# Are Canadian bonds a scam?



## juniperpansy (Jan 5, 2013)

I've been wondering about this for a while. The Bank of Canada controls inflation. If they want inflation to go up, they print more money. If they want it to go down they print less money. Bottom line is the Bank of Canada ultimately controls inflation by regulating the amount of money printed.

For the past while Canadian Bonds yield less than inflation. That means for people who purchase CB the government is taking their money, purposely devaluing it, and then returning. So currently if you buy CBs you are lending the government money (inflation - interest rate) and paying them for that 'privilege.'

Also there was the move to make CBs only purchasable by regular consumers through payroll deductions. This appears to be a way to make CBs less competitive (same thing magazines did with their automatic monthly renewals). 

Are they different views on this?


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## arrow1963 (Nov 22, 2011)

A couple of answers come to mind:


1. No


2. This is a stupid question. First of all, does 'Canadian Bonds' mean Canada Savings Bonds, federal government bonds generally, the Canadian bond market on the whole, as expressed through ETFs like VAB?

Secondly, what's the value in asking a question that is built around abusing a commonly understood word? Does scam mean 'a bad deal', or 'a criminal conspiracy', or ' a financial arrangement born through deception that leads to poor outcomes for the victim/donor/investor'? 

Are Canada savings bonds a bad deal with a 1% interest rate? I think so, I'd much rather hold money in a HISA than in CSBs. But no one makes you buy them, they aren't sold under pressure, and their terms are transparent. I would never call them a 'scam'. If someone buys them blindly, not looking at other fixed income options, I'd write that up to a 'stupid tax' rather than anything else.


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## Rusty O'Toole (Feb 1, 2012)

They have never been anything but a scam. They never really pay them off and never will. They sold bonds to pay for WW1 and that money has never been repaid, just rolled over. But since the dollar is now worth 97% less than it was then, they have effectively dodged 97% of that debt.

They supposedly pay a certain interest rate but your capital gets eaten up by inflation plus you pay tax on the interest so really you get little or nothing. At the present time the interest rate is below the inflation rate so you have a negative return.


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## OhGreatGuru (May 24, 2009)

Rusty O'Toole said:


> 1. They have never been anything but a scam. They never really pay them off and never will. They sold bonds to pay for WW1 and that money has never been repaid, just rolled over. But since the dollar is now worth 97% less than it was then, they have effectively dodged 97% of that debt.
> 
> 2. They supposedly pay a certain interest rate but your capital gets eaten up by inflation plus you pay tax on the interest so really you get little or nothing. At the present time the interest rate is below the inflation rate so you have a negative return.


1. The statements in the first paragraph are so divorced from reality one cannot constructively comment.

2. No argument that at present rates they are not a good investment. But no one is being forced to buy them.


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## My Own Advisor (Sep 24, 2012)

I suppose at one time in history, they were a decent investment. No longer. You need to be earning >2% year-over-year to beat inflation.

http://www.bankofcanada.ca/monetary-policy-introduction/inflation/


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## Retired Peasant (Apr 22, 2013)

arrow1963 said:


> ... This is a stupid question.


Geez, nice way to welcome someone to the forum.


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## stephenheath (Apr 3, 2009)

Bottom line, it's supply and demand. The government only issues so much debt and demand is pushing the yields below the value of inflation. You and I may look at it and think it's silly, especially if you assume a lot of people buying that debt are assuming there will be deflation in the future and think the government won't let that happen, but that's the good part... we can walk away and look for somewhere else to deploy our money.


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## HaroldCrump (Jun 10, 2009)

Wait...this seems a re-incarnation of a previous troll on the forum.
It usually starts with some innocuous post like this.
Next will come how the whole fractional reserve banking system is a scam.
Then will come how all private banks should be dissolved and there should be one and only one govt. owned bank.

I have spent enough time discussing with this troll in the past...not going there any more.


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## arrow1963 (Nov 22, 2011)

Retired Peasant said:


> Geez, nice way to welcome someone to the forum.




