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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • The Advantages Of Paying With Cash

    There is a growing trend towards paying for all goods and services with electronic means based on debit or credit. Has any thought been given to the advantages of paying with cash?

    The disadvantages of paying in cash are frequently noted: It can be stolen and never recovered, it is bulky to carry and it takes more time to go to a bank or cash outlet and withdraw bills then to use a card that is already in your wallet. You also cannot buy anything on the internet with cash which is becoming very popular among people. On the banking and government side, you are being discouraged from using cash since carrying large amounts is assumed to be criminal activity. Obtaining cash is becoming harder as some places like airlines or government offices are not accepting cash for certain purchases. The counterfeiting of $100 bills has also restricted the use of large bills, which is convenient if you buy something costing hundreds of dollars.

    What about the advantages of paying with cash?

    Cash is cheaper than any other means of payment. Yes there are withdrawal fees from your bank, but if you make few withdrawals with larger amounts, you can reduce these fees significantly. You can also go to credit unions that do not charge for withdrawals, but doing this for all of your accounts is more limiting if you need access to funds outside of your home town. Many vendors will give you a discount if you pay in cash or waive the sales taxes, which will result in cheaper prices. One reason why this happens is because electronic means of payment are expensive to the merchant - usually 3% of the transaction amount or higher. The merchant has to pass that cost onto someone, and that someone is the final consumer. If every layer of business is using electronic means to purchase supplies, these merchant charges can add up and all of them will be passed on to the consumer.

    There is no risk of identity theft with cash. Your credit card information can also be stolen, which is identical to a mugging. This can be done at short distances through wireless card readers where someone will not have to see or touch your credit cards. Credit card numbers can be changed periodically to mitigate this risk, but there are risks of theft with electronic means as well as cash, and they are harder to identify. There will be fewer unwanted emails, telephone calls or unaddressed admail coming into your mailbox because people will not know what you are buying. By extension, there is also more privacy in using cash. There is a lot of concern about the erosion of privacy, but this is directed correlated with how much technology you use. Even if the entity you are dealing with is reputable, there are viruses, hacking, data being sold, companies being merged and other compromises which can erode your privacy.

    You will spend less money if you pay for things with cash. Taking the time to withdraw the money and counting it gives your mind a chance to reconsider impulse purchases, which in some cases will prevent you from making them. Cash also has a way of forcing to see what you are doing directly at the time you are doing it, as opposed to electronic means that feel painless until the bill arrives that you have to pay. The debit card can solve this type of issue, but the reconsideration period only happens when you are carrying and handing over tangible bills.

    There are times when using electronic means is better than cash, but the reverse is also true. It may be time to consider looking at both methods carefully and having both of them at your

    Apr 14 5:43 PM | Link | Comment!
  • A Hidden Source Of Inflation

    Whenever there is discussion about inflation or standard or living, the causes of it are typically pinned on labour, materials and overhead for producing a product. There is another cost which is indirect but very prevalent when it comes to the cost or pricing of goods - the cost of debt. Consumer debt and government debt are widely publicized and monitored as indicators of economic health. What about producer debt?

    Most businesses finance operations with debt because it is considered a tax expense. There is also this idea that using someone else's money is better for business because it can free up your own resources, allowing you to produce more goods. What is not discussed is the effect that producer debt has on an economy. When a business borrows money to do something, the money always comes at a cost. Should that same business use cash that it has invested instead, the cost would be negative as the company is not paying to have access to money, and is earning interest on keeping the cash. The tax deduction of debt financing reduces the cost of the financing, but there is still a cost. A business will typically put this cost into their expense list and adjust the price of the goods and services upward to recoup the money spent from the consumer. The consumer sees this cost as inflation or rising prices.

    What is the effect of doing this? If many businesses are using debt and all of them are passing the costs onward, this will result in higher prices for everything. Since debt is compounding, this will be on ongoing expense that has nothing to do with labour, materials or overhead. Does this matter? In some cases, debt will not be a major factor if the interest rate is relatively consistent and low. If the rate is volatile and high, this expense could create distortions in the business world because access to credit will favour large companies instead of smaller ones. This will create an additional barrier to entry which is outside the scope of the market where the good is sold. As an example, I could have a great idea for selling lemon juice, but I would have to borrow money at 10% interest to acquire scale of the lemon juice production equipment. A large company may be able to get the same financing at 2%, which would mean my prices would have to be 8% higher to break even. Since that amount of margin differential can be very high, I would not be able to be in business. Interest rates are low for mortgages and lines of credit, but if you are talking about loans for inventory, unsecured credit or private lending, interest rates can go as high as 60% annualized before the usury laws would limit what can be charged. This is obviously a wide range, and paying 50% more for your inventory, production equipment, supplies etc would be quite a disadvantage.

    As you can imagine, changing interest rates can have an amplified effect on the inflation numbers. Higher interest rates would also lesson consumer demand and vice versa which would have an opposite effect on inflation, but this discussion would be outside the scope of this article.

    Apr 07 2:13 PM | Link | Comment!
  • The Canadian Dollar: Same Old, Same Old

    Why is the Canadian dollar declining in value? It has a lot to do with what is going on in the rest of the world as opposed to what is happening here. First of all, the price of oil has plunged. Since the Canadian economy is heavily based on oil for export, the price of oil affects the Canadian dollar. The second factor in predicting the value of the Canadian dollar is the budget deficit. Since oil revenues are expected to plunge, the budget deficit is expected to swoon, and this generally is bad for a currency. Lowering the Bank of Canada rate recently was designed to prop up the economy, but it is also a negative for the Canadian dollar.

    The US is talking about raising their interest rate. Although it is not clear whether this will happen or not, the different directions in interest rate policy that Canada is heading in versus the U.S. is causing people to reevaluate the future value of the Canadian dollar versus the U.S. dollar. A fourth factor is the idea that the Canadian real estate market is overvalued. The three reasons why this is cited as a problem is because Canada was largely unscathed by the subprime crisis of 2008: Real estate did not tank in Canada the way it did in the U.S. and Europe. The second reason why this may be a problem is due to Consumer indebtedness. Why does this matter? If consumers have too much debt, they cannot spend money to buy actual things. The third reason why real estate is critical is because it is the collateral behind most mortgages and bank debt. If real estate goes into the tank, so will the mortgages and the Canadian banking industry. Since banks are pivotal to the economy, the effect will spill over into every other sector. A last factor to consider is that the U.S. dollar is getting stronger versus all currencies, so the Canadian dollar will go down even if these other factors were not present.

    One indicator that does not seem to be present is currency speculators that "take a run" at currencies simply for profit. This may be counteracted by the Bank of Canada neutralizing their trades to stabilize the Canadian dollar. While this can occur at any time, it is not easily forecast. If there is large volatility in the currency without much explanation, or a large one way move in the value of the currency without any real cause, speculators could be the reason. What tends to happen is that existing trends get amplified and taken to the extremes until the fundamentals change.

    On the plus side, a lower Canadian dollar will mean cheaper exports and more spending in general. It will also mean more investment from foreign investors within Canada. These two things will help mitigate the effect of the lower currency over time.

    What to do? Now that you know what will affect the Canadian currency, the way to know what will happen is to examine these factors to see which ones play out. In general, oil is bound to rebound eventually. The budget deficit will still be there, but a combination of spending cuts and more taxes can counteract the lower revenues. The U.S. dollar can always get weaker again and the Canadian real estate market can go down, but when is not clear. In other words, there is not much new here in terms of what the Canadian dollar is doing.

    Mar 17 9:03 AM | Link | Comment!
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