Arbitrage Magazine - October 2010 by Arbitrage Magazine

The Con of Inflation:

WHERE DO FINANCIAL CRISES COME FROM?

THE MONEY ISSUE

From Gold to Fractional:

DOES GOLD NEED A COMEBACK?

The Evolution of Money Why We Love Money

IS OUR FINANCIAL SYSTEM A PYRAMID SCHEME

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EDITOR'S NOTE To the Arbitrage Community, As the Arbitrage Magazine enters into its forth issue, I’m proud to say that we’re finally taking the necessary steps to turn the “ARB” into a groundbreaking publication.

FALL 2010 Editor-in-Chief+CEO David Alexander Board of Director Samita Vasudeva Garin Kilpatrick

The first step in this process is the ARB website (www. ArbitrageMagazine.com). It’s finally up, roaring and ready to champion our mighty magazine into the wide and wild world of the Interweb.

MAGAZINE PRODUCTION TEAM Managing Editor Section Editor Writing Staff

Writer-At-Large

Kevin Kang Saif Quershi David Tal Pawan Shamdasani Alfred Yim Victoria Chau Luis Fernando Arce Troy Redick Nicki MossavarRahmani

Contributor

Rabeea Wajeeha Sushil Tailor Alex Vo Michael Moretto Charles Dreezer

Art Director

Ryan Trinidad

Design Staff

David Tal Luis Ernesto Rojas Gonzalez Akil Worrell Jennifer Lee Mary Zhao Trishaala Ninan Laura Gonsalves Katie L. Serensits

ARBITRAGE SUPPORT STAFF Director HR HR Coordinator

Marketing Staff Web Designer Accountant

Rabeea Wajeeha Natalie Sekiritsky Amritha Godishala Sakthi Subas Andrei Dias Sushil Tailor Catherine Chen Fu-Chieh Yao Junwen (James) Wu

That said, its goal isn’t to simply regurgitate the content offered in the ARB magazine, but to involve our readership through meaningful conversation and debate (and a few cash prizes along the way). To that end, we very much hope that you put a little of yourselves into this website so that it provides you and others more value, so that it becomes a better representative of its readership and in the end, so that it’ll be worth sharing to your friends. On top of this, we’re on a hiring binge: we’ve already doubled the size of our staff, with plans to double it again within three to four months. And with all these new hands on deck, we plan to start invading all Toronto and GTA schools with innovative marketing campaigns, as well as reach out to all our cross border and overseas readership. Finally, the ARB magazine itself. We’ve doubled our design staff to give your eyes more to drool over. We’ve added new writers to provide your brains with new perspectives. And together, we’ve provided you with a publication that (we hope) you’d be eager to share, learn from and call your own. Going forward, the ARB hopes to continue entering new territory by discussing controversial subjects and opinions, exploring alternative perspectives on current events and sounding the alarm about those trends that will change your future over the coming decade. Enjoy the read!

David Alexander CEO & Editor-in-Chief Arbitrage Magazine Email: d.alexander@arbitragemagazine.com LinkedIn: http://www.linkedin.com/in/davidalexander85

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Features:

ALL THE WORLD’S A CAGE

THE CON, OF INFLATION

? WE

♥$

FROM GOLD TO FRACTIONAL

40 THE EVOLUTION OF MONEY 67 WHY WE LOVE MONEY

By Nicki Mossavarrahmani, Writer-At-Large Designed by David Tal

Rachel Cuthbert, CMA Business Intelligence Analyst, Aritzia LP

I HELP TURN DATA INTO LITTLE BLACK DRESSES. What attracted Rachel Cuthbert to the Certified Management Accountant program was the opportunity it gave her to work in any industry. Fashion being one of her passions, it’s no surprise Rachel landed at Aritzia, a North American fashion boutique. She credits her CMA with giving her the tools to understand the business side of fashion. It’s a career choice that fits her perfectly. See Rachel’s film at becomeacma.com.

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becomeacma.com ®/™ Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. Used under license.

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Content: POLITICS AND BUSINESS

CANADA

The Chinese Marketplace Why markets are needed for a nation to thrive.

FIFA and South Africa: a Mismatch of Interests

The albertan tar sands Hidden Fortunes Or Empty Dreams?

FINANCE

EDITORIALS AND OPINIONS

Basic Money Management

Is the Stock Market Really Just a Casino?

What is Short Selling?

Spreading the Wealth: Spread & Long/Short Strategies

Scare Tactics and the Blurring of Truth

CETA: Is this New Agreement Right for Canada?

CANADIAN CONSUMERS ARE GETTING LESS WHEN THE DOLLAR IS WORTH MORE

“Canadian retailers have yet to pass on the gains of a strong Canadian dollar.”

mutual funds

The Greatest Crime Perpetrated to Humankind

Have Canadian Banks Played It Too Safe?

Greed is NOT good

Worthless Endeavours Protesting the G20 Summit CAREER PLANNER

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Is the Financial System One Giant Pyramid Scheme?

OPINION by: David Tal Designed by: Jennifer Lee

THESE ARE THE lullabies people say to comfort themselves. However, as you’ll see, it’s no defence. Take the case of Bernard “Bernie” L. Madoff. He got caught inside a whirlpool last March, 2009, when he pled guilty to running an elaborate Ponzi scheme that fooled a highlight reel of celebrities, charitable organizations and what many considered to be ‘informed/professional’ investors. The fallout was many tens of billions worth of investments written off into the red—this included the life-savings of many who will now never know a comfortable retirement. When such high profile scams make headlines, both the victims and the public are left to ask how so many high-powered, intelligent people could be duped so easily. In retrospect, it seems obvious that an eye of caution be directed upon people or corporations who offer inexplicably high or consistent returns on monies invested. Haven’t these people ever heard the adage that if something sounds too good to be true, it usually is? Such questions generally conclude with people mumbling another adage—buyer beware—and then believing that the same thing could never happen to them. But what if it can? What if you, dear reader, are already in the clutches

of a similar scam to the one suffered by Madoff’s investors? And what if everyone is in on it, both as victims and perpetrators of the largest financial scam known to human history? To be more blunt, what if our entire financial system—as it exists today—is a scam, one that’s hardwired to funnel wealth from the masses to an elite few? Don’t want to believe it? Well, before you stop reading, how about we play around with this theory? To start, if we are going to put our financial system on trial, it is necessary to define the parameters of this charge.

SET UP

For one, how should we define our present financial system? Well, we can start by focusing on the financial system that the modern world’s majority uses: Monetarism. This is a theory whereby, according to the American Heritage Dictionary, “economic variations within a given system, such as changing rates of inflation, are most often caused by increases or decreases in the money supply—usually enacted by controlled government policy.” (For those new to

economics, don’t worry. This will be explained more simply soon enough.) No matter the country, nor the dominant ideology we ascribe to—be it communist, socialist or capitalist—they all use a monetary system; only the degree of government intervention in the system varies. Next, what kind of scam are we charging our financial system of resembling? For the purposes of this article, we will use a pyramid scheme as a model (albeit the most sophisticated pyramid scheme ever devised). Briefly, a pyramid scheme is a scam where one ringleader (sometimes a team) convinces a number of individuals to invest money into a ‘new money making system,’ which requires these new investors to work—usually on a kind of commission—to recruit others to then invest money back into the said ‘system.’ Those new recruits are then encouraged to lure even more individuals into this system and so on. This scheme is called a pyramid scheme because of its shape: if one person recruits ten people and those ten each recruit ten others and so on, the pyramid could potentially involve everyone on earth within ten rounds of recruiting—with most or all the

money being funnelled to the top. That said, such schemes never make it to this level, as once it reaches a certain size, there will always be a few who begin to smell a fish. So with these parameters set, let’s turn our attention to some of the prominent reasons why people get caught up in financial schemes. According to Skepdic.com, greed is probably the underlying factor. The desire for wealth and power are easy levers that the crafty can wield against most anybody. This greed, or even just a basic desperation for money, can lead to varying states of wishful thinking, where even the smartest of those involved forsake logic and reason for the hope that this ‘money-making system’ is actually legitimate. As a result, asking those worthwhile questions that can save one’s wallet all of a sudden begins to feel uncomfortable or impolite. Even those few who catch on to what they’ve gotten themselves into continue playing along, thinking, “Hey, I’m not at the bottom of the pyramid; I’m near the top. I can still get out of this making a profit!” Housing Meltdown, anyone? Finally, one should also consider that it often isn’t a shifty looking man in a trench coat trying to recruit you into these get-rich-quick-schemes, but

normal, honest-looking people. These people are quite often educated and/or well-respected, like teachers, investors (ala Bernie) and even police officers. Anyone is susceptible, and the more the initial ringmaster can attract respected participates into this system, the more it wraps around itself an air of legitimacy borrowed from such individuals. This makes the system that much more attractive to future recruits.

another factor, one that makes this system thoroughly unstable and perpetually in need of government intervention—like a crack fiend’s constant search for another fix. Interest. Sometimes called usury, interest (the charging of a fee for the use of money) was once banned in the ancient world. All Abrahamic belief systems (i.e. Judaism, Christianity & Islam) likened it to a sin and even philosophical titans like Aristotle deemed it unnatural. It was only until late into the 16th century that interest slowly began to gain acceptance (primarily due to a push from the business classes), until charging interest became normalized in the 17th century. Now while the concerns about interest being sinful may be a tad antiquated, the way it affects and distorts our financial system, our personal lives and our freedoms are very real. To explain, think back to the previous sidebar that explained how money is created and now add on top of it the next sidebar that explains the effect of interest. (Refer to Figure 1 on the next spread.) From what The Effect of Interest infographic shows us, interest has no place in a perfectly stable

FOUNDATION

Now that we’ve explored how average financial schemes scam people, it’s about time we investigate our present financial system to see how it scams people in a positively above-average way. To do this, we first need to explore the system’s innards, i.e. shed light on how money is created, how it’s manipulated, and how you and I and all of society are bound inside its cage. To begin, let’s show how money is created. (Refer to Sidebar A below.) Now that we know how money is created, let’s take it one step further. Aside from the inflation that’s structurally built into our financial system (thanks to the Fractional Reserve System), there is

HOW SIDEBAR A:

MONEY IS CREATED

HOW MONEY IS CREATED

Note: Oh hi! I need 10 billion dollars. Can you help me out?

Sure! Anything for a friend. That said, I’d like 10 billion in bonds.

Hey, no sweat!

Super! Now here’s your money.

10 BI LL

$$LL$ION

10 B I

ION

N LLIO 10 BIBONDS

Once the Federal Government receives the new money, it places it into a bank account to become legal tender money, adding 10 billion to the money supply. And that’s how money is created, though today it’s done electronically and within a few seconds. But it doesn’t end there.

The new money created is created out of debt, i.e. the Central Bank created the 10 billion with the expectation that it will all be paid back. So essentially, MONEY = DEBT. [In fact, under our current system, one cannot exist without the other. If everyone paid off all their debt, there would be no money for the economy to function. The crazy thing is, the world doesn’t even have enough money to pay off all the debt that exists (sidebar B will answer why this is so).]

and sustainable monetary system, as its presence is an inherently destabilizing influence that works to undermine the viability of a stable economic system. This is because not only is new money generated out of nothing (ala sidebar A), but the money needed to pay back the interest applied to this new money doesn’t even exist! So where does society find all this non-existent money to pay down the interest on the money that was created out of nothing? It can’t. The system in place now has a built-in perpetual deficit, one that is destined to collapse the entire system unless measures are taken to avoid it. As luck would have it though, there are two options to deal with this flaw. Individually, those who don’t have the power to print more money and can’t pay their debts or interest can simply go bankrupt and have their assets liquidated. Meanwhile, governments, which can print more money, do so, and do so excessively (as we saw governments do following the late 2008 Housing Meltdown). Thus, on a micro level, the ill effect of both fractional-reserve banking and interest is that a percentage of the population is destined for financial

Once the 10 billion is deposited into a bank, that bank can then lend out that money. The only limit being said bank needs to keep a percentage of the original deposit on hold as a “reserve” (usually around 10%); e.g. out of the 10 billion deposited, the bank can now lend out 9 billion. [This process is referred to as “Fractional Reserve Banking.”] However, while logic would have you think that banks lend out that 9 billion from the original 10 billion, the truth is that 9 billion is lent ON TOP of that original 10 billion. That’s right, 9 billion in brand new money is created into the economy simply because there is a demand for this loan and there is enough money in the bank to fulfil the reserve requirements. So basically, after the bank asks you for assets (e.g. your

disaster. Meanwhile, on a macro level, the expansion of the money supply, leads to a reduction in buying power (i.e. structurally built-in inflation) and as already mentioned, a hidden and ever-growing tax upon all society in the form of inflation.

A CAGE UNMASKED

On one hand we have a structurally flawed financial system and on the other, we have a pyramid scheme. How do the two relate? To start, we must ask, “Who’s at the top of this pyramid?” The simple answer is: those who control the world’s banks (especially the privately owned central banks, like the US Fed) and thus have the power to print money. Now, before this writer enters the realm of conspiracy theory, let me add an extra dimension to this answer: that unlike your average pyramid scheme, there’s actually no one person or group at the top. People come and go, just as fortunes come and go. Instead, what you’ll see at the pyramid’s precipice is a system, one that promotes profit maximization above all other values. tThis single-minded drive is what the majority of global society has bought into

car) to back up your mortgage, the bank in turn creates and lends you money from nothing, money that’s backed up by nothing except a hypothetical liability: money that you’re expected to pay back and then some. The implications of this are huge, as this process will happen all over again in the bank where that 9 billion is next deposited (minus the 10% reserve) and again in the next bank and the next, etc. If this process runs its course, that initial 10 billion the Federal government called into existence has the potential to add another 90 billion into the economic system. All of this is money created out of nothing. But if the money came from nothing, where does it get its value? The only

place it can: from the existing money supply. The new money steals value from the existing money supply, expanding the money supply irrespective of the demand, thus reducing its worth and creating inflation. This means that our Fractional Reserve System is inherently inflationary, thus reducing the buying power of our money (see chart below). MONEY SUPPLY VS. DOLLAR BUYING POWER $0.90 $0.80

$14 $12

$0.70 $0.60

$10

$0.50 $0.40 $0.30

$8 $6 $4

$0.20 $0.10

$2 1950

2006

and what the majority refuses to give up. Why? Because we all want to be at the top of that pyramid. That’s the genius of this system. There is no one individual to point our fingers at because, at the end of the day, we’d only be pointing fingers at ourselves. Until we, as a collective society, choose not to live under a system where power through the accumulation of money is the core value—a system where greed and corruption aren’t built in—we will forever be beholden to a system where only a small minority at the top prosper and the mass at the bottom struggle or go without. But some may counter, “Okay, there might be people who let themselves be leashed by greed, but what about the rest of us? How can one system, or pyramid scheme, actually control the majority of the planet’s population? The answer lies in how money is created and the existence of interest (both previously discussed).

Essentially, this pyramid scheme creates money through banks that it gives out on mass, encouraging all individuals within the monetarist system to spend that money, thereby increasing their debt and forcing them to pay back said money, with interest or through various forms of bankruptcy. For the minority of the world’s population who can pay these debts and remain debt free, this arrangement is of no consequence. But for the gross majority, those who can’t pay off 100% their debts by the month’s end or are living paycheque to paycheque, this system ensures a subtle form of veiled servitude—what some might call slavery. If you don’t work, you won’t be able to pay your debts. If you can’t pay your debts, you won’t be able to keep your possessions and the standard of living to which you’ve grown accustomed. This fear of losing everything is what keeps the world in toe and what ensures the wealth of the bottom continues to flow upward to the banks and those who control them. So let’s recap:

FIGURE 1:

THE EFFECT OF INTEREST

Stable money supply i.e. amount of money is fixed

Introduction of the use of interest with loans

Overtime, those who charge interest will control more and more of the pie

In time, those who charge interest will control the full money supply

*At this point, the economy will no longer be able to function as all the money is controlled by the interest-charging elite

To avoid the collapse of the economy, the money supply must grow

This causes money to reduce in value and inflation to rise

This means people will have to work harder (in a variety of ways) just to get by. And in a very real way, interest and the inflation it helps cause is a ‘hidden tax’ levied upon us all

Who’s at the top? Ringleader

Banks

How people are lured into the scheme Ringleader convinces a number

Most of today’s global

of individuals to invest money

population were born into the

into a ‘new money making

current financial system, one

system,’ by promising easy

which convinces society that

returns on investment (a “get-

everyone has the potential

rich-quick” scheme).

to be rich if they work hard enough.

How the scam works Ringleader encourages new

Banks create and give out

recruits to work to recruit

money on mass, encouraging

others to invest money back

all individuals within the

into said ‘money making

system to spend that money,

system.’

thereby increasing their debt and forcing them to pay back said money, with interest. The culture of consumerism this system fosters is another draw.

