Unemployment Worsening in Canada, but EI not keeping pace.

(Photo Credit: etftrends.com)

Unfortunately just when most people thought it couldn’t get any worse it is going to get worse.  The number of people applying for employment insurance (EI) is up 19% from January, but the number of people receiving EI only increased by 7.8%.  This means there a fair number of people needing EI who are not receiving it.  With the number of unemployed predicted to continue rising over the next year, the Government of Canada needs to start making sure the unemployed receive the funds they need to live on.  It is a sad state when people who are forced into unemployment cannot receive the funds they need to feed their families. 

As reported by the Star, more than 1.4 million Canadians were counted as unemployed in February, but only 610,000, or 43 per cent, were collecting regular EI benefits, [Erin] Weir, [an economist with the United Steelworkers union], said.

The unemployment rate according to Stats Canada, has increased to a staggering 8% with the loss of 357,000 jobs since October 2008.  According to the Star,  TD Securities economics strategist Millan Mulraine believes ”this deterioration has important implications for the Canadian economy, as the weak labour market conditions will continue to breed further economic anxiety among Canadian households, thereby depressing consumer spending further.”

It is a self fulling prophecy.  People see job losses and cut back spending and start saving more.  This creates more job losses, more saving, even less spending and causes a continual depression of the economy.  This is why it is a tough job being an economist.  There are tools to help rebound economies, such as the interest rate, but you must convince people that it is ok to spend.  And as you can see this is not easy.

The unemployment rate is most likely an understatement of the current turmoil in the labour market.  Many people are currently underemployed (i.e. forced into part-time positions or self employed positions) and therefore still counted as employed.  If underemployed people were counted in the unemployment rate, the Canadian Labour market would look much worse than it already does. 

Even when the economy begins to rebound, it will be sometime after until the labour market starts showing improvements.  Employers confidence in the future must be restored before they begin hiring again and that may come months or even a year after the economy starts rebounding.  Hopefully, Mr. Harper will start getting more EI to the Canadians who truly deserve it.

I didn’t want to talk about this.

But it seems I must.  Swine Flu.  If I have to hear about this anymore I am going to go crazy.  Honestly the regular flu kills people all the time.  If you are healthy chances are even IF you get it, you will fight it off.  

There is no need to live in fear because of the swine flu.  The media ALWAYS blows things out of proportion.  Swine flu is not very prevalent in Canada or the U.S.A.  The chances of catching it are microscopic.

I may not be a doctor, but I am a practitioner of common sense so if you don’t want swine flu follow these simple steps:

1) WASH YOUR HANDS.  

2) Don’t touch your face with your dirty hands.

3) Don’t go into crowded areas.

4) If you know someone who went to Mexico consider not seeing them for the time being.

5) If you are overly concerned about swine flu then get a mask.  I have linked to some mask designs for the fashion forward individual who may be concerned about the usual unfashionable mask designs.

(Photo Credit: samiraboon.com)

If you want to feel less at risk I advise against watching T.V., especially CNN.  You will be fine if you take the precautionary steps listed above.

GM down to four core brands.

Via Eco Auto Ninja

“This morning, GM announced they were cutting 21,000 jobs and getting rid of Pontiac. Plans are in place to close more factories as the automaker fights to avoid bankruptcy.

GM has been surviving on on $15.4 billion in government loans and revealed that it envisions receiving an additional $11.6 billion. But if GM’s restructuring plan can’t satisfy the government by June 1, the struggling company could go into bankruptcy protection. The company also made an offer to bondholders to exchange of $27.2 billion of bonds for common stock.

The death of Pontiac, as well as GM’s decision to cease production on Saturn and Hummer brand vehicles after the 2009 model year, leaves GM with four core brands: Chevrolet, Buick, GMC and Cadillac.”

This is all part of GM reducing its number of brands to satisfy the requirements of the loan granted by the U.S. government.  I think from here on in it is pretty obvious that GM will be going through Bankruptcy protection.  So the bondholders who traded debt for equity will most likely see that equity go to zero.  

I am still upset that GM dropped Saab.  I was looking forward to driving one of those when I was older.  I guess I will have to settle with this car:

The Financial System of the Future…

Found this link on Greg Mankiw’s blog.  I decided I would post it as well.  This is a really interesting idea and may not be all that farfetched.  It would solve a lot of informational problems, especially moral hazard.  It basically allows people to adopt all the risk and not banks and other corporations.  Therefore there are less likely to be risky dealings as people don’t want to risk losing their money.

