Alarm Bell is Sounded by the Fed's Chairman

Here, Mr. Greenspan is issuing a warning that the housing bubble is about to burst.
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Greenspan cautions investors

By JEANNINE AVERSA

Tuesday, September 27, 2005 Posted at 3:09 PM EDT

Associated Press

WASHINGTON — Federal Reserve Chairman Alan Greenspan issued a fresh warning on Tuesday that investors shouldn't be lulled into a false sense of security by the economy's long stretch of low interest rates.

“History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets,” Mr. Greenspan said in a speech delivered via satellite to a meeting of the National Association for Business Economics in Chicago.

Mr. Greenspan, in Tuesday's speech, didn't specify what risky assets he was referring to. But the Fed chief has been sounding an alarm for months — including an emphatic warning on Monday — about the perils to home owners and lenders using risky and exotic types of mortgages.

In his remarks Tuesday, Mr. Greenspan repeated worries he has expressed in the past — that a rise in interest rates may spell trouble for some investors who are counting on rates to stay low for an extended period of time.

“Such developments apparently reflect not only market dynamics but also the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender,” he said.

The country enjoyed some of the lowest mortgage rates in more than four decades, when the Federal Reserve ratcheted down a key interest it controlled to the lowest level in 46-years. However, since June 2004, the Fed has been raising rates gradually to keep inflation in check.

This Fed campaign is beginning to have an impact on long-term interest rates set by financial markets. While long-term rates — such as those on mortgages — are still considered low, analysts do believe that they will move higher in coming months.

Low mortgage rates powered home sales to record highs four years in a row and are on track to set a new record this year. The hot housing market has sent home prices skyrocketing.

Mr. Greenspan said it is “difficult to suppress growing market exuberance when the economic environment is perceived as more stable.”

The economy, he said, has shown incredible resilience in the face of major shocks, including the bursting of the stock market bubble in 2000 that wiped out trillions of dollars in paper wealth and the Sept. 11, 2001, terror attacks.

Even now, coping with steep rises in oil and natural gas prices over the last two years, the economy thus far has weathered “reasonably well” this situation, Mr. Greenspan said.

Mr. Greenspan devoted part of his speech to an extensive defence of the Fed's failure to deflate the stock market bubble of the 1990s. He again stated his belief that it would have required the Fed to push interest rates so high it could have triggered a serious recession.

He acknowledged, however, that the Fed was troubled as stock prices soared.

“We at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings,” he said.

Despite this concern, he and other Fed policy-makers believed that “we would have needed to risk precipitating a significant recession, with unknown consequences,” to have any impact on the roaring stock market at that time.

Mr. Greenspan on Monday offered his most extensive thoughts thus far on the housing market with a two-pronged message. He issued a fresh warning about risky mortgages, saying in the event of a widespread cooling in the housing market certain borrowers and lenders “could be exposed to significant losses.”

At the same time, Mr. Greenspan said most homeowners are in a fairly good position to weather a shock if prices drop.

“The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices,” he told a bankers conference in California.

© Copyright 2005 Bell Globemedia Publishing Inc. All Rights Reserved.

More Signs of a Recession is about to Hit.......

Needless to say more, this is another indicator that a recession is about to happen.

Now, the Feds Chairman, Alan Greenspan, is warning investors about interest rates will keep going up - which means the Federal Reserve can feel that inflation is rising (especially with the current crude oil prices).

I will post that article later today.

Increasing interest rate will cost the U.S. government billions on debt servicing. Also, mortgage rates will go up as the prime rate goes up. The real estate bubble will burst (sounds like I am just repeating myself in the past month.......)

You know the rest if you have been following this blog in the past few weeks.
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U.S. consumer confidence drops

By ROMA LUCIW

Tuesday, September 27, 2005 Posted at 10:55 AM EDT

Globe and Mail Update

U.S. consumer confidence tumbled in September to its lowest level in almost two years, hurt by record high gasoline prices and the damage inflicted by hurricane Katrina.

