Skip navigation

 Login or Register | Member Centre

Dodge chides markets

HEATHER SCOFFIELD

Globe and Mail Update

Latest comment posted at 10:50 AM EST 13/09/07

Bank of Canada governor lashes credit rating agencies, investors and dealers in key speech in London, saying that they need to better understand risk ...Read the full article

This conversation is closed

  1. Tim Bee from Canada writes: Why? They can make more money and if things go bad, they can charge us more to make up for the loses. Isn't that what usually happens?
  2. De Based from Canada writes: LOL Tim Bee... good one. And dead on!

    However, the BoC here is "the pot calling the kettle..." . Their merely saying by words and actions ( they only accept hi grade gov't paper as collateral, whereas other CBs are accepting ABCPs as well for collateral) that here in Canada "we're alright Jack"!

    I sure hope so, because holding the line on interest rates still looks like a dumb move based on "Canadian" fundamentals. And here I though the entire purpose of a home grown monetary policy was to tailor things to Canadian conditions.

    What might those "Canadian" conditions be? Profligate printing of money with nothing to back it up... perchance???
  3. The Emperor's Paparazzi from Canada writes:
    Has it occurred to anyone in positions of responsibility/authority that if decisions by private investors result in the necessity of a public institution (Bank of Canada) intervening to override (what should be) a self-correcting marketplace in order to rescue a public interest-rate policy, then perhaps the tether joining the private and public markets should be severed.

    In other words, the commercial banks of this country seem to have a hold on the Bank of Canada by the short and curlies.
  4. Paul F. from Toronto, Canada writes: Let's ponder this moment, shall we? A bank governor telling the major players in the market that they need to accurately assess risk? Isn't that a little like telling a mechanic that he has to do a better job of fixing cars? In other words, the major "players" in contemporary capitalism have no idea how the system currently works. What's wrong with this picture? How is it that we have an economy where security structures are so complex you actually need a Ph.D in mathematics to understand them. I was at a seminar of a company trying to sell a pricing service for derivatives, and they were bragging about how many math Ph.D.s they had. My question is, why do securities need to be so complex? I mean I understand the idea behind derviative is to mitigate risk and produce high returns, but the function now seems to obscure risk or in fact deceive people as to the amount of risk? Who benefits from this? The mass of investors, the population as a whole? Certainly not. It appears it works more to the advantage of a small minority of hedge fund operators. Clearly the only function it play in equity markets is to distort investment. Laissez faire capitalism of course no longer exists, despite what some ideologues on the right may believe or advocate. But what is clear is that the controls and regulations that exist are insufficient. In the end the economic system should produce general prosperity or it needs to be reassessed. But it is looking to me that what we are looking at nowadays is a general crisis in how capitalism works.
  5. john deere from Canada writes: Let me chid Dodge. Dodge is lying through his teeth when he blames somebody else for these problems.

    This is the central bankers fault. They were entrusted to run the money supply. This was and is their responsibility and they failed. They should of and could have printed less money and prevented this bubble from getting out of control. It is and was their job to prevent this from happening. They are cowards to blame others.
  6. Matt Stiles from Vancouver, Canada writes: Dodge does a good job of explaining some of the causes of this liquidity crunch (it's not a credit crunch yet). But he conveniently (and ironically) leaves out a very important fact. All of the problems explained are merely a symptom of interventionalist policies by central bankers worldwide over the last century and a fiat currency system where through inflation, encourages otherwise unattractive risk taking. Abolish the central banks!
  7. Sam Snead from Canada writes: I say, Credit-rating agencies, investors and dealers, fully understand what's involved. Dodge, is being very polite. He should be using words like fraud and misrepresentation.

    The last thing the monetary system wants is for a large percentage of people to take the time to figure out how the system is rigged. A credit crunch from people not willing to lend money (conjured out of thin air) is certainly a bad thing. However, the crunch from people not willing to borrow money is a much greater concern.

    Dodge is rightly concerned about the integrity within the system.
  8. Josua Cord from Courtenay, Canada writes: After reading the conflicting comments above from what appears to be highly informed and intelligent writers I am placing my savings in the mattress.
  9. Z Z from Canada writes: I really see no benefit for the chiding. Do lenders become overly aggressive and lend imprudently? Of course! They've always had bouts of extreme fear and extreme greed. I can't see how a slap on the wrist makes any difference.

    John Deere, it is the central banker's job to manipulate the money supply so that what is real grows as quickly and as sustainably as possible. Who cares if they print money or burn money (yes, they have done both) as long as we grow long-term and not shrink. The main problem that occurred was that the punishment of the lenders by the market spilled over to the real economy. In other words, I'm not interested in losing a job because a bunch of computers spread around the world made bad choices about lending to people I do not know in another country. The bail out was for us, regular people.

    Paul F., no developed country in the world including America have laissez faire capitalism. Markets are volatile because people's emotions are volatile and investors are known to act irrationally. The debate is basically whether or not the money supply should be manipulated and manipulated by a central agency that is owned by the government. I see no problem with manipulating the money supply. It is dangerous and a mess up results in horrible consequences (including the complete collapse of a country); however, it does yield higher gains versus a static money supply. These gains are consistent, long-term, and backed by 70 years of performance history.
  10. lafontaine louis from montreal, Canada writes: The central bankers have not done their job in the last 15 years , flooding the markets with easy money ...

    They corrected the 1987 crash with easy money and then the thecno bubble with easier money and then created the real estate and car bubble with even easier money.

    Now that they are trying to increase the rates for the first time in 15 years (a little bit - inflation ) we have a major crisis.
  11. Z Z from Canada writes: Josua Cord, I'm going to break off with the status quo and say that inflation should make the option of putting your savings in a mattress highly unattractive. You lose money every year. To preserve your money, you need to at least put it in a bank where the money will be lent out to others who need to use it more urgently. In otherwords, you're basically forced back into the banking system or lose money every year.