Our current crisis was caused by banks taking big risks because they could.  If banks fail then shareholders can only lose as much as they invested.  With a cap on how much they could lose on big risks and seemingly endless gains, banks went to town with subprime mortgages and risky lending.  This system promotes risk taking and creates these huge bubbles that inevitably burst, which then causes deep recessions like the current one we are in now.

Enjoy the article.  It is very interesting.

Is outsourcing to India a thing of the past?

(Photo Credit: UMass Lowell Sunrise Radio)

Finally many companies are realizing that outsourcing customer service to India is really a whole lot more expensive than initially thought.  The cost isn’t in terms of dollars, but in terms of frustrated, angry, upset, displeased, aggravated, and unhappy customers.

The Globe and Mail has reported that Primus Telecommunications Canada will be abandoning most of its operations in India and in turn bringing more of its customer service back to Canada.  Primus isn’t the only company leaving India as last month BCE said it will be cutting back the amount of calls going to India and Delta Airlines has already closed all of its call centers in India.  Retaining customers is even more important in these tough economic times as every dollar towards the bottom line helps keep companies a float until the economy rebounds and money is easier to come by.

Many companies have seemingly only discovered now that customer service results from India are not exactly satisfactory.  Apparently, customers do not like dealing with a customer service representative who for the most part doesn’t even understand their problem.

Outsourcing customer service to India, according to analysts, is roughly 50% - 75% cheaper than having customer service representatives in North America.  But this is like buying a shirt from old navy.  Sure, it’s cheap and looks decent, but after two washes the fit is no longer the same and you don’t even want to wear the shirt anymore.  Whereas if you put up a few more bucks for a shirt from Banana Republic the shirt lasts a long time and fits the same after every wash.  This is exactly like the trade-off between customer service in India or North America.  It’s cheap in India, but customers become unhappy after a few calls.  But in North America, customers are happier longer (although most people in the end hate dealing with customer service representatives).

I don’t know why it took these companies so long to figure this all out, but they finally did.  I am sure happy that in the future I won’t have to call India and waste two hours explaining that Bell overcharged me.

Geithner hopes to fool people.

(Photo Credit: p3books.com)

Tim Geithner announced that a vast majority of banks are well capitalized in the U.S., but Paul Krugman, among others, was quick to rebuttal this statement and rightfully so.  This statement is incredibly misleading.  While technically Geithner is correct, it is a classical example of lying with statistics.

There are over 1,722 large commercial banks in the U.S and many of them have been very risk averse and therefore did not get caught up in the sub prime mortgage debacle and risky lending practices.  This means a great deal of these banks are fine and have very adequate levels of capital to safely handle their operations, but the vast majority of these healthy banks are very small players in the grand scheme of things.  Krugman points out that the top 10 banks have 58% of total assets.  These are the JP Morgan’s, Citi’s, Bank of America’s, etc.

Most of these top banks are not adequately capitalized and due to their sheer size are very important to the financial system.  Saying that the majority of banks are well capitalized does not at all mean the financial system is in good health.  The majority of banks don’t matter because they are so small.  When we look at the major players, banks are not in healthy positions. Many are insolvent and are the bottle neck of the economy right now.  They are holding extreme amounts of reserves to protect against bank runs and more importantly risk.  This is causing lending to lag and the economy to lag as well.

Basically, who cares if the vast majority of banks are well capitalized and solvent?  It doesn’t matter because in the system we live in a minority of banks hold the financial system up, and this minority made a lot of stupid decisions and now the minority of banks are insolvent and under capitalized.  Therefore the U.S. financial system is still in shambles.  Lending will continue to slow and the economy will continue to slow.  Geithner is trying to get confidence up and create much needed optimism for the sake of the markets, but I don’t know if people are this (ughh) dumb. It was a good try Mr. Geithner.

Happy Earth Day.

(Photo Credit: caglecartoons.com)

Happy Earth Day.  I hope today makes people a little more cognisant of their actions on this beautiful planet.  We all, myself included, are very ignorant towards the fact that our actions are causing serious harm to this planet.  We think that we can continue our wastefulness and excessiveness infinitely because the planet is indestructible.

Starting today let`s make a conscious effort to recycle everything that is recyclable, not run the water when it doesn’t need to be run, pick up a piece of garbage off the ground (even if it’s not yours), bring our own grocery bags to the grocery store, and most importantly realize that if we do not change our ways, this Earth will crack sooner than later.

In the spirit of Earth Day I would like to share a really cool housing idea that is taking off in Germany - Passive Houses.