The U.S. Conference Board said its index, which had rebounded in August to a revised 105.5, fell to 86.6, the lowest since 81.7 in October, 2003. Analysts had expected the index to decline to 95.

“Hurricane Katrina, coupled with soaring gasoline prices and a less optimistic job outlook, has pushed consumer confidence to its lowest level in nearly two years and created a degree of uncertainty and concern about the short-term future,” said Lynn Franco, director of the Conference Board's consumer research centre.

The price of crude and gasoline rocketed higher this month after Katrina, and most recently Rita, tore through the South-Eastern United States. Katrina damaged rigs and disrupted oil production in the Gulf of Mexico, and left hundreds dead and thousands homeless. The rise in energy bills have left Americans with less money to spend, and is threatening to curtail economic growth.

However, Ms. Franco said that historically, shocks such as those triggered by Katrina have had a short-term impact on consumer confidence.

“Fuel prices remain high, though they have retreated in recent days, and when combined with weaker jobs market outlook, will likely curb both confidence and spending for the short-term. As rebuilding efforts take hold and job growth gains momentum, consumers' confidence should rebound and return to more positive levels by year-end or by yearly 2006.”

The present situation index fell to 108.9 from 123.8, but the expectations index suffered the biggest drop, falling to 71.7 from 93.3.

Ian Shepherdson chief U.S. economist at High Frequency Economics, noted that the expectations index is at its lowest since March 2003, when the U.S. was waging war in Iraq.

“It is not clear there is anything in this survey that was not already apparent; the awful images of Katrina and its aftermath, together with the brief but huge spike in gas prices, depressed confidence substantially. The key question now is how quickly it recovers; we are hopeful the October numbers will show a partial rebound,” he said.

The Conference Board's assessment of the job market also turned pessimistic in September, with those expecting more jobs to become available in the near future dropping to 14 per cent from 16.4 per cent. The index of those expecting fewer jobs jumped to 25 per cent from 17.3 per cent in August.

The number of consumers saying business conditions are good fell to 25.2 per cent from 29.7 per cent, while those who said conditions are “bad” climbed to 17.7 per cent from 15.1 per cent. Furthermore, those anticipating business conditions will worsen rose to 19.8 per cent from 10.0 per cent.

The Conference Board is based on a survey of 5,000 households, conducted before Sept. 20.

Earlier this month, the University of Michigan's preliminary consumer sentiment index for September dropped to a 13-year low of 76.9, its biggest monthly drop on record.

© Copyright 2005 Bell Globemedia Publishing Inc. All Rights Reserved.

My Education Seems to Worth the Cost!!

Being able to post similar analyzes to the Economist (about the US economy and an upcoming recession) four weeks in advance just skyrocketed my ego.

A recession in North America, to me, is inevitable. It will hit the United States in the next 6 months. Canada will follow suite. This recession will hit Central Canada the hardest, given that most of Canadians' manufacturing are based in Ontario and Quebec. Other provinces (i.e. Saskatchewan, Alberta, and BC), with a significant resource based economy, will not be hit as hard.

I wish I can comment a bit more on the article. Maybe whenever I have a bit more time after this week.
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Reluctant party-poopers

Sep 21st 2005
From The Economist Global Agenda

Despite the economic impact of Katrina, which dealt a stiff blow to America’s oil markets, the Federal Reserve has once again raised interest rates by a quarter of a percentage point. With high fuel prices threatening to bring on both inflation and recession, being a central banker is harder than it used to be

WILLIAM McCHESNEY MARTIN, a past chairman of America’s Federal Reserve, famously observed that the job of a central banker is to “take away the punch bowl just when the party is getting started”. Unsurprisingly, this often generates quite a bit of hostility from the party-goers, who would prefer a few more shots of low interest rates to really get things going. This accounts for the tendency of many central bankers in years past to err on the side of easy money, resulting all too often in double-digit inflation.

