OK, so after three decades of surpluses, we can certainly afford it, but it’s nevertheless an alarming sign of the times: Canada’s first trade deficit since, what was it, 1974 I believe. It is not a pretty thought.
While we were celebrating President Obama, the Bank of Canada made its move: the Canadian prime rate is now lower than ever, at 1%. The expectation is that the economy will not fare well in coming months.
Being the holder of a variable rate mortgage, I have no reason to complain. Still, it’s an unsettling development.
I just saw the documentary “I.O.U.S.A.” on CNN. Or, to be precise, I saw the last half hour of it, and then I went to the I.O.U.S.A Web site and viewed the “bite-sized” 30-minute version.
It’s alarming. I am not an American, and our country has so far maintained a modest budget surplus (this year, it may yet turn into a deficit, but perhaps not, as the days of the present government may be numbered) but I am still gravely concerned: a collapse of the U.S. economy or, more precisely, that of the U.S. dollar would make the Great Depression seem like child’s play in comparison.
No wonder many are expecting a near miracle from the incoming Obama administration. That is because it’s abundantly clear that “business as usual” means certain disaster. But what can Obama do? He may be exceptionally talented, but even so, miracles may be beyond his reach.
Watch out, you are being cheated.
Chances are you receive many offers like I do, from credit card companies offering incredibly low interest rates, no fine print, no questions asked, often not even a transaction fee. It makes sense to put these offers to good use, does it not? Or perhaps there is a subtle catch?
Indeed. And subtle it is, not very easy to explain. Let me try to use an example with numbers.
Suppose you have a VISA card and you spend $1,000 on it every month, but you’re like I am, and pay it off at the end of every month. So you don’t even care that the interest rate is high, say, 18.5%, since you never pay any interest (much to the regret of your friendly neighborhood credit card company.) But then comes this hard-to-ignore offer: you can pay off another debt at the low-low interest rate of just 2.99%!
So you do that, pay off a $10,000 debt using your VISA card, figuring that you’d do like before, and pay your $1,000 plus any accrued interest in order to keep your card in good standing. Meanwhile, you ignore the small print that says, in part, that “if you have low rate offers, which apply to a portion of your overall cash advance balance, then your payments are applied to these low rate offer balances first”. Yet this text is critical.
For here is what happens. At the end of your first month, you’ll be owing $11,024.58 to the credit card company: $10,000 was the loan amount, $1,000 is your monthly expenses, and $24.58 is the “low low rate” interest on the $10,000. So you send the credit card company a check for $1,024.58.
The next month, you find that you owe the company $11,036.37. Of this,$22.12 was interest on your low interest loan amount of $9,000 (!), while the rest is your present month’s spending of $1,000 along with high-rate interest at $14.25 on last month’s spending of $1,000. In subsequent months, things get worse: every time you send $1,000 to your credit card company, instead of being applied against your current month’s expenses, it is used to reduce the low-interest debt. In the sixth month, you’d be paying them $1,085.22: $1,000 is what you usually pay, last month’s spending that is, $11.94 is the interest on your preferred loan (now only $4,855.50), while $73.29 is interest on your accumulated high-interest balance of $5,144.50!
Whoa! On average, you will have paid interest at the rate of 6.66%, which is well over twice the advertised rate!
If your monthly spending is higher, things get even worse: at $1,500 a month, your effective interest rate will have increased to 8.53%. Not a very good deal, is it.
The only way to take advantage of a special offer of this kind is with a credit card on which you have no unpaid balance and which you are not using for any other purpose until the loan is repaid. Otherwise, you’ll be paying through your nose.
Here’s a little calculation with Microsoft Excel that demonstrates the six-month payment schedule:
The other day, David Letterman had a segment called The Ten Most Hated Christmas Songs. They were well known Christmas tunes with twisted lyrics. All of them were funny, but two I found especially memorable. The first said,
“Joy to the world, George Bush is done.”
The second one was really creepy:
“It’s beginning to look a lot like Christmas,
I am sure this is a fine CBC journalist and her report about OPEC was interesting, but I do wonder: why did she have a dead Christmas tree (looks like leftover from last year) to her left in the background?
I’m listening to Mitt Romney. He’s not the only one suggesting that the big problem with Detroit is that it is burdened by its unions: that excessive benefits like generous pension plans are the reason why Detroit cannot compete with others, and that the solution is a restructuring that helps the automakers get rid of these undue burdens.
I don’t want to sound like a grumpy socialist (which I am not, or at least I sure hope I am not) but is the rolling back of worker benefits really the right solution in this time of crisis? I am certainly not advocating an isolationist economic policy that protects an inefficient industry from foreign competition, but how about requiring that other automakers who either manufacture cars in, or export cars to, the United States, play by the same rules as the “big three”?
Either Romney is wrong, and the unions can take solace in the fact that a Democratic president with a large Democratic majority in both houses is about to be unaugurated. Or, Romney is right and Obama and the Democrats are about to make some colossal economic mistakes. Time will tell.
Here are some depressing charts that I just created:
I don’t mean to be panicmongering, but I do wonder what the future will bring.