Tag Archives: government debt

Our Credit Rating & Tim’s Reward Card

Aren’t we on topic! Last week we talked about the federal government’s budget and deficits as far as the eye can see. The day after, last Thursday, Fitch (one of the major credit rating agencies) announced that our government debt is “close to incompatible with a AAA credit rating.” So we’ll not only pay a lot more interest because of the debt total, but with a drop in credit rating, we’ll also pay a higher interest rate to keep borrowing. Exactly what happens with us individuals: When our credit rating drops, rates get much more expensive because we’re a higher credit risk.

Tim’s now has a rewards card. If you don’t mind lugging around the card, every 7th coffee will be free. Not a bad deal to get a 13% price discount equivalent…until they change it to every 8th, then 9th, then 10th once they’ve trained and hooked enough customers. Mark my words! Why did they start the program? My guess is that the Esso stations now run by 7-11 will be kicking out their Tim’s coffee as soon as the contract is over. That’ll plummet Tim’s sales. Since we’re really loyal to loyalty programs, no matter how crappy they are, this is Tim’s pro-actively re-training us to visit Tim’s and not 7-11 when they switch back to their own coffee at a much bigger profit margin.

5 Short Insights

A week ago, the Fraser Institute released a report that showed how bad the financial situation is in Ontario:  The Ontario government debt is almost double that of California. They have only a third of the population (14 million vs. 38 million) and double the debt? California is really working on getting it down – Ontario seems to be really working on continuous increases. They’re already spending 10% of all their revenues on interest payments.

According to a BMO survey last week, 44% of Canadian homeowners intend to buy another home in the next five years. Boy, if that’s even close to true, that’s a lot of economic activity in the next few years! Not just for realtors and real estate prices but the average person spends over $10,000 on new appliances, renovations, etc.

Yesterday, the payday lender Cash Store Financial, with 510 stores, filed for bankruptcy. How sad (he says sarcastically). BC laws allow $23 of charges on a $100 payday loan. That wasn’t enough, as a BC court ordered them to pay back $1 million in overcharged fees. And then there’s the U.S. class action lawsuit and huge problems in Ontario…

I didn’t know a bunch of listeners have been saving thousands of dollars on eye glasses. I’ve heard from three people that Zenni Optical (zennioptical.com) and their $20 to $30 prescription glasses are actually a hit in the Okanagan! Can’t blame people…oh, and there’s another online seller now: goggles4u.com. For both, you’ll need to just enter your prescription with your P.D. (papillary distance) from your optometrist.

Government Debt vs. Ours – Is It Fair to Compare?

Now that the Canadian Federal Election is a month behind us, what are we in for? If you voted Conservative, it’s nice to see there’s a majority government and we won’t be spending the $300 million on an election every two years.

If you’re not Conservative – don’t worry about it – that’s not a true conservative government that’s elected in any event. Partly, because us Canadians wouldn’t want it, or tolerate it.The budget two weeks ago had $37 billion in deficit. That’s more spending than income. And the government will take four years to get out of the hole. If you’re spending more than you’re earning, four years puts you into bankruptcy, and you had better deal with this BIG problem sooner.

You may also realize that nobody is talking about our $500 billion debt. That’s no different than most of us individuals. We only really want to focus on making it through each month, and thinking about our total debt is way too depressing. Well, you cannot change what you don’t acknowledge. But….let’s not talk about that, or even think about the total staggering amount of debt…. Right now, however, that debt takes $40 billion of interest payments. That’s the deficit right there if we weren’t in debt!

Again, it’s exactly the same as most people’s finances. The interest we pay each month has a real choke hold on our finances.

Four years to get out of the hole? That’s four years of not a single dollar onto paying down the debt. And that’s in an economic upturn cycle. So what happens when the next down cycle, or recession comes? Yup. We’re right back to borrowing, just to pay the bills.

The vicious cycle, for governments all over the world, and all of us, is totally backwards. Financially successful people SPEND during a bad economy and SAVE during the boom times. Think about that. They’re spending when everything is on sale and saving when earnings are up and inflation makes things more expensive.

Lastly, can we please stop comparing ourselves to broke countries? Well, we’re better off than this country or that. What nonsense. My neighbor might have one foot in bankruptcy court and that makes me financially successful? Give me a break!

And a final question to ponder: Who leads the way here? Should the government be the ones to balance their budget and live within their revenues, or should we lead by example and then hold the government accountable?

Yesterday’s U.S. Elections

Yesterday, the U.S. had their mid-term elections and there are certainly some interesting philosophies and policy suggestions raised when it come to debt and financing.

A number of very conservative Tea Party Republicans were elected as senators yesterday. Their common belief, and quite correctly, is that the deficit (spending) is out of control, and spending has to be curtailed – NOW. OK, but between March and June of next year they will need to vote on increasing the debt limit. That’s the total the government owes, but something nobody really talks about at all. That’s kind of like the U.S. credit limit, and it has to be voted on a specific day when the debt ceiling is reached.

Will these senators stand on principal and refuse to vote for it? If so, you are going to see a huge, immediate, and world-wide impact on the stock market, consumer confidence, the dollar, and many other areas. It will also immediately shut down all but essential government services. Will they do it on principal, no matter what the implications?

What drove me insane yesterday were a bunch of politicians flagrantly refusing to answer direct questions of what spending they would cut. For the entire election campaign, it was nothing but generalities and buzzwords. That sounds nice, but specifically, what would you cut? Pretty much all of them said it couldn’t, and wouldn’t be defense, social security, and medicare. Fine, but there’s a problem: These three areas are around 93% of all federal spending. So what does that leave?

The equivalent is that you can’t or won’t cut your spending on housing, vehicles financed, and utilities. What does that leave where you can have a meaningful impact on your debt? Yup – nothing. Take a $4,000 income, and now work with only 7% that you can impact. That’s $280. Can you work your way out of an incredible mountain of debt when all you can work with is maybe 5 or 10% of that $280? It’s nuts. It’s political talk, and it’s ridiculous.

There are literally trillions of dollars that the U.S. government has in unfunded liabilities. That’s IOUs for pensions and medicare that are not funded and for which there’s no money. Yet, there was no talk about that. They can’t even come up with specific solutions to today’s debt – never mind the next wave that will hit within five or ten years.

There’s a Canadian politician that coined the phrase: Elections aren’t the time to talk about policy. Yesterday’s elections reminded me of that. Or essentially, we’re pretty much too stupid to understand policy questions and meaningful solutions.

Lastly, you know I’m not in favour of debt and borrowing. But in the U.S., and Canada, there are only three groups that can spend in the economy: Consumers, businesses, and the government. In a recession as severe as the one just ending, consumers stopped spending, as did businesses. Who does that leave? Can you imagine how much worse it would have been without the government infrastructure spending?

And ironically, the U.S. Chamber of Commerce heavily lobbied politicians two years ago to vote in favor of the stimulus programs. A year later, they’re spending tens of millions in campaign money against those same people who did! But that’s not much different than what some of the opposition parties did in Canada. Ah, if we could only be like politicians and have it both ways – all the time. Unfortunately, for us, in the real world – that’s not reality.