Of course, if the party gets out of hand, and the house is wrecked, the central banker can expect to come in for plenty of censure, even from those who were previously begging him to give them just one more for the road. After the excesses of the 1970s, and the hangover of the early 1980s, it was thought that monetary authorities had learned their lesson. Twenty years on, most developed countries seem to have built a solid reputation for inflation-fighting; even lax Italy has been brought under the discipline of the European Central Bank (ECB). And developing countries, seeing the results, seem to be genuinely interested in keeping inflation in check.

And yet this is a worrying time to be a central banker. Though global economic growth is strong and inflation tame, powerful imbalances are building beneath the surface, and they threaten to throw the world economy off course. The fight against inflation is, it turns out, just one battle in a wider war.

It is hard, of course, to feel too sorry for the Fed’s Alan Greenspan, who enjoyed rock-star-like levels of popularity in the late 1990s, when America happily handed him the credit for its long economic boom. Nonetheless, he now finds himself deep in uncharted waters. After cutting short-term interest rates to just 1% to help ease the country out of the 2001 recession, he has been raising them at a measured pace, trying to keep the economy from overheating. The Fed’s hawkish credibility, along with cheap goods from China and other low-wage countries, has helped to keep consumer-price inflation relatively tame despite exceptionally loose monetary policy.

Asset-price inflation is another story. Though America’s stock markets are quiet compared with the go-go 1990s, its housing market looks decidedly frothy. Consumers have tapped into home equity and cut back saving to virtually nothing in order to finance their continued spending. As a result, they are dangerously overstretched and vulnerable to any change in interest rates. A sharp correction in the housing market could give the economy convulsions. There are similar worries in Britain, whose central bank cut interest rates in August as the (so far) gentle deflation of the country’s housing bubble contributed to a sharp slowdown in consumer spending. The Bank of England left rates unchanged this month, but with fears growing that economic expansion will fall short of expectations, it may soon have to choose between fighting inflation and staving off Britain’s first recession in over a decade.

The Fed may well face the same tough choice. Hurricane Katrina roared into already tight oil markets, damaging much of America’s oil-pumping and -refining capacity, and another hurricane, Rita, threatened to wreak more havoc along the Gulf coast this week. With the petrol price hovering around $3 a gallon and America’s consumers already living beyond their means, another recession no longer seems impossible. Nonetheless, the Fed continued to play the party-pooper this week, raising rates by another quarter of a percentage point, to 3.75%, at its meeting on Tuesday September 20th. Katrina’s inflationary effects, it concluded, were more worrying than its direct impact on GDP growth.

Nonetheless, both effects are causing concern, and this has led to renewed talk of stagflation, a central banker’s worst nightmare. With its combination of slow growth and fast inflation, stagflation presents the monetary authority with a dreadful dilemma: lower rates and let inflation run away, or raise them and throw even more people out of work. So far, there is little evidence of real danger. But given that higher energy prices generally boost inflation and shrink demand, it is not unreasonable to worry about the future.

Yet Mr. Greenspan and Mervyn King, the Bank of England’s governor, have it easy compared with Jean-Claude Trichet, the head of the ECB, monetary guardian of the euro area. Mr. Trichet presides over a currency zone more diverse than America’s, but without the fiscal stabilizers that help smooth over regional variations. In 2004, Portugal’s economy grew by 1%, Ireland’s by almost 5%, but both had the same nominal interest rate. This has the perverse effect of giving higher real (inflation-adjusted) interest rates to slow-growing, low-inflation countries, and lower real rates to booming economies with rapid inflation—precisely the opposite of what a sound monetary authority would prescribe.

Moreover, the euro area as a whole has grown slowly: by just 2% in 2004, according to statistics from the Organization for Economic Co-operation and Development, compared with 3.1% in Britain and 4.2% in America. For this, the central bank has taken a disproportionate share of the blame. Critics say that the ECB, which has left interest rates unchanged at 2% for more than two years, is paralyzed, unable to look beyond its inflation-fighting mandate to deal with Europe’s economic malaise.