It wasn't nice, but I'm not sure the question is legitimate and I know it is inflammatory. If you follow the paragraph, you'll see that 'stupid' could have been 'not well informed enough to enable nuanced discussion', but that doesn't have the same ring to it.


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## Eclectic12 (Oct 20, 2010)

Rusty O'Toole said:


> They have never been anything but a scam. They never really pay them off and never will...


Assuming you mean Canada Savings Bonds - I could've sworn I did well the year they paid 18% bonds when no one else was paying close to that. 


Cheers


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## juniperpansy (Jan 5, 2013)

My apologies if what I wrote was unclear. I am talking about bonds put out by the Canadian federal government (Canada Savings Bonds and Canadian Premium Bonds).

I thought my use of scam was fairly straight forward. I am not insinuating criminal activity but rather purposely misleading the public into buying a product that produces financial gain when really it does not. Let me try again. The Canadian government promises 'interest' on bonds. But since the interest is less than inflation the person is loses money on the purchase. The government controls inflation (by printing more money) are therefore very conscience of the whole process.

In effect buying bonds is not only giving the government a free loan, but paying them to for the 'privilege' of borrowing your money.


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## arrow1963 (Nov 22, 2011)

juniperpansy said:


> I am not insinuating criminal activity but rather purposely misleading the public into buying a product that produces financial gain when really it does not. Let me try again. The Canadian government promises 'interest' on bonds. But since the interest is less than inflation the person is loses money on the purchase. The government controls inflation (by printing more money) are therefore very conscience of the whole process.


First of all, other than real return bonds (for example XRB as an ETF of CDN RRB's http://ca.ishares.com/product_info/fund/overview/XRB.htm), almost every investment everywhere promises nominal returns. Canada savings bonds are not unique in promising a nominal return. If you want investments to offer real returns, how confident are you in the methods used to calculate inflation?

Secondly, the investing climate right now kind of sucks. Bond returns are pathetic. Equity markets have shot up in value, and are attractive relative to bonds, but don't provide good value on a historic basis. Borrow to invest in residential property in much of Canada, and I'd say there's a 10% chance you lose everything.

The returns on govt. bonds are awful, but there's a 99% chance you'll get your money back, and they'll provide diversification benefit in the event that the stock market tanks again. There aren't a lot of asset classes that offer that level of security. Everyone makes their own decisions, and it's rational for others to choose safety over wealth maximization.


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## sags (May 15, 2010)

I read somewhere that the "target" interest for Canada Savings Bonds was 2% above inflation.

I don't know what happened to that theory..............but there is probably so much demand to buy Canadian debt, that the interest rates have been driven down. In theory............the government shouldn't pay 1 cent more than it has to on "our" collective debt, so it looks like they are doing a good job of that.

CSBs are safe............and a lot of people would rather gain nothing, than lose hard earned savings. It is just too difficult to replace and the years slip by so quickly that losing a big chunk of capital can be a traumatic experience for older investors.

Everybody is recommending and chasing dividend stocks, and they do pay better returns than bonds.........but there is also risk that people are paying too much and they will lose more capital than they gain in dividend payments.

There is no easy answer these days, but once people have sufficient capital in place............there is no need to take any risk with it anymore.

Sometimes you just have to be satisfied with what you have and plan around that.


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## lonewolf (Jun 12, 2012)

Does anyone really believe the goverment will forever keep all its promises? Goverment bonds are a way to legalize theft by the goverment.


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## arrow1963 (Nov 22, 2011)

lonewolf said:


> Does anyone really believe the goverment will forever keep all its promises? Goverment bonds are a way to legalize theft by the goverment.


Seriously?

I thought taxes were supposed to be 'legalized theft', if you're inclined to that manner of speaking. Where do bonds even fall on the 'legalized theft spectrum'?

Income Tax
Property Tax
Tariffs
Tolls
Sales Tax
CPP
EI
Bonds?

