Dec 172015
 

Federal Funds Rate increased to a range of 0.25% to 0.50%

The Federal Reserve finally increased the interest rate by 0.25%¬†after 7 years of essentially being at 0%. It was the talk of the financial news world yesterday. Is this good or bad? Well, that depends on who you are. ūüôā

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The winners are people¬†who hold¬†the U.S. dollar. For example if you have U.S. investments in $USD, then you are in a good position. Anyone who makes money in U.S. dollars will also get a boost in purchasing power. These lucky folks¬†include Canadian exporters, and¬†other Canadians companies that do business in the U.S.¬†such as TransCanada, which rallied 15% this week. ūüėÄ American based banks also¬†benefit from the rate hike since it gives them an excuse to increase their prime lending rates, which¬†means they can charge consumers more for mortgages and car loans. Not surprisingly bank stocks such as Goldman Sachs and JP Morgan were up over 2% after the news yesterday. ūüėČ Major international banks such as Switzerland’s Credit Suisse and Britain’s¬†HSBC also liked the news, both gaining over 2.5% at the day’s close. Canadian banks with U.S. exposure such as Royal Bank and TD also saw some gains, but to a lesser extend. As a whole, stock market investors can celebrate. In the past, equities in developed nations have “reacted pretty well¬†to a Fed tightening,” according to Brian Davidson, markets economist at Capital Economics. Savers and conservative investors, many of who are seniors, can also rejoice as their savings accounts, CDs, government bonds, and money market funds should produce more attractive returns, not immediately, but gradually over the next year or so.

The losers¬†of this Federal funds rate hike, on the other hand,¬†are U.S. borrowers, commodities, U.S. real estate owners, and Canadian consumers. According to the¬†Consumer Financial Protection Bureau, more than 94% of general purpose accounts in their credit card database have variable rates, the average being 12% APR. The quarter rate hike by the Fed will make it harder to service those credit card debts for a lot of U.S. consumers starting from their next billing cycle.¬†Interest has such accrual way of accumulating. ūüėõ The increased value of the U.S. dollar relative to the Canadian¬†loonie will mean Canadians have to pay more to import goods from south of the border. I don’t know about the rest of the country but around my¬†neck of the woods we important most of our fruit and vegetables from the U.S. I’m expecting higher grocery cost in 2016. Prices of commodities such as oil, copper,¬†and other resources will fall because they are valued in $USD, so a¬†stronger greenback means they become more expensive to most buyers around the world.

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Feb 062015
 

How Money is Created

For a country’s GDP to grow there needs to be economic expansion, which means people must earn and spend more money.¬†But in order for additional¬†money to exist somebody has to create it first. That’s where you and I come in. ūüôā Money is created whenever we¬†borrow money from a bank. When we¬†take out a $1,000 loan, for example, $1,000 of bank credit is instantly created which¬†we can cash out and spend, which adds $1,000 into the existing currency¬†supply in the economy.¬†This $1,000 did not exist in the world yesterday, but it does now because we created the money by borrowing it into existence. This increases the¬†country’s nominal economic output. Nice. ūüôā¬†¬†Most of the world’s money today is created this way. Even though¬†we are now $1,000 in debt, the nation overall is better off because our extra spending just becomes income for other people.

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The opposite phenomenon can also happen. If we pay off our $1,000 loan then that money would cease to circulate in the economy and be destroyed forever through debt cancellation. This is deflationary and is what every Central Banker in the world wants to avoid. ūüėē

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