Alberta economic growth among Canada’s leaders

Alberta economic growth among Canada’s leaders: 3.7% hike forecast for this year

CALGARY — Alberta is positioned as one of Canada’s provincial leaders in growth, according to the latest RBC Economics Provincial Outlook report released Monday.

The provincial economy is set to grow at a rate of 3.7 per cent in 2011 and 3.9 per cent in 2012, said RBC. Both years Alberta will be second overall in the country behind nation-leading Saskatchewan’s growth rates of 4.3 per cent this year and 4.1 per cent next year.

Continued uncertainty in the global economy and volatility in the financial market forced RBC to downgrade its economic outlook for Canada. It is now predicting 2.4 per cent growth in 2011 and 2.5 per cent growth in 2012 for the country, down from 3.2 per cent this year and 3.1 per cent in 2012 it had forecast in June.

In June, the financial institution predicted economic growth of 4.3 per cent for Alberta this year and 3.8 per cent in 2012.

Increased production at major oilsands projects in Alberta in the past two years has rapidly boosted crude oil output and signs of further acceleration emerged earlier this year, said the report, but wildfires then forced widespread shut-downs in late-May and caused oil production to plummet in the weeks that followed.

“We expect that the negative economic impact from the wildfires will be short-lived, as most facilities were able to resume operations fairly quickly after the fires subsided,” said Craig Wright, senior vice-president and chief economist for RBC. “The economic loss associated with this disaster should be largely recovered in the second half of 2011.”

Solid investment in Alberta’s energy-related sector is the key driver of economic growth at play in the province, added the report. Oil and gas producers are slated to spend more than $24 billion this year, an 18 per cent increase over 2010.

“Continued strength in energy-related sectors will support a slight acceleration in economic growth to 3.9 per cent in 2012, maintaining Alberta’s status as a growth powerhouse,” said Wright. “This has had a positive impact on employment, as more than 77,000 jobs were added to the Alberta economy in the first eight months of this year, which was the strongest gain ever recorded over this period in the province.”

© Copyright (c) The Calgary Herald

The Bank of Canada’s changing language

I love this data below as it is easily summarized into: World events mean that mortgage rates in Canada are going to stay low for about another year. This is great news for people in the variable as rates (Prime) were expected to rise and they are not going to for a while now. Fixed rates will also stay low too so everyone wins.

If you are not sleepy right now then do not bother to read the rest of this below. Perhaps bookmark it for a sleepless night and use the powers of economic speak to zonk you out then.

On Wednesday September 7, 2011, 4:51 pm EDT

Watching the Bank of Canada’s language on the economy change over the past year is like seeing a healthy, upbeat person gradually come around to the idea that a serious illness is overtaking them.

A year ago, the central bank was continuing the slow process of raising its key interest rate toward familiar levels, as the western world began to put the financial cataclysms of 2008 behind it. On Sept. 8, 2010, the target rate for overnight loans between banks rose to one per cent.

And here’s how the world economy looked to the Bank of Canada — getting better, but though not steadily: “The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies,” the Bank of Canada said in September of 2010.

And Canada’s economy — buoyed by demand for commodities like oil, gas, uranium and fertilizer — was recovering: “The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity,” the central bank’s statement read at the time.

It was canny, however, about forecasting any further increases in rates, sensing possible trouble ahead: “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

That was code for don’t get too excited, folks: a lot could still go wrong — and it did.

Remember that for more than a year, from April 2009 to June 2010, the central bank’s key rate had been 0.25 per cent — effectively zero, or maximum stimulus, as a rising Canadian dollar did some of the bank’s inflation-cooling work and the world began to recover its appetite for Canadian commodities.

The bank had gradually increased its key rate over the next few months to 0.75 per cent. Then came the bump to one per cent exactly a year ago.

Since then, as Europe’s debt problems have flared in Greece, Ireland, Portugal and Spain, and in some people have taken to the streets to protest government attempts to curb spending and remain solvent, the Bank of Canada’s key rate has been rock steady at one per cent.

Now watch how the language has moderated, as central bank economists saw the economy flattening:

On Oct. 10, leaving the rate at one per cent, the bank said: “In advanced economies, temporary factors supporting growth in 2010 — such as the inventory cycle and pent-up demand — have largely run their course and fiscal stimulus will shift to fiscal consolidation over the projection horizon .… The combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular.”