How the scheme spreads The ringleader’s pyramid could

Over centuries of growth, the

potentially involve everyone

current financial system now

on earth within 10 rounds of

envelops most of the world’s

recruiting—with most or all the

population within its monetarist

money being funnelled to the

system, with money gradually

top.

being funnelled from the bottom to the top, continuously.

Why people stay with the scheme People stay in the scheme

People stay vested in the

because of the air of legitimacy

current financial system

it borrows from its high-profile

because of its legality, the

members or simply out of

legitimacy it borrows from its

greed or desperation.

many high-profile proponents and out of fear of losing their established quality of life. Pyramid Scheme Current Financial Scheme

At this point, a final question begs answering: “If the financial system is just another fancy pyramid scheme, then why hasn’t it failed like all other pyramid schemes?” The simple reason is that, for centuries, this scheme worked. Yes, the system is far from balanced and the gap between rich and poor is large and growing everyday, but for all its flaws, the monetarist system of playing to people’s self-interest (greed and the pursuit of power) has resulted in a world far richer and better off today than in any time in human history.

THE RED PILL

But here’s the catch. While it’s true our monetarist system has provided humanity unprecedented wealth, it is also true that it was bankrolled almost entirely by our largest and oldest benefactor: the Earth. To be clear, in order for the economy to continue growing, in order for it to avoid collapsing under the money supply’s constant expansion, more and more economic resources need to be mined from the earth, processed by man and commercialized by our markets.

MONEY CREATION

AND THE

BASIC SHAPE OF THE ECONOMY

CENTRAL BANK

FEDERAL GOVERNMENT

OTHER COUNTRIES

loans

PROVINCIAL/STAT

g inv

PRIVATE BANKS loans leftover funds returned to bank

debt repaid with interest

> bankruptcy > asset liquidation

loans

YES can the entity repay the loan?

COMPANI

income employment

TYPE OF MEDIUM EXCHANGE

SPENDING USES money used to buy earthâ&#x20AC;&#x2122;s resources to produce goods, services and infrastructure

bonds

COMPANIES/INVESTORS

money

money used to support living standards and population growth

new money

grants loans

loan repay savings

TE/MUNICIPAL GOVERNMENTS

grants nvestments

purchases investments donations loans I

* **

grants loans

IES/INSTITUTIONS/NGOs

money interest

Businesses gain a great deal of their profits from working with other businesses (B2B), not just through the public and the government. This loan repayment process is mostly the same of all loans.

welfare grants loans

type of medium exchange

PEOPLE purchases investments donations loans

OTHER

direction of flow tax

grants loans spending use

Doing this produces enough new wealth fast enough to pay down all those new, interest-laden loans the banks are generally all too happy to give. It’s also what has allowed the human population to grow as much as it has, providing ever-growing numbers of new consumers for the system to exploit and grow. In all, the flow of resources ensures the music continues to play. So there you have it:

It’s no different than what happens to a caribou herd when they discover a new land, one rich in food: they feed, multiply and prosper. So too with humans. When we learned the art of agriculture, it allowed us to produce an excess of food from the Earth’s soil and in turn, allowed us to shed off our nomadic lifestyle and commit to and develop communal living (i.e. families, villages, townships, cities, countries). Millennia later, humanity discovered how to harness energy from coal, leading to the first Industrial Revolution. A century later, humanity learned how to harness energy from oil and so the modern age began.

With each new discovery of how to use the Earth’s abundant resources, humanity fed, multiplied and prospered to new heights. In fact, from the discovery of agriculture (approx. 8000 BC) to the Industrial Revolution (approx. 1800s), global human population gradually grew to around 800 million. Then within only 100 years after the Industrial Revolution, the population grew to one billion. Then after learning to truly harness oil, the most abundant and versatile energy source humanity ever discovered, global population exploded to roughly 6.3 billion and counting. Sad thing is, when the caribou herd grows to a point where they exhaust their land’s richness, the prosperity ends. Swaths of caribou starve and the herd shrinks back down to a level the land (Earth) can support. The herd may try and search for a new, richer land, but in the end, the cycle always repeat itself. And again, so too with humans. Soon, a time will come when events transpire to alter the very nature of modern society and “the system” as we know it. For pyramid schemes only continue expanding so long as there are more recruits and more money (resources) to pull into its sphere of influence. In other words, such scams can only continue existing in a world of infinite growth. Sadly, that’s not the world we live in. While modern economics and society in general

-Andrew Gause, Monetary Historian

choose to assume otherwise, the reality is that we live inside a finite world, a world with limits, both on the number of human beings it can support and the amount of resources it has available for consumption. Eventually, something’s gotta give. And that something’s going to give within our lifetimes.

CRYSTAL BALL

So how exactly will an economic system that survived for centuries and has seduced the world’s majority into its tentacles’ embrace suddenly fail? Answer: there are two trends slowly converging into one chaotic mess: resource scarcity and demographics. The first trend, resource scarcity, was discussed in detail in the previous issue of the Arbitrage (Winter 2010) and so I won’t go into the specifics here. But to put the matter into perspective, we can think of the Malthusian trap (the theory that the human population growth rate will outpace humanity’s ability to farm enough food to feed this growth). For many decades, the world avoided mass Malthusian starvation because we’ve consistently developed new agriculture technologies to grow higher yields of food. Similarly, the world economy continues to grow because we too freely and cheaply reap from the Earth untold amounts of raw materials that we then turn into riches. But how much longer can this go on?

Outlined in the Arbitrage’s previous issue, the reality of a finite world is that it will run out of many of its non-renewable resources (especially oil) within the next 50 years or so. And over the next decade, we will begin to see the effects of this growing scarcity in the form of increased prices (inflation) on just about everything we buy. Meanwhile, when talking about demographics (the subject of the Arbitrage’s next issue), the well known, Comte adage holds true: demographics is destiny. Economists have few ideas about how to maintain a country’s economic growth if its population is in decline. Remember, our present financial system is predicated on infinite upward growth in resources and population. So without either, the columns of the system begin to crack. Presently, the birth rates for much of the developed world average out to 0.1%, far below the 2.1% needed for a population to replenish itself (sourced from the Population Reference Bureau’s 2006 World Population Data Sheet). Roughly speaking, with less people, the labour force shrinks, leading to higher wages whose cost is past on to the consumer; this inflation leads to reduced demand, cut backs in the private sector, layoffs and may lead into a downward recessionary cycle. Likewise on the government side: a country’s

tax base shrinks, causing a nasty chain reaction that weakens its ability to pay for pension plans and public services. This leads to across the board government sending cuts, meaning greater unemployment and increased employment insurance costs that the government won’t be able to afford. This will then lead to the government continually turning to the central bank for loans to pay for needed public services, and in time, once a country reaches the point where it’s borrowing to pay down debts of borrowed money, that’s one step away from a country going bankrupt. There are no crystal balls, but the fact remains that these two trends are real, well documented, and their effects are generally easy to predict: a gradual reduction in economic and population growth and a possible breakdown in the current financial system’s ability to continue functioning.

ALTERNATIVES?

Given what we know, in order for the world to avert catastrophe, we must shift to a financial system that doesn’t depend on constant growth to function. We need a new, stable, and resilient system. One that can both efficiently manage the world’s growing resource scarcity, while thriving amongst a steadily declining population. In all, we need something radical enough to save us, but familiar enough to be accepted by a world population that may become increasingly sceptical and fearful of change. From this writer’s perspective, there are two core options/directions a future financial system may evolve towards in order to meet the challenges of tomorrow. In order of least to most disruptive and familiar, these options include: a financial system influenced by Demurrage (using a kind of Scrip currency) and a Resource Based Economy.

Unfortunately, detailing how each may work will each take an article unto themselves. That’s why two further articles will be published in future Arbitrage issues that will comprise a series exploring the different alternatives our flawed financial system may evolve into and how each may change the world and how we will live in it. Such a change may seem impossible now. To imagine a world where a whole other financial system takes over, one entirely different from what has claimed dominance for so many generations, certainly seems inconceivable. But as every historian can tell you, what seems impossible today may just become the commonplace reality of tomorrow. 100 years ago, who knew that man would be able to fly and then land on the moon? In our generation, who knew that computers and the Internet would revolutionize nearly every dimension of human existence?

And so too with our financial system. Nothing is meant to last forever. In the end, a revolution happens roughly every quarter century in some form or another— and we’re about due for the next one. So when it happens, don’t be surprised if it changes everything. Click to read more & join us!

-Kenneth Boulding, Economist & founder of the Evolutionary Economics Movement

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POLITICS AND BUSINESS

The Chinese Marketplace

Why markets are needed for a nation to thrive. By Sushil Tailor, Contributor Designed by Luis Ernesto Rojas AFTER THE REFORMS endowed onto China by Deng Xiaoping in the 80s, the nation became an economic force to be reckoned with in the decade after. With foreign direct investment on the rise, Chinaâ&#x20AC;&#x2122;s GDP grew at a rate of 9.5% a year. In 1999, it became one of the largest economies in the world, second only to the United States. This served as quite a shock for the Western World. Once again, liberal democracies were no longer situated as sole world powers. The Soviet Union was toppled but a largely socialist China was now on the rise. Aside from military strength, power and influence over world affairs is gained via a powerful economy. Veto power is given to UN nations with strong economies. The chairman of the board for the World Bank is appointed by the United States, its biggest shareholder. Agricultural subsidies in the USA are enough to crush local farms in Third World and developing nations. A strong economy provides leverage on matters of international diplomacy. Nevertheless, how is this economic strength gained? The answer lies within a thriving financial sector. A thriving financial sector can only be attained if the corresponding rules are put into place, rules that allow for a market economy.

Two columns in Downtown Torontoâ&#x20AC;&#x2122;s Chinatown

First, debt collection needs to be enforced and so regulatory mechanisms must be set in place in order to allow for said debt to be collected. Another important institution are the courts that deal with common law. These courts deal with affairs pertaining to contracts, which are a required in order for creditors to dole out money to debtors with a greater sense of ease. Laws allow corporations to be limited liability institutions, entities that are regarded as legal persons (not to mention, laws allow corporations to exist in the first place). Meanwhile, regulations unsure general accounting guidelines are adhered to in order to en sure investors have the correct financial information needed to make an investment decision. These laws and regulations may not be perfect, but once instated and enforced, greater stability

ArbitrageMagazine.ca | Summer 2010

ensues that allow businesses and entrepreneurs to take risks, while knowing roughly what the general outcomes will be. These rules provide for a stable foundation from which the financial sector can grow, as seen in action throughout history. Hong Kong serves as a prime example as seen by its proximity to mainland China and the contrast it serves between the two. After the First Opium War, Hong Kong was ceded to the British under the Treaty of Nanking. The Convention of Peking after The Second Opium war resulted in more land gained by the British. Situated as a trading outpost, English Common Law was introduced into Hong Kong. Now a special administrative zone of China, Hong Kong still adheres to English Common Law. The rules set forth by

POLITICS AND BUSINESS

Pacific Mall during the weekday

precedent within it on how to deal with matters of contract, tort and business allowed for a market economy to thrive while mainland China’s financial system suffered after Mao Zedong instated a command economy. The English Common Law rules and regulations mentioned previously, along with a liberal political environment, resulted in a growing free market economy. As a result, Hong Kong shines today as an international financial hub, giving birth to powerful banking institutions such as HSBC and hosting a welcoming business climate for international banking institutions originally from places such as America, Canada, Europe and Singapore.

China’s reforms in the 80s by Deng Xiaoping were the result of emulating Hong Kong for the purposes of attracting foreign business, as its tiny neighbour had succeeded in doing for so long. For this reason, special economic zones were set up with rules that would garner foreign investment. Amongst these zones were Shenzhen, Shantou and Xiamen. From then on, central planning took a different route and instead of directing goods and services on a microeconomic scale, more attention was given to market-oriented macroeconomic planning. Hong Kong’s liberal market economy served as an inspiration for the planners in the Communist Party.

Ultimately, while Maoism and variants of communism and socialism are the official ideologies of the Communist Party of China, ideas regarding the economy proposed by capitalist liberal democracies are often implemented. For a strong economy they needed foreign direct investment and a thriving financial sector. In order to accomplish this, they realized that they had to follow suite with what Western nations have been doing for so long: have laws and regulations that allow for a market economy. Click to read more & join us!

Summer 2010 | ArbitrageMagazine.ca

POLITICS AND BUSINESS

FIFA and South Africa: a Mismatch of Interests By Luis Fernando Arce, Staff Writer Designed by Trishaala Ninan As the entire world knows, South Africa has just undergone an experience that is sure to have a myriad of effects on all aspects of society. The FIFA World Cup, held for the first time ever in South Africa, has allowed the world to peek inside the doors of the country and see what it has to offer. This opportunity, however, has shown itself to be a doubleedged sword. On the one hand there are obvious positive economic consequences for the country; but on the other, the attention has placed political pressure on South Africa, domestically

and internationally, making it easier to gauge the efforts the government has made in terms of curing the social problems plaguing the country. According to most government officials and private companies offering transportation, hospitality and tourist attractions, the figures expected to be raked in from the FIFA tournament are by all means positive. Indeed, according to brandsouthafrica. com, an International Marketing Council for South Africa (under the executive authority of the Minister in the Presidency), the tournament is expected to bring in an estimated R93 billion gross throughout the year, with tourism accounting for 16% of the gross impact (that’s over US $12,311,162,650). This translates to around 0.5% of the country’s expected GDP growth for 2010, which compared with the decline in the last quarter of 2009, seems very encouraging.

The Finance Minister, Pravin Gordhan, took the opportunity to say that every aspect of the country will feel benefited, from the telecommunications and transportation infrastructures to the thousands of new employees needed for the newly created jobs in the construction, service and security industries. But even more revitalizing, according to the Finance Minister, is the potential foreign investment opportunities that have opened up as a result of all the media attention. These benefits, he assures, are there but will be felt only “long after the players return home.” However, despite all the positive hype, a large portion of the South African population are angry with the government’s spending priorities. They ask where the billions of dollars used to build stadiums and accommodate FIFA personnel were found while

Original image sourced from France 24 Community and Kora Awards Image redesigned by Trishaala Ninan

ArbitrageMagazine.ca | Summer 2010

POLITICS AND BUSINESS money remained scarce for priorities such as poverty, AIDS and homelessness ran rampant. Specifically, to hold the FIFA World Cup Tournament, South Africa shelled out over R18 billion (that is over US $2 billion) for stadiums and other costs, including accommodations and additional infrastructure. The maintenance of each stadium is estimated at US $2 million a year. At the same time, 40% of South Africa’s population is living on less than US $2 dollars a day or 60% under the poverty line. Even more disgraceful is that much of the population living in the towns the stadiums were built in weren’t even able to afford access to the games inside them. As a result, many South Africans participated in organized protests during the

Photographed by Trishaala Ninan

FIFA tournament to demonstrate their disagreement with the country’s FIFA spending. Examples of these protests included ones that focused on the insignificant wages that the private employers have been paying their employees. Although the stewards had been promised a payment of 1500 Rand a day by FIFA, according to what one of the protestors told the CBC associated press, they have only been given an eighth of that – 190 Rand a day. One article in the Toronto Star, written by Craig and Marc Kielburger, the founders of Free the Children, reported that some workers were receiving even less than that, putting the figures at US $1 a day wages, as reported by Building and Wood Workers International. Nonetheless, the South African government remains solid in its stance. In the speech for the 2010 budget, the Finance Minister announced that there were roughly R907 billion to be allocated towards public assistance, with the largest sums going towards HIV/AIDS programmes (R5.4 billion), national and provincial health programmes (R105 billion), education (R165 billion) and infrastructure (R1.2 billion over three years). The main issue, as such, stems from the fact that many South Africans seem to feel very little of the positive effects of the economy. As a large part of the country dwells in slums, with over 30% of the population unemployed, it really is a

wonder how the government was able to spend over six years of time and money in building stadiums rather than addressing the problem of unemployment more adequately. The other problem has been in the government’s stubbornness to follow guidelines set out by world-wide organizations, such as the World Health Organization. And although Avert.com, an internationally acclaimed AIDS charity, reports that in 2010 the South African government has finally taken significant steps towards complying with WHO recommendations regarding prevention of mother-to-child transmissions, there is still a need for better monitoring in regards to the collection of data and its quality, as suggested by the District Health Barometer. In the end, the FIFA players, coordinators and fans are all packing to go home. Only time will tell, whether the real effects of the FIFA tournament are felt on the country and its people. Although the government has delivered its speech outlining the budget, it remains to be seen if the money will be properly allocated, properly employed and if indeed it will seep into those lives and communities most in need. Click to read more & join us!