    Hoarding gold doesn't work either. Developed nations have realized that gold is worthless and have been trying to sell gold slowly. In fact, Europe was planning on dumping all its gold on the market at once. Canada and the States objected so strongly that they promised to do it slowly so as to not shock the gold miners here to harshly. To countries, what is more important, hoarding gold which some people place irrational confidence in because they believe it is some standard? Or buying people, technology, and businesses in other countries with that gold before people lose confidence in gold so as to get long-term growth and prosperity themselves. If I buy a company from you using gold and then refuse to accept gold as a standard, you can't buy that company back using gold.
  12. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    To preserve your money, you need to at least put it in a bank where the money will be lent out to others who need to use it more urgently.

    ----

    Banks don't need your money to lend it out to someone else. With a reserve ratio of 0% required by the Bank Act of Canada, all they need to do is to wait for people or businesses to line up at the loan window. The amount of people is not controlled by by reserve requirements, it is controlled by the interest rate. Lower interest rates attract more borrowers while higher interest rates have the opposite effect.

    Once they ascertain that you are worthy of the "loan", they create checkbook money (credit) backed by nothing but your promise to pay it. This is brand new "money", created by the private bank.
  13. J C from United States writes: Trust me, he doesn't want credit risk to be fully reflected in the market. Canadian customers and corporates would see a significant increase in their cost of financing, and the small securities market in Canada (relative to other global markets) would become even more illiquid.
  14. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Z Z from Canada writes:

    "Developed nations have realized that gold is worthless and have been trying to sell gold slowly."

    ----

    Gold is a non interest bearing asset, to be sure. Worthless? Gold can behave as a commodity as well. It's value is set by market demand and supply. Gordon Brown, now Prime Minister of England, sold half of England's gold reserves over a few years, starting in 1999, despite protests from the other board members. This action is infamously called the "Brown Bottom", as he sold the gold at historic low prices, where it reached its all time low of $250 US in July of 1999.

    Since that time, gold has been on a tear. It is now trading around $700 US / ounce. More demand for jewelery? Sure. More demand from speculators? Yup, that applies. People trading cash for gold? Yes.

    Gold has the unique property of also being money, as well as being a commodity. It is one of the few commodities you can trade immediately for other commodities (try doing that with a bushel of wheat). You may scoff at that, but here in the Western world, we are not as familar with that concept as Europe, China and India are, thanks in large part to the Bank of Canada and the private chartered banks historical efforts to ensure the public remains largely unaware of how money is created and destroyed.

    You are correct that Central Banks are selling their gold into the market. Some are. What your statement does not mention is that other Central banks are buying.
  15. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    "Mr. Dodge said he was confident that Canadian financial institutions have the wherewithal to withstand the credit crunch."

    ----

    Of course he would say that. Can you imagine the market impacts if he stated otherwise?
  16. Owen Perry from Ottawa, Canada writes: Paul F. - I enjoyed reading your thoughts. For the most part, I believe you're right on: at it's roots, our economic system should provide everyone a comfortable level of prosperity. There is something seriously wrong with our system when a single mother with children is working two or three jobs just to pay the rent and put food on the table. Changes need to be made, but how? I don't know...
  17. Z Z from Canada writes: Tax me! I'm Canadian! I'll roll over: "Banks don't need your money to lend it out to someone else."

    -----

    You're correct that they don't "need" your money to lend out. However, they do "prefer" your money to lend out because they make more money that way. If you don't give them money they can always borrow money from the BoC to lend out except that comes at a higher interest rate than if they get money from you. Also, if nobody borrows from them, they can always park that money in the BoC. Again, they get less profit because in that case, the interest they get is lower than if they lent out.

    Tax me! I'm Canadian! I'll roll over: "Gold has the unique property of also being money, as well as being a commodity."

    -----

    That's the thing, gold has historically been a currency (and even then never quite the standard). As a currency though, it is outdated and cannot take into account psychological factors that artificially impact the real economy which fiat currency can handle. I'm well aware that gold is currently treated as a currency and commodity in the markets and that some people still believe in gold as the universal currency of exchange. However, it is about time we let go of this legacy system and this irrational confidence in gold as currency. Nothing backs up fiat and nothing backs up gold save confidence. If I refuse to recognize gold as currency and the people you interact with refuse to recognize it as currency then it becomes very worthless very fast. Same applies to any type of money.
  18. Wilma De Bruyn from Canada writes: And speaking of money, there is a new "Amero" coined from Denver, Colorado to deal with the currency for the upcoming "North American Union". Are we in "Can a da" losing our Sovereignty? It appears we are.

    The other question is why the "Ombudsman" in BC cannot investigate Credit Unions any longer? Are they still money laundering out of the Squamish Credit Union? The rules of investigations have changed and
    why has the CPP become an "Investment Board" when it is Federal jurisdiction? Who has the authority to investigate them? The RCMP
    did not, why not???
  19. gordon mcpherson from ottawa, Canada writes: For example, the 'experts' tell you not to attempt market timing...and I understand why over the long term. However, during a correction for whatever reason, warning flags go up by people in-the-know, the lemmings begin jumping ship and the entire market, no matter the sector make a huge correction, then everyone begins to climb aboard again but at a lower price. Now if that isn't designed market timing I don't know what is...
  20. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Z Z from Canada writes:
    You're correct that they don't "need" your money to lend out. However, they do "prefer" your money to lend out because they make more money that way. If you don't give them money they can always borrow money from the BoC to lend out except that comes at a higher interest rate than if they get money from you. Also, if nobody borrows from them, they can always park that money in the BoC. Again, they get less profit because in that case, the interest they get is lower than if they lent out.

