you. 403-381-4376

Bank of Canada sees hikes on the horizon

Financial Post July 19, 2011 11:08 AM
Bank of Canada governor Mark Carney.

Bank of Canada governor Mark Carney.

Photograph by: Reuters

OTTAWA — The Bank of Canada held its benchmark interest rate steady on Tuesday, as widely expected, as the global economy remained fragile amid debt problems in Europe and the United States.

But the central bank hinted higher borrowing costs could be coming sooner than later if the domestic economy maintains steady growth.

The bank’s lending rate has been at a near-historic low of one% since last September in an effort to spur economic growth following the downturn.

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the Bank of Canada said in its interest rate statement. “Such reduction would need to be carefully considered.”

Avery Shenfeld, chief economist at CIBC World Markets, “may be nudging the market into pricing greater odds of at least a modest dose of interest rate hikes before year end.”

“It dropped the word ‘eventually’ in reference to the need for rate hikes ahead, and while saying some of the pressure on core inflation is ‘temporary,’ it also attributed some to ‘more persistent strength in the prices of some services’.”

The Bank of Canada on Tuesday also revised its economic growth outlook for 2011 to 2.8%, down from the previous estimate of 2.9%. Left unchanged were growth forecasts for 2012, at 2.6%, and 2013, at 2.1%.

“Of course, the troubles abroad and challenges to net exports kept the bank from hiking as early as today, and it is still assuming a resolution of the eurozone debt issues,” Shenfeld said. “But signs of better growth in the U.S. and Canada in the second half would clearly be enough to tip the bank into hiking, and we should have enough of that evidence on hand by October.”

Still, some economists have pushed back the possibility of a rate hike until early next year due to continuing uncertainty outside Canada’s borders.

“Weighing-in on the stand-pat side, the U.S. economic soft patch is dragging on, as we count down to potential ‘credit events’ on both sides of the Atlantic,”said BMO Capital Markets economist Michael Gregory.

“Pulling on the tighten-soon side, Canadian domestic demand performance in Q2 might not be as bad as initially posited, owing to a surprising surge in home construction, while the output gap could be smaller . . . and closing quicker . . . if the latest Business Outlook Survey is any guide.”

The Bank of Canada is expected to provide more details on its economic outlook on Wednesday when its releases its Monetary Policy Report.

© Copyright (c) National Post

Calgary housing is not in a bubble

Canada housing not in a bubble

The attached PDF is from Ben Tall, one of my favorite economists. He is one of CIBC World Market’s top guys and his research shows that there really is only a risk in Vancouver and Toronto.That is great news for Alberta.

And remember, the in-migration into Alberta is what caused the dramatic price increase before. The new numbers show that Alberta is on the receiveding end of most of the migration now. That supports housing prices more than almost any where else in Canada.


Alberta to top province for economic growth

Oil to drive Alberta to top province for economic growth:3.8% forecast for next two years

CALGARY — Alberta will lead the country in economic growth this year and next year, according to a report released Wednesday by Scotia Economics.

The report says real GDP growth in the province will be 4.2 per cent this year, the highest in the nation, followed by 3.3 per cent growth in 2012, which will tie Saskatchewan as the highest in the country.

Scotia Economics is forecasting Canadian economic growth of 2.7 per cent this year and 2.5 per cent in 2012.

Alberta will once again lead Western Canada’s outperformance, with growth averaging nearly 3.8 per cent in 2011-12,” says the report. “Heavy oil output is being ramped up, with further investment and construction activity underpinning a multi-year period of solid growth.

“The manufacturing and service sectors will experience a positive spillover as physical and human capital are added to support the expansion. However, rising construction and labour expenses will also weigh on business costs, and may pressure capacity towards the end of the forecast period.”

The report says the oil sector will continue to be Alberta’s growth engine with significant investment and output gains contributing to the increased momentum. Total crude oil output is projected to expand by nearly 30 per cent from current levels by 2012, bringing total production to 50 per cent above 1999 levels, it said.

“Alberta is expected to lead the country in job creation over the 2011-2012 period. The province lagged the national pickup in hiring earlier this year, but has been gaining momentum ever since. Alberta has one of the tightest labour markets in Canada, which is expected to put increasing pressure on wages,” says Scotia Economics.

Employment growth of 2.7 per cent this year and 1.8 per cent in 2012 is forecast for the province.