Summer 2010 | ArbitrageMagazine.ca

POLITICS AND BUSINESS

The albertan tar sands

Hidden Fortunes Or Empty Dreams? By Luis Fernando Arce, Staff Writer Designed by Akil Worrell WHEN THE SPANISH and other adventurers went in search of El Dorado nearly six centuries ago, they were not aware that they were chasing a ghost. After two centuries of searching and finding nothing resembling the Golden Cities of which they had heard, the great El Dorado was relegated into the closets of their minds, becoming mere However, in our present time, Canadians seem to have stumbled onto their own treasures found in the Tar Sands in Alberta, and investors, much like the seekers of El Dorado, have already begun their explorations. The Tar Sands found in Alberta, recognized internationally as a legitimate source of energy to be extracted in 2004, have placed Canada second only to Saudi Arabia in terms of quantity. Thus far, it has been estimated that over 170 billion barrels of recoverable oil are trapped in the crude bitumen, the tar-like material from which the oil is extracted. This is enough to last for over 100 years, by which time it is hoped new technology will be made available to extract the rest of the estimated 1.73 trillion barrels of crude bitumen. For now, the importance of securing access to those 170 billion barrels, particularly in the wake of global oil scarcity, has taken precedence in the agendas of various groups of society. The investment opportunities this unconventional source of

oil has opened up are immense and oil companies, as well government officials, have all been swift in recognizing the great economic boost that this represents. Indeed, the Canadian Energy Research Institute (CERI) released a 236-page report in 2009 titled “Economic Impacts of the Petroleum Industry in Canada” that attempts to show, through multiple sections dedicated to research and to the calculations employed, the positive influence on the economy that investment in the Tar Sands represents. Summarily, the report estimates over $100 billion in investment through 2020, yielding over $500 billion dollars in output; it expects an increase in the GDP of over $800 billion – that is if prices stay at the $32 US/barrel mark; and a government revenue of over $120 billion. Yet, although the economic advantages are obvious, there are other issues that have prompted the intervention of other groups of society. One issue has been the ecological side-effects that the process of extracting the oil from bitumen causes. A CBC sponsored documentary that took its cameras to Fort McMurray, the “epicenter of the oil boom in Alberta,” determined that it took about one barrel of oil (in energy) to produce two barrels of oil. This ratio creates around three times as many carbon emissions as it takes to mine conventional oil. Moreover, green groups, which criticize not only the carbon emissions but the trail of toxic waste and the depletion of the Boreal Forest, are concerned with the leverage that private companies seem to have over governments.

ArbitrageMagazine.ca | Summer 2010

Indeed, companies such as ExxonMobil (who alone have spent over $60 million on Canadian oil), have succeeded in lobbying the US government to allow Albertan Oil inside its borders, persuading the amendment of a 2009 carbonemission provision (lowering the requirement from 20% to 17%, and allowing for offshore drilling expansion). Social maladies have also seen a rise from the new black-gold fever. As more and more families leave their homes to move to Alberta in search of fortunes, places such as Fort McMurray have become the epicenter of seemingly unattainable dreams. Some families, who moved to Fort McMurray with the intent of returning home rich in just a few months, have been settled into unstable residences for over eight years. Rent has seen a dramatic increase and, consequently, so has homelessness rates. As well, drug-trafficking has seen a rise as individuals attempt to cope with the harsh living conditions and the insufficient wages. But after 9/11, the need to secure friendly sources of petroleum has come to trump the costs of doing so. Moreover, as President Hugo Chavez sweeps Venezuela under a socialist banner, nationalizing the Oil Industry and distancing itself from the United States, the latter has been adamant about securing a source in the North. As a result, Canada has been the first to capitalize on this opportunity. On the other hand, Chavez’ reforms have inadvertently placed Alberta in a similar position to the one Venezuela found itself in before the industry was nationalized. The mining of its oil represents ecological and

POLITICS AND BUSINESS

Image soucred from celsias.com

sociological exploitation that is not being justly remunerated by private oil companies. Peter Loughheed, former Premier of Alberta, has expressed concern over the lack of expansion of the Heritage Fund, a project he started 23 years ago as a way to ensure that the exploitation of natural resources in Alberta would produce long-term benefits for the province. He reminds Canadians that the oil is owned “by the people, not by the oil companies,” and urges more investment in the province by the Alberta Investment Management Corporation (a crown corporation since 2008, previously the Heritage Fund). A similar attitude was taken by the premier of Newfoundland and Labrador,

who demanded royalties from the big oil companies drilling in his province, demands to which they agreed. While the Albertan Tar Sands have blown a new breath of opportunity into the Canadian economy, it is important that governments take note of the effects this process has on the people as much as on the environment. Moreover, it is of interest to the government to realize that the exploitation of the people’s natural resources, physical strength and lack of political sway prompted places such as Venezuela to adapt such radical measures as nationalizing its industries. Governments around the world, including our very own, are already facing protesters demanding a stop to the trading

of what they call ‘dirty oil’. As these protests gain fervor, the Canadian government will have to decide whether the opportunity to become a leading world oil supplier can override the social and ecological woes that come with the title. But perhaps this will prove harder than anticipated as most people have been left to wonder when, or rather if, their local economy will feel any of the positive effects of being a top oil-supplier, something that for some in Alberta seem more and more like an empty dream Click to read more & join us!

Summer 2010 | ArbitrageMagazine.ca

the

, Con of

inf lation

Where do financial crises come from? By Charles Dreezer, Staff Writer Designed by Ryan Trinidad

BUSINESS CYCLE, BUSINESS SHMYCLE

Where do financial crises come from? You know, those events that pull the world into a recession and, just maybe, pull you out of your job? Why do they happen? What turns a recession into a depression? The Austrian School of economics, which today has little to do with Austria, can offer us some insight. A key tenet of the Austrian argument is that central banks and their misguided monetary policy are largely at fault. The Austrian Business Cycle Theory (ABCT), which is mostly ignored by mainstream economics, holds that ineffective monetary policy tends to set interest rates too low for too long. This invariably leads to excessive credit creation, speculative bubbles, and unsustainably low savings and high consumption. To illustrate, let us begin with a simple example. Low interest rates tend to stimulate borrowing from the banking system. Increased borrowing means an expansion of credit, which is really an expansion of the money supply. An abundance of cheap money leads to an unsustainable credit-fuelled boom in which artificially stimulated lending seeks out diminishing investment opportunities. Eventually, there are so few reasonable investments left that capital resources are misallocated into areas that would not attract investment if the money supply remained constant.

A recession then occurs when the central bankers wise up to the over-inflated asset prices and are forced to increase interest rates in order to stop the credit creation. The ensuing period is characterized by debt default, a rush to divest from projects that are not feasible at the new higher interest rates, and a corresponding contraction of the money supply (i.e. deflation). At this point, central bankers become concerned that the economy will funnel into a downward spiral (DS) when low demand leads to downsizing and bankruptcy, which lead to job loss. Job loss further decreases consumption, which in turn leads to more downsizing and more bankruptcy. For fear of the DS, interest rates are dropped. Rinse and repeat. Now let’s apply this model to the current financial crisis. The dot-com bubble exploded at the beginning of the new millennium. Between 2000 and 2003, Alan Greenspan, then Chairman of the US Federal Reserve (Fed), lowered the Federal funds rate target from 6.5% to an all-time low of 1%. As expected, low interest rates decreased savings and increased consumption, fending off the risk of the DS. Easily obtained credit and money that would previously have flocked toward dot-com companies now focused on the real estate sector as a ‘safe investment alternative’. So what happened? As outlined, attractive investment opportunities diminished, still free-flowing credit was used to finance the bidding up of asset prices, as well as other increasingly unattractive and risky investments. Eventually, the Fed realized that this was going on and, as predicted by the ABCT, raised the interest rate from a low of 1% to 5.25% about two years later. Loan defaults triggered a wave of destruction in the financial sector as complex derivatives and the institutions that held them took a nosedive. In true form, the Fed lowered interest rates again for fear that a DS would cause a systematic failure of the financial system. Who wants to take bets on a repeat? Remember that thing called the free market? F. A. Hayek, one of the early influential Austrian economists, reminds us that a recession can be good for us. “Enterprises are gambles that sometimes fail: a future comes to pass in which certain investments should not have been made. The best that can be done in such circumstances is to shut down those production processes that

turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. Depressions are this process of liquidation and preparation for the redeployment of resources.” The ABCT explains the Fed’s (and most of the workd’s) monetary shenanigans as a shortsighted attempt to smooth out the business cycle. Unfortunately, among its true effects are misallocation of resources and prevention of the recession, which is the free market mechanism that would purge the economy of improperly employed resources. Why, then, does the Fed use such practices when it seems obvious that they are in fact intensifying the business cycle rather than easing it? Let’s take a closer look at the subject of inflation to find out.

CPI TRAIN WRECK

In introductory economics courses, students are told that inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The preferred measure is the Consumer price index (CPI) or, more recently, the Personal Consumption Expenditures price index (PCE). Both are calculated as the value-weighted price of a basket of carefully selected goods. This is actually a misleading view on inflation. More accurately, rising prices are the symptom of inflation, not the cause. The reality is that inflation is an increase in the money supply. As expected from an increase in the supply of any commodity (ceterus paribus), the value of each unit will decrease. It is the value of the money that is changing, not the value of the goods

truthis, theFed as the of the gaurdian sole supply, the

money is just the old man behind the curtain.

and services. For this reason, it is a waste of time to try to accurately measure the value of money by measuring the prices of goods and services. The prices of individual goods or services change constantly irrespective of their value. Sometimes the basket of goods is altered because of a price change in a particular category that is deemed to be distortive. In fact, it is absurd that the Fed would use any other measure than the amount of money in the economy. The math involved is much less complex and certainly not as prone to error. Peter Schiff, an American author, businessman, financial commentator, and a 2010 candidate for the U.S. Senate, used a witty analogy. Imagine a person, let’s call him Central Frank (I added the name), is standing on train tracks. Understandably, Frank does not want to be on the tracks when the train passes. But Frank is not a very bright person. Frank decides that seeing the caboose is the best way to tell that the train is coming. We have warned Frank that he should be looking for the front of the train, the engine, if he doesn’t want to be pulverized. But Frank is stubborn in his view and insists that he use the caboose indicator. Is Frank’s plan likely to work?

THE WIZARD OF INFLATION

Price stability is one of two goals that make up the Fed’s mandate. Ben Bernanke, current Chairman of the Fed, said in his July 16, 2008 testimony before the Committee on Financial Services (U.S. House of Representatives) that “upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation … ” Interesting. Didn’t Bernanke say that rising prices lead to inflation? Either Bernanke does not realize that rising prices are the result of inflation, or he does know and is purposely misleading the public. Both possibilities raise very real concerns. The former would suggest that the most powerful economy in the world is run by a man who doesn’t understand basic economics. The latter entails an act of misdirection that would make even the great and powerful Wizard of Oz blush. The Fed, disguised by fire, smoke and a giant head, says in a booming voice that the rising prices of several commodities are the cause of inflation. Who are we to dare to question the great and powerful Wizard of Oz? The truth is, the Fed (of most any country), as the sole guardian of the money supply, is just the

old man behind the curtain. His continued reign as the Wizard of Inflation is protected by the fact that the majority of people do just what he asks of them: “Pay no attention to the man behind the curtain.” How many people do you know that understand what the CPE is? Ludwig von Mises, one of the first Austrian economists, explains: “[t]here is no longer any word available to signify the phenomenon that has been, up to now, called inflation… As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

WHY DO THEY DO IT?

Austrian economists agree that the state uses inflation as one of the three means by which it can fund its activities (the other two being taxing and borrowing). Taxation is relatively straightforward. Military spending is often cited as the reason for resorting to inflation and borrowing. More recently we have seen all sorts of fiscal recklessness (bailouts, etc.) that provides another possible motive. One method that central banks use to increase the money supply is to purchase government bonds on the open market. The bank can then create the money it uses to buy the securities and the government can create the securities that it sells to the bank (basically a complicated but common borrowing practice). This type of arrangement is one way the U.S. government is able to service its more than $13 trillion in debt. Unfortunately, it also causes the money that everybody else holds to decrease in value (thus causing inflation).

Inflation is therefore a type of indirect tax (and a sneaky one at that). Given there is no foreseeable shortage of whims on which governments will be able to spend their taxpayers’ hard-earned money, it seems unlikely that this is a problem that will go away on its own.

THE CRITICS

Mainstream economists tend to ignore the concerns of the Austrian School. The most common criticism of the School is that it lacks scientific rigour. According to D. Walker, its theories are not developed in formal mathematics, but by using mainly verbal logic and what proponents claim are self-evident axioms. In fact, as M. Thomas notes in his critique of Boettke’s critique of mainstream economics, the Austrian School advocates a rejection of methods that involve the direct use of empirical data in the development of theories. A final criticism is that, while the School claims to highlight shortcomings of mainstream methodology, it does not offer a viable alternative.

The Austrian School, however, offers up a response to these criticisms. According to Hayek, the lack of mathematic and econometric justification is a necessity. He believed that economic theories cannot be proven or disproven through the same methods of empirical observation that are commonly applied to the study of natural science. Ludwig von Mises, another early Austrian economist, explains that we cannot build a theory to predict how humans will act in a “complex” situation from how they will act in “simple” situations. Furthermore, there may be limits to how much we can learn from observing even a “simple situation.” Only the human actor knows to what ends he acts. Observers may try to understand why an actor behaved in a particular way but this reason must be inferred from a complex set of data, which can only be gathered once. Reproducible experiments are not possible because both the actor and the observer have been altered by the experiment. Although the Austrian School does not offer a completely viable alternative, it does advocate a laissez-faire approach to the economy. This conclusion follows from a key tenet of the Austrian School: that the free market price mechanism (i.e. the natural interaction of supply and demand) is the most efficient and effective way of organizing and allocating the economy’s resources. Despite the criticism, there must be something to it if Greenspan himself would say that «the Austrian School have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.»

WHAT CAN BE DONE?

Many Austrian School economists support the abolition of the central banks and the fractionalreserve banking system. They would advocate a return to the use of Free Banking, a monetary arrangement in which banks are subject to no regulations beyond those applicable to most other

Do need inf lation or we do needtobe protected it from

corporations (see the next issue of Arbitrage for my article on Free banking).

FOOD FOR THOUGHT:

Why do we need inflation? Do we need inflation or do we need to be protected from it? What would happen if the money supply were fixed? Is the free market mechanism the most effective way to control interest rates? Have central banks become much too involved in trying to manage a process that they don’t really understand? What would be the government’s response if the economy were to make a move toward the free market control of the business cycle? Would it resist the removal of its power to finance its activities through inflation? Would important government programs suffer because they may not have access to consistent funding? Click to read more & join us!

CANADA

CETA: Is this New Agreement Right for Canada? Rabeea Wajeeha, Contributor Designed by Katie L. Serensits

On May 6, 2009, negotiations for the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) were launched. The trade talks have progressed very rapidly and quietly until recently. Thus far, two official rounds of negotiations have been completed (in October 2009 and January 2010), while the aim is to close negations by 2011. Considering the impact this agreement will have on public policy in Canada and the broad scope of this agreement, many feel that considerable public debate is warranted. Yet both the media and our elected officials have reported little of these talks thus far. For the first time ever, provincial governments are invited to directly participate in the negotiations. Meanwhile, the agreement will cover such topics as greater protection for foreign investors, competition policy, simplifying or removing regulatory barriers to imported goods, reduction of tariffs, regulatory cooperation, government procurement, opportunities for crossborder sales of services and sustainable development.

This agreement is said to be more ambitious than WTO and NAFTA and will protect corporate activities from government control. Proponents of this agreement, seek to promote cooperation on key regulatory, labour and environmental topics, along with removal of trade barriers. This would open up a highly attractive multi-trillion dollar foreign market for businesses. In fact, CETA would decrease Canada’s dependence on the US and proposes to provide Canada with an excellent opportunity to develop and diversify trade with the European Union. However, the lack of transparency around these talks is preventing meaningful public debate on this agreement. A draft consolidated text was leaked by the Trade Justice Network (a group of social justice, labour, environmental and other civil society organizations), on April 19, 2010, in the hopes of sparking a much need public debate about the effects this agreement would have on various public policy areas. Members of this organization suggest that, “The Canada-E.U. (CETA) negotiations are based on commitments to place corporate rights before social and economic justice, democratic control, and ecological sustainability.” The government procurement market has been one of the EU’s top priorities in these negotiations. This is a major cause for concern as the biggest purchasers of goods and services are mainly provincial and municipal governments that use tax dollars for economic and social development. This agreement would take away their power by opening public service contracts to international competition.