By Dec. 7, it saw recovery “largely as expected,” but sounded the first note of bigger trouble ahead: “At the same time, there is an increased risk that sovereign debt concerns in several countries could trigger renewed strains in global financial markets.”

On Jan. 18, 2011 — happy new year! — there were signs the economy was rebounding all too well, with government spending in the U.S. and Canada showing up in growth all over. As well, Canadian commodities remained hot sellers, pushing up the value of the Canadian dollar.

In fact, the bank said, “the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.”

Translation: “No need to raise interest rates.”

On March 1, the recovery kept pushing ahead, driven by exports, but the bank left rates unchanged, and stuck with this now-boilerplate paragraph at the end of its release: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

On April 12, the bank forecast 2.9 per cent gross domestic product growth in 2011 and 2.6 per cent in 2012 — all good, with robust spending and business investment leading investors to “become noticeably less risk-averse.”

And yet, searching the horizon for clouds, the bank saw enough to stick with its boilerplate: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

By May 31, however, the bank began to see some of its more horrible imaginings coming true, and the boilerplate was dropped. Again leaving the key rate at one per cent, the bank said global inflation might be growing, but “the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

Stimulus might be “eventually withdrawn,” it said, but “such reduction would need to be carefully considered. ”

On July 19, the bank’s language noted slower-than-expected U.S. economic growth, Japan recovering at a lower-than-expected pace from its nuclear disaster, and said “widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets.” In other words, investors were getting jumpy about how Europe might pull itself together without major defaults and weakened currency.”

And on Wednesday, laying out all the factors that are besetting global growth and the Canadian economy, the bank finally sounded a doctor facing a sick patient.

It didn’t explicitly suggest returning to more stimulus (lowering interest rates), as some economists had forecast it might, but the bank no longer expected to withdraw economic stimulus:

“In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.”

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.

Mark Herman in the press on high-end properties selling quickly

High-flying stock market sends business to brokers Lingering caution at the big banks and wealthy clients increasingly bullish on the stock market are helping brokers claim their biggest share of high-end deals in years – with a Re/Max study helping explain the phenomenon.

By Vernon Clement Jones

Lingering caution at the big banks and wealthy clients increasingly bullish on the stock market are helping brokers claim their biggest share of high-end deals in years – with a Re/Max study helping explain the phenomenon.

“In the last week, we’ve just had two of the biggest deals of my career,” Mark Herman, an agent and team leader for Mortgage Alliance Mortgages Are Marvelous Inc. in Calgary, told “One was a new purchase for $1.525 million, with 5% down, and the other one was for a $750,000 line of credit on a $1.5 million purchase. High-end mortgage business for brokers in Calgary has picked up like we’ve never seen.”

Calgary brokers may not be alone.

Re/Max examined 12 major centres from coast-to-coast and found that luxury sales surged in two-thirds of them during the first four months of 2011, compared to the same period last year.

While Vancouver led in terms of percentage increases – 118% year over year – Dartmouth, at 27%, Winnipeg, 24%, Hamilton-Burlington, 13%, and Greater Toronto, 9%, also saw spikes.

Herman’s market of Calgary was also on that list, at 51%, although that scorching hot performance fell short of setting a new record, unlike the other top jurisdictions on the list. With the exception of Vancouver, their sales growth can be chalked up to domestic buyers.

Michael Polzler, executive vice president for Re/Max in Ontario-Atlantic Canada, pointed to three key factors for the rise in high-end business: equity gains, stock market recovery, and improved economic performance.

Brokers like Herman are pointing to the some of the same factors to explain why they’re getting more high-net-worth clients stepping across their thresholds.

“These guys weren’t buying as much during the recession, but with prices still below recent highs, high-end buyers are now out bargain shopping,” said the mortgage agent, also an MBA.

“But what they’re doing is they’re looking to keep their money in the stock market and other high-yield investments and want to buy homes with as little money down as possible – it’s all about limiting opportunity costs. Also they’re coming to brokers this time because they’re finding the banks have been slower to ease credit and aren’t giving them the discounted rates they expect.”

Less than five months into 2011, another broker, Sharnjit Gill, has already surpassed last year’s total for high-value deals.