    ---

    With respect, that sadly what a great deal of people believe. It isn't true. Bear with me:

    1) You go into a bank for a mortgage. Let's assume it is for 300K for 25 years at 6% interest. You will not make any extra pre-payments or double up your mortgage, and the interest rate over 25 years will not change (makes the math easier to comprehend).
    2) The bank does put you through some hoops to ensure that you are a worthy debtor, and if so, grant you the mortgage.
    3) That 300K does not come from their private stash, their depositors accounts, or the Bank of Canada. It is brand new checkbook money created the split second they granted the loan to you. Their books balance as a result of this creation as the new loan is an asset (interest-bearing) and it is a liability (it is a deposit - the folks you bought the house from will cash the 300K check).
    4) This 300K makes its way into the economy, as the people that sold you the house buy things with that money, maybe a new house, maybe other things. Who cares. It is circulating checkbook credit we use as a substitute for money (cash).
    5) Your job is to pay that 300K back to the bank over 25 years, PLUS the interest! Using a simple mortgage calculator, this amounts to a total of 300K (P) 275,826.00 (I) = $575,826.00 dollars. Amazing right? The bank charges you interest on the money they created when you signed the loan agreement!

    More on the next post...
  21. James Cyr from Balmertown, Ontario, Canada writes: ZZ: you may not recognize gold as a currency and that is your right. You will probably be the only one to do so. Gold has evolved as a universal medium of exchange over thousands of years, and I can not see it being abandoned overnight. Fiat currency is fine if there is actual wealth (not bubble credit) to back it up.
  22. john deere from Canada writes: Z Z from Canada writes: Tax me! I'm Canadian! I'll roll over: "Banks don't need your money to lend it out to someone else."

    -----

    But they need you to repay the money they printed out of thin air. That is what's in it for them.

    It's a great gig and that is what Dodge is worried about protecting. Does he care about investors holding a bagful of useless paper. Of couse not! The system crashing and the central bankers being blamed for this mess is his only concern.
  23. N J from Canada writes: I was working at a major Bank. They laid off hundreds of risk guys as these risk guys were not directly selling anything to clients and thus not generating direct revenue.

    Serves the banks right.
  24. Stude Ham from Outremont, Canada writes:

    odd... never once did the boc happen to mention this detail.... before it exploded in everybody's portfolios.

    thank you dodge for giving us the warning a bit too late.

    maybe friendly flakey can concoct more financial disruptions trying to cope with this mess. aw shucks... flakey's out of the park trying to get a single canadian regulator going.
  25. Tax me! I'm Canadian! I'll roll over : from Canada writes: 6) So you labour for most of your working life to pay that loan back. We know that the 300K exists in the overall money supply...because you created it when you signed the loan, but what about the 257K in interest? Where did that come from? How did that get injected into the money supply for you to be physically able to pay it back to the bank? This is critical to understand. The answer is:

    There is NO money to pay that back. Bullsh!t you say. If that were the case, our economy would have collapsed long ago. You would be correct, except for one thing. I retract my statement about the interest money not existing. The interest money does exist. How?

    By other people taking out loans after you. The interest you pay back is with credit created by other folks going into debt after you did!

    7) Multiply this process by thousands of loans. Tens of thousands of loans. Hundreds of thousands of loans. Let's go to a bigger picture now with respect to our money supply.

    8) Statistics Canada tells us that the Canadian economy is about 1 trillion dollars, meaning that their is about 1 trillion dollars in circulation to service our buying and selling. According to the Bank of Canada's financial statements, it has printed about 47 billion dollars in bank notes. this means that there must be some other money servicing the economy to the tune of 953 billion dollars. Is the rest of that money quarters, dimes, nickels, and pennies? ;-) Nope. It is checkbook money, manufactured by the private chartered banks via the loan process, and injected into the economy.

    9) So let's take a big picture view of this. 953 Billion dollars of debt based money. Let's assume that the average interest rate of all these loans that make up the money supply is 4% (I am feeling generous). This translates into 38 Billion dollars of interest revenue flowing into the private banking industries coffers.

    More on next post...
  26. Ramesh Fernando from Canada writes: James Cyr is right also we must think of Say's Law!
  27. andrew james from Canada writes: Wilma De Bruyn from Canada writes: And speaking of money, there is a new "Amero" coined from Denver, Colorado to deal with the currency for the upcoming "North American Union". Are we in "Can a da" losing our Sovereignty? It appears we are.

    This was a joke.. too bad Hal Turner fell for it.
    Probably because it fits his paranoid fantasy..

    http://www.snopes.com/politics/business/amero.asp
  28. Timothy Nessus from Somewhere, Canada writes: This is plain vanilla BS of the HIGHEST CALIBRE!!!

    LOOK it IS simple:

    1 - Central Banks control interes rates through different mechanisms.
    2 - In a TRULY FREE market, interest rate = RISK.
    3 - Since Interest Rate is being manipulated by the BoC, therefore we LOOSE the picture of the REAL MARKET RISK.
    4 - THEN, the BoC creates an orgy of liquidity, in effect announcing that the RISK is ludicrously small.
    5 - Market reacts in turn, accepting this position and acts accordingly.
    6 - Market gets burned BECAUSE the REAL RISK is NOT related to interest rate level.
    7 - BoC blames Market!!!

    BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT - BS ALERT -
  29. Rick Sieb from Edmonton, Canada writes: And then you have a character like Flaherty who creates an unnecessary surprise unescapable risk.
  30. G. Lightle from Canada writes: Let there be no doubt that our banking system is the safest on the planet. You can create paranoia in a few minds by trying to articulate in a few paragraphs how the system functions if you care to. The fact remains that our system functions well. I do share the thought that banks are killing us slowly with service fees.
  31. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    9 con't) 38 Billion dollars (plus the principles of all those loans being retired, but that doesn't show up as revenue) being vacuumed out the economy by the banks. Simply because they have the right to mint checkbook money - we use as a substitute for money - or put another way, legally counterfeit money (an oxymoron, but yet somehow appropriate).

