Bank of Canada increases overnight rate target to 1 per cent • Hacker News Board

Re: Bank of Canada increases overnight rate target to 1 per cent

#141

Post by BenoitEssiambre » Wed, Sep 06, 2017, 8:20 PM UTC

SimbaOnSteroids wrote: post #14

latch wrote: post #9

For those not following Canada's economy. Two weeks ago no one was sure if they'd hike the rate again, and no one thought they'd do it so quickly (though it seemed likely they'd do it ~oct/nov). But, Canada posted exceptionally strong growth numbers (4.5%) at the end of August, which kind of made this very likely. Also, the government just sold bonds that mature in 2064 (at 2.2%) and has indicated that it might issue…

Why would any entity buy bonds that when matured will not have kept up remotely with inflation? Obviously I'm missing some key idea here, I just have no idea what it is.

There is nothing unnatural about negative real returns on stores of value (even though negative nominal rates can create issues). Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

Re: Bank of Canada increases overnight rate target to 1 per cent

#142

Post by cthrow » Wed, Sep 06, 2017, 8:23 PM UTC

JackFr wrote: post #130

cthrow wrote: post #104

Earlier quoted context omitted.

Wages haven't gone up, so while you may have shifted allocation of purchases within the CPI basket, your total spending is probably around the same as it was last year, and the year before that. EG you buy more electronics and gas (cheaper), and less clothing and food (more expensive), but your overall spending remains ~50% of your income, which hasn't changed. Wages are usually the primary driver of higher CPI measu…

> Inflation has occurred outside of CPI basket, most notably in equity markets and real estate prices in large urban cities Those are assets rather than goods. They are neither produced nor consumed. That being said, yeah, it's no mystery that low rates have caused asset price inflation, not consumer price inflation.

It's all a matter of technicalities and definitions :)

You are consuming housing when you pay rent/mortgage. A house is built, and then its owners consume it in "housing units", or rent those "housing units" to other for consumption.

Likewise that ground beef you have in the fridge is an asset - you can sell it to your neighbor at any point before you consume it.

Equity is a claim on a company's assets. If General Electric goes bankrupt and you own GE stock, you will get paid out (after everyone else) a share of the bankruptcy proceeds. So in a way you own some of what GE produces, some of the inputs it consumes, etc.

You can look at literally any transaction as an investment into an asset (generally durable goods) or the purchase of a good for consumption (generally non-durable goods). It depends on how you want to record it on your personal balance sheet...

Re: Bank of Canada increases overnight rate target to 1 per cent

#143

Post by dblohm7 » Wed, Sep 06, 2017, 8:27 PM UTC

randomdata wrote: post #131

NathanCH wrote: post #127

Earlier quoted context omitted.

That's a bit misleading, by no means was/is the bubble limited to these cities. More like B.C and Ontario.

That may be an exaggeration as well. As a resident of Southern Ontario, but not Toronto, the CREA data shows that home prices in my area were stagnant, to slight decline, for most of the last decade. It has only been in the last year that any meaningful price appreciation has been observed. And I attribute the recent price appreciation to an improving economy and near record low unemployment (currently 2.9%).

And regardless of the scope of the bubble, even if we conceded that it is all of BC and ON, the fact remains that the Bank of Canada has to act in the best interests (ha) of the country as a whole.

Re: Bank of Canada increases overnight rate target to 1 per cent

#144

Post by GatorD42 » Wed, Sep 06, 2017, 8:51 PM UTC

8ytecoder wrote: post #95

kitcar wrote: post #51

Earlier quoted context omitted.

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long. What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buyin…

As an example - if I get to reduce my mortgage payment by $500 - because interest rate is extremely low - I could technically spend that money on upgrading my car or travel or groceries or eating out - and so pushing up the price. At least that's how I understand it. I assumed that housing prices were included but apparently not (at least in the US)[1] [1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu.…

The CPI in the U.S. does count shelter in its index. It is not very accurate because of issues measuring the prices of consumer electronics which are getting better and cheaper. See https://medium.com/@vince.pavlish/using-iphone-prices-to-che...

Re: Bank of Canada increases overnight rate target to 1 per cent

#145

Post by sbenitoj » Wed, Sep 06, 2017, 8:55 PM UTC

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

You're right -- the commonwealth countries are in for a rude awakening! Especially considering government debts worldwide have increased A LOT since the 2008 financial crisis [0], they don't have the same ability to inflate their way out of the next crisis that they had after the 2008 crisis.

Even though I agree with the spirit of your statement, I don't think that central banks "let this happen" -- on the contrary, fiat currencies and central banks BY DESIGN massively exacerbate (and arguably cause) the boom and bust cycle [1].

Without central banks unilaterally determining the price of borrowing money (AKA interest rates) and propping up bankrupt institutions (e.g. see 2008 bank bailouts), the natural boom and bust cycle would have a much lower amplitude as the market would determine the price of borrowing money rather than disconnected bureaucrats sitting in the room pouring over the latest econometric reports. Price controls don't work for goods and services (see the USSR) and they certainly don't work for money either!

