# I still don't understand anything about the economy



## emperor (Jul 24, 2011)

I've spent a lot of time and effort trying to learn this stuff I'm starting to think it's impossible. Here are some questions I don't understand

1.) Net worth and debt levels. How exactly do average Canadians have the highest net worth in history at around 400K and the highest debt ratio also? 

2.) CMHC and low interest rates have made houses unaffordable for most new buyers. Why? How does that benefit Canada? Why would they want an average house to be a million dollars? What's the purpose? Why is the CMHC and the BOC manipulating the market?

3.) Why is the US dollar going up, they have a debt load so large they can never pay it down. Has this issue been resolved?

4.) Why did Oil just crash? Can't anyone see they are producing too much inventory before hand? Shouldn't it go down slowly as inventories fill? Same with gold why just over night does it crash instead of slowly going down as demand wanes.

I'm just not understanding, maybe if someone explains it to me I can wrap my head around it a bit better.


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## Oldroe (Sep 18, 2009)

All very good questions. People go to school for years and years to understand these questions. Keep plugging along.


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## Davis (Nov 11, 2014)

You might want to try reading newspapers or news websites to get a better understanding than you will get from a group of random strangers who may or may not have a clue about anything. A lot of people on the internet seem to form very strong opinions without really knowing very much about the subject.


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## Oldroe (Sep 18, 2009)

Make sure you understand who is writing the opinion and what there agenda is.


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## Eclectic12 (Oct 20, 2010)

emperor said:


> I've spent a lot of time and effort trying to learn this stuff I'm starting to think it's impossible. Here are some questions I don't understand
> 
> 1.) Net worth and debt levels. How exactly do average Canadians have the highest net worth in history at around 400K and the highest debt ratio also?


I'm not sure you are asking how ... but just in case, spend more than one makes and finance it using the companies begging for one to borrow. For example, a couple my sister worked with complained about how they couldn't afford their mortgage ... but that didn't stop them from buying his and hers new cars.




emperor said:


> 2.) CMHC and low interest rates have made houses unaffordable for most new buyers. Why? How does that benefit Canada? Why would they want an average house to be a million dollars? What's the purpose? Why is the CMHC and the BOC manipulating the market?


They can influence the market ... but house prices are subject to supply & demand so regardless of what they do, the market is going to determine the price. If there were no buyers willing to pay that much - prices wouldn't be at that level.

The market doesn't really care about new buyers as long as there's other buyers.




emperor said:


> 3.) Why is the US dollar going up, they have a debt load so large they can never pay it down. Has this issue been resolved?


I doubt the issue is resolved ... but some probably don't want to bet against such a large market.



emperor said:


> 4.) Why did Oil just crash? Can't anyone see they are producing too much inventory before hand? Shouldn't it go down slowly as inventories fill? Same with gold why just over night does it crash instead of slowly going down as demand wanes.


My guess would be speculators as well as people thinking the inventory was a temporary thing ... then too, I suspect those wanting high oil prices did not think the Saudis/OPEC would let lower prices stick around.


Cheers


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## emperor (Jul 24, 2011)

> spend more than one makes and finance it


Okay that makes sense, I thought net worth meant you take all assets minus all debts and that's your net worth. That's why I was confused how can you have the highest level of net worth and debt at the same time.



> They can influence the market ... but house prices are subject to supply & demand so regardless of what they do, the market is going to determine the price


Why did they create the CMHC in the first place, if it's a market based on supply and demand why not leave it that way? Why did they want people that couldn't qualify for a house to get one and now they don't care? If they are influencing the market, what are they trying to accomplish? 



> I doubt the issue is resolved ... but some probably don't want to bet against such a large market.


Okay I can see that I guess, basically what they are saying is it's far from perfect but the best we got. 



> My guess would be speculators as well as people thinking the inventory was a temporary thing ... then too, I suspect those wanting high oil prices did not think the Saudis/OPEC would let lower prices stick around.


So some of the public knew this stuff and just thought it meant something else? That makes a little sense. So it didn't just crash over night people knew about it for awhile and read the tea leaves wrong.


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## Just a Guy (Mar 27, 2012)

1) most people's net worth is tied to their principal residence. As you note in question #2, real estate has been manipulated and is artificially high. People then leverage this artificial net worth and spend it on "wants" that they feel they deserve since they are "wealthy". When the market corrects, there will be blood.

2) they did this to stimulate the economy. Cheap money means people will spend. Unfortunately, it also means people can afford to pay more for housing (or other junk) because of the "low monthly payments". You may have noticed that advertising rarely mentions the final price anymore...it's all about monthly, bi-monthly, or even weekly payments which you can now afford...

The more people who can afford the payments, the more petrol there are trying to buy the same items, which means prices go up. If money becomes more expensive, people will not be able to afford the "low monthly payments" anymore because they won't be as low anymore and then prices will go down as everyone tries to cash in their net worth at the same time...so the supply and demand pendulum will swing to the opposite extreme.

3) mainly because it is the best of the worst. Many other countries are actively trying to make their economy worse than the USA so that they can "benefit" from the lower currency, or they are politically unstable, or they are actually worse off ecconomically.

4) there are a lot of wars in the Middle East. One of the ways to win a war is to beat the enemy ecconomically. If your enemy is funding the war based on his oil revenues, you can make him have to produce twice as much to buy the same bullets...Fracking also is a threat to them, as it means less demand for opec oil. If they can make it economically unviable to complete the Fracking production before they come online, they kill the competition. The USA does similar things like the political delays on the pipelines from Canada...delay the threat of cheap oil while they bring on their own cheap production...there are other reasons of course, but this is one reason why OPEC didn't want to cut production. These countries don't need oil to be expensive to make money.

As an add on to your response to #1) the guys with the high net worth aren't also the ones with the high debt levels...there are many people trying to "keep up with the joneses" who only have the debt, not the assets.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> 1) most people's net worth is tied to their principal residence. As you note in question #2, real estate has been manipulated and is artificially high. People then leverage this artificial net worth and spend it on "wants" that they feel they deserve since they are "wealthy". When the market corrects, there will be blood.


That's one factor for imbalance being reported.

Another that I recall from a "net worth" article was that pension funds were being included. One typically can't use them to address debt for a long time while driving up the net worth number.




Just a Guy said:


> 2) they did this to stimulate the economy. Cheap money means people will spend. Unfortunately, it also means people can afford to pay more for housing (or other junk) because of the "low monthly payments"...


I agree that the policies lately have been in this direction plus it does answer what happening now ... sixty nine years after CMHC was created.

http://en.wikipedia.org/wiki/Canada_Mortgage_and_Housing_Corporation


As for "Why did they create the CMHC in the first place?" ... 


> As World War II veterans returned, CMHC's programs supported social and rental housing and created public housing program for low-income families. New housing was offered very low cost mortgages, small down payments and