A study by Scott Sinclair, senior research fellow at the Canadian Centre for Policy Alternatives, outlines how the European Union is taking advantage of Canada’s weaker bargaining position in these negotiations. “These talks are really about the role of government and driving domestic restructuring as we are the weaker party in this negotiation,” Scott Sinclair explains, on April 19, 2010, at the press conference held by the Trade Justice Network. He concludes that European companies are seeking unconditional access to provincial and municipal procurement markets. CETAwill have a sizeable impact on Canadian culture and social structure, as this agreement is also looking for increased foreign ownership and control of our telecommunications sector, which would have a lasting impact on the Canadian intellectual property legislation. Other proposals include changes to the public services and social procurement, food sovereignty, manufacturing industry, public postal services and numerous other public sectors. It’s clear why the European Union is pursuing this agreement; it currently has a trade deficit with the rest of the world and is aggressively seeking open foreign markets. Accordingly, this agreement will help set the terms of global trade in its favour, but is it at Canada’s expense? Click to read more & join us!

Summer 2010 | ArbitrageMagazine.ca

CANADA

CANADIAN CONSUMERS ARE GETTING LESS WHEN THE DOLLAR IS WORTH MORE

“Canadian retailers have yet to pass on the gains of a strong Canadian dollar.” By Victoria Chau, Staff Writer Designed by Luis Ernesto Rojas If one were to walk into a Canadian bookstore today, one would pay anywhere from 15 to 30 percent more than if one were to buy the same item in the United States. For the past few decades, because of the Canadian dollar’s subordinate stance in front of the United States’ dollar, this mark-up on virtually everything from flat screens to even food made sense and has gone unnoticed by most of us. But times are changing. For a few years now, the Canadian dollar has lingered around parity with the US. So why have Canadian consumers not felt the benefits of a strong currency? To put things in perspective, let’s go back a decade and analyze our dollar’s value trajectory. Using the Bank of Canada’s online Currency Converter, it is evident that there has been a more or less systematic increase in the value of the Canadian dollar since 2000. In fact, from January 2000 to April 2003, the Canadian dollar shot-up in value from US $0.60 to US $0.70. After a year, the Canadian dollar continued to increase and its value came up just under US $0.80. As our dollar’s value was still worth less than the US’ by quite a bit, it made sense during

this time that there’d be a mark-up on our items since they actually did cost more. The next few years though, we continued to see an increase in the value of our dollar, climbing from US $0.80 to US $0.95. But despite this steady upward climb in value, Canadians continued to pay a similar mark-up to the one seen in previous years during substantially lower values. Finally, in September 2007, we hit parity with the US dollar amid a scrambling US market; then two months later, the Canadian dollar continued to increase and hit a high of just under US $1.10. It was at this time in 2007, that complaints from Canadian consumers began to surface in regards to unreasonably high prices despite a stronger value right here at home. It simply didn’t make sense that we were paying more for our goods when our dollar should have given us more value in return. Then, as more Canadians began to purchase their items from online US retailers or by crossing the border itself, retailers began to announce price cuts and special discounts for Canadian consumers; larger Canadian retailers like Zellers and Wal-Mart followed by announcing cutbacks on hundreds of items to persuade Canadians to buy at home. Following these events, and in response to the public outcry, Finance Minister Jim Flaherty claimed in a Toronto Star article to “want the market to work… [and for] prices to go down to reflect the increased purchasing power of the Canadian dollar.” However, after Flaherty met with several large retailers to discuss the pricing issue and

ArbitrageMagazine.ca | Summer 2010

Aren’t we shocked sometimes by the rising dollar?

lobby for more substantial pricecuts, a different issue emerged regarding supply costs. Canadian retailers claimed that they were unable to lower their prices on all goods because their suppliers were charging them more than the retailers in the United States. In fact, Liberal Industry Critic Scott Brison told the CBC that the manufacturers providing the goods to Canadian retailers are charging them up to 90 percent more than their American counterparts. Instead of suggesting retailers to lower their prices, Brison calls for the Canadian government to re-evaluate the tariffs being charged on the goods entering the country, as the taxes and the transportation costs are causing the mark-up to remain in place. On the one hand, it does make sense that products in Canada might be more expensive than in the United States when taking into consideration transportation costs and tariffs. After all, every business student will recall Porter’s Five Forces Model explaining purchasing power. We—as Canadian consumers of some 30 million people— have a smaller purchasing power than the Americans who have a population of over 300 million.

CANADA

A loonie in front of a laptop monitor. How much is it worth in the U.S. here?

We also have to bear in mind that some of the regional retailers in the US are actually the same size, if not bigger, than some of our Canadian national retailers. As National Affairs Vice-President of the Retail Council of Canada, Derek Nighbor, puts it, “it’s an issue of scale.” Nonetheless, back in 2007, retailers promised that given time prices would begin to adjust accordingly to the increased value of the Canadian dollar, as many items (particularly books) are priced anywhere from six to twelve months in advance. Yet even after three years, Canadians have seen no major difference. And as hopes that we will ever see the benefits of a soaring loonie begin to ebb, Canadians have instead turned to online shopping or

have chosen to make the drive across the border, making sure to remain there at least 48 hours so as to avoid the extra custom fees. In fact, Direct-Marketing Strategist, Paulina Sazon, has reported that thanks to the World Wide Web “the volume of shipments through the Canadian postal service’s special service for American retailers [has] increased 38 percent over the last year,” while PayPal Canada states that it sees “an average of 1200 cross-border transactions per hour.” However, even with the threat of online and cross-border shopping, Canadian retailers have yet to pass on the gains of a strong Canadian dollar. Despite the consumer outrage in 2007, which forced retailers to

concede deals (apparently these deals had an expiration tag beginning after the 2007 holiday season), consumers seem to have forgotten their anger and passively accepted the return to marked-up prices. It seems to be a losing battle to put our hopes on the retailers and suppliers; until they realize the threat online or crossborder shopping presents to them, Canadian consumers will simply have to continue looking elsewhere for those best deals. So to move this along, why not make yourself comfortable in front of a computer or take a small trip over the border? Click to read more & join us!

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THE

EVOLUTION Of money By Saif Qureshi, Section Editor Designed by Ryan Trinidad

MONEY IS ONE of the most important things in our lives. It helps ensure our survival and is a key to power. It is also one of the earliest and most significant inventions by humans and has become the foundation of our modern economies. Hardly a day goes by without some discussion of money, its promises and its consequences. Almost everything around us has a cost attached to it and obtaining ownership requires money. Yet, when it comes down to it, we are essentially paying for these goods or services through pieces of paper or through electronic signals (e.g. credit card or online banking). In fact, we have become so accustomed to these forms of payment that many have never even paused to think about why and how they work. So in order to properly understand the current forms of money we take for granted, it is important to understand how our payment systems have evolved over time â&#x20AC;Ś and later, what they may evolve into.

THE DAYS OF WAY BACK WHEN

As surprising as it may seem, money didn’t exist among early human societies. In fact, barter was the first system of payment: an arrangement where two parties agree to exchange one good or service for another, thereby making a transaction. It is not known exactly when this first started but it is quite possible that it dates back to the first humans. But although this system is very easy to understand and remained dominant for quite some time, there are few to no rules and the rate of exchange is vague. But from 9000 to 6000 BC, with the advent of new farming techniques, a new form of barter grew in popularity. It became commonplace for farmers to trade commodities, such as cattle or grain, for some other good. This commodity money became an ideal currency because everyone knew what a bushel or cow was worth. That said, in order for money to be a medium of exchange, it also needs to also be easily transportable and divisible, so that it can become easy to use. This is one reason why cattle are not used today as a form of currency; as it’s very inconvenient to hack a cow into small pieces, keep it refrigerated and bring enough of its carcass to a store to purchase a new shoe. Considering the three functions shown in the infographic above, the first known primitive form of money was cowrie shells, which came into use around 1200 BC in China. These shells were found around the Maldives and were highly regarded in China and India, due to their attractiveness and rarity.

Similarly, much later on in history, American Indians highly valued wampum shells and used them for decoration, jewellery, religious ceremonies (buried in graves) and of course as money. In fact, these shells were acceptable for payments of debts, fines, tributes and even for ransom. All of these uses for the wampum shells and its symbolic value ensured that their demand and value remained strong. Around 7th century BC, money evolved once again and started to become familiar to what we have today. In Turkey, bean-shaped currency was produced using gold and silver. These primitive coins had a special mark on them, which represented the coin’s specific value. Previous to this creation, the metal was simply exchanged based on its weight and purity, which made it very difficult to engage in a transaction since both of those qualities had to be measured. About 100 years later, in the kingdom of Lydia (located in modern day Turkey), circular coins as we know them today were invented. Seeing the benefits of this standardized currency, other nations such as the Persian and Roman empires were quick to follow and further refined their currencies. (Coincidentally, at around the same time, craftsmen in China were making coins with very elaborate shapes such as spades and knives, of which the flat surfaces were decorated with Chinese characters.) It was not until the 3rd century BC that the Roman emperor decided to create a more practical round coin, but with a square hole in the centre.

This is one reason why cattle are not used today as a form of currency; as it’s very inconvenient to hack a cow into small pieces, keep it refrigerated and bring enough of its carcass to a store to purchase a new shoe.

MEDIUM OF EXCHANGE:

widely accepted in exchange for goods and services in a market.

UNIT OF ACCOUNT:

unit in which we measure our economic transactions, such as prices

STORE OF VALUE:

possesses value that can be stored and retrieved over time.

With the rise of money, different sorts of financial transactions started to take place, which could be called the beginning of banking. In Greece, starting from 4th century BC, private entrepreneurs and institutions (such as temples and public governments) began taking deposits, making loans, exchanging different currencies and testing the coins for weight and purity. Many of these transactions were unheard of since this time and provided the citizens with more services and convenience

ITS JUST PAPER I TELL YOU

Around the 9th century AD, the first official paper currency was introduced in China under the Song dynasty. It was quite different from todayâ&#x20AC;&#x2122;s modern currency though because it was in very short supply, had an expiration date and was only available in some regions. However, the main benefit was that wealthy people did not have to carry a ton of currency around. In fact, the origin of paper currency was that rich merchants who owned lots of coins, started to leave their wealth with a trustworthy person and in turn received a promissory note (representative money), which could be redeemed afterwards. These occurrences coupled with a shortage of copper, led to the government implementing one of the first forms of fiat money in human history. However, about five hundred years later,

this currency was eventually abolished because there was mass printing of bank notes, which led to rising inflation. Notably, this was still several years before the Europeans would adopt paper currency and several centuries before it would become widely used. Then came Stockholms Banco, a private bank in Sweden founded in 1657 by Johan Palmstruch. Four years after its foundation with the collaboration of the government, it became the first bank to issue European banknotes, which could be exchanged for a specific amount of silver coins at the bank. These banknotes became very popular, as they were easy to carry around (rather than the metal currency of the time) and could be exchanged for goods at the market. Unfortunately, the bank issued more notes than it could redeem for silver coins and so when people started asking to have their notes honoured, the bank did not have enough reserves. This led to a loss of confidence in paper currency, ending with the Swedish government taking control over the bank, settling debts and quickly thereafter closing it down. As these two examples show, establishing paper currency was far from easy. For the next few centuries, several attempts were made with banknotes, until eventually they became accepted by the public. The only reason why people did eventually become comfortable with

recently, we have seen a completely new form of money emerge: digital money paper (fiat) money that was worth nothing was when governments backed them with their own reserves. This prevented banks like the Stockholms Banco, from becoming bankrupt but introduced a truly new evil to the world: inflation. To battle this problem, several countries started to adopt the gold standard, which is when countries start to fix their currencies to a set value in gold. The gold standard reduces inflation because it is very difficult to manipulate the economy’s demand for money when it’s backed up by gold. Specifically, one can only produce as much money as there is gold; but since the world’s gold supply is fixed, the amount of money in the world would remain the same unless one discovers a new gold mine or new method of alchemy. Unfortunately, this strength was also its eventual undoing, as the gold standard was short lived. During the Great Depression, the system completely collapsed after many economists blamed it for being unable to revive the economy

through monetary policy (i.e. increasing the money supply to pump funds into the market, as we saw governments do following the 08-09 economic meltdown). The new system that followed arose at the end of World War II, where the International Breton Woods System replaced the gold standard. Under this agreement, all countries agreed to tie their currencies to the US dollar, which was pegged at $35 per ounce of gold. This occurred mainly because the US was the world’s largest economic power and because it held the majority of gold reserves. This system endured until 1971, when the dollar started to devalue and other countries did not want to appreciate (raise) their currency value due to the damage it would do to their export dependant industries. As a result, the United States abandoned the fixed value of the dollar and let it float in the world’s money markets (fiat currency). This is how the world’s monetary system now works and has become very important in international trade and globalization. Fiat currency, which is used in most of today’s developed countries, is issued by the government as legal tender and is not convertible into anything such as gold or silver; making it virtually useless were it not for its acceptance in transactions (i.e. by society’s willingness to believe that government backed pieces of paper have value).

Evolution of man.

THE DIGITAL AGE

Just to stop and put this all into perspective: there were many forms of currency not even discussed above because the thousands of small societies in human history each had their own different methods for commerce. However, most of these can be classified as some form of commodity or representative money. But more recently, we have seen a completely new form of money emerge: digital money. The categories within this form of money are broad, including: credit cards, banking, online trading and internet payment systems. • CREDIT CARDS: When a credit card is swiped, an electronic signal is sent through the card network over phone or cable lines, carrying all that transaction’s information. The benefits from this are that it makes it very easy for consumers to conduct transactions and that there is always an available line of credit. • BANKING: In regards to banking, computers fit very well in banks, because they are ideal for storing information and performing calculations. Today, they are used in electronic fund transfers between banks, in ATMs and also in online banking, which makes it very convenient to pay your bills. • ONLINE TRADING: Additionally, digital money has also found its place in the capital markets, since most trading is now done electronically. There are also many online brokerage websites with very low commissions that now allow you to trade stocks. • INTERNET PAYMENT: The next context in which digital money has become so important is e-commerce. While privacy is always a concern, with internet security growing more secure year by year, online credit card transactions has grown each year over this past decade.

In fact, while the traditional credit card model has held sway for quite some time, with the rise of more advanced computing power and complex programming, the payment system can be made much more efficient and does not need to be such a burden on sellers. Thanks you influential online payment web services like PayPal, the cost of accepting credit card payments have fallen dramatically. This concludes our version of the history of money. One thing that is clear from all of this is that money in one form or another will probably be around for a long time. Other payment systems that could become dominant in the future and have already started to take shape around the world include payment through mobile airtime, through public transit passes and Twitpay (paying through twitter). Although we still don’t know what that dominant form of money will be in the future, one thing that’s for certain is that we will continue to spend those precious dollars in a completely different way and as the trend shows, spending will likely become easier. Click to read more & join us!

FINANCE

Basic Money Management By Saif Qureshi, Section Editor Designed by Luis Ernesto Rojas MOST STUDENTS COMPLAIN about their financial situation yet continue not doing anything about it. So instead of waiting to win the lottery, the following are a number of tips you can use to help ensure that your wealth grows over time. Just remember, what you’re about to read requires some financial discipline and will certainly not make you a millionaire over night (but if followed, will likely keep you out of the poor house). The first thing you need to do is compare your income versus your expenses. Obviously the latter should not exceed the former—unless, of course, you have lots of assets already. Assuming you don’t, then you need to rely on a very important financial skill called budgeting. Essentially, this involves dividing your current expenses into categories (e.g. food, utilities, entertainment, etc.) and then monitoring the totals in these areas to ensure they are under control. Using this method will allow you to quickly realize which areas you need to cut down on, so you can use that money more wisely in other places or (if possible) to save it for the future. Many banks have an online spending manager for your credit card account, which shows the amounts you spent in several categories. If this is not available for you, then it’s probably a good idea to use spreadsheet software to budget your expenses. However, the

harder part of budgeting is the actual cutting down of your expenses, which involves asking yourself difficult questions, such as, “Do I really need a big screen television in my room?” Once you have mastered budgeting, you might one day notice that you have extra money in your bank account. You now have two options: you can either spend it all again (in which case you need to go back to the beginning of this article) or you can use the next very important financial skill called saving. Saving is important, as it allows you to pay for major expenditures or for costs that you had not previously expected. Having some sort of reserve is essential and will mean that you can avoid having to go and get a loan in the future. You might wish to open a Savings Account and as a general principle keep about a year’s worth of expenses, just so that you are free from financial problems. An additional skill that comes along with saving that you should seriously consider is investing. For this skill, you need to consider what your financial goals are and estimate your future expenses. Whether you are investing so that you can buy your dream car or for retirement, you need to build a portfolio, one which combines stocks, bonds and other financial instruments, in order to reduce your risk. How much you allocate to each stock/ bond depends on the return on investment you are looking for and the risk that you are willing to take. Usually, the higher the return on investment, the higher your risk will be, meaning your return will deviate by higher values.