[0] Worldwide Government Debt - https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS

[1] Austrian Business Cycle Theory - https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Re: Bank of Canada increases overnight rate target to 1 per cent

#146

Post by mgbmtl » Wed, Sep 06, 2017, 8:56 PM UTC

wyatte wrote: post #137

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

Well "only reacting now" might be a stretch. A few years back they elimintated 40 year mortgages putting them back to 25 years and adjusted the loan requirements. Canada isn't facing a housing bubble as much as they are facing a debt bubble. Most of the recent household debt that has been record breaking year after year has been with credit cards, autos and lines of credit.

> "Canada isn't facing a housing bubble as much as they are facing a debt bubble."

Are you sure? I've seen articles mentioning increasing debt in general, but that's mostly tied to mortgages, which isn't a big deal (unless rates rise quickly, which is unlikely).

For example: http://www.cbc.ca/news/business/canada-credit-cards-transuni...

"[credit card] delinquency rates in British Columbia and Ontario dropped by 2.1 per cent and 3.3 per cent, respectively." (by contrast to Alberta and Saskatchewan)

Car loans are ~ 2% of total debt, at least in Quebec: https://www.desjardins.com/ressources/pdf/pv170828f.pdf?resV...

Re: Bank of Canada increases overnight rate target to 1 per cent

#147

Post by goodcanadian » Wed, Sep 06, 2017, 9:02 PM UTC

emodendroket wrote: post #138

goodcanadian wrote: post #134

Earlier quoted context omitted.

Other differences: Canada does not have a mortgage interest tax deduction nor does it have low/no down payment mortgage options. Generally, the more conservative approach to banking makes things more sane and is part of the reason that Canada rode out the global financial crisis relatively unscathed.

Well, it also makes people less likely to own homes, and I'm not really convinced you couldn't have a relatively cautious system that still had long, federally backed mortgage terms or tax deductions or even relatively low down payment options. The big crash was preceded by lots of outright fraud.

I got curious, so I did a google search. It appears that the home ownership rate is very similar between Canada and the US. At the moment, it is higher in Canada as the US is still recovering from the effects of the mortgage crisis. That said, I don't disagree with you. The US has made a policy of promoting home ownership, more so than other countries. That has potentially come with adverse side effects. On the other hand, Canada's relative banking conservatism has arguably prevented Canada's own housing bubble from bursting which could be, itself, a bad thing.

Re: Bank of Canada increases overnight rate target to 1 per cent

#148

Post by omegaworks » Wed, Sep 06, 2017, 9:05 PM UTC

sbenitoj wrote: post #145

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

You're right -- the commonwealth countries are in for a rude awakening! Especially considering government debts worldwide have increased A LOT since the 2008 financial crisis [0], they don't have the same ability to inflate their way out of the next crisis that they had after the 2008 crisis. Even though I agree with the spirit of your statement, I don't think that central banks "let this happen" -- on the contrary,…

Is there a viable alternative to fiat currency? The Gold Standard brought about an era of mineral extraction and colonial pillage, and Bitcoin doesn't seem to work all that well at having a stable value or even as a means of exchanging that value (unconfirmed transaction delay).

Re: Bank of Canada increases overnight rate target to 1 per cent

#149

Post by faeriol » Wed, Sep 06, 2017, 9:06 PM UTC

8ytecoder wrote: post #95

kitcar wrote: post #51

Earlier quoted context omitted.

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long. What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buyin…

As an example - if I get to reduce my mortgage payment by $500 - because interest rate is extremely low - I could technically spend that money on upgrading my car or travel or groceries or eating out - and so pushing up the price. At least that's how I understand it. I assumed that housing prices were included but apparently not (at least in the US)[1] [1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu.…

Keywords here being IF and COULD...

I'm under the impression most people are ready to spend a certain portion of their income on their living arrangement and low interest rates just encourage them to buy ~bigger~ more expensive property, rather than actually turning the "savings" into other types of spending. I'd be interested to find actual data and research about the relationship between interest rates and mortgage spending for given incomes...

Re: Bank of Canada increases overnight rate target to 1 per cent

#150

Post by megaman2 » Wed, Sep 06, 2017, 9:06 PM UTC

asdf33323 wrote: post #116

refurb wrote: post #80

Earlier quoted context omitted.

Real estate is local. I've seen multiple listing in the Toronto area, SFH, that haven't sold and are delisting at 20-30% below comparables from 3 months ago.

I call BS unless you provide proof.

Unless I'm reading the reports wrong, according to the Toronto Real Estate Board (TREB) the average price of a detached housed in the "416" (Toronto) area in July 2017 was $1,304,288. In August it was $1,191,052.

So that means a -8.7% change from July to August alone.

Numbers for recent months - Detached houses in "416" area code: August: $1,191,052 July: $1,304,288 June: $1,386,524 May: $1,503,868 April: $1,578,542

http://www.trebhome.com/market_news/release_market_updates/n...