“We’re also seeing more activity there because those clients are more educated about what we as brokers can do for them beyond rate,” he told

Still the trend is less obvious at other mortgage brokerages, even in those markets highlighted by the Re/Max report.

While her Ottawa brokerage has seen an uptick in volume, said Kim McKenney, senior VP at Dominion Lending Centres The Mortgage Source.

“The average dollar amount has risen by only a couple of thousands of dollars,” she told is a division of KMI Media.


Calgary market transitioning into a more vigorous phase.

This is great news as affordability is super important. Note in Vancouver it takes about 3/4 of a person’s income to pay for their home. Yikes! Have a look at some other good reports here.

TORONTO, May 20 /CNW/ – Unlike most other major centres across Canada, housing affordability in Alberta remained stable in the first quarter of 2011, according to the latest Housing Trends and Affordability report issued by RBC Economics Research.

Until the fall of 2010, abundant availability of homes for sale in the face of sluggish demand kept housing prices firmly under control. Resulting stable or slightly declining property values contributed to a substantial improvement in affordability in Alberta last year.

“The Alberta market continued to be stuck in low gear in the first quarter of 2011. Sales of existing homes and construction of new housing units showed very modest increases,” said Robert Hogue, senior economist, RBC. “While market conditions have become more balanced in recent months, owning a home doesn’t seem to be getting more expensive in the provincial market at this stage. Affordability levels are still looking quite attractive.”

RBC’s housing affordability measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, remained relatively unchanged and below their long-term averages in the first quarter of 2011. The measure for the benchmark detached bungalow in the province moved up to 31.3 per cent (an increase of 0.4 of a percentage point from the previous quarter), the standard condominium stayed flat at 20.2 per cent and the standard two-storey home fell to 34.2 per cent (down by 0.2 of a percentage point).

RBC’s report notes that there are signs that the Calgary housing market is finally overcoming its protracted slump. Home resales in the area grew for the second consecutive period in the first quarter, the most growth since the middle of 2009, helping to remove market slack and setting a healthier balance between demand and supply.

“Calgary home prices have yet to break out of their listless trends, but they rose at their fastest rate in more than a year in the first quarter, with detached bungalows leading the way,” said Hogue. “Firmer market conditions and higher prices had only limited impact on Calgary’s affordability, which remains among the most attractive of Canada’s major cities.”

The majority of Canadian markets experienced weakened affordability in the first quarter of 2011. Most notable was the sizeable deterioration in British Columbia. More specifically, Vancouver saw significant gains in property values, which drove the already elevated cost of homeownership even higher. Quebec’s homebuyers also faced noticeable rises in ownership costs, while those in Atlantic Canada saw their affordability advantage somewhat diminish. The picture remained mixed in other areas of the country, with Ontario, Alberta and Saskatchewan experiencing ups and downs in ownership costs, depending on the housing type.

“Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada – with Vancouver being a notable exception,” said Hogue.

RBC’s housing affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 72.1 per cent (up 3.4 percentage points from the last quarter), Toronto 47.5 per cent (up 0.8 of a percentage point), Montreal 43.1 per cent (up 2.0 percentage points), Ottawa 39.0 per cent (up 0.4 of a percentage point), Calgary 35.9 per cent (up 0.9 of a percentage point) and Edmonton 31.5 per cent (up 0.5 of a percentage point).

The RBC housing affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Calgary ranks third on global prosperity score card

Calgary ranks third on global prosperity score card: Toronto Board of Trade

Calgary is back near the top of a score card that ranks prosperity in a number of cities around the world, besting all other Canadian metros on the list.

Strong population growth, a young workforce, disposable income, affordable housing and clean air helped boost the city to the number three spot on the list behind Paris and San Francisco.

That’s up from last year’s fifth place ranking, but below its first place finish in 2009, the first time the Toronto Board of Trade compiled results, using information from the Conference Board of Canada — including commute time, income equality, gross domestic product and productivity — to compare 24 major cities.

However, Calgary did score low in some key areas, including transportation.

“I think it speaks to Calgary’s more dynamic economy, more dynamic than we had in the ‘80s when it took us years to crawl out of the recession,” Todd Hirsch, senior economist at ATB Financial, said of the city’s post-recession recovery. “What you’d really hate is to be extremely high in some (indicators) and at the bottom on others.