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The best way to proceed with your investments is to talk to your financial advisor or, alternatively, do your own homework (for which there are infinite materials online) and manage your investments yourself. To further convince you to invest, here is a numerical example. If one were to invest a $1000 every year from the age of 20 till the age of retirement at 65 (with reasonable a 5% return on your investments), one would end up with a total of $159,700 in their investment account. You might be thinking how that’s possible, if one only invested $45,000 over the 45 years? The answer to that lies in the return of 5% you will be making, with the combination of the magical power of compounding. Compounding means that in addition to the 5% you make from your investment every year, you make an additional 5% from your previous investment returns. Over a long period, this strategy makes a big difference and can lead to large amounts of income. Just remember that in the long term, whether you are budgeting, saving or investing, all of this requires some sort of financial discipline on your part and will first require you to devise a financial strategy based on your needs and goals. Once you figure out those basics, then all you have to do is stick to them. Click to read more & join us!

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Is the Stock Market Really Just a Casino? By Saif Qureshi, Section Editor Designed by Saif Quershi

Image sourced from Telegraph.co.uk

Many have heard people claim that investing in the stock market is like gambling in a casino. While there’s some truth to that, overall, investing has been proven the more lucrative choice. However, there are many successful gamblers just as there are many successful professional investors. So one has to wonder: is it all really just luck? Let’s compare. Firstly, whether you are investing or gambling, you have to compare the risk of your money towards the possible gain. Investors can lower their risk by following risk management strategies such as diversification or by investing in stocks with strong histories and low measures of beta. Gamblers on the other hand can look at the odds and decide whether or not it is a worthwhile risk, or how much to put into play. Most professional gamblers, like investors, have a pretty good idea after a while on how to increase their reward, while minimizing risk. Another surprising similarity is that both investors and gamblers

study past behaviour. For example, players playing poker look at their opponents for clues and try to determine whether or not they are bluffing. They also study the betting patterns of their opponents, and some good players can remember what their opponents wagered 20 hands back. Understanding this information, allows gamblers to predict the future to some extent. On the other hand, investors try to predict the future by examining and analyzing stock charts using various techniques called technical analysis. However, this is not an exact science because of the efficientmarkets theory, which claims that the current stock price reflects all past prices. This is because there are millions of investors out there looking to exploit the same opportunities as you, and thus it is most likely that the current price already reflects all past events. So if, both stocks and casinos have risk and both rely on past uncertain information to predict the future, then what’s the point of putting your money in either of them? The case for buying stocks in a company is that it gives the investor an ownership stake in that firm and allows the investor to take a share out of the company’s earnings. Over the long term, it has been proven that business profits increase more often than not, and if profits go up, so does the stock price. That is one of the main reasons why investing is so much safer than going to your local casino. In the long run, gambling is a zero-sum game, meaning that it only transfers money from the loser to the winner (and of

course the house who takes it share). Investing on the other hand enhances the economy, and in the long run more capital leads to improved productivity and wealth for everyone. You might also have noticed that when you gamble, after the game you are playing is over and you have lost, you lose all the money you put in and there is nothing you can do about this. This example demonstrates the two major ways in which investing differs from gambling. First, investing is not a time bound event, meaning that you are free to invest for however long you want. However, when you are gambling, you don’t have a choice because once the game is over, the bet is finished and the money is distributed. The second major difference is that when you are investing, you don’t usually lose all your money. The reason for this is that first of all the company you have invested in would have to go bankrupt for you to lose all your money, and this rarely happens. On the other hand, this is very common in gambling because if you lose the game, then you lose your entire bet. Next time someone mentions to you that gambling and investing are the same, you can inform them about how there are both major similarities and differences. Both involve risking your money and hoping to get high returns, but in the long run investing in stocks has a higher chance of making you a millionaire than playing at a casino Click to read more & join us!

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FINANCE

What is Short Selling?

examples below). And while the short seller may suffer from a loss if the price of the assets rises, the lender will experience a gain.

Nicki Mossavarrahmani, Staff Writer Designed by Katie L. Serensits

Example: Market conditions are such that the shares in company X are currently being traded at $10 per share. Scenario 1: The short seller decides to borrow 100 shares, for a total value of $1000 and immediately sells those shares. If the price of the shares falls to $6, the short selling can buy the same number of shares back at the price of $600 (100 shares x $6). Once he returns the shares to the lender, the borrower has made a $400 profit, minus any borrowing fees. Scenario 2: If the price of the shares in company X instead rises to $14 per share following the short sale, and the short seller is required to return the shares, the short seller would have to buy back 100 shares at $1,400 and would suffer from a loss of $400, plus any borrowing fees.

Short selling, shorting or going short; this is the financial practice of an intermediary borrowing an asset from a lender and then selling it to a third party on the market, in the hopes of making a profit from the variations of the borrowed asset’s worth. Confused? Well, hopefully the following will clear up the

basics. The intention of the borrower (also known as the short seller) is to sell the lender’s assets at a higher price and then buy them back when they drop in price in the markets. The borrower is thus betting that the borrowed assets he/she sold will reduce in value in the long run, so that he/she can buy them back at a fraction of the cost they were sold for. This idea works because the original lender will have all his securities (in this case, securities being the assets sold to third parties) returned, not the value of the securities (see the short selling infographic and

This example illustrates how investors can make a profit on a declining market by short selling an individual stock. But you may ask, “why would a person lend his/her securities in the first place?” Well, regardless of the change in price, the lender will receive a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Additionally, the lender is hoping for the market price of his/ her securities to rise, thereby receiving both the borrowing fee and the securities that are now valued at a higher price.

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Going short can be contrasted with the more conventional practice of going long, whereby an investor profits from any increase in the price of the asset. In comparison, investors who employ short selling often use this technique to allow them to profit on securities which they believe are overvalued, whereas long investors attempt to profit on securities by buying those which they believe to be undervalued. So if one is sure that a stock is going to decline and wants to profit from its regrettable demise, then short selling is the best option. Thanks to this investing technique, many investors make money on the decline of an individual stock or during a bear market. Most of the time, you can hold a short position for as long as you want, but the downside is that interest is charged on margin accounts. (Margin accounts are collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk.) Therefore, keeping a short position open for a long time will likely cost you more. Additionally, an added risk in short selling is that you can be forced to cover (buy the shares) if the lender demands you to return the borrowed shares. As always, the principal rule of investing applies; the investor faces high risks for potentially high returns. Click to read more & join us!

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Spreading the Wealth: Spread & Long/Short Strategies By Michael Morretto, Contributor Designed by Laura Gonsalves The magnitude and speed at which financial innovation has occurred over the past thirty years is nothing short of astonishing. Increasingly complex financial products give investors the flexibility to implement more complex investment strategies. Accordingly, it is impossible to find the ‘perfect’ investment style or strategy; rather different strategies cater to different levels of investor sophistication and goals. Before trying to decide on a particular investing style, one must consider his own particular risk tolerance, time horizon, investment objective, need for liquidity and so on. Investing in a financial product with an initial lockup period might provide an excellent risk-adjusted return; however, it would be completely inappropriate for an individual that needs unobstructed access to their funds. Market leaders are companies that are expected to show more potential than their peers or the market and possess a position of dominance compared to the offerings or market position of their peers. The opposite can also be said for companies that are ‘underperformers’ relative to their sector, industry and index. This is where the concept of a spread trade comes in.

In any given sector, an investor can select what they think to be the leader(s) and underperformer(s) and exploit the spread (difference) between them. This would be achieved by going long the outperformer and short (i.e. short selling) the underperformer. In an ideal situation, profit would be achieved from the leader generating positive returns and the lagger producing negative returns, thus returning a profit on both the short and long positions. The same logic could be applied to a sector and either a strong/poor company within that same sector. For example, with a negative outlook on the sector, one could short it and long a market leader. The logic being that even if the market leader and the sector both fall, the market leader will fall less than the overall sector. This means that the short on the sector will return more profit than the loss will be on the market leader, leaving the investor with an overall positive return from the combined two positions. It goes without saying that there are risks with this investing style. Some are more specific to this style whereas others that apply generally to investing. One of the principal risks is that both the long and the short positions move against the investor; this could produce even greater losses than simply being long or short. Proper risk management measures, such as a stop loss on the long position and a limit buy on the short position, will help to limit the extent of losses. Another risk for a trader could be a break from a historical relationship that exists between

a pair of securities. A break in these traditional trading bands, ranges in which securities trade, can be caused by moments of market panic or euphoria. This in turn can be problematic for investors with a long/short spread trade, because the two securities are out of their normal trading range and may not respond in the predictable way the investor expected. A matter of moments is all that it may take to break a historical relationship that has existed for such a long period of time and that we have almost taken for granted. This reliance on empirical observations is not unique to this particular investment approach; however, this investment style is susceptible to this type of problem.

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FINANCE

Scare Tactics and the Blurring of Truth By Alfred Yim, Staff Writer Designed by Laura Gonsalves Have you ever heard the news warn of an impending Zimbabwean-like hyperinflation? Why the US will sooner, rather than later, become the next Greece? Or that the government is bankrupt and that you should expect the dollar to take a nose dive? For the layperson who comes across these messages, it would be easy to understand why they may become frightened and mislead. This article’s purpose then is to analyze some of the more common claims and arguments that serve to perpetuate this hysteria, allowing you—the level headed individual—to analyze opposing views and make informed conclusions regarding deficits, debt, devaluation of the dollar and hyperinflation scares.

“Deficits Lead to Certain Economic Ruin” DEBT AND DEFICITS

Daniel Griswold of the Libertarian CATO institute lends support to the idea that deficits may be misrepresented. He states that in periods where the current account deficit is worsening, GDP growth has been more substantial than in periods where the deficit is decreasing. For instance, in the 1980s when the current account deficit declined as a percentage of GDP, the economy grew at a modest 1.9 percent; but when deficits grew moderately, GDP grew at 3 percent; and finally, when deficits were rapidly increasing, GDP grew at 4.4 percent.

Just as interesting, is the fact that rising deficits have been witnessed alongside improving employment numbers; when deficits were at their worst, unemployment fell by 0.7 percent, while unemployment jumped by 0.8 percent per year when deficits were considered to be improving. Another Libertarian argument comes from Robert Murphy who, in his article “Perpetual Trade Deficits Can Be Good,” analyzes the apparent danger of deficits. In the piece, Murphy begins outlining Peter Schiff’s comparison of the US debt situation with 5 Asians and 1

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American on a desert Island; where the American, whose job is to eat, pays the Asians for their hard days foraging and hunting with IOUs. Murphy goes on to say that if a country’s comparative advantage is in intangible financial services, then trade deficits will naturally arise due to other country’s lending in hopes of returns; the cost of growth for the country would then be interest paid rather than physical items imported; this necessarily requires us to put financial cost in context with a nation’s growth metric, that is GDP.

FINANCE The discussion of historical data necessarily requires the discussion of the purpose or necessity of said deficits. The reasons for running a deficit should, at the very least, bear as much significance as the size of the deficit. For instance, Krugman says deficits are needed in the short term to alleviate the problems of the present, echoing Maynard Keynes’ statement that, “In the long run, we are all dead.” The spending fills in the deficit in private spending and lack of consumption, greatly needed in times of crisis. Krugman goes on to say that during the Great Depression, what precipitated further hardship in 1937 was the incorrect assumption that the problem was resolved, which lead to the tightening of monetary policy and as a result, prolonged suffering. In general, deficits are not one dimensional and require a look at the opportunity cost of slashing deficits. A counterargument to spending usually involves the mention of the potential for asset bubbles and malinvestment. On the issue of asset bubbles, there is a way to enact spending policies while avoiding the negative corollary-and that is to implement regulation and controls. In the case of the housing bubble, higher lending standards (i.e. down payments needed) led to a much smaller sub-prime market in Canada, which was only 6% of the market 2006 through 2008, as noted in the Vancouver Sun. The threat of mal-investment is based on the notion that individuals, faced with the opportunity for cheap money will be incentivized to spend

differently than they normally would. However, as Joseph Heath points out, incentives do not necessarily lead to outcomes that were intuited on the outset. For instance, one would expect taxi drivers to work longer hours on days with high volume of customers to take advantage of extra income; but on average, these drivers work less hours in these conditions, contrary to what incentives tell him or her to do. This analogy by Heath shows that the possibility of bad investment due to some kind of incentive shouldn’t preclude quantitative easing altogether. Not only are incentives more complicated than first seen, other secondary alternatives such as tweaking regulation and rules, as mentioned before, can achieve the same desired outcome of a non-existent bubble.

“Families Can’t Live Beyond Their Means—Neither Can Governments” This argument is one of the strongest cases for a fiscal tightening of the belt. Indeed, why should governments have a different fiscal standard than the nuclear family? Such arguments however, cloud certain realities, in that families DO take loans out on things, such as education and homes, as well as borrowing for consumption. And this same dichotomy exists for government spending as well. When expenditures are made with an investment mindset, it’s a wholly different thing from consumptive borrowing.

So to apply the notion of dual usage of borrowed funds, instead of education and housing, the federal governments’ borrowing can bring about boons in the form of more employment and increased production

“Deficit Spending is Wasteful, Let’s Do Without It” A counterargument to the aforementioned ‘potential benefits’ of leveraged spending, would point to the ineffectual nature of spending in general and that government intervention simply serves to crowd out private investment driving the economy further away from Pareto optimal economic conditions (Pareto Optimal being, a state where changing any one variable would result in a negative change elsewhere). In response to that, one should consider Lipsey’s and Lancaster’s Theory of Second Best, where in a market/ economy with one or more of the assumed conditions in the General Equilibrium Theory are broken, any attempts to move towards Pareto Optimality will actually be worse off than letting 2 seemingly ‘un-optimal’ factors cancel themselves out.

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FINANCE To Illustrate, take a polluting company which possesses a monopoly and therefore and produces less than it could to maintain high prices. If there is a move to increase the number of competitors, the level of harm would be increased— simply letting the factor of monopoly offset the problem of externalities (pollution) is a better route in this case. Drawing on this and applying it to deficits and spending, advocating thrift in an attempt to move towards Pareto Optimality, when the market has severe problems of contracted demand and lending reticence by the banks, will not only NOT guarantee a net benefit but can worsen it, as in the case of the polluting company.

“USA Will be the Next Greece… And Soon” A popular argument for lifting up fiscal bootstraps involves Greece. It’s easy to relate Greece’s problems to the US, making forthcoming chaos sound quite possible. That said, this is a scare tactic. Propaganda. And at first glance, the comparison seems true. Debt comparisons between these 2 countries in terms of the public debt are shown in the table. In absolute terms, US trounces Greece’s interest payment amount. As a percentage of GDP though, it is actually a smaller

amount, largely owing from the fact the US economy is 40 times larger than Greece (14 trillion versus 302 billion). However, if one takes a look at total debt, including intergovernmental debt, the ratio to GDP is much closer, with both countries around 100% with Greece sitting at 115% and the US at around 94.27% Despite the apparent parity, the US debt situation has 2 elements that make it different, as discussed by Robert Green: (1) Greece pays higher interest on its debt than the US. The average coupon interest rate for outstanding US debt (Debt To The Public) is just 2.5% (as of March 31, 2010, according to the Bureau of the Public Debt) and the Fiscal year 2011 budget projects an average interest rate for the fiscal year 2011 of just 2.0%. Confidence in the US is what primarily allows interest rates demanded to be so low. (2) Greece cannot finance its debt with the printing of money (double-edged advantage). If push comes to shove, the US can ‘print’ or finance its debt by buying treasuries, Greece cannot. Hyperinflation is purported to result from any mass printing of money, however inflation requires there to be a willingness to lend (on the banks’ part) and a willingness to take out loans (on the part of consumers), both elements clearly depressed and missing at

Source: USA statistics: Office of Management and Budget, US FY2011 White House Budget; US Treasury March 2010 Schedule of Federal Debt; Greece statistics: European Commission Eurostat

ArbitrageMagazine.ca | Summer 2010

the present, in Greece. If this lack of lending and borrowing vigor persists into the future, hyperinflation would likewise be a case of Chicken Little. However, predictions of sentiment in the future would be speculating at best, just as it would be to attempt to predict the sharp reverse in the US bond market. These factors illustrate the differences one must take into account between Greece and the US debt. Objections would include the issue of intergovernmental debt and the point in time where social security payments necessitate the agency to reclaim its lent money. However, the transition period when such redemptions of bonds aside, this debt owed to itself essentially indicates how a portion of debt is more flexible than public debt.

HYPERINFLATION

Printing Of Money & Hyperinflation Scares Overzealous doomsayers like to prey on misconceptions about just how close hyperinflation is to becoming reality. One must note however, that the increase in money supply does not necessitate inflation if that money is not being lent, which means at the minimum, hyperinflation will not arise. Moreover, there has not been a perfect correlation of inflation and the money supply-this is without taking into account any other variables behind the data. The reason for the lack of more lockstep interaction could be laden in how M2 money supply is defined. M2 among other things, such as deposits at banks, includes the holdings of cash outside of banks. In

FINANCE

times of great apprehension on the public’s part, there will be a larger amount of dollars held, representing the atmosphere of pessimism. This in turn, can slightly increase the M2 figure, but what should be focused on is that the willingness of individuals to spend is depressed. The final link to this argument is the aforementioned other variable which is the velocity of money (amount of economic activity associated with a given money supply); which is weak due to said pessimism.