(Photo Credit: contemporist.com)

Passive houses are houses that require very little energy.  They are well insulated which prevents almost any heat from escaping.  The Passive houses have heat exchangers inside that displace air inside with air outside. These exchangers are efficient, transfering around 80% of the inside air`s heat to the new air coming in to the house.  This means little heat is lost in ventilating the house.  This allows for low cost heating. Also, in Passive houses cold floors do not exist (I want one). These houses are really amazing.  The only downfall is the technology only works for smaller houses.  Hopefully in the future the technology will be able to apply to any size home.  I would love to see some of these come to Canada.

Happy Earth Day.

And the interest rate falls again

The Bank of Canada has cut its key interest rate (the overnight rate) to 0.25% which is the lowest the Bank has ever gone since its opening in 1935.  This move is the Bank’s respone to try to increase inflation to its desired 2% target.  It will be expected to stay at 0.25% for the next year until the economy begins to rebound and inflation increases back to its desired level of 2%.

Will the key interest rate go lower?  No.  This is the end of line for interest rate cuts.  0.25% is the middle bound for the overnight rate, which means the lower bound (the interest rate commerical banks can lend to the Bank of Canada at) is now 0% and the upper bound (the interest rate commercial banks can borrow from the Bank of Canada at) is now 0.5%.  Therefore, the only way to cut interest rates any lower would be through introducing negative interest rates.  Yikes.  Is that possible?  I doubt it but a top economist, Greg Mankiw, believes it’s an idea worth thinking about.

Inflation, which continues to fall, is expected to go negative before climbing back up.  By the third quarter of 2011, the Bank expects inflation to be back to the desired level of 2%.  This makes it look like the Bank is expecting a much slower recovery than it initially thought.  If we can only expect inflation to be back to 2% by 2011, it may seem Canada will not be operating at its full potential until around then as well.  So we may be looking at 2 more years of slow times.

If you are looking to buy a home, which I know my sister is, this could mean mortgages rates falling to even lower levels (the Big Banks in Canada have already started cutting rates slightly) .  With housing prices falling and low borrowing rates, home buying is looking lucrative as eventually housing prices will rise which makes buying today a great investment into the future.

How many pillows are on your bed?

(Photo Credit: Nicolekiss.blogspot.com)

I just got back from the Business in a Recession Panel Discussion put on by the College of Management and Economics at the University of Guelph. It was a great discussion and a lot of really informative things were said, but I think what I took away the most was the analogy put forward by Bruce McAdams. He had recently attended a conference for hotel owners in Canada and there was a discussion going on about surviving in the recession and the moderator, who was guiding the discussion, stopped everyone and asked the entire room who was giving customers 6 pillows on their beds. The whole room put their hand up. To make this a short story, he asked why? Of the 6 pillows, 4 end up on the ground unused. The 6 pillows don’t add value. They add cost. Basically Bruce was saying that the business won’t be saved by cutting bell hops, people at the front desk, etc. The business will be saved by analyzing all the current processes and keeping the ones that add value and cutting the ones that don’t (having 6 pillows).

This was such a great analogy. Times in the past were so good for almost all businesses that no one was wasting time analyzing the value of certain processes, but were merely hiring more and more people to assit in every aspect of the business. Companies kept adding more and more “pillows to their beds” just because they could as money was seemingly freeflowing. These “pillows” didn’t add value, but because the money kept coming in no one was saying boo about them.

Now that the times have slowed, people need to start analzying these “pillows” and determine whether or not they add value.  Even with the recession, there is room for opportunity if you can find out your business’ strengths and then build upon them.  It is a time to start cutting the fat and building on the muscle.  It may mean lots of time spent analyzing your company’s processes to determine the most integral, but this could pay huge dividends.  If you focus on what you do best and hammer away then there is room for success.

Too many companies right now are not putting any thought into what they are cutting; they are just cutting.  Sometimes its fat, but a lot more times it’s muscle that is truly important to the company.  Now is the time to crunch the numbers and determine what is important to customer value and most importantly profitability.

In the future, businesses need to be much more selective of the processes they choose to implement.  Even if money is freeflowing, companies should always consider whether or not adding this process will add value or if it will do nothing.  If you consistently do this, downturns won’t hurt you as much and upturns will be when you are far ahead of the pack.  If companies only do what they do best, our whole economy will be better as will be exploiting someting we call comparative advantage in economics.

Business in a Recession - Panel Discussion

If anyone will be in Guelph this Sunday April 19th I encourage you to come to the Business in a Recession Panel Discussion being presented by the College of Management and Economics at the University of Guelph.  The participants will be explaining the cause of this recession, the ways out of it, and how much longer this recession will last for.  Warren Jestin, chief economist at ScotiaBank, is a great speaker and definitely worth seeing.  Please do come if you can.  It will be very informative.  Email me if you have any questions.  Hope to see you there.