“You’d rather be really good on a number of indicators and get an overall ranking quite high, like Calgary got.”

The Toronto board of Trade said “Calgary’s success comes from a combination of solid fundamentals in both (economy and labour attractiveness), not just from a robust economy. With the fastest population growth of all metros, Calgary proved that it was an attractive place for people seeking work.

“Calgary’s housing affordability and clean air provide further evidence of its livability.”

Elsbeth Mehrer, director of research, workforce and strategy for Calgary Economic Development, says the city’s ranking shows it should be a choice destination for both companies and people.

“To be able to put the city in the context of major global cities like Paris and San Francisco, that’s an important frame around our positioning,” she said. “I think that helps to elevate the conversation to a different level.

“If you’re comparing yourselves with communities of this stature, now it’s a very different conversation in terms of the types of target companies you’re trying to attract, the types of investment.”

On the score card Calgary ranked third overall, and third for being attractive to workers (behind Paris and London).

The ability to attract labour is important, said Chamber of Commerce chief economist Ben Brunnen, because “the labour shortage, labour retention issue is starting to emerge again. Positioning Calgary as a destination for young talent is a fundamental first step for long-term prosperity.”

Calgary placed sixth if only the economy was looked at (behind San Francisco, Boston, Seattle, Dallas and New York).

The Toronto Board of Trade wrote that Calgary overcame “near-bottom rankings on venture capital investment, market size, and IPOs, with first or second-place results on income growth, unemployment rate, residential building permit growth and GDP growth” to get to that sixth spot.

Calgary’s average office rents also put them in the top half of the rankings, in that they’re cheaper than more than 50 per cent of the list.

In the first three months of 2011, according to CB Richard Ellis, Calgary’s office vacancy fell to 12 per cent from 15 per cent compared to the same period a year before. Regional managing director for Alberta Greg Kwong said in a release that given the amount of office space coming onto the Calgary market, the drop is “amazing. This is a testament to how resilient Calgary’s office market has become.”

However, for all the good news, the city rated an overall 13th place in the transportation category.

That factored in an average commute time of 67 minutes, longer than Los Angeles, Chicago and Berlin, but better than Toronto’s 80 minutes, and a score in the bottom half when public transit ridership was evaluated.

“It points out some of the warts, too,” Hirsch said of the score card. “It’s good to be made aware of this is where we rank in global cities when it comes to commute times. A 60-minute commute time is not normal, this not just being part of a big city.

“This is a problem. Who knows where we would be if we could solve some of those transportation problems.”

Calgary also ranked lower in areas that included productivity and venture capital, which Mehrer said are on-going issues the city’s business community knows need work.

“It reaffirms what we know needs to be a focus,” she said.

© Copyright (c) The Calgary Herald


This is great news.

TORONTO, Feb. 24 /CNW/ – Canada’s housing affordability continued to improve in the fourth quarter of 2010, thanks in part to slight decreases in five-year fixed mortgage rates and minimal home price appreciation across the country, according to the latest Housing Trends and Affordability report released today by RBC Economics Research.

“Some of the stress that had been building in the housing market between 2009 and the first half of 2010 has been relieved, but tensions persist overall and the recent improvement in affordability is likely to be short-lived,” said Robert Hogue, senior economist, RBC. “We expect that the Bank of Canada will resume its rate hike campaign this spring and with borrowing costs set to climb further in the next two years, housing affordability will erode across the country. That said, we don’t expect this to derail the housing market because of rising household income and job creation from the sustained economic recovery.”

The RBC Housing Affordability Measure captures the proportion of pre-tax household income needed to service the costs of owning a specified category of home. During the fourth quarter of 2010, measures at the national level fell between 0.4 and 0.8 percentage points across the housing types tracked by RBC (a decrease represents an improvement in affordability).

The detached bungalow benchmark measure eased by 0.8 of a percentage point to 39.9 per cent, the standard condominium measure declined by 0.4 of a percentage point to 27.6 per cent and the standard two-storey home decreased 0.4 percentage points to 46.0 per cent.

“We expect affordability measures will rise gradually in the next three years or so while monetary policy is readjusted, but will land softly thereafter once interest rates stabilize at higher levels,” added Hogue. “This pattern would be consistent with moderate yet sustained stress on Canada’s housing market. Overall, the era of rapid home price appreciation of the past 10 years has likely run its course and we believe that Canada has entered a period of very modest increases.”