    10) That money doesn't stay in the bank. They use that money to pay shareholders, develop products and services, expand operations, further their business interests, and pay creditors and employees. Those employees, who also carry mortgages, use that money to pay the bank so the money flows back in again. No matter what path the money is flowing, since it originated from the bank as a debt, its ultimate destination is back to the bank, like a revolving door.

    11) However, as the folks in the economy with the oldest loans begin paying off their mortgages and loans, the amount of interest revenue begins to drop. The banks need fresh blood to create new loans. If too many loans are being paid off, and not enough new loans are being created, we have a contraction in the overall money supply. Thus begins the economic slowdown we are all versed in.

    12) This is where the Bank of Canada comes in. By raising or lowering the interest rates (called the overnight rate which we know as "prime") , which the private banks use as a benchmark to raise and lower their mortgage or loan rates. Lower interest rates entice new borrowers into the bank, creating a fresh new supply of debt based money into the economy. The economy begins to heat up as there is an injection of credit into the economic "pot of soup". If there is too much money created this way, which has the effect of creating a "hot economy" and thus inflation, the BoC raises interest rates, discouraging borrowing from private banks, and causes existing loans to be reset to higher interest rates when the term comes due.
  32. OZZY RULES THE WORLD! from Canada writes: john deere from Canada writes:

    This is the central bankers fault. They were entrusted to run the money supply. This was and is their responsibility and they failed. They should of and could have printed less money and prevented this bubble from getting out of control. It is and was their job to prevent this from happening. They are cowards to blame others

    -----------------------------------
    You are absolutely right on that one, its the central bank thats the problem. The Communist Banking system does not in the end work well with a true free market.

    ___________________________________________________

    Z Z from Canada writes: Josua Cord, I'm going to break off with the status quo and say that inflation should make the option of putting your savings in a mattress highly unattractive. You lose money every year. To preserve your money, you need to at least put it in a bank where the money will be lent out to others who need to use it more urgently. In otherwords, you're basically forced back into the banking system or lose money every year.

    ----------------------------------------------
    (((Thats because we have a crooked banking system that forces people to play the stock market game. If you think this is right or a good thing then you have a real problem. Its forced economic slavery.))

    Continued below
  33. OZZY RULES THE WORLD! from Canada writes: Hoarding gold doesn't work either. Developed nations have realized that gold is worthless and have been trying to sell gold slowly. In fact, Europe was planning on dumping all its gold on the market at once. Canada and the States objected so strongly that they promised to do it slowly so as to not shock the gold miners here to harshly. To countries, what is more important, hoarding gold which some people place irrational confidence in because they believe it is some standard? Or buying people, technology, and businesses in other countries with that gold before people lose confidence in gold so as to get long-term growth and prosperity themselves. If I buy a company from you using gold and then refuse to accept gold as a standard, you can't buy that company back using gold.
    ------------------------------------------------

    Please tell me where you heard this, first the only reason banks do this is to screw with the prices to make it look like the dollar is worth something then others buy it up. Its real money, if they are getting rid of it and just going to all paper then they are fools because when not if a paper currency crashes they will be left with nothing.
  34. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    So what does this all mean?

    It means that private chartered banks have control of the vast majority of our money supply. It is a debt based system that must be fed by economic expansion. This is why we are fed the mantra of "grow, grow, and GROW!". This money is the worm at the heart of Capitalism. It is a cancer on us. We invest to grow our money to retire in comfort and run from the inflation boogeyman (created by our banking system and Bank Of Canada). Businesses have specialized so much that they survive solely on the gamble that the market will expand.

    If I make refrigerators, I can only sell them to so many people. Even if I increase my efficiency of manufacturing refrigerators (productivity), I can still only sell so many. The only way I can keep going is if I have more and more people to sell them to, if I am going to expand. If I am a public company, my shareholders will whip me to bring them a profit or I will be replaced as CEO. Grow, baby, GROW! In a static economy, I'd better learn to diversify into sustainable revenue streams, or I tank.

    A debt based money supply requires that an economy grows. Period. As such we need more people to take out more loans to buy more stuff to work at more jobs to make more stuff to sell to more people that buy more stuff....and it goes on and on.

    Planet Earth cannot support this. The environment will not sustain an economy built on infinite growth, since everything we own, live in, or wear, came from farming the surface of the Earth or mining the depths of it. Implement all the Kyoto or environment protocols you want, unless we create a sustainable zero-growth economy or one that can shrink sustainably, without debt based money, we are going to turn the earth into a smoking hole.

    And we will owe the private banks, who have been empowered by our stooge government, a great deal of debt. And it is not a debt of gratitude.
  35. OZZY RULES THE WORLD! from Canada writes: Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    To preserve your money, you need to at least put it in a bank where the money will be lent out to others who need to use it more urgently.

    ----

    Banks don't need your money to lend it out to someone else. With a reserve ratio of 0% required by the Bank Act of Canada, all they need to do is to wait for people or businesses to line up at the loan window. The amount of people is not controlled by by reserve requirements, it is controlled by the interest rate. Lower interest rates attract more borrowers while higher interest rates have the opposite effect.

    Once they ascertain that you are worthy of the "loan", they create checkbook money (credit) backed by nothing but your promise to pay it. This is brand new "money", created by the private bank.

    ___________________

    That right, a 0% ratio means that they can make money forever and charge interest on it. People do not want to realize it but money is essentially worthless, banks can make as much as they want and charge interest..what a racket.
  36. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    OZZY RULES THE WORLD! from Canada writes:

    "That right, a 0% ratio means that they can make money forever and charge interest on it. People do not want to realize it but money is essentially worthless, banks can make as much as they want and charge interest..what a racket."

    ----

    Just to clarify, Ozzy. I don't want the impression left with the folks on these boards that the banks can create money "forever". They need one thing:

    You.

    They can only create it as long as their are people lined up for and being granted loans. It is purely market driven, incented or discouraged by interest rates.