Zimbabwe Other arguments one should be wary of are those that bring up the printing of money and the hyperinflation in places like Zimbabwe. Saying a country will become the next Zimbabwe is hyperbole at best, as Zimbabwe’s hyperinflation is a result of extremely poor rule, which is manifested in its management of the economy. To avoid this state, a country like the United States would need to do the following: drastically reduce its level of democratization, turn youth groups into paramilitary wings, seize farms and run them into the ground, deter foreign investment by using said paramilitary wings to seize assets and terrorize the populace and commit a host of other counter-intuitive actions before any exaggerated statements can avoid being regarded as a monetary equivalent of Godwin’s law. Many other instances of hyper-inflation such as those pre 1980 were accompanied with the fact that fiat money systems were in place; however this fact was always accompanied with a weak central government and civil/social unrest, including war.

What Should You Take Away From This?

Given that such themes of deficit and hyperinflation doom are less apocalyptic than first observed, investing in commodities (gold included) should not be undertaken with overconfidence. As well, complete divestment from US bonds and cash is unwarranted. If you are going to make a bet that commodities will continue to benefit from the economic and

social climate, then you should do it with a sound rationale. An example of a more prudent way of going about commodity investment is to invest in broad based commodity ETFs. The reasoning for this is because commodities have very low correlations with each other. In addition, research has shown that if there is any possible long run return, in excess of the risk free rate in commodities, it is achieved by holding a portfolio of equally weighted periodically rebalanced commodity contracts (which Erb and Harvey details in their paper “Tactical and Strategic Value of Long run Commodity Futures”). The implication for the average investor is this: buy a broad based ETF (which holds portfolios of contracts, so that you the investor can avoid the duty of rollover and rebalancing), if you do not have many other assets like stocks or bonds. Also, buy ETFs which don’t have many commodities when you have other non-commodity assets to speak of. In all, besides avoiding the arguments which use hard and absolute statements (which are a red light in terms of fallaciousness), one should also take great care in realizing that economics is not perfect; therefore arguments which depend on what may or may not happen are either individuals’ best guesses and/or estimates. Regardless, having a more pragmatic approach with your money is never the worst choice. Click to read more & join us!

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From Gold To Fractional Which Financial System is the By Pawan Shamdasani, Staff Writter Better Choice Today? Designed by Mary Zhao Once the world was run by gold, now it’s by paper and plastic. But how did this transition happen? Why is it important? Why does it affect our lives, and did the world make the right choice in this switch? To start, the gold standard was a monetary system where each participating country fixed the value of its currency to a specific amount of gold. Most developed countries adopted this system during much of the nineteenth century and early twentieth century. Meanwhile, the Fractional Reserve system—the most current monetary system—has existed since the early nineteenth century. This system involves banks keeping a fraction of their deposits as reserves while lending out the remaining and having the obligation to redeem all these deposits upon demand. Amid this latest financial downturn, there has been a lot of heated debate by economists about whether the Fractional

Reserve system is the still most appropriate for the current financial system. Now it’s our turn to join that debate.

GOLDEN HISTORY

Before World War I, the world economy operated under the gold standard. The standard was adopted by England in 1717, the United States in 1834, and by other major countries in the 1870s. During 1880 to 1914, most countries adhered to the “Classical Gold Standard”; this was also a period of unprecedented economic growth and relatively free trade in goods, labour and capital. But WWII changed everything. The gold standard collapsed as countries demanded monetary flexibility to finance the war. Only after Germany’s defeat did developed countries initiated the “Gold Exchange Standard”, where all countries fixed the value of their currencies in terms of the U.S. dollar. Likewise, the U.S. Central Bank fixed the value of the dollar

in terms of gold. But this system was no better than the last, as it broke down in the early 1930s. Then came “the Bretton Woods System” around 1944. This system was based on the convertibility of U.S. dollars into gold (for foreign governments and central banks only) at thirty-five dollars per ounce. With this system, the majority of countries settled their international balances in U.S. dollars. However, continuous U.S. balance-of-payments deficits steadily reduced their gold reserves, thus lowering the ability of the United States to redeem its currency in gold. Finally, on August 1971 the gold standard was abolished.

FRACTIONAL HISTORY

Since the end of gold’s dominance, the world economy has largely operated under the Fractional Reserve system. Savers of money were in search of safekeeping depositories for their valuables, including gold and

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silver coins, eventually lending these to goldsmiths who would return a receipt (an IOU or note) for their deposits. Gaining the trust of people, these goldsmiths’ notes became a popular medium of exchange and an early form of paper money was created. But during this process, goldsmiths began to notice another trend. During trades, people would not usually redeem all their notes at once and so the goldsmiths took this opportunity to reinvest their gold coin reserves in interestbearing loans and bills. Clearly, income was generated for the goldsmiths leaving them with more issued receipts than gold reserves. The goldsmiths’ role as a guardian of gold and charging fees for secure storage was altered to that of an interest-paying and interestearning bank. And that’s how the Fractional Reserve system was birthed.

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MIDAS’ TIP SHEET

The gold standard was used to regulate the quantity and growth rate of a country’s money supply. It ensured that, for most countries, the money supply (and thus the inflation rate) was relatively stable as new production of gold added only a small amount to the accumulated stock. An exception to this was when Australia and California discovered many gold

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example, could be exchanged for approximately 1/20 ounce of gold. Likewise, the British Treasury would exchange 1/4 ounce of gold for one pound. Because a Canadian could convert twenty dollars into one ounce of gold, which could be used to buy four pounds, the exchange rate between the pound and the Canadian dollar was effectively fixed at approximately five dollars to the pound. As exchange rates were fixed, the gold standard was the cause of parallel movements in the price levels around the world. This movement mainly occurred through an automatic balance-of-payments adjustment process known as the “pricespecie-flow mechanism.” To explain, this mechanism operated like so: using the US as an example, if a technological innovation was the result of quicker real economic growth in the United

If the gold standard was to function effectively, the Central Bank had to play by the “rules of the game.” reserves in the early 1850’s, causing global price levels to shortly become very volatile. The gold standard was an example of a fixed exchange rate regime where most currencies were convertible directly into gold at fixed rates, so exchange rates between countries were also fixed. Canadian dollar bills, for

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States and the supply of gold in the short run was fixed, the U.S. price level would fall. Therefore, U.S. exports were less expensive relative to their competing imports (say, from the UK); as such, the British would demand more exports while the Americans would demand less imports.

THE RESULT?

The U.S. balance-of-payments system is at a surplus causing gold (specie) to flow from the United Kingdom to the United States. The inflow of gold increased the U.S. money supply having the reverse effect of increasing prices while the outflow of gold reduced the U.K. money supply, lowering prices. The net effect was balanced prices among the two countries. The drawback of the gold standard is that it was known to cause both monetary and nonmonetary (real) shocks. These were transmitted through flows of gold and capital between countries. A monetary shock in one country would affect the money supply, domestic expenditure,

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nominal income, real income, and the price level in another country. An example of a monetary shock was the California gold discovery in 1848. If the gold standard was to function effectively, the Central Bank had to play by the “rules of the game.” Michael D. Bordo, a professor of economics at Rutgers University explains that these banks were supposed to “raise their discount rates (the interest rate at which the central bank lends money to member banks) to speed a gold inflow, and to lower their discount rates to facilitate a gold outflow. Thus, if a country was running a balance-ofpayments deficit, the rules of the game required it to allow a gold outflow until the ratio of its price level to that of its principal trading partners was restored to the par exchange rate.”

THE FRACTIONAL GUIDE

Dolloars

As for the Fractional Reserve system, this is where commercial banks (not the government) are ultimately involved in the creation

of money. To initiate the process, people deposit their money in banks, who then lend out a fraction of their depositors money to other customers. The remaining funds are held with the banks as reserves. These customers pay interest on the borrowed funds used to finance the banks’ expenses of conducting business (that is, to pay interest to their depositors) and as a source of profits for the banks’ owners. The bank behaves as an intermediary between the people who have a surplus of resources and those who have a lack of it. When lending out money, the bank absorbs most of the risk and must return the principal to the depositor irrespective of their return on the investment. The practice of Fractional Reserve banking has a cumulative effect on the banking system, allowing it to create money. For instance, if Jason deposits $100 in Bank A, which lends out $50 to Ray who spends it, the money is eventually deposited in Bank B by a different person. Bank B then lends

out $25 to Mary, which is spent and deposited in Bank C. The process continues indefinitely until the total amount of deposits equals a multiple of the initial amount of cash deposited in Bank A. In this example, the total amount of deposits, $200, is exactly twice the initial amount of cash, $100. This multiple is known as the money multiplier, which depends on the required reserve ratio and the currency ratio.

THE BENEFITS

The main advantage of the gold standard was it ensured long-term price stability. Between 1880 and 1914, the average annual inflation rate was 0.1 percent, whereas under the Fractional Reserve system, between 1946 and 2003, the average was 4.1 percent. On the other hand, the Fractional Reserve system benefits a large number of players in the economy including depositors, borrowers, bankers and society. Depositors are able to earn interest on their deposits instead of having to pay to keep their money at the bank. Borrowers have access to these funds at competitive interest rates that they would not otherwise obtain. Bankers are able to generate profits and society can efficiently channel idle resources into economic productive use.

THE COSTS

The main disadvantage of the gold standard was that prices were highly volatile in the short run, mainly because economies were so susceptible to real and monetary shocks. A measure of short-term price instability is what D. Bordo states as the “coefficient of variation—the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change.”

For the United States, the coefficient of variation was 17.0 between 1879 and 1913 under Gold, while it was only 0.88 between 1946 and 1990 under Fractional. Also, under the gold standard, the government could not use monetary policy to stabilise output, so economies were not able to avoid or offset monetary or real shocks. This meant that real output was more variable under the gold standard. Unemployment was also higher during the gold standard era, averaging at 6.8 percent in the United States between 1879 and 1913. The most common issue with the Fractional Reserve system however, is that it is responsible for inflation. Money creation by banks causes the money supply to grow faster than the commodity supply, resulting in the price of goods and services to rise and generate higher inflation. Meanwhile, a problem claimed by few Austrian Economists is that the system subjects the economy to boom-bust cycles it cannot avoid.

CONCLUSION

As of today, the consensus among most economists is that it would not be wise to return back to the gold standard. The key issue with gold functioning as a monetary standard is that there is no guarantee gold stocks will grow at rates necessary to keep prices stable. In the past, new discoveries of gold reserves created substantial inflation and had adverse macroeconomic effects. At other times, it was observed that prices would fall as a result of the gold stock failing to grow fast enough. But the core problem occurred when the public began doubting the redeemability of the currency. There was a rush to convert those

currency notes back to gold, causing the total money supply to shrink. As mentioned earlier, the severity of the Great Depression was largely a consequence of staying with the gold standard. Once the United States withdrew from its commitment to operate on the standard, the money supply stopped shrinking. With the Fractional Reserve system however, it is more difficult to determine whether the costs outweigh the benefits or vice versa. The 2008 financial crisis has spurred much debate about reforming the financial system and how the banking system operates. Returning to a system of one-hundred percent reserve banking (but with a gold standard) is a possibility, yet the main consequence of this would be deflation, which is strictly more harmful than inflation. In fact, some inflation is vital to stimulate a growing economy and lowering unemployment levels. So at least for now it’s safe to say that we won’t be seeing any dramatic changes in the financial system … at least not until the next financial disaster. Click to read more & join us!

EDITORIALS AND OPINIONS

mutual funds

The Greatest Crime Perpetrated to Humankind By Alex Vo, Coordinator Designed by Akil Worrell YOU PROBABLY KNOW someone who has money invested in a mutual fund. Maybe you have money invested into a mutual fund. And who wouldn’t, right? With benefits such as diversification, high liquidity, small up-front investments and professional management, it doesn’t seem like we need any more convincing. It’s a way where less wealthy people can get into the action of the stock market without having to check their stock prices on a daily basis. Your money is safe with a professional. Or is it? Investing in mutual funds is generally much more beneficial than leaving it in a savings account.That’s where the knowledge of it ends, while they pretend to understand what the mutual fund salesperson is saying to them. Fees are the most obvious negative to mutual funds, as they easily eat into your returns. Management fees, for example, get paid whether the fund achieves a gain or a loss. If your job is to make money for other people, why should you be paid if you aren’t doing your job? Why should you have to pay a fee when your portfolio actually declined in value? Because of the recent economic downturn we experienced, you might have postponed your summer vacations. These people probably didn’t. In addition to the fees, returns are not guaranteed. You will not know how much money you will

gain or lose and the funds are not covered by insurance, as opposed to a savings account. Secondly, they are not designed for short term investors. As many people know, stock markets go through a business cycle with ups and downs. Mutual funds are designed for long-term investors if they want to profit, as well as the fact that fees may be charged for liquidating them prior to maturity. Third, mutual funds have tax consequences depending on an individual’s situation. You may still end up paying taxes from your mutual funds even if it loses money. Furthermore, mutual funds cannot short sell and that is probably the most important fact to be aware of. This means that in a down-trending market, like the one we had recently, you will lose money. It will be inevitable. It is illegal for mutual funds to short stocks, which is when you profit when share prices decline. How much do these “professionals” know anyway? Most mutual fund holdings include businesses from the S&P/TSX 60 index. This means that an individual who would like to invest in stocks could purchase the index or create a portfolio similar to a mutual fund’s portfolio, without having to know anything about stocks. Less than half of Canadian mutual fund companies produce a higher rate of return than the index and therefore purchasing the index could be a much better alternative. Anyone, even busy individuals who would like to invest, will be able to do so without a lot of work and avoid the expenses that come with mutual funds. ETFs

Image soucred from propublishingservices.com

(exchange-traded funds) are another alternative to mutual funds, but that’s a different topic on its own. As a final point, diversification is useful for those who want to preserve wealth, hence those who have a large sum of money. Because of the expenses incurred when purchasing a mutual fund is percent based, it will cost a wealthy investor more money. On the other hand, less wealthy individuals don’t have the goal of preservation. They instead want to make capital gains. There’s a saying in the mutual fund world. “Two out of three ain’t bad.” So, tell me, where’s the mutual in mutual funds? Author Bio: Alex Vo is the primary blogger of www. voindustriesblog.com, where he discusses financial and investment strategies on a frequent basis, using methods from articles to videos to inclass lessons. He loves to answer questions and help beginner investors achieve financial freedom Click to read more & join us!

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EDITORIALS AND OPINIONS

Have Canadian Banks Played It Too Safe? By Victoria Chau, Staff Writer Designed by Laura Gonsalves IN THE MIDST of the subprime debacle that resulted in the global financial crisis (beginning some three years ago), Canadian banks were hailed as the forerunners of banking systems everywhere. Ranked first in a survey by the World Economic Forum in 2008, Canada was declared to have “the soundest banking system” while the United States and Britain were ranked No. 40 and No. 44 respectively. However, now that we have established our banking system is sound, Canadian banks should be taking great strides to take advantage of this position and place themselves more competitively on a global scale. Canadian banks have never really been known as powerhouses in terms of size, profits, innovation, or anything else. The one thing we have always been—and probably always will be—is prudent. This isn’t necessarily a bad thing, as it’s the reason why Canadian banks did so well during the economic crisis when the larger and more competitive banks the world over failed and looked toward government bailouts. Yet, whenever the global economy does well, Canadian banks are left behind and miss out on the big profit party. That is not to say that Canadian banks have not proven that the system itself is sound, and that much of this security is

rootedin a sense of conservatism. However, the conservatism of the Canadian Banking system was merely a cloak that postponed a crisis, but it would never have entirely averted it. Had the crisis occurred a year or even a few months later, even the system’s conservatism would have succumbed to the same bleak realities that the rest of the world wallowed in. All that has happened in this past recession does not mean that Canadian banks are the best in the world; it merely means that we were conservative enough not to take the huge risks thatour global counterparts did and consequently did not fall in the same holes. Therefore, as it stands, Canadian Banks are in an advantageous position as global financiers look towards Canada as a secure and financially sound place to invest their funds. Canadian banks are experiencing historically high yields while banks worldwide are insolvent and are relying on their respective governments as a crutch. The solvency of Canadian banks can be attributed to the conservative measures that the Office of the Superintendent of Financial Institutions (OSFI) and the banksthemselves have placed on their capital restrictions. As a result of these measures, Canadian banks have enjoyed capital reserves that on average are two times higher than those in the United States and three times higher than those in the European Union. These good times for Canadian banks should mean that they’re out there looking for good deals and bargains on smaller and more regional banks worldwide so that they can continue to

ArbitrageMagazine.ca | Summer 2010

expand. This should, of course, continue to be done according to the more conservative nature that is the core of the Canadian banking system. However, we haven’t seen much movement from Canadian banks in terms of acquiring new sources of revenue. Mainly, the banks have been revelling in the stagnant global limelight that had been previously pointed south of the border as the world reveres our prudence. The profit structure of Canadian banks are much different than their American counterparts. Canadian banks earn a lot more revenue from service charges and fees from their everyday customers, whereas American banks look towards making investments and profiting from those decisions. Consequently, Canadian banks haven’t felt the need to expand or innovate new financial instruments that could be used to earn more revenue. For example, in March of 2008, following the financial meltdown, the market capitalization of the Canadian banks exceeded many of their US counterparts, such as those of Merrill Lynch and Morgan Stanley. This placed the Canadian banks in the optimal position to continue expansion into the States. But it did not happen as simply as it seems it could have. In fact, although there have been numerous ‘scouting’ opportunities for Canadian banks since the crisis began in September 2007, many of these opportunities have been turned down or ignored as a result of risk avoidance. American banks meanwhile, such as JPMorgan Chase, Goldman Sachs and Wells

EDITORIALS AND OPINIONS

Fargo, all made purchases and expansions within the States. Across the ocean, Barclays (based out of London) purchased Lehman Brothers after it sank, and BBVA of Spain bought what was left of Guaranty Financial. Canada doesn’t have much to say in response, aside from TD purchasing Commerce Bancorp and CIBC unveiling its plans to purchase Citigroup’s $2.1 billion Canadian MasterCard credit card portfolio last month. Overall, Canadian banks have been quite lethargic in making use of these basement-bargains. In the end, this is the optimal time for Canadian banks to take advantage of their positions and

begin to find ways to become more globally competitive. Whether this means a more extensive expansion into the American and other world markets, committing to the research and development of other not so dangerous financial instruments, or a little bit of both, these choices are up to each individual bank. One thing that should be agreed upon though, is that Canadian banks should not be relying on their current profit structure any longer, as it has resulted in stagnation while the rest of the financial world has become much more developed.