A majority of provinces saw improvements in affordability in the fourth quarter, most notably in Alberta where falling home prices once again contributed to lower the bar for affording a home. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.

RBC’s Housing Affordability Measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68.7 per cent (down 0.4 percentage points from the last quarter), Toronto 46.8 per cent (down 0.5 percentage points), Montreal 41.3 per cent (down 0.4 percentage points), Ottawa 38.7 per cent (up 0.5 percentage points), Calgary 34.9 per cent (down 3.1 percentage points) and Edmonton 31.0 per cent (down 2.4 percentage points).

The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Highlights from across Canada:

  • British Columbia: Buying a home in B.C. became slightly more affordable in the fourth quarter of 2010, due primarily to a small drop in mortgage rates. After experiencing some declines in the previous quarter, home prices rose modestly for most housing categories; condominium apartments bucked the trend, however, and depreciated slightly. Prices were supported by a tightening in market conditions with home resales picking up smartly following substantial cooling in the spring and summer that saw sellers lose their edge in setting property values. Demand and supply in the province are judged to be quite balanced at this point. RBC’s Affordability Measures fell between 0.8 and 1.0 percentage points in the fourth quarter which came on the heels of much more substantial drops (1.7 to 4.8 percentage points) in the third quarter. Notwithstanding these declines, affordability remains poor and will weigh on housing demand going forward.
  • Alberta: Alberta officially became the most affordable provincial market in the country in the fourth quarter, according to the RBC Measures which fell once again by 1.0 to 2.4 percentage points, extending their declines since late-2007. In addition to the lower mortgage rates, the further depreciation of home prices contributed to lowering homeownership costs. Property values were negatively affected by a substantial downswing in demand in the spring and early summer, which put buyers in the drivers’ seat. The significant improvement in affordability is near the end of its line, however, as demand has shown more vigour in recent months – alongside a provincial economy that is gaining more traction – and the market has become better balanced. RBC expects that this will stem price declines this year, thereby removing a potential offset to the negative effect of projected rise in interest rates on affordability.

One guys thoughts on the Western Economies

If you are a student of economics then this is “interesting.” If not then it will make no sense at all.

I think he is accurate in summarizing where “hidden inflation” will come from at the end of the post.

Stephen Johnston; Partner & CIO – Agcapita Farmland Investment Partners

As Kierkegaard elegantly pointed out, “There are two ways to be fooled: One is to believe what isn’t so; the other is to refuse to believe what is so.”

The problem of being fooled “by believing what isn’t so” appears to be endemic in mainstream economic circles.   Increasingly, we see the panic of central bankers and politicians in the thrall of the mistaken belief that the mere act of printing money can conjure wealth and sustainable growth into existence that this nostrum has stopped working.

In simple terms the powers that be in the west have been fooled by Keynesian dogma that:

– nominal increases in GDP represent growth;

– printing money increases nominal GDP; therefore

– printing money must generate growth.

Surely, this is to believe what isn’t so.  A simple example of the fallacy this represents is Frederic Bastiat’s parable of the “broken window”.  To paraphrase Bastiat, if all the windows in the country were suddenly broken there might be an increase in nominal GDP as the reconstruction took place but we should not be fooled into believing that this has made us wealthier.

Keynesians would argue that business activity has been stimulated, jobs were created and the economy benefited. In his own version of the “broken window” Keynes famously advocated burying newly printed money and paying people to dig it up as a way to stimulate the economy.

With all due respect to Lord Keynes, this belief is in the process of being exposed as the mirage it has always been.  The true measure of the wealth of an economy is the pool of productive capital.  Currency is merely the measuring stick.  In our broken window example, the pool has been maintained but without the reconstruction it could have been increased – therefore the net effect, taking into account both “the seen and the unseen” in Bastiat’s words, is actually a loss of wealth.

If printing money does not create productive capital then how can you explain its perennial appeal amongst the banking and political classes?

For politicians, printing money is desirable for two reasons.  Firstly, it acts as an unseen tax.  One which few voters understand and for which even fewer are likely to blame the political class, at least in the beginning. Secondly, by reducing the value of the currency, the measuring stick I mentioned above, politicians are able to fool many of the voters that their wealth has increased, but of course no such thing has happened.