The reality is more complicated. The euro area’s economic woes have much more to do with tight fiscal policy and structural rigidities in its markets, particularly those for labour, than with any bottlenecks in the money supply. Real interest rates have actually been near zero in the euro area for much of the past two years, making monetary policy relatively loose. But because continental Europe’s mortgage markets are less sophisticated than those in Britain and America, changes in interest rates do not filter through as easily to consumer demand, limiting the effects of monetary loosening. And the ECB, like its American and British counterparts, must contend with high oil prices pushing up the inflation rate and hindering growth.

In Asia, too, central bankers are having to deal with the fallout of higher oil prices. In Indonesia, rising prices for the country’s oil imports, paid for in dollars, recently sparked fears of a currency crash. The central bank seems to have staved off the crisis, but only by raising interest rates three times in the past month.

China’s central bank faces a different set of problems. To keep the yuan cheap enough to subsidize China’s massive export industries, it has had to buy billions of dollars and pour them into American bonds. The longer this goes on, the more vulnerable the bank is to a fall in the value of the dollar, which would in turn sharply decrease the value of its bond stockpiles. But fears of the domestic political unrest that might occur if the export sector faltered keep the bank from reducing its exposure to the dollar. Moreover, the massive currency operations create domestic inflationary pressure, which the bank struggles to contain given the primitive state of China’s financial markets. No matter where you are, it seems, being the central banker is no party.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

It'll Keep Going Up!!

Like I said about a month ago, the interest rate will keep going up, as oil price and inflation keeps soaring and a recession is about to hit America.

With government spending being tied up in Katrina reliefs and possibly other reliefs after Hurricance Rita (another catagory 4 storm), there will be even less room for the U.S. Government to move when the recession hits.

All I can say is "sit tight and get ready for the rough ride"!!
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Fed raises rate to 3.75%

By TAVIA GRANT

Tuesday, September 20, 2005 Posted at 3:01 PM EDT

Globe and Mail Update

The Federal Open Market Committee raised its key lending rate for the 11th straight time, to 3.75 per cent from 3.5 per cent, suggesting the Fed is more concerned about rising inflation in the U.S. than any economic slowdown stemming from hurricane Katrina.

In one of the most widely debated outcomes in years, the Fed said the economy was expanding at a healthy pace before the hurricane hit. While the Fed suggested Katrina will hurt the U.S. economy and add to energy price volatility in the short term, it kept the word “measured” in its description of future rate hikes.

Many economists had expected the Fed to raise rates, but signal a pause after today.

“There's absolutely no hint in this statement that the Fed is gearing up to move to the sidelines,” said Marc Lévesque, chief strategist at TD Securities Inc. “Unless energy prices soar or the U.S. economy runs into a really serious rough patch, it's a good bet that at the next FOMC meeting they're going to hike another 25 (basis points).”

The decision comes just three weeks after hurricane Katrina hit, with many economic reports not yet reflecting the effect of the devastation. Katrina could cost as much as $200-billion (U.S.) in federal spending and has prompted economists to cut their third-quarter growth forecasts on expectations higher gasoline prices will sink consumer spending.

But the Fed indicated Tuesday that those effects could be fleeting.

“While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat,” the FOMC said in a statement. “Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures.”

Still, core inflation has been muted in recent months and longer-term inflation expectations remain “contained,” it said, adding that it will continue to raise rates “at a pace that is likely to be measured.”

As of Monday, 86 of 107 economists surveyed by Bloomberg News had expected the Fed to raise its benchmark rate today, while 21 expected it to stay pat at 3.5 per cent. Before the hurricane, all of the economists surveyed expected an increase, Bloomberg said.

Unlike previous announcements over the past year, today's decision wasn't unanimous. Nine committee members favoured a rate hike, while Mark Olson preferred no change in the federal funds rate target.