    Banks still keep cash on hand, as their Customers still demand it...but they are working their darndest to turn folks off of cash. Banks hate paper money. In their perfect world, they would not have a single paper note in the vault. They have to count cash, store it, transport it, wrap all the security infrastructure around it....Yuck. Much cleaner to use digital money, no?

    You stated that money is essentially worthless. I know what you mean, but other folks might be scratching their heads about what you mean.

    Whatever form of money is in use, be it pretty pieces of paper printed by the Bank of Canada, or shiny yellow metal like gold, any form of it is worthless if no one values it. In any given economy, wherever money is used, money has value because participants in the economy have confidence in it. They accept money in return for products or services because they are confident that this money will be accepted by others they trade with. Shake that confidence, and that form of money will be treated with suspicion. Shake it harder, and that form of money will evaporate.

    I would not classify myself as a die hard gold bug, but I do like it for the fact that neither the government nor the banks can create it out of thin air.
  37. James Cyr from Balmertown, Ontario, Canada writes: I agree that hoarding gold does not work, nor should it be done. But it is okay to have gold as part of an overall investment portfolio. And yes, money is worthless unless there are assets (gold included) to back it up. That is what Germany found out the hard way in the 1920's. A "sustainable zero-growth economy" is a contradiction in terms. There is no such thing as "zero growth"--there is only a crash. Markets change, priorities change, new ideas come along, but the concept of a market will always endure. The economy will grow and shrink according to these concepts. Government attempts to maintain "zero growth" would be disasterous at best!
  38. Toby Maloney from Canada writes: That's a good one from Slammin' Sammy Snead!
  39. Mike H from Grande Prairie, AB, Canada writes: Hey Tax Me. I've got a quick question that maybe you could answer for me, since you seem to be more up to date on the banking system than me.

    I was under the impression that while Canadian Banks don't need a specific percentage of cash on deposit to match their borrowers (IE: 10% reserve ratio or some other such number), they are still required to keep a Tier I Capital Level of at least 7% and a Total Capital Ratio of at least 10%.

    Does that requirement not operate much the same as a reserve ratio?
  40. George Lawrence from Thunder Bay, Canada writes: Right on Mr Dodge-Listen up you Income Trust Investors.Had you consulted a knowledgeable Advisor,you just might not have put all your financial eggs in one basket.particuarly Income trusts which were KNOWN and acknowledged by those who had expertise in these matters,TO BE RISKY.But then again sometimes one has to learn the hard way do we not?
  41. Mike H from Grande Prairie, AB, Canada writes: ZZ, I just wanted to let you know that I essentially agree with your assessment of gold as a currency. It is only valuable based on some one else's confidence in it as a currency. No different than paper money if you ask me.

    The people who state it has been that way for thousands of years sound like the people who say the real estate market always goes up. Chances are it will continue to be a valuable commodity well into the future...but what if someone suddenly discovers that gold is poisoning us or some other unexpected event of that nature.
  42. J Lee from North Vancouver, Canada writes: Good work Dodge! But isn't there an aphorism about the horses and the stable gates, and another one about hindsight being 20/20.
  43. James Cyr from Balmertown, Ontario, Canada writes: Actually gold is different than paper money. When the value of paper money was ties to the gold reserves of a country, it provided a means protection from inflation. And we all saw what happened to paper money in Germany during the 1920's. Platinum also can be used as a "currency" and so can silver, both to a lesser extent. Gold always seems to be the preferred medium.
  44. Mike H from Grande Prairie, AB, Canada writes: James Cyr from Balmertown, Ontario, Canada writes: Actually gold is different than paper money. When the value of paper money was ties to the gold reserves of a country, it provided a means protection from inflation. And we all saw what happened to paper money in Germany during the 1920's. Platinum also can be used as a "currency" and so can silver, both to a lesser extent. Gold always seems to be the preferred medium."

    Ok James. Tell me then. HOW is gold different than paper money? Because the markets associate a value with gold, same as they do with paper money. What if that value disappears for whatever reason? Ie) The markets no longer associate any value with gold. How would that be any different than the markets no longer associating any value with a paper currency?
  45. James Cyr from Balmertown, Ontario, Canada writes: Mike H: the value of gold has gone up, and the value of gold has gone down, but at no time in history since gold was first designated as having value has the price of gold been zero. Paper money, unless backed by either a gold standard or a country's assets, is just worthless paper. At one time, the US dollar was "as good as gold" because that dollar was backed by a gold standard. Over the last twenty years or so, various countries have tried to eliminate gold as a currency by selling off their gold assets. Has that worked? No. Look at the price of gold today, and look at the US dollar today. The gold price rebounded from these sell-offs, and people are still predicting that it will go to $US 1000. I do not know if it will or not, but I still maintain that it will have value as a commodity and a currency.
  46. Andrew MacGillivray from Victoria, B.C., writes: Meanwhile Mr. Dodge has been busy raising interest rates in Canada to try to contain "inflation". He raised rates just ahead of the recent credit crunch and my guess is he'll have to reverse course before too long. He has done this before. Trouble is the inflation exists only in Alberta and that is because of massive investment in energy that is required to develop the secure reserves there in a world where reserves are diminishing and mostly located in politically risky places. Project economics will eventually solve that problem not a quarter point or two in increased borrowing costs from the BOC. Meanwhile the rest of Canada is watching as the $CDN rockets towards parity with the $US putting a big squeeze on manufacturers and potentially on employment in those companies. That's OK says Mr. Dodge, unemployment is too low. Never mind that demographics are at play here and that record numbers of boomers are leaving the work force.
    Bring on the unemployment and screw the manufacturing base. If that what it takes to get inflation down from 2.2% to 1.9%, then damn the torpedoes. Where do they find these guys anyway ? And why do they think what they are doing is really that important ? There are record amounts of global savings these days and capital markets have been globalized in large measure, so the cost of capital should be low as there is more money around than there are good investment opportunities. That's the marketplace at work and not the central banks. Hands off Mr. Dodge and don't start chiding everyone for not knowing how to assess risk. The really smart money never did buy any of that structured product crap and every cycle ends up with some mispriced risky assets in the hands of those who didn't do their due diligence in the heat of the moment. And so it goes...
  47. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Ok James. Tell me then. HOW is gold different than paper money? Because the markets associate a value with gold, same as they do with paper money. What if that value disappears for whatever reason? Ie) The markets no longer associate any value with gold. How would that be any different than the markets no longer associating any value with a paper currency?