The top 10 soundest banking countries are as follows: • Canada (6.8) • Sweden (6.7) • Luxembourg (6.7) • Australia (6.7) • Denmark (6.7) • Netherlands (6.7) • Belgium (6.6) • New Zealand (6.6) • Ireland (6.6) • Malta (6.6) Based on a scale of one to seven (one being insolvent and in need of government assistance, seven being completely healthy). Click to read more & join us!

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EDITORIALS AND OPINIONS

Greed is NOT good Kevin Kang, Managing Editor Designed by Katie L. Serensits In the famous words of Wall Street’s Gordon Gecko, “greed is good.” According to free-market economists, the incentive of profit is what drives efficiency and innovation in the modern world. Why work hard if you do not get paid for it? Who would share a new idea or invention with the world if there was no payment in return? The opportunity for profit pushes businesses to produce efficiently and constantly create new ways of improving our lives. For supporters of the profit incentive, money is truly what makes the world go round. However, greed is also known to provoke unethical and illegal behaviour. So the question must be asked: is money making the world turn the wrong way? Does your paycheque always reflect the value you have added to society? Countless examples of controversial compensation can be drawn from the recent global financial crisis. Often, those who were to blame for the economy’s troubles were those who reaped the most rewards. At the height of the crisis, AIG Inc. distributed millions of dollars of government bailout money as executive bonuses. Major investment banks were taking executives to expensive corporate retreats, while middle-class Americans were evicted from their homes. The realization of this growing disparity even led the Obama administration to place a salary

cap on CEOs. These events make it clear that the laissezfaire pursuit of profit leads to inefficient outcomes. The unrestrained profit incentive can be examined at a micro level in China, where small village farmers have stopped growing crops to “grow” houses instead. This strange phenomenon started years ago when the Chinese government began buying large plots of farmland for urban development. To do so, farmers were reimbursed for the fair value of their land. However, farmers saw that profit was to be made: if they constructed buildings on their plots, the value of their land would increase. Soon, poorly built brickand-mud houses sprung up all over the countryside, crowding out fields of crops. Although some are built illegally without permits, they quickly grow into communities and homes, making it difficult for the government to step in and demolish them. Even if the houses were demolished, crowds of farmers would illegally build them again overnight.

ArbitrageMagazine.ca | Summer 2010

The result? The Chinese government has no choice but to pay farmers more than what their land was originally worth. In the end, regardless of what happens in the buying process, all of the houses that are “grown” will be torn down by the government for development. Thus, all construction and demolition that occurs is completely pointless. When more money can be made without actually having to create value for society, the profit incentive leads to inefficiency. Like the farmers, businesses and individuals without a strong sense of morality would be encouraged to cut corners and invent ways of creating profit without having to work as hard for it. The Chinese government is in the process of creating further legislation and boosting law enforcement, but the legal process is always two steps behind. Milton Friedman, famous economist and free market advocate, once wrote an essay stating that “the social responsibility of business is to increase its profits”. Friedman argued that the modern concept

EDITORIALS AND OPINIONS of corporate social responsibility was idiotic and inefficient: if businesses operated according to the law and focused purely on profit, they would be acting morally enough. He added that by spending the business’s money on social initiatives, businesses are using up a substantial chunk of their employees’ and shareholders’ paycheques. Thus, Friedman argued that by pursuing profit and at the same time, playing by “the rules of the game”, society is pursuing a better future. Unfortunately, the theoretical free market works very differently from the real world. In practice, profits have a tendency to lead people astray and encourage them to commit unethical, illegal and economically inefficient acts. In the perfect world, everyone would follow greed to the limits of the law. However, our legal system is infamous for being slow and critically flawed in dealing with white-collar crime.

As shown in the recent financial crisis, regulations on financial markets that should have existed were simply not there. As we amend our regulatory policies, we realize that innovation in the financial services sector evolves more quickly than the law, and that something else is needed in order to prevent such a crisis from happening again. The famous philosopher, Immanuel Kant, had a utopian solution for such moral dilemmas. He believed that morality could only be achieved if we pursue an action as a “means in itself.” This means that to be moral, we must do things because we believe in what we do and not because we are pursuing ulterior motives. What does this mean for profit? It means that people should work and contribute to the society simply for the purpose of improving our collective quality of life—not for making a profit. Farmers in China should farm

purely for the sake of providing food to the nation. Otherwise, they may be able to find other ways of making profit without being truly productive. Of course, Kant’s philosophy is neither practical nor possible. A world that tries to live by those rules would be too inefficient and could never exist. However, it is obvious that we each need our own sense of morality and social justice. To be practical, we can and should seek profit. Nevertheless, when unrestrained by a strong code of ethics, greed is definitely not good. Click to read more & join us!

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EDITORIALS AND OPINIONS

Worthless Endeavours

Protesting the G20 Summit By Sushil Tailor, Staff Writer Designed by Sushil Tailor A WEEK BEFORE the Group of Twenty (G20), a congregation of leaders from 20 current and rising economic powerhouses, I had a run in with an executive of the York Federation of Students (YFS). They were advertising their protest that they planned to hold at the G20. While a campaign for public education was commendable, I cringed at the sight of our student union wasting the money we collectively paid into it on a venture with no tangible gains in sight. The then G20 went underway and my suspicions were confirmed. Their protest yielded no results and all of those advertising dollars went to waste. The G20 exists primarily as a forum to discuss issues pertaining to international finance and the global economy, be it banking, stimulus or budgets. Its member nations prefer not to add issues into the mix that go beyond this scope. The main reason behind this is that when dealing with these various different member states, a common agreement that there should be a stable global economy exists whereas agreements on the vast brunt of other issues vary. The Americans don’t talk about Iran’s nuclear program because the Russians would disagree on the issue. China and Vietnam do not propose socialist ideas for contentions would be met by various Western nations.

Europe does not bring forth the concept of reducing CO2 outputs since that would be met with opposition from China and India. Many protestors and Western nations wish to propagate liberal democracy but China, Vietnam, and Saudi Arabia would not find that in their favour. In order to make meetings successful, issues that evoke controversy between member states are often left untouched. This is why the meetings held largely pertain to regulating banks, reducing budget deficits and paying off debt. Furthermore, given the fact that the majority of the protestors were Canadian, it should be noted that 19 members of the G20 were not. Other world leaders are beholden to the interests of their own populace and thus are not likely to pay mind to catchphrases chanted by Canadian activists on Toronto’s streets. Conversely, protesting at the G20 not only serves no purpose because of a discrepancy between the agendas of activists and that of world leaders, but due to a discrepancy between the agendas of the activists themselves. Activists in Toronto hailed from many different groups at the G20. Environmentalists, women’s rights activists, peace activists, labour rights activists, conspiracy theorists, anarchists, and socialists were amongst the many. From a marketing perspective, given this situation, it is not logical to go out and protest since your message would be less likely to be heard. For example, you could be a labour rights activist whose message would be drowned out by a larger and louder crowd

ArbitrageMagazine.ca | Summer 2010

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of peace activists. When more groups are added to the list of protestors, the overall message for each group becomes more muddled and incongruent due to the added clutter. Ultimately, your message gets lost in the noise and the sea of banners, while your efforts in raising awareness are left in vain. And then there is the Black Bloc. Many activists should have learned by now that protests at large international events are bound to be derailed by the actions of the Black Bloc. The burning and breaking of public and private property has become a common occurrence in such big-ticket events due to this elusive group and protest tactic. This ragtag group of vandals organize either individually or in a cell. Many have no relation to one another and may even disagree with one another on a

EDITORIALS AND OPINIONS

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fundamental ideological level. However, they are grouped together by their common tactic of donning all black attire over their existing clothes and covering their faces with

bandanas or ski masks in order to maintain anonymity. Once assembled in a vast crowd of regular protestors, they begin to wreak havoc on the environment around them

breaking windows and in Toronto, burning police cars. Some try to attack corporate headquarters and franchises situated in the surrounding area as a symbolic message against capitalism while others prefer acting out on their nihilist fantasies. Upon completion of their random acts of vandalism and violence, they rid themselves of their black attire and meld into the crowd of otherwise peaceful protestors. Like a hurricane, they come and go leaving only destruction in their wake. Law enforcement is left baffled at the prospect of capturing the dark clothed attackers without knowing their identities. The real victims of the Black Bloc end up being the peaceful protestors who wished to raise their concerns. The media no longer direct their cameras and microphones towards the messages of the various protestors but towards the broken windows, fires, the rioters and the police. And so we come back to the York Federation of Students and their campaign for keeping education public. Given the subject matter of the G20, which focused largely upon financial issues, the fact that their message competed with that of other groups and the riots induced by the Black Bloc, the following question arises: what gains were realized by the YFS executives for protesting at the G20? By now you can answer that on your ownâ&#x20AC;&#x201A; Click to read more & join us!

Summer 2010 | ArbitrageMagazine.ca

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By Nicki Mossavarrahmani, Writer-At-Large Designed by David Tal

You can’t eat it, drink it or use it directly for anything. It’s a poor substitute for wood when starting a fire. And yet we all work our butts off, 9-to-5, for it.

MONEY.

YOU KNOW, THAT thing that really makes the world go round. But let’s start by taking a step back. What is money? How does it work? Money is generally considered an object that circulates widely as a means of payment. Broken down further, there are actually two types of money: commodity money and fiat money. Today, use of commodity money can be seen in prison. There, cigarettes can be used to trade for goods and services but it can also be consumed for ones utility. Then there is fiat money (i.e. a form of money, like a $20 bill, declared as legal tender by the government), which is intrinsically useless and does not have any direct utility. So then why would anybody want to hold fiat money? Money has three functions: it’s a store of value, a unit of account and a medium of exchange. To act as a store of value, money must be able to be reliably saved, stored, and retrieved. A unit of account is a monetary measurement of the market value or cost of goods, services, or assets. It gives meaning to profits, losses, liability, or assets. The third function of money, medium of exchange, is a sole feature of money. It thereby avoids the inefficiencies of a barter system, such as the 'double coincidence of wants' problem. This problem lies in the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time, same place and by the same people. For instance, an economics professor may have economics lessons to offer but in exchange would like to purchase a car. However, the student that would like to

purchase a lesson cannot offer a car in return. This dilemma causes inefficiencies in the economy and leads us back to reasons as to which people prefer to hold money (as they can use it for any purpose). The increased buying power, freedom and control consumers have using money is what motivates and maintains fiat money. In fact, let’s assume for a second that we do not have money to use as a means of exchange and we revert back to the barter system. Let’s explore the consequences. As individuals partake in fewer economic transactions the economy gets closer to what is called autarky. This represents a state when individuals are unable to make mutually beneficial trades and as a result each individual can only consume what he or she produces and nothing else. Consumer theory holds us to that consumers prefer to have diversity in their consumption. For instance, farmer Joe produces only wheat but would like a variety of goods and services such as clothing, shelter, meat and furniture. However, since the barter system brings us closer to autarky due to restrictions in trade, that means that farmer Joe will have lower variety of goods and services which translates into lower utility in his lifestyle. Therefore, when Joe is faced with the option of holding money versus barter, he will choose money. But what is it about today’s fiat money—these easily destroyable pieces of paper—that makes it so valuable? Simply our belief in its value.

If one believes that fiat money will not be valued in the future, then fiat money will have no value in the present. Therefore, no one would be willing to give up goods and services for money. If people’s belief in the value of money disappears, it becomes a self-fulfilling prophecy. So what happens when our belief in (fiat) money is shaken?

Meanwhile, other economists believe that different motives (three in all) lie behind peoople’s desire for money. These motives include: the “transactions” motive (having sufficient funds for day-to-day individual and business purposes); the “precautionary” motive (having money on hand for unforeseen circumstances); and the “speculative” motive (holding money because prices of your desired

Money is not a particular thing. Money is an Inflation is a good example of something that deteriorates people’s belief in the value of money. If in the next period your money is worth less, you will be inclined to hold less of it. Therefore, inflation is one of many determining factor in how much money people would like to hold. On the other hand, when people’s belief in money is strong, when we really love our money, people tend to hold onto their money. Some economists suggest that this is because the demand for money is a function of two variables: interest rates on close substitutes to money like bonds and the level of income. Higher income means a higher demand for holding money as the number and value of ones transactions increase. On the other hand, if an individual sees a higher return from an interestyielding asset instead of the interest given by the bank, the individual is likely to hold less money in liquid form (coins and bills).

Idea.

goods may decrease). Since people’s desires to hold money rely on these motives, when these motives grow stronger, people will hold on to more money, which results in a drop of total individuals and business expenditure. Conversely, when these motives weaken, you can see an increase in total expenditure. In the end though, even if we were to abolish money, it would always be reinvented in some way. For money is not a particular thing. Money is an Idea. Dollars, pounds, lire, whatever it may be, as long as we are bound by markets, by trade to share resources, money in any of its forms will always be something we lust after. Click to read more & join us!

CAREER PLANNER

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ArbitrageMagazine.ca | Summer 2010

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CAREER PLANNER

job profiles

By Kevin Kang, Managing Editor and Trishaala Ninan, Designer

the intro

career planner

selection training directory Summer 2010 | ArbitrageMagazine.ca

self reflection

the intro

CAREER PLANNER

aking career choices is seldom an easy task. Everyone eventually comes to a point in their professional lives when they have to pick between a promising path and another that looks equally attractive. The yellow brick road of a career in finance is full of both hope and uncertainty. If you make all the right moves, you have a shot of living out your dreams with the money and fame of a successful trader. If you don’t, you might be led away from your ultimate goals. In the end, we all seek to arrive at our destinations having walked a road paved with victories. However, without a road map, finding your way may prove difficult. Let the Arbitrage’s Career Planner be your guide!

Choosing to work in finance means becoming a part of the immense system of capital that flows throughout the world. In previous issues of the Career Planner, we mapped out a career in wealth management and an overview of a career in the industry. This issue’s Career Planner focuses on one of the most important areas of the system: commercial banking.

job profiles

We created this planner for you in the hopes of helping you make informed decisions. Our goal is to tell you about a position that you never knew existed, and help you realize your career ambitions. Follow your yellow brick road and you’ll get exactly where you want to be—and maybe even further.

what is commercial banking?

the basics

selection training directory

Unlike investment banking, commercial banking is a broad term for services dealing with the daily functions of large companies, governments, and consumers. Dealing with large businesses is known as corporate banking and dealing with the transactions of consumers (known as retail banking). Typically, commercial bankers deal with everything from managing consumer deposits to managing changes in foreign exchange rates. This area of finance involves a very broad range of positions, each with different job descriptions and salaries. Each role within commercial banking offers a unique experience so be careful when you are deciding on a path. Corporate Banking (excerpt from efinancialcareers.com) Corporate banking is the range of different services that large companies, governments, or other big institutions need in order to function day to day. Responsibilities range from the relatively simple business of issuing loans to more complex matters, such as helping minimize taxes paid by overseas subsidiaries, managing changes in foreign exchange rates, or working out the details of financing packages necessary for the construction of a new office,plant or other facility.