The Canadian dollar was little changed after the announcement, hovering at a 13-year high of 85.55 cents. The Dow Jones industrial average, meantime, fell on expectations higher borrowing costs could crimp earnings. U.S. Treasuries also declined.

© Copyright 2005 Bell Globemedia Publishing Inc. All Rights Reserved.

The Free Ride is OVER!!

Well, The New York Times finally requires subscription to read its Editorial/Op-Ed section of its web-site, which means no more free Krugman articles from now on..........

Flat Tax or Not??

I used to be a proponent of flat tax (about 10 years ago.) However, I am having some reservations to the idea.

The utility that can be generated by an "extra dollar" decreases as income rises (i.e. the diminishing marginal utility of income) - richer individuals are "less dissatisfied" to pay more tax than the poor.

However, that does not mean that we should tax the rich excessively (i.e. punitive rates that Britian had before Thatcher - a whopping 98% at the top income tax bracket.)

On the other hand, with a flat tax (aka the proportional tax system), the middle class will be hit the hardest (see the article below from "The Economist") if the government wants to generate the same amount of tax revenue.

Here will be the question for flat tax proponents: Should the government make a higher flat tax rate and provide more tax credits to lower income earners?

Or the government should simply tax less, overall, and take a hit in their revenues?

Obviously, there are no clear answers to the question.

Take Canada for example. Our tax rate is almost like a flat tax rate - that is if all the "clawbacks" are included (I will try to provide the study that I read in the next couple weeks for this claim.) Our tax system is not as "progressive" as many other think.

There is definitely no clear-cut answers to this "big debate" if proportionate taxation is a better system than progressive taxation. It is a very similar debate to the question "If tax cuts are always good?"

This is an issue of which income class and how much should each of them share the tax burden.

My answer is everything has to be dealt with moderation. Every country and every region are different, and just like almost every other issues in economics, there is no straight right or wrong answers to the great tax debate.

For your information, "Mentok the Mind-Taker" made a couple interesting posts about tax cuts last week. But I think now you have to e-mail him for those posts, as he took them down.

Also, "When Irish Eyes Are Smiling" made a good post about taxes as well.
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Flat income tax

A dip in the middle

Sep 8th 2005
From The Economist print edition

The Conservatives toy with a politically risky idea

INCOME tax has been paid in Britain for more than two centuries. First introduced by William Pitt the Younger to finance the war against Napoleonic France, it is the Treasury's biggest source of revenue, raising 30% of tax receipts. It arouses strong political emotions, regarded as fair by some because it makes the rich pay a bigger share of their income than the poor, but unfair by others because it penalises enterprise and hard work.

During the past 30 years, income tax has been subject to sweeping changes, notably the cut in the top rate from 98% to 40% under Margaret Thatcher between 1979 and 1988. Now another Conservative politician, George Osborne, is floating a radical reform to match that earlier exploit. The shadow chancellor announced on September 7th that he was setting up a commission to explore the possible introduction of a flat tax in Britain.

Mr Osborne's big new idea stems in part from frustration at the Conservative party's failure to win votes on tax in the past two elections. Their proposal to cut taxes by £4 billion ($7.4 billion) a year did them few favours at the polls in May. Such a paltry reduction in a trillion-pound economy seemed an apology of a policy.

By contrast, the introduction of a flat tax would be a radical step. The reform is already being tried elsewhere. Mr Osborne first expressed interest in the flat tax after a visit in June to Estonia, which introduced it in 1994. Since then eight other countries in eastern and central Europe have followed suit. Poland appears likely to adopt a flat income tax. Even Germany is flirting with the idea (see article).

Introducing a flat income tax into Britain would involve two main changes. At present, there are three marginal tax rates. The first £2,090 of taxable income is taxed at 10%; the next £30,310 is taxed at the basic rate of 22%; and income above that is taxed at the higher rate of 40%. These three rates would be replaced by a single rate, which would be considerably lower than the current top rate. At the same time there would be an increase in the tax-free personal allowance, currently worth £4,895.