    ----

    Hi Mike, perhaps I can take a stab at this one.

    Gold is different than paper currency in the sense that it is:

    1) Scarce. You can't find it just anywhere. it used to be found on the surface, then by panning, then surface mining. It is getting harder and harder to get at. In fact, if all of the gold ever mined by man was poured into a cube, it would only measure 20 meters on a side.
    2) Banks and Governments cannot print gold at will, like they can with paper (or credit). They have to get it from someone else or dig it out of the ground. If gold was the physical form of our money, central banks would not have the power to inflate it at will. Our governments could not run deficits as they do today by exchanging bonds for money.
    3) Gold has been regarded by most civilizations as money for 6000 years.

    Why is gold considered a good candidate as money?:

    1) Like I said earlier, it is scarce.
    2) It is inert. It doesn't rust or react with very many things. You can drop a gold bar in the ocean for a 1000 years and, assuming no erosion, it will still be there.
    3) It is divisible. You can melt gold into coins of smaller (or larger) denominations. This is why diamonds are not a good candidate. You can't make change for a piece of land.
    4) It has beauty unto itself and all cultures value it.

    More to follow...
  48. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Mike H, I encourage you to read Alan Greenspan's brilliant essay entitled "Gold and Economic Freedom":

    http://www.usagold.com/gildedopinion/greenspan.html

    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

    Greenspan wrote this in 1966. Irrelevant you might ask? Ron Paul asked Greenspan in 2002 when he was still the head of the Fed, if he "still believed that what he wrote was valid". Greenspan stated, "I wouldn't change a word."
  49. James Cyr from Balmertown, Ontario, Canada writes: Tax me! I'm Canadian: Great posts! You have pretty well hit the (golden) nail on the head!
  50. Mike H from Grande Prairie, AB, Canada writes: James Cyr from Balmertown, Ontario, Canada writes: Mike H: the value of gold has gone up, and the value of gold has gone down, but at no time in history since gold was first designated as having value has the price of gold been zero. Paper money, unless backed by either a gold standard or a country's assets, is just worthless paper... I do not know if it will or not, but I still maintain that it will have value as a commodity and a currency. " James, I understand what you are saying. And don't get me wrong. I agree with you that gold will most likely always have value as a commodity and a currency. The point I am trying to get across is that it is an arbitrary value only and at the end of the day is no different than paper money. Gold is only valuable because someone at some point decided it was valuable. Personally, to me, gold has no value. I wouldn't pay money to buy gold. Sure, if I could buy it really cheap and sell it for a profit to some other sucker, I probably would. But that's no different than if someone was going to sell me $1000 worth of USD for $500 CAD. You'd be an idiot not too make the deal. If at some point in the future the majority of people start to think as I do, that gold really isn't valuable, than that view point would become reality. Effectively making gold no different than paper money. That being said, the chances of that happening are slim, however it is a chance. I hold the same view point for all precious metals and precious stones. None of them are valuable to me and I would never spend money purchasing any of them just for the sake of owning them. A steel watch is just as good to me as a platinum plated watch. I see where you are coming from, I just hope you can see where my viewpoint is coming from.
  51. James Cyr from Balmertown, Ontario, Canada writes: Mike H: Yes, I can see where you are coming from, however I am having trouble with some of your basic assumptions. For example, you state that "someone at some point decided it was valuable". I suspect that it did not work that way. Gold slowly evolved over thousands of years as a universal medium of exchange, beating out other types of exchange. And as I stated before, I would not recommend hoarding piles of gold, however it may be a good idea to have some gold in an overall investment portfolio. If not actual gold coins or bars, then stocks in gold companies, but I would recommend also that considerable research be done before investing. Your comparison to selling and buying $US currency as a value--that is a money market exchange and is happening as we speak (write). But you are right in saying that "value" is a relative term. What is valuable to me, may not be valuable to you, and that is okay. And yes, I certainly agree with you on that one!
  52. Mike H from Grande Prairie, AB, Canada writes: I really, really, really wish that the Globe and Mail could fix whatever stupid issues they have with their formatting. I hate when paragraphs magically disappear.

    Tax Me. I liked the answers you gave under why it makes a good currency. And I will acknowledge that it does have benefits over a paper money. Still, to me...I'd rather have the paper money. Gold doesn't do much for me personally, since I can't take it into a store and trade it for goods and services. Long term I can see the benefits of holding gold though.
  53. Mike H from Grande Prairie, AB, Canada writes: Either way. James and Tax Me, I've appreciated the debt but I'm going to be away from my PC for the remainder of the day. If this link stays open I might be able to comment this evening.

    Thanks for the things to think about. Tax Me, I am still interested in your thoughts on my comment regarding Tier I Capital if you have a chance.

    Have a great day guys.
  54. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Mike H from Grande Prairie, AB, Canada writes:

    I see where you are coming from, I just hope you can see where my viewpoint is coming from.

    ----

    Mike, I definitely see where you are coming from, and I don't really find fault with your reasoning. However,

    "Gold is only valuable because someone at some point decided it was valuable."

    No. Gold has value because the entire market community decided it did, just like when a market community used sea shells, salt, or even yak dung. Not because someone decided it was valuable. It's value was based on mutual agreement. That said, when markets opened up through expansion, salt was debased as money as new sources of salt came pouring into the market as other economies had it in so much supply it became worthless as it was no longer scarce. I bet you the first foreigner who saw that a market was using salt as money, went home to get as much freaking salt as he could get his hands on, return back to that economy, and present himself as a billionare...for a while until everyone had salt. Gold is not like that.