Given that non payment of the other ways of raising money to run the country results in imprisonment, and that buying bonds is entirely voluntary, I'd have a hard time thinking of bonds as 'legalized theft', unless that's a description that you would apply to everything that is done collectively in society.


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## Eclectic12 (Oct 20, 2010)

juniperpansy said:


> My apologies if what I wrote was unclear. I am talking about bonds put out by the Canadian federal government (Canada Savings Bonds and Canadian Premium Bonds).
> 
> I thought my use of scam was fairly straight forward. I am not insinuating criminal activity but rather purposely misleading the public into buying a product that produces financial gain when really it does not. Let me try again. The Canadian government promises 'interest' on bonds. But since the interest is less than inflation the person is loses money on the purchase. The government controls inflation (by printing more money) are therefore very conscience of the whole process ...


By the definition of interest less than inflation (which someone else posted this had to be >2%), there's lots of financial companies offering products for less than 2%.

As an example, this place is offering a 1 year cashable GIC for a whopping 1.60% with a $25K minimum (http://gicdirect.com/). 

Or there is good old Royal bank who is offering 0.80% to 0.675% with only a $1K minimum (http://www.rbcroyalbank.com/products/gic/cashable_gic.html?tab=ir).

Of course if you are willing to go with a ten year redeemable, then Royal will give you 2.05% but the lessor ranges from a high of 1.95% to a low of 1.05%.
http://www.rbcroyalbank.com/products/gic/regulargic.html?tab=ir#redeemable


Are these scams as well?


While I can understand that the investor can want better than inflation ... unless inflation stays relatively stable and the investor can find someone offering more than inflation, there's no guarantees.

Then too - regardless of what rate the gov't sets, if there is enough similar product in the market paying substantially more - the gov't will be forced to pay more if they want to sell any bonds.


Cheers


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


> Does anyone really believe the goverment will forever keep all its promises? Goverment bonds are a way to legalize theft by the goverment.


Say what?

I haven't bought CSBs for years and I don't see any gun to my head from the gov't to buy them. Income and property taxes on the other hand, regardless of how the money is used - I have no choice. Or there all those nice taxes that get added to gas as well.


Since the Royal bank is offering substantially less than the gov't for up to a 1.5 year redeemable GIC - do you consider that legalised theft as well?


Cheers


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## fraser (May 15, 2010)

Scam??

Not certain why anyone would think it is a scam. Rather, it is simply an offer.

You know the interest rate. You know that your principal is safe. You know that you will be paid on principal and interest.

How on earth can this be construed as a scam. We get .5 percent on our bank savings account, 1.2 percent on our bank esavings account. We get 1.9 percent on a third party bank and trust company esaving account. Does this make our bank rates of .5 and 1.2 a scam?


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## juniperpansy (Jan 5, 2013)

Eclectic12 said:


> By the definition of interest less than inflation (which someone else posted this had to be >2%), there's lots of financial companies offering products for less than 2%.
> ...
> Are these scams as well?


The difference with Canadian Bonds is that the government is using *inflation* by increasing the money supply to devalue the money they return to the consumer. This is the issue my original post addressed. Banks do not have this power.


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## andrewf (Mar 1, 2010)

Inflation is pretty transparent. The government (via Bank of Canada) tells people loudly and often that it intends to create 2% inflation.


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## Rusty O'Toole (Feb 1, 2012)

OhGreatGuru said:


> 1. The statements in the first paragraph are so divorced from reality one cannot constructively comment.
> 
> 2. No argument that at present rates they are not a good investment. But no one is being forced to buy them.


I had the impression our national debt keeps increasing as the government rolls over the old debt, plus interest, plus new debt. Can you tell me when and how they have ever paid down the national debt, or paid off old bonds without selling new ones?


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## cheech10 (Dec 31, 2010)

Forgotten the Paul Martin years already? Our national debt decreased during those years as we had a surplus in the federal budget, which was used to pay down the debt by issuing fewer new bonds when the old ones came due.


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