Flat-tax proponents say that the reform would yield many economic benefits. If it were combined with an assault on other tax reliefs, then it would simplify a tax system that is groaning with complexity. The latest edition of “Tolley's Yellow Tax Handbook”, which contains all direct-tax legislation for 2005-06, runs to four weighty volumes and has roughly doubled in length since Gordon Brown became chancellor of the exchequer in 1997. Only this week, Mr Brown was upbraided by a parliamentary committee for the complex “nightmare” of his system of tax credits, designed to help poorer families.

Another advantage is that reform could sweep a lot of low-paid people out of income tax altogether. In the past eight years under Labour, the number of income-tax payers has risen from 26.2m to 30.5m. Over the same period, the number of higher-rate taxpayers has risen from 2.1m to 3.6m.

Flat-tax fans also think that it could trigger a new economic dynamism, as people respond to the enhanced incentive to work harder. The more this happens, the more the reform could pay for itself as a bigger economy generates more tax revenues.

So much for the economic case for a flat tax. What of its politics? One obvious objection is that the reform would be unfair, since the richer would pay less tax than they do at present. Advocates of a flat tax make two rejoinders. First, an income-tax system with a single rate remains progressive—the rich pay a higher proportion of their income than the poor—as long as it is combined with a tax-free allowance. Second, the rich can exploit current complexities to avoid taxes in ways that could be curtailed in a flat-tax system.

But could a flat tax be introduced without there being losers? A recent paper from the Adam Smith Institute suggested that this would indeed be possible. Richard Teather, its author, proposed a flat-rate tax of 22%, the present basic rate, with a tax-free personal allowance of £12,000, more than double the current one. “All taxpayers would be better off under the reform,” he argued.

However, the proposal has an obvious flaw. As Mr Teather himself admits, it would result in an initial loss in revenue of £50 billion a year. That is over a third of the total income-tax receipts of £138 billion that the Treasury expects this year; and a tenth of all government revenues.

Unless public spending were slashed, other taxes would have to rise to meet this shortfall. So a more realistic simulation of the impact of a flat tax is to make it revenue-neutral. The Economist asked John Hawksworth, an economist at PricewaterhouseCoopers, an accountancy firm, to calculate what that might involve. He said the current yield of income tax could be preserved with a flat rate of 30% and a personal allowance of £10,000. We also asked Mr Hawksworth to estimate what impact such a reform would have on income-tax payers. Under this revenue-neutral approach, there would be losers as well as winners compared with current tax bills (see chart).

Those who would gain are low-earners as well as high-fliers. For example, someone on £10,000 would gain 8.7% of their income; someone on £100,000 would gain 5% of their income. Those who would lose are in the middle, with losses peaking at 3.5% of income at the current higher-rate threshold of £37,295. In all, more than 10m income-tax payers—a third of the present number—would lose from such a reform.

Clearly, different combinations of allowance and tax rate would generate different results. But the general pattern would remain the same. “If you raise the same revenue but increase the allowance, then it is the people in the middle of the income tax paying population that lose from a flat tax,” says Christopher Heady, head of tax policy at the OECD.

This finding is politically awkward for the Tories. Unless a flat income tax were financed by big increases in other taxes, it is difficult to see how it could realistically be introduced without exacting a lot of pain among middling earners. Yet their votes will be crucial if the Conservatives are to stand any chance at the next election.

The flat tax is an arresting idea—and politically attractive because it gives the Tories a platform to attack Labour's itch to meddle with the tax code—but it does not get the Conservatives off the hook. Mr Osborne wants lower and simpler taxes. However, he will be able to achieve that goal only if he can work out a convincing set of proposals to cut public spending.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Low Household Savings Rate - In the Canadian Context

I made a post about the current status of the American economy and their savings rate a few weeks ago (re: Greenspan Got It Right (again)!!).

This time, instead of focusing on the American economy, a similar phenomenon has been happening in Canada. Although our household savings rate is not as low as our neighbour's, the sign is not encouraging at all.