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER

the intro

In many cases, there's an overlap between corporate banking and capital markets. Bankers working in capital markets help companies raise money by issuing equities or debt. Corporate bankers typically help clients raise money through loans. When necessary, corporate bankers will bring in the expertise of their capital markets colleagues.

the basics

Corporate Banking continued

Retail Banking Retail banking encompasses the services provided for individual consumers, including arranging loans, handling mortgages, and keeping various types of accounts. Like corporate banking, this type of banking is largely traditional and gains profit from transactions and the “spread” between borrowing and lending.

job profiles selection

self refelction

One person’s dream can be another person’s nightmare. Don’t just make your career decisions based on what your peers are interested in. You need to be aware of your own interests and values in order to pick the right career for you. This starts with a self-evaluation: look at your skill set, personality, and interests. If you select a position that suits you, you will have a much more successful professional life. Below is a list of items that you should review before stubbornly departing upon a path leading away from your penthouse and garage of expensive cars. Categories for Career Interests

Summer 2010 | ArbitrageMagazine.ca

training directory

Skills What kind of technical and/or occupational skills are you enthusiastic in utilizing on a daily basis? What kind of skills are you passionate about to attaining? Knowledge and Expertise What kind of knowledge do you most look forward to gain? What kind of knowledge and/or expertise are you most passionate about to working toward that will support career ambitions? Experience What are the types of challenges and on-the-job intrinsic rewards that will make your future career satisfying and fulfilling? Abilities What abilities do you have to contribute and which ones do you want to improve on?

self reflection job profiles

training directory

selection

job profiles

self reflection

CAREER PLANNER Categories for Career Interests continued Opportunities for Growth What future opportunities are you hoping to achieve? How high up the corporate ladder do you hope to climb over the course of your career?) Prestige and Recognition How much respect and popularity does your ego need [i.e. if a lot, then chose an occupation that commands a great deal of respect and popularity from your peers, co-workers and the general public]? What level of authority do you envision your ideal position possessing in regards to your team, your division and your firm? Work & Team Environment What kind of surroundings are you most comfortable working within? Characteristics of Personalities Do you feel that the qualities of your personality allow you to meet and exceed the demands of your ideal job? The Objective of the Job Does the purpose of your desired career align with the core organizational goals of your ideal company, as well as your own career expectations and objectives? Will your desired career allow you to achieve a sense of accomplishment when reflecting on your job on a daily basis? Responsibilities & Duties Do you believe that you will be passionate and enthusiastic about the responsibilities and tasks you will likely carry out on a daily basis? Salary Levels What is your target salary range that you hope to aspire to over the course of your career?

The following are general descriptions of the most prominent roles unique to commercial banking. When reading these overviews, please consider them as a kind of realistic job preview that will help prepare you for making the career choices of your future. These overviews are by no means definitive and will likely be out of date within another few months (as the financial industry tends to evolve quite regularly). Thus, while we recommend using this guide to aid in your career choices, we also recommend reviewing secondary sources before you make your final decision. Keeping this, as well as your self-reflection answers in mind, we hope you find the following career planner section quite eye opening. (Compiled from careers-in-finance.com and careerplanner.com)

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER

the intro

Job Description This is a common entry level job which requires that you evaluate business and consumer loan applications made to your bank. Your duties include projecting a company’s future cash flow, evaluating its current financial soundness, visiting and interacting with financial people at businesses and dealing with lenders. You will learn a lot about business in this job. Your success in this job will depend on how detail-oriented you are, your knowledge of accounting, and your ability to communicate.

job profiles

Credit Analysist

Salary $39 000 - $50 000

training directory

Summer 2010 | ArbitrageMagazine.ca

selection

Duties • Analyze credit data and financial statements to determine the degree of risk involved in extending credit or lending money. • Prepare reports that include the degree of risk involved in extending credit or lending money. • Evaluate customer records and recommend payment plans based on earnings, savings data, payment history, and purchase activity. • Confer with credit association and other business representatives to exchange credit information. • Complete loan applications, including credit analyses and summaries of loan requests, and submit to loan committees for approval. • Generate financial ratios, using computer programs, to evaluate customers' financial status. • Review individual or commercial customer files to identify and select delinquent accounts for collection. • Compare liquidity, profitability, and credit histories of establishments being evaluated with those of similar establishments in the same industries and geographic locations. • Consult with customers to resolve complaints and verify financial and credit transactions. • Analyze financial data such as income growth, quality of management, and market share to determine expected profitability of loans.

job profiles

Education and Qualifications • University degree in Finance, Accounting or related field • CCP or FCI (Certified Credit Professional) an asset

training directory

selection

job profiles

self reflection

CAREER PLANNER

Loan Officer Job Description This is a highly desirable job in banking which involves making loans to businesses and consumers. Being a loan officer requires that you have good selling skills, an ability to understand a business and a solid understanding of how banking works. Most people in upper management at banks were once loan officers. Salary $40 000 - $115 000 Education and Qualifications • University degree in Finance, Accounting or related field • CCP or FCI (Certified Credit Professional) an asset • CFA designation an asset Duties • Approve loans within specified limits, and refer loan applications outside those limits to management for approval. • Meet with applicants to obtain information for loan applications and to answer questions about the process. • Analyze applicants' financial status, credit, and property evaluations to determine feasibility of granting loans. • Explain to customers the different types of loans and credit options that are available, as well as the terms of those services. • Obtain and compile copies of loan applicants' credit histories, corporate financial statements, and other financial information. • Review loan agreements to ensure that they are complete and accurate according to policy. • Work with clients to identify their financial goals and to find ways of reaching those goals. • Market bank products to individuals and firms, promoting bank services that may meet customers' needs. • Set credit policies, credit lines, procedures and standards in conjunction with senior managers. • Provide special services such as investment banking for clients with more specialized needs. • Analyze potential loan markets and develop referral networks in order to locate prospects for loans. • Arrange for maintenance and liquidation of delinquent properties. • Interview, hire, and train new employees. • Petition courts to transfer titles and deeds of collateral to banks.

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER

the intro

Job Description You would be responsible for overseeing all activities at your branch including opening new accounts, loan origination, solving customer problems, foreign exchange, and safe deposit boxes. Most importantly, you are responsible for establishing relations with customers. This job can be very satisfying, is never boring and requires you to be hands-on. Many bank managers start as tellers or customer service representatives. Key things go have for this position are customer service skills, empathy, quantitative ability, strong work ethic, organization and a solid understanding of banking. Can move up to be a market manager and oversee branches in a market.

job profiles

Branch Manager

Salary $56 000 - $100 000

training directory

Summer 2010 | ArbitrageMagazine.ca

selection

Duties • Effectively retains existing business and expands/attracts/acquires new business. • Translates branch sales goals into sales plan and oversees execution. • Communicates, motivates, monitors and coaches branch staff in attaining production and referral goals. • Assures operations standards are met through branch adherence to bank policies • Oversees direct reports to deliver branch sales growth and assures product suitability for customer needs: • Monitors and controls expenses and fees. • Performs platform sales and service responsibilities as required. • Conducts sales activities outside of the branch. • Promotes professional growth of employees through planned development activities and experiences for succession advancement. • Participates in productive community and civic events to extend name recognition and reputation of Bank. • Networks by joining key organizations or groups within the marketplace.

job profiles

Education and Qualifications • Bachelors degree in Finance, Accounting, or Business Administration • PMP an asset • CFA an asset • 8-10 years experience working at a branch

job profiles

self reflection

CAREER PLANNER

Trust Officer Job Description In this job you would deliver trust services, financial products and advice to bank customers (often more upscale ones). This work will give you knowledge of business, investing, estate planning, taxes, probate law and will involve a lot of counseling. Salary $60 000 - $80 000

training directory

selection

job profiles

Education and Qualifications • Accounting experience • Bachelors degree in accounting or finance • CGA or CFA preferred

Duties • Gathering of client information for new accounts, existing accounts or account terminations. • Coordinating that data through Operations for execution. • Interacting with clients via phone, mail and client meetings to handle client requests. • Prepare special reports for clients to supplement account statements, summarizing their financial, cash flow, tax, gifting and/or estate planning information. • Collect and create disbursement requests while ensuring adequate documentation. • Manage and oversee the preparation of proper documentation and compliance backup for client family gifts and charitable gifts, crummey notices, etc. • Coordinate the process of calculating Charitable Trust distributions and communicating to the client regarding such. • Coordinate the process of calculating Required Minimum Distributions from IRAs and communicating to the client regarding such. • Meet with clients to review their accounts, assist in financial planning and organization. • Work closely with accountants of clients to ensure timely filings and taxes paid. • Prepare client accounts documentation for their annual trust account review. • Reviewing investment policies, account performance, cash liquidity needs, historical or prospective changes in client situations or activities, etc.

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER

the intro

Job Description Your primary responsibility as a mortgage banker is to supply potential homeowners and businesses with loan opportunities. You will work closely with real estate agents, perform credit checks, and coordinate with purchasers. Often loans are sold on the securities market. Because the number of homeowners in the country continues to increase, mortgage bankers enjoy a fair amount of job security.

job profiles

Mortgage Banker

Salary $50 000 - $83 000

job profiles

Education and Qualifications • Bachelors degree in business administration or related field • Experience as a credit analyst

Summer 2010 | ArbitrageMagazine.ca

training directory

selection

Now that you know more about the major career options in commercial banking, take a few moments to brew it over in your mind and weigh each with your vision of your future self. You now should have a good idea of the types of duties associated with each of the roles, as well as the type of education and experience required. The final section of the Career Planner will provide you with more information on the various designations you may choose to pursue. Having a designation beside your name will make you look much appealing to employers and are an investment in your career path. Even if a designation is not specifically stated under a job description, it may still be relevant and give you a leg up during the recruitment process.

selection

Duties • Originate mortgage loans. • Establish and maintain relationships with realtors, builders, developers and other potential business development sources. • Conduct applicant interview and review & evaluate applicant financial and credit data to determine acceptable risk. • Negotiate terms and conditions of loans with mortgagors. • Provide superior customer service to existing and prospective customers. • Provide loan origination and related service and support to internal bank personnel. • Keep informed on current real estate market trends and the rules, regulations, & upcoming changes pertaining to residential construction and residential mortgages.

training directory

job profiles

self reflection

selection

CAREER PLANNER selection explanation continued It is our hope that reading this planner has granted you a better understanding of your yellow brick road. Be sure to follow your ambition and never be afraid to apply for the jobs of your dreams.

Note: Some of these designations are available in both Canada and the US, while others are only offered in the US. Who knows where your career will take you, so we figured we would stay safe and offer information on designations from both sides of the border.

Canadian Securities Institute Designations

The CSI offers a variety of respected designations that are highly prized in the Canadian market place; those include: Chartered Professional (Ch. P), Fellow of CSI (FCSI)™, Derivatives Market Specialist (DMS), Canadian Investment Manager (CIM)™ and Financial Management Advisor (FMA). Each designation has their own extensive requirements to obtain them. WEBSITE: www.csi.ca

training directory

selection

Certified Financial Planner® (CFP®)

Those with the CFP® designation have demonstrated competency in all areas of finance related to financial planning. Candidates complete studies on over 100 topics, including stocks, bonds, taxes, insurance, retirement planning and estate planning. The program is administered by the Certified Financial Planner Board of Standards Inc. In addition to passing the CFP certification exam, candidates must also complete qualifying work experience and agree to adhere to the CFP Board's code of ethics and professional responsibility and financial planning standards. (Definition sourced from www.investopedia. com/) WEBSITE: www.fpsc.ca

Chartered Financial Analyst® (CFA®)

This designation is offered by the CFA Institute. To obtain the CFA charter, candidates must successfully complete three difficult exams and gain at least three years of qualifying work experience, among other requirements. In passing these exams, candidates demonstrate their competence, integrity and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management and security analysis. (Definition sourced from www.investopedia.com/) WEBSITE: www.cfainstitute.org

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER

the intro

As the name implies, an individual with this certification has demonstrated his or her expertise in mutual funds and the mutual fund industry. These individuals often advise clients on which funds to invest in and, depending on whether or not they have their license, they will buy and sell funds for clients. The Institute of Business & Finance (IBF), provides training for the CFS, and the course focuses on a variety of mutual fund topics, including portfolio theory, dollar*cost averaging and annuities. (Definition sourced from www.investopedia.com/)

training directory

Certified Fund Specialist (CFS)s

Chartered Financial Consultant (ChFC)

Chartered Investment Counsellor (CIC)

Certified Investment Management Analyst (CIMA)

Certified Public Accountant

and

Personal Financial Specialist

Those holding the CPA designation have passed examinations on accounting and tax preparation, but their title does not indicate training in other areas of finance. So, those CPA holders who are interested in gaining expertise in financial planning in order to supplement their accounting careers need to become certified as personal finance specialists (PFS). The PFS designation is awarded by the American Institute of Certified Public Accountants to those who have taken additional training and already have a CFP designation. (Definition sourced from www.investopedia.com/) WEBSITE: www.aicpa.org

Summer 2010 | ArbitrageMagazine.ca

training directory

This designation focuses on asset allocation, ethics, due diligence, risk measurement, investment policy and performance measurement. Only individuals who are investment consultants with at least three years of professional experience are eligible to try to obtain this certification, which signifies a high level of consulting expertise. The Investment Management Consultants Association offers the CIMA courses. (Definition sourced from www.investopedia.com/) WEBSITE: www.imca.org

selection

Given by the Investment Counsel Association, this is a designation which CFA charter holders who are currently registered investment advisors can study for. The focus of the CIC program is portfolio management. In addition to proving their high level expertise in portfolio management, these individuals must also adhere to a strict code of ethics and provide character reference letters. (Definition sourced from www.investopedia.com/)

job profiles

Individuals with the ChFC designation have demonstrated their vast and thorough knowledge of financial planning. The ChFC program is administered by the American College. In addition to successful completion of an exam on areas of financial planning, including income tax, insurance, investment and estate planning, candidates are required to have a minimum of three years experience in a financial industry position. (Definition sourced from www. investopedia.com/)

training directory

selection

job profiles

training directory

self reflection

CAREER PLANNER Chartered Life Underwriter (CLU)

This designation is issued by the American College and those who hold it work mostly as insurance agents. The CLU designation is awarded to persons who complete a 10*course program of study and 20 hours worth of exams. The course covers the fundamentals of life and health insurance, pension planning, insurance law, income taxation, investments, financial and estate planning, and group benefits. (Definition sourced from www.investopedia. com/)

Chartered Accountant (CA)

Being a Chartered Accountant is a valuable designation to put beside your name regardless of your career path, but by combing a Charter Accountant designation alongside your financial degree (and other financial designations and certifications) is a killer combination in the eyes of just about any employer in this competitive market place. To obtain this designation, you will have had to complete all the appropriate university courses (or equivalent training), before being admitted into the CA training program where you will take part in a kind of multiyear apprenticeship. Specifically, you will gain work experience in a CA Training Office under the supervision of experienced CAs. As well, during your training you will be continually assessed on your development by CA board representatives, before finally submitting to a three day Uniform Evaluation (UFE) to gauge your knowledge and place you on the next step to your CA designation. WEBSITE: www.cica.ca/index.aspx

CMA (Certified Management Accountant)

Similar to a CA, a CMA is a valuable asset to place in your CV. CMAs focus primarily on managerial accounting and are usually often found in industry. Following university graduation, CMA candidates write a two*day CMA Entrance Examination that tests business knowledge, analytical thinking and written communication. If you pass, you enter through series of successive phases in the CMA Strategic Leadership Program that will take 24 months to complete and include substantial practical work experience in the field. A final examination and assessment take place at the end of this program before one attains their CMA designation. WEBSITE: www.cma-canada.org

CGA (Certified General Accountant)

The CGA incorporates aspects from both the financial and management streams of accounting. While not as prestigious as the other accounting designations, the CGA offers practical tools for those interested in the accounting field. Attaining this designation is much more flexible than the other accounting designation and can be started while attending university. WEBSITE: www.cga-ontario.org Click to read more & join us!

ArbitrageMagazine.ca | Summer 2010

CAREER PLANNER LEARN MORE! CLICK HERE!

the intro

job profiles

selection

training directory

CAREER PLANNER

EMPLOYMENT:

INTERVIEW:

SUBMISSIONS:

OTHER QUERIES:

ARBITRAGE editors welcome submissions from writers and photographers. Ask for details: submissions@arbitragemagazine.com

query@arbitragemagazine.com

LETTERS TO THE LEGAL NOTE: EDITOR: Suggestions? Kudos? Criticisms? The ARBITRAGE welcomes Letters To The Editor. They must be signed and include city of origin. Email: letters@arbitragemagazine.com