    Now fiat (paper) is different because the ruling authority made it so, not by public consent. This type of money is valuable because governments made it so by decree (fiat) and forced it upon the people by making it the only acceptable method to pay taxes. They took a cheap commodity (paper or tally sticks), put some fancy symbols on it, and punished (severely) those who counterfeited it.

    "Government is the only agency which can take a useful commodity like paper, slap some ink on it and make it totally worthless." - Ludwig Von Mises.

    Therefore, what we use as paper money, is only as strong or stable as the authority of the government that backs it. This is NOT the case with gold. It is based on grassroots (we the people) consent.

    "We have gold because we cannot trust government" - President Herbert Hoover.
  55. Gary Dare from Portland, Oregon, Canada, writes: Mike H writes, "I really, really, really wish that the Globe and Mail could fix whatever stupid issues they have with their formatting." What browser are you using? I had that problem with Netscape 7.2 on both Mac and PC ... now using NS 9.0b3 (but you need Thunderbird for your NS mail, NS9 is only a browser). Or you can go with FireFox ...
  56. Sylvia Wilson from Canada writes: The fractional reserve system is broken. There was a time when Canada controlled 25% of its debt. Low interest loans financed Canada's infrastructure and important social programmes. Deregulation of the banks changed all that. Now Canada like everyone else pays top interest rates to pay down debt. An overhaul of the system is badly needed. Countries need to return to having more control over their own currency with less being allotted to privatization.
  57. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Mike H from Grande Prairie, AB, Canada writes: Hey Tax Me. I've got a quick question that maybe you could answer for me, since you seem to be more up to date on the banking system than me.

    ------

    I am learning all the time, Mike, and I don't have all the answers. I like to think I have a pretty good handle on the problem though.

    "I was under the impression that while Canadian Banks don't need a specific percentage of cash on deposit to match their borrowers (IE: 10% reserve ratio or some other such number), they are still required to keep a Tier I Capital Level of at least 7% and a Total Capital Ratio of at least 10%.

    Does that requirement not operate much the same as a reserve ratio?"

    ----

    I will investigate. These are the types of questions I will be looking to have answered:

    - What regulations outline what you asked? BIS? Basel? Basel II?
    - Who wrote these regulations? Who appointed these people? What is the chain of accountability?
    - Are these regulations mandatory or best practices?
    - What mechanisms are in place for reporting, auditing, and enforcement of these regulations? If these regulations are (a) mandatory and (b) enforceable, who enforces them and what penalties are imposed on the offending institution that failed to comply?
    - What instruments qualify as "Tier 1 Capital"? Who creates and how are these instruments created?
    - How is Total Capital Ration calculated? What elements go into the equation to calculate that?

    ----

    These are some of the questions I will be asking.

    However, the creation of debt based money (bank credit) via the loan process is still there, even if I find that there is a small reserve ratio.
  58. Patrick Murray from Ottawa, Canada writes: Thanks for the lively debate everyone - it's refreshing to read and thought provoking - particularly after plowing through the pitiful posts in the political forum.
  59. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Sylvia Wilson from Canada writes: The fractional reserve system is broken. There was a time when Canada controlled 25% of its debt. Low interest loans financed Canada's infrastructure and important social programmes. Deregulation of the banks changed all that. Now Canada like everyone else pays top interest rates to pay down debt. An overhaul of the system is badly needed. Countries need to return to having more control over their own currency with less being allotted to privatization.

    ---

    Hi Sylvia,

    Where did the government get those low interest loans?
  60. OZZY RULES THE WORLD! from Canada writes: Mike H from Grande Prairie, AB, Canada writes:

    Tax Me. I liked the answers you gave under why it makes a good currency. And I will acknowledge that it does have benefits over a paper money. Still, to me...I'd rather have the paper money. Gold doesn't do much for me personally, since I can't take it into a store and trade it for goods and services. Long term I can see the benefits of holding gold though.

    ______________

    If it was remonetized like Ron Paul wants then yes you could go and trade it for goods in a store. Its because the government ie banks want you to use their debt money. If there is no debt there is no money so the banks make huge sums as long as we use their currency. We all will be in debt forever as long as their is a central bank and non backed paper currency. Period.
  61. Z Z from Canada writes: Tax me! I'm Canadian! I'll roll over: I can answer the reserve ratio question for you. There is no regulation regarding reserve ratio in Canada. Banks set their own reserve ratio depending on their own expectations of risk and reward. Also, the majority of money is not currency but numbers on a computer. To be more precise, about 10% of money in Canada is paper and coins. So, regarding your question about the $1 trillion. Our GDP is 1.1 trillion dollars and that measures nothing more than the flow of money. For example, if the money supply was $1 and that $1 went from households to corporation to households 1.1 trillion times, then the GDP is $1.1 trillion.

    Since you can see through the veil of how our money system works, I'm surprised that you are caught in the "money should have value" trap. Money is not important. It may be important to you and me but not if you have the ability to infinitely create or destroy money in an instant at will (the central bank). The whole goal of the system we are in is to manipulate what is not real (money) for what is real (production, distribution, and consumption of goods and services). The question we should really be asking is "What fake system can we setup to maximize what is real?" Gold standard does a poor job of this historically which is why we switched out of it.
  62. Matt Stiles from Vancouver, Canada writes: A gold standard does not neccessitate carrying around a little sack full of coins. It can be a system where upon taking the paper currency to a bank, one can ask for gold in exchange and receive it immediately, no questions asked. It could even be a partial gold standard to begin with, where a percentage of the note is backed by physical gold.
  63. The World Is Mad from Hamilton, Canada writes: A major problem is that we moved away from capital markets strictly being a source of capital. Derivatives stacked on top of multiple layers of derivatives is just a stack of paper playing cards ready to come falling down. Money is no longer backed by tangible assets, only a whispered promise.
  64. Matt Stiles from Vancouver, Canada writes: A great article today by Mike Shedlock on Bernanke and Central Bank doublespeak: http://globaleconomicanalysis.blogspot.com/2007/09/global-savings-glut-exposed.html
  65. Voice of Reason from Montreal, Canada writes: Hmmm...don't take the comments of the ratings agencies at face value. But when the BoC says a couple months ago that rates will probably need to be raised and some of us go out and finance ourselves accordingly only to see rates stay where they are because the BoC has sheepishly changed course, that's ok, right Dave?