The Americans are having a -0.5% household savings rate (yes, it is a negative number, which means foreign countries are financing Americans' consumptions - just like what I stated a few weeks ago, and Americans are loading up their debt.)

We, the Canadians, are not much better. Our household savings rate is at the lowest on record; only at 0.5% - which means, on average, for every $100 a household earned, only $0.50 is put into savings.

Mr. Tal, the CIBC economist (see the G&M article below), basically stated what I said a few weeks ago - but in the context of the Canadian economy.

Households with no savings will suffer much more then those with savings. Savings in bank accounts help to absorb shocks brought by recessions (and that echoes my point that the U.S. is heading for a painful recession whenever it happens.)

The bright side of the picture for Canadians is most of our governments are running surpluses. Effects of shocks from a recession can be partially eased off by government spending.

Therefore, when a recession hits this continent (which will not be far away), the Canadian economy should not suffer as much as the American economy would - and let's hope that will be the case.
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Canadians not saving enough

By TAVIA GRANT

Tuesday, September 13, 2005 Updated at 3:11 PM EDT

Globe and Mail Update

Canada's personal savings rate has dropped to its lowest level since the 1920s in recent months, a phenomenon that one economist said is making people more vulnerable to economic shocks.

While the personal savings rate has been in a freefall for years, most economists had dismissed it as a poor indicator, saying the rate doesn't reflect soaring prices for assets such as houses, which have jumped almost 50 per cent since 1997 alone.

But Canadian Imperial Bank of Commerce senior economist Benjamin Tal said Tuesday the indicator shows Canadians are not saving enough to cushion them from any sudden change in economic conditions. Moreover, real-estate holdings tend to be illiquid and house prices are expected to level off in the coming year.

“The negative savings rate is reducing flexibility as far as households are concerned,” said Mr. Tal in an interview. “That will have an impact on their ability to respond to any economic shocks, be it higher energy prices, higher interest rates or an economic recession.”

Because Canadians have almost no savings, economic shocks could be exacerbated by a slowdown in consumer spending, the main driver of Canadian economic growth, Mr. Tal said.

His report comes after Statistics Canada said last month that the rate plummeted to 0.5 per cent in the second quarter. In the U.S., meantime, the personal savings rate stands at minus 0.6 per cent, the lowest level on record.

While the methodology of calculating the rate may be flawed because it doesn't include asset prices, it's been compiled in the same way for decades. Ten years ago it stood at 10 per cent, 20 years ago at 20 per cent — an indication of a significant downwards trend, he said. Moreover, all age groups have seen a steady drop in their savings rate, Mr. Tal said in the report.

He attributed the falling rate to a number of reasons, among them lower inflation expectations, an extended period of low interest rates, a slower pace of personal income growth and changing financial attitudes.

This, combined with a real-estate boom, has turned Canadians into passive savers, with most of their money tied up in their homes, he said. And while financial assets, or more liquid assets, have been climbing in recent years, it's been mostly concentrated among older Canadians. At least 40 per cent of Canadian households have no financial savings outside of their personal savings and chequing accounts, he wrote.

Overall, CIBC recommended Canadians start building up their nest eggs — especially as guaranteed investment certificates offer low returns.

“The practical implication of this environment is that young Canadians today must start saving very early in their life compared to previous generations,” the report said. “Our findings as presented in this report suggest this is not happening.”

© Copyright 2005 Bell Globemedia Publishing Inc. All Rights Reserved.

For Those Who Champion Tuition Freezes.......

This is an article from "The Economist".

A couple year ago, a professor of mine said that there are "two leagues" for the Nobel Prize of Economics. They award North America economists one year (which is the regular Olympics), and Europe economists in the next (my professor called it "the Special Olympics") and they alternate it every year.

What he was trying to say is Departments of Economics in North America are much better, in general, then Europe. I don't know if that is the truth or not, as I have not seen any studies on this issue (or any sort of measurements). However, going by this article, there are some truth to the quality of North American institutions are better than European.

