We all make significant decisions daily as real estate investors. To maximize the impact of those decision, investors need a solid grasp of business, economic and political fundamentals. Sadly, many do not. And when we don't have a deep understanding of why we make the decisions we do, we stop being an investors. We become speculators. Speculators gamble because they don't understand the game they are playing. Sometimes they win. Often not. It's dumb luck. Real estate gamblers have minimal control over the outcome. Investors think in terms of odds – the statistical likelihood an outcome will come true. You don’t always win, but because you make informed decisions, the odds you will succeed over the long term is guaranteed. Not due to chance. But because the odds make it so. You must stay disciplined though and always make evidence-backed choices. What Canadian Think of Interest rates and Inflation - a survey by Abacus Data, August 2023 A recent survey of 2,500 Canadians by Abacus Data revealed that we are not well-versed as citizens (and investors) for the big issues that affect our lives. https://abacusdata.ca/what-canadians-think-about-interest-rates-and-inflation/ We have permission to disagree with our political and financial leaders because we live in a safe, progressive, parliamentary democracy. But if we don't reciprocate by understanding how the political and economic systems of Canada work, we will end up inflicting some pretty major economic self-harm upon ourselves and those around us. In that vein, here are some of the findings of the nationwide Abacus survey. WHO DO YOU BELIEVE SETS THE INTEREST RATES IN CANADA? 36% of those surveyed believe the Bank of Canada does so with direction from the federal government. WRONG 5% said the federal government alone. WRONG 18% didn’t know. Real Answer: The Bank of Canada independently, which only 41% of respondents got correct. The separation of powers between the central bank and the government prevents political meddling in economic policy. This separation exists in the United States too, although it was put sorely to test by Donald Trump when he was president. Politicians often lose power when the economy is bad, so you can understand their desire to tamper with interests rates to artificially juice the economy and improve their ratings. But this is terrible economic policy and it's the reason why politically-mature countries keep the fingers of government away from the interest rates lever. ARE INTEREST RATE INCREASE NECESSARY TO REDUCE INFLATION 23% said Probably Not. 21% said Definitely Not. 15% said I don’t know. REAL ANSWER: Raising and reducing interest rates are established ways to speed up and slow down economic growth. The Bank of Canada has a mandate to manage interest rates so that we achieve stable annual inflation of 2%. If the prime minister, or any other government official were to give the Bank of Canada orders, it would spark controversy. It takes a while for the impact of higher interest rates to seep through the system. Excess existing cash needs to be soaked up, and consumer demand to buy things needs to be squeezed out. When debt costs more, consumers and businesses take on less off it. It’s never a straight line though and sometimes interest rate changes don’t work at all. Look at Japan’s last three decades after its real estate bubble burst. Low and negative interest rates should see a glut of borrowers and lots of increased productivity through consumer buying and R&D investment by businesses. Not in Japan. Only now is it making small steps toward economic growth after all those excesses of the 1980’s. Without growth, economists call these Japan’s lost decades. They are cautionary take for all central bankers and economics students who believe interest rates are all-powerful. Back to Canada. If 44% of our populace doesn't understand how monetary policy works (interest rate fluctuations) this will influence political dissatisfaction. We could elect/remove a government based on a faulty understanding of how the economy works. No Canadian government gets to dictate how high or low interests are. Period! TO WHAT EXTENT DO YOU THINK THE FEDERAL CARBON TAX HAS AN IMPACT ON INFLATION IN CANADA The carbon tax is a political wedge issue. Conservatives hate it – not because it doesn't work, but because Justin Trudeau and the Liberal Party introduced it. The carbon tax is not really a tax at all because it’s designed to be revenue neutral. Money comes out of one hand when we fill up at a gas station and goes back into the other hand by different means. The dreaded T-word shouldn’t even be used because the Carbon Tax is a smoke-and-mirrors mind-game. Yes, it gets added to gas prices when we fill up our vehicles. We pay a charge. BUT the money gets returned later-on in a tax rebate. So why have it? Basic economics. If you want less of something, tax it. (eg. Carbon pollution from cars, cigarette smoking, alcohol consumption.) If you want more of something, offer discounts. (e.g. No GST on most fresh food, unlike less healthy snack foods and processed foods.) It’s carrots and sticks. Behavioral economics 101. Taxes are a nudge to make us do fewer damaging things and more of the good things that benefit our health and society in general. The carbon tax is a classic economic nudge. You pay up front. You feel the pain. So economic theory says we will do whatever we can to minimize that pain and so use less gas. But most of the tax comes right back to users in the form of federal tax credits – the ones in the small print we never read when filing our taxes. The amount of real money paid is small, but we human beings don’t respond well to delayed gratification and so adjust our behaviour at the gas pump when we see the higher price. This results in changes to driving habits and reduced consumption of climate-damaging fossil fuels. So the theory goes…and it works. Evidence to date indicates that Carbon Taxes encourages people to use less fossil fuel. DO YOU THINK INFLATION IS HIGHER IN CANADA THAN IN SIMILAR COUNTRIES AROUND THE WORLD 52% said inflation was higher in Canada. WRONG 35% said inflation in Canada was about the same as in similar countries around the world. WRONG REAL ANSWER: Canada has the lowest inflation rate of the G7 countries. It was 2.8% when the survey was taken. Only five countries in the 38-nation Organization for Economic Co-Operation and Development have interest rates lower than that of Canada. All in all, the results of this survey are discouraging. Access to information has never been easier. Unfortunately, though, the sources most people use to understand the world around them are notoriously unreliable. Social media is not a safe place to inform ourselves because anyone with any degree of (or lack of) expertise can amplify their voice there. Yet social media is what so many people turn to. It is better to seek out acknowledged experts in different fields and listen to them directly. Selectively choosing media outlets that have a record of unbiased reporting is important too. Sadly, there are far fewer of these than there should be. Demagogues, politicians and influencers depend on it. They know that pablum from Tik Tok and elsewhere is easier to swallow than a nuanced interpretation of facts. BACKGROUND Canada’s federal government is currently led by prime minister Justin Trudeau’s Liberal Party. The Liberals have a minority government and are propped up by the New Democrats. Polling suggests the Conservative Party has a lead over the Liberals and could form the next Canadian government. The Abacus survey data from August 2023 on which this post is based can be found here: https://abacusdata.ca/what-canadians-think-about-interest-rates-and-inflation/
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