    The sooner you march your arse out, the better, Dodge!
  66. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Money is not important. It may be important to you and me but not if you have the ability to infinitely create or destroy money in an instant at will (the central bank). The whole goal of the system we are in is to manipulate what is not real (money) for what is real (production, distribution, and consumption of goods and services). The question we should really be asking is "What fake system can we setup to maximize what is real?" Gold standard does a poor job of this historically which is why we switched out of it.

    -----

    Z Z, I agree. Money in of itself is not valuable. Money is:

    1. A medium of exchange.
    2. From the above characteristic then, it flows that it has units of measure.
    3. Again, from the first point, to be used as a medium of exchange it must be a store of value, for the purpose of deferred spending.

    If I had the ability to create money at will based on seducing a largely ignorant populace into my doors to monetize their willingness shackle themselves to debt, my revenue stream is secured.

    If I am not worried about making money as I can create it out of thin air, the game for me is no longer wealth. It is power. My power over the market by furthering my interests and continuing dominance in the playing field.

    I know I keep sounding like a gold bug, but dammit, I can't think of a better form of money. We did not "switch out" of gold. There were tremendous forces of power in the early 20th century that wanted to have control over the issuance of currency, the so called "money trust". Gold stood in the way of this as it could not be manufactured at will. Please refer to my Greenspan link above. All sorts of coordinated market attacks took place around this time to cause the people to cry out to government to save them. What we got was a cartel of bankers and government officials we call a central bank, as per design.
  67. Patrick Murray from Ottawa, Canada writes: Voice of Reason c'mon ... your decision to "lock in" based on BoC statemetns is tea leave reading 101 and is the very problem Dodge is pointing out - a lack of thorough risk evaluation makes for poor decisions. Dodge has a fine job and furthermore he does not act alone but through a consensus driven process. Don't politize this.
  68. Tax me! I'm Canadian! I'll roll over : from Canada writes: :
    Matt Stiles from Vancouver, Canada writes: A great article today by Mike Shedlock on Bernanke and Central Bank doublespeak: http://globaleconomicanalysis.blogspot.com/2007/09/global-savings-glut-exposed.html

    -----

    Excellent commmentary Matt! Thanks for the link. I see that that site is well worth reading.
  69. Moshe Goldstein from Canada writes: Nice try Dodge, pretending you and your cb buddies in Europe have nothing to do with removeing the main barometer of risk, which is the price of gold and chiding anyone for not seeing through it is outrageous. Every time there is any kind of event that should signal increased risk, the BOE, spain, swiss, uk etc dump gold into the market to mask the deterioration in the currency and obscure the real inflation rate. Stop using tricks to trick people into risk taking in favour of this ever expanding money supply which is quite frankly out of control now.

    What is the real inflation rate when housing, food, and fuel are in it, and leave out the computer power hedonics? I bet higher than the g-10 prime rate. Dingbat!
  70. Michele K from Ottawa, Canada writes: Some great commentary here, folks - thank you.

    I've always believed we're running one big pyramid scheme here (growth, growth, growth! etc.), but 'Tax Me', you have succeeded in dissuading me from putting any more money with a money manager.

    Question is, what do I do with it - I don't see any bonds with 15% coupons to be clipped these days.
  71. Z Z from Canada writes: Michele K: Answer is simple, if you do not put your money in the hands of a money manager, then you should do something with it yourself. I, personally, am I big supporter of grassroots entrepreneurship. You can put your money in what you believe in. For example, look for a startup, evaluate it using your best judgment, and put money into the one you feel is good. Or, a company doing something you believe in wants to expand and are issuing bonds. Put your money in there. It should be very clear that there is risk involved in these actions. But that is what money is meant to do, it is not meant to be sitting around but to be used in either investment or consumption. If you really don't know what to do, put it in a bank until you do figure out.

    The main problem with the gold standard is that it fails to take into account that prices are sticky downwards. This effect hurts the real economy a lot. Keynesian economics (the system we are current using) takes this and inflation into consideration at the cost of additional complexity. Quite frankly, if prices were not sticky downwards, a gold standard would do just fine. Classical economics before Keynes was gold standard. At this point in time, it would be extremely imprudent for our society to revert back in time to a proven inefficient system.
  72. James Cyr from Balmertown, Ontario, Canada writes: John Meynard Keynes (Lord Keynes) in a letter to President Roosevelt in 1938 stated that businessmen are "much milder than politicians, " and should be treated as "domestic animals" and trained as he would see fit. Keynes sought to transform capitalism; he did this by advocating government involvement into the market place. The result is the mess that you see today. We do not have a "free market" system; we have a mixed economy, a mixture of economic freedom and government controls that serve to distort the market place. It is a mixture of freedom and controls, and it is always the freedom elements that take the blame for any market hiccups. The view of Keynes of businessmen as "domestic animals" is not akin to socialism, but more akin to fascism--of the relationship between business and government in a fascist state. Michele K: if you are looking for money to invest, do a lot of research before investing it. Your portfolio should be as mixed as possible, avoiding the "eggs in one basket" situation. And if you invest, invest over the long term; do not expect to make a quick killing. That only leads to trouble.
    • Pos