A very simple trend can provide signals that North America universities probably have better qualities. Most students from second and third world countries choose to study in North America rather than Europe for their post-secondary education - if they are going abroad.

Now for those of you who want tuition freezes and lower tuition fee, you should be glad that there is a significant cost for post-secondary education. The quality of our product (education) , in general, actually is better than Europe's - where many countries have free post-secondary education. Hence, our university graduates are more productive than graduates from Europe. More productive societies are wealthier societies, with higher economic growth, and better living standards.
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Universities

How Europe fails its young

Sep 8th 2005
From The Economist print edition

The state of Europe's higher education is a long-term threat to its competitiveness

THOSE Europeans who are tempted, in the light of the dismal scenes in New Orleans this fortnight, to downgrade the American challenge should meditate on one word: universities. Five years ago in Lisbon European officials proclaimed their intention to become the world's premier “knowledge economy” by 2010. The thinking behind this grand declaration made sense of a sort: Europe's only chance of preserving its living standards lies in working smarter than its competitors rather than harder or cheaper. But Europe's failing higher-education system poses a lethal threat to this ambition.

Europe created the modern university. Scholars were gathering in Paris and Bologna before America was on the map. Oxford and Cambridge invented the residential university: the idea of a community of scholars living together to pursue higher learning. Germany created the research university. A century ago European universities were a magnet for scholars and a model for academic administrators the world over.

But, as our survey of higher education explains, since the second world war Europe has progressively surrendered its lead in higher education to the United States. America boasts 17 of the world's top 20 universities, according to a widely used global ranking by the Shanghai Jiao Tong University. American universities currently employ 70% of the world's Nobel prize-winners, 30% of the world's output of articles on science and engineering, and 44% of the most frequently cited articles. No wonder developing countries now look to America rather than Europe for a model for higher education.

Why have European universities declined so precipitously in recent decades? And what can be done to restore them to their former glory? The answer to the first question lies in the role of the state. American universities get their funding from a variety of different sources, not just government but also philanthropists, businesses and, of course, the students themselves. European ones are largely state-funded. The constraints on state funding mean that European governments force universities to “process” more and more students without giving them the necessary cash—and respond to the universities' complaints by trying to micromanage them. Inevitably, quality has eroded. Yet, as the American model shows, people are prepared to pay for good higher education, because they know they will benefit from it: that's why America spends twice as much of its GDP on higher education as Europe does.

The answer to the second question is to set universities free from the state. Free universities to run their internal affairs: how can French universities, for example, compete for talent with their American rivals when professors are civil servants? And free them to charge fees for their services—including, most importantly, student fees.

Asia's learning

The standard European retort is that if people have to pay for higher education, it will become the monopoly of the rich. But spending on higher education in Europe is highly regressive (more middle-class students go to university than working-class ones). And higher education is hardly a monopoly of the rich in America: a third of undergraduates come from racial minorities, and about a quarter come from families with incomes below the poverty line. The government certainly has a responsibility to help students to borrow against their future incomes. But student fees offer the best chance of pumping more resources into higher education. They also offer the best chance of combining equity with excellence.

Europe still boasts some of the world's best universities, and there are some signs that policymakers have realised that their system is failing. Britain, the pacemaker in university reform in Europe, is raising fees. The Germans are trying to create a Teutonic Ivy League. European universities are aggressively wooing foreign students. Pan-European plans are encouraging student mobility and forcing the more eccentric European countries (notably Germany) to reform their degree structures. But the reforms have been too tentative.

America is not the only competition Europe faces in the knowledge economy. Emerging countries have cottoned on to the idea of working smarter as well as harder. Singapore is determined to turn itself into a “knowledge island”. India is sprucing up its institutes of technology. In the past decade China has doubled the size of its student population while pouring vast resources into elite universities. Forget about catching up with America; unless Europeans reform their universities, they will soon be left in the dust by Asia as well.

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