For members of the privileged banking class the appeal of printing money is that they are best positioned to take advantage of the confusion between the measurement of the pool of capital and the actual pool of capital itself.  In simple terms, they can exchange the declining currency for productive assets while artificially low interest rates finance these activities at minimal cost.

So in general while printing money creates no new wealth in the form of productive capital, a significant amount of wealth can be misappropriated silently by the banking and political classes.   For the rest of us, the relentless expansion of the money supply offers no true benefits and the very real danger that it is our wealth that is misappropriated.
In the spirit of Bastiat, ask yourself if the central banks increased the global money supply 20-fold overnight would we have more farmland, more oil wells, more factories, more of anything other than decimal places in our currency? The nominal price of all these things would likely increase but the size of the capital pool has not changed. How do the money printing programs currently underway differ from this in anything but magnitude?

Unfortunately, the perverse consequences of printing money do not stop with the misappropriation of wealth from the inflatees to the inflators.  A policy of artificially low interest rates serves to sustain or create additional mal-investments – investments that cannot generate sufficient returns, and in many cases over the last decade ANY returns, to justify their existence.   The failure to liquidate mal-investments allows the economic problems they cause to multiply and the inevitable accounting to be that much more devastating.  Artificially low interest rates also fool the market into believing that capital is plentiful and that consumption can continue at unsustainable levels with severe consequences for the real economy. The word consume means “to expend, to use up, to waste or squander”.   Always remember that consumption represents the diversion of productive capital into non-productive uses – i.e. the destruction of capital.   Savings, on the other hand, are the only source of capital to create productive assets.

I do not believe that the aggressive expansion of the money supply in the west will have a beneficial effect on the real economy – i.e. will not increase the pool of productive capital in any meaningful way.  However, I do believe it will fuel inflation and speculative activities.    Of course, more inflation and speculation are exactly the opposite of what western economies need. We cannot all make our livings selling condos, stocks and bonds to each other – someone has to produce something and production requires genuine capital.

But this Frankenstein, finance driven economy appears to be exactly what our governments and central bankers are trying to keep alive.  The west has become a vast inflation-creating machine in order to support the impaired banking and housing sectors.  According to data published by analyst Mike Hewitt, since the crash in 2001 and the onset of aggressive low interest policies, the global money (M0) supply has increased over 170%.   Some, fooled by government inflation data ask – “but where is all the inflation?”   Fortunately for us, the Renminbi peg and OPEC petro-dollar recycling have been escape routes for a large amount of western money/inflation creation and heavily massaged government inflation data has helped disguise the rest.

As fast as we have been creating money in the west, China and OPEC have been importing and storing it on their balance sheets in the form of developed world sovereign debt.    Some observers even argue that China will indefinitely accumulate western debt in order to maintain its peg against our inherently weak currencies.   I believe that this is wishful thinking and once again it is to be fooled into believing what isn’t so merely because something hasn’t happened to date.  When the emerging economies are forced to take serious steps to check domestic inflation – which for example is already starting to happen in China – they will stop purchasing our debt and even start selling it, at which point decades of stored western inflation could be returned to us in a very short period of time indeed.

In general, my investment premise remains that sustained real growth is unlikely to take place in the developed world until we stop engaging in capital destroying activities.   Worse, our depleted and declining capital pool, combined with an enormous expansion of the monetary base and expanding government is creating a high probability of an extended period of stagflation in the west.

This is not to say that I take a universally pessimistic view of possible future returns.  I believe that exposure to inflation-hedging assets with strong macro fundamentals and underlying cash generating capability, ideally in sectors exposed to growth outside of developed markets, will continue to be a fruitful area to search for outperformance over the long-term.  My personal preference remains agriculture and energy.

Kind Regards

Stephen Johnston

‘Window closing’ on ultra-low mortgage rates

Tim Shufelt, Financial Post · Monday, Feb. 7, 2011

Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.

Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.

That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”

TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.

Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.

Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.

That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.

“If you can’t afford [your payments] … that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”

In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.

Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.

“There are going to be a lot of people that will enter into their agreements by March 18.”

Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.

“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.

In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.

If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.

“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”

So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data.