Canada is America’s largest trading partner. The reasons Canada has come out of the 2008-2009 recession virtually unscathed is murky to most Canadians and all Americans. Some of it was dumb luck and/or the holding back on innovations.

Space limitation allows for a thumbnail sketch only of the differences in style of business in Canada vis-a-vis the United States.

Banking Industry

Canada’s five major banks, with thousands of branches, pleaded with the government to be allowed to merge, evolve into 2 or 3 multibillion dollar banks able to underwrite big deals, big enough to match Wall Street’s behemoths. The government said, “No, you’re likely to close unproductive branches in rural areas.” The banks tried to con the finance minister, claimed they would keep all branches open. The federals wouldn’t budge. The banks got lucky.

Royal Bank of Canada, Toronto Dominion, and CIBC went into the U.S. market anyway. CIBC got badly burned in the Enron fiasco where it settled with the SEC for $1 billion dollars. RBC and TD have had better luck, with TD expanding with commercial branches in the northeast and southern United States.

The Housing Market

There doesn’t seem to have been a single foreclosure in Canada. Prices are still rising in some locations, dipping in others. In the United States, folks don’t care to build up equity since mortgage interest is tax deductable. Furthermore, availability of a 30-year mortgage allows one to get by with minuscule amounts of principle being paid. When home prices rose, the tendency was to apply for a second mortgage treating one’s home like an ATM machine. In Canada, to buy a home, a substantial down payment is required, and credit worthiness is a prerequisite. One is offered a fixed rate (amortized over 20 years) mortgage for up to five years only. Interest is not deductable. The mortgage is insured for a small fee by the Canadian Housing Authority and is held by the issuing bank to maturity. All in all, it was an old fashioned way of doing business.

Living Standard

A little known fact is that, in Canada, a good three-quarters of the population is middle class. While per capita income is lower than the United States, the social safety net, including the National Health Plan, offsets the difference. The fabricated stories of mistreatment, waiting periods, death panels, and more, are just that: malicious rumours spread by those interested in maintaining the U.S. status quo. What puzzles many visitors to Canada is an absence of slums.

Climate

A good many Americans from above the Mason Dixon line retire, and establish permanent residence in the sunbelt. Naturally, Medicare services in such locales are strained, increasing costs. Canadians who wish to avail themselves of the Health Plan stay at home. There is no sunbelt to retire to, and no trailer parks. The benefit of this lower mobility is more stable home prices and adequate medical staffing.

Immigration and Government

Major cities in Canada, (about six), are a polyglot of nationalities. There are no racially segregated areas in Canadian cities, just segregation by housing costs. There is little friction, perhaps because, with the exception of some parts of the Maritimes, Canada is a country of immigrants. Canada does not have a land border with an underdeveloped country. Illegal immigrants that get in, usually by air, can apply for asylum. While they wait for an immigration panel to adjudicate their case, they are free to find work and obtain some subsidy, if needed. A costly affair, but it does provide for peaceful society.

In the recent era, governments of all political stripes, to stave off defeat in a vote of confidence, which brings on an election, managed Canada’s affairs from the center. The current right-wing, minority government is no different. Partisanship is mostly rhetoric. A law passed by the House of Commons (component of Canadian government of elected officials) gets an easy pass from the unelected Senate. There is little drama, and few surprises.

Manny Drukier is a columnist for the Epoch Times. His weekly feature, “The Practical Entrepreneur,” appears every Thursday in the Business section.

by Mark Jasayko and Neil McIver
The Vancouver Sun

Interest rate policy is often divisive, pitting borrowers against savers and investors against speculators.

On Tuesday, the Bank of Canada raised its key lending rate from 0.50 per cent to 0.75 per cent. On balance, this rate increase will be good for Canada, whose economy has reached a level that is the envy of others, judging by the accolades received in the international press.

However, using low rates to stimulate our economy towards an even higher trajectory could create imbalances that will eventually risk our new global economic standing.

To some, such as politicians, speculators and profligate consumers, a juiced-up economy sounds like a fantastic proposition. Unfortunately, most Canadians don’t fall into any of these categories. If interest rates are kept too low for too long, economic resources begin to flow rapidly to relatively unproductive uses. In the end, disasters such as real estate bubbles pose the greatest risk.

We only have to look south to see what an era of “easy money” interest rate policies have achieved: a real estate meltdown and an economy that has remained flat for a decade when the effects of financial engineering and over-borrowing are netted out. Apart from some lucky real estate speculators who timed things perfectly, is the U.S. better off?

Higher rates would have played an important role in bringing balance to the U.S. economy. Instead, there were some stunning side effects of low rates that included the statistic that 40 per cent of all job creation was related in some way to real estate (agents, bankers, mortgage brokers, construction firms, etc.) before the bubble burst.

Higher rates would have helped other service and manufacturing industries to compete for the labour that was otherwise attracted to real estate with its fevered speculation and promises of unending growth.

In a concerning development, real estate prices in Canada are back at record levels and in many cities prices exceed afford-ability indices. If the bank rate is kept too low for much longer, Canada risks the potential of becoming an economy that is too dependent on maintaining real estate price trends, inhibiting our ability to grow beyond the currently hot economic industries of construction and resources. The future of our economy will be on more solid ground with more diversification and job growth in other areas, and interest rate policy will have an effect on this.

Another benefit of higher rates is to provide savers with a yield. Recently, savings rates in Canada have plummeted as Canadians are being induced to borrow and spend while employment remains strong and rates remain low. In addition, there is reduced incentive to save and invest when yields are so low.

Even worse, for those who are saving or who depend on current investment income, there is the temptation to invest in lower quality investments in order to pick up a little more yield.

The asset-backed commercial paper catastrophe illustrated the hazards of this strategy for income-seeking investors who did not have the resources to assess the true underlying quality.

Finally, being able to cut rates in a time of crisis is crucial. However, this tool is drastically compromised when rates are already severely low, tantamount to “pushing on a string.” If the anemic global economy begins to impact Canada through trade flows, we are going to need all the policy ammunition we can muster.

Increased rates now will ensure that we are able to fight that battle if it arrives, thereby protecting our newly acquired, and envied, economic advantages.

Mark Jasayko and Neil McIver are portfolios managers with McIver Wealth Management Consulting Group at Richardson GMP Ltd.

Statistics Canada has just released its Consumer Price Index for June that shows that prices rose 1.0% in the 12 months to June, following a 1.4% increase in May.

Energy prices rose 1.3% between June 2009 and June 2010, after increasing 6.2% over the 12 months ending in May. Excluding energy, the Consumer Price Index (CPI) advanced 0.9% in June, following a 1.0% increase in May.

The price of gasoline decreased 2.9% in June compared with the same month a year earlier, after rising 6.9% in May. This was the first year-over-year drop in prices at the pump since October 2009.

Natural gas prices increased 3.0% in June, after rising 4.7% in May. This was the third consecutive advance following several months of decline.

Electricity prices rose 5.8% in June following a 4.0% advance in May.

Prices for the purchase of passenger vehicles rose 2.8% in June, following a 5.1% increase in May.

On a seasonally adjusted monthly basis, consumer prices fell 0.2% in June, the same rate of decrease as in May. Both the transportation and the clothing and footwear indexes fell 0.7% while food prices decreased 0.1%.

Prices increased in seven of the eight major components of the CPI in the 12 months to June; the only exception was clothing and footwear.

Shelter costs rose 1.6% in the 12 months to June, after increasing 1.3% in May. Homeowner’s replacement costs rose 5.2% following a 4.4% increase in May. In addition to paying higher prices for natural gas and electricity, consumers also paid more for rent.

On the other hand, the mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, declined 5.0% in June, following a 5.4% decrease in May.

Despite the year-over-year decline in gasoline prices, transportation costs rose 1.0% in the 12 months to June after increasing 4.1% in May. In addition to paying higher prices for the purchase of passenger vehicles, consumers also paid 5.3% more for passenger vehicle insurance premiums.

Consumers paid 1.2% more for household operations, furnishings and equipment. This increase followed a 0.9% rise in the 12 months to May. Higher prices were recorded for telephone services and child care. Costs for financial services fell 2.8%.

Food prices went up 0.7% in June following a 0.8% increase in May. The increase in June was the smallest since March 2008. Prices for food purchased from restaurants rose 1.8% while prices for food purchased from stores increased 0.1%. Prices increased for sugar and confectionery, tomatoes and lettuce, while prices for oranges and potatoes fell.

Prices in the health and personal care component were up 1.7%. Prices for oral-hygiene products and dental care increased.

In the recreation, education and reading component, prices rose 0.4% after falling 0.2% in the 12 months to May. Consumers paid more for cablevision and satellite services. However, prices for video equipment and computer equipment and supplies fell.

Prices for clothing and footwear declined 1.8%. In this component, lower prices were recorded for women’s and children’s clothing.

Apart from Manitoba, consumer prices rose in all provinces in the 12 months to June, but at a slower pace than in May. Prices at the pump fell in most provinces.

The fastest rate of change occurred in Ontario where consumer prices rose 1.6%. Prices for the purchase of passenger vehicles were up as were passenger vehicle insurance premiums. Ontario consumers also paid more for electricity and telephone services.

In Manitoba, consumer prices decreased 0.2% in the 12 months to June, following a 0.5% increase in May. Lower prices for gasoline, natural gas and home and mortgage insurance were recorded in this province.

In British Columbia, prices advanced 0.5% in June, following a 0.6% increase in May. Electricity prices rose 21.7% while prices for home and mortgage insurance declined.

The Bank of Canada’s core index advanced 1.7% in the 12 months to June, following a 1.8% rise in May. Price increases were recorded for the purchase of passenger vehicles, passenger vehicle insurance premiums, homeowner’s replacement costs, electricity and telephone services.

The seasonally adjusted monthly core index increased 0.1% in June, after increasing by the same amount in May.

For more information, or to enquire about the concepts, methods or data quality of this release, contact the Dissemination Unit (toll-free 1-866-230-2248; 613-951-9606; fax: 613-951-2848; cpd-info-dpc@statcan.gc.ca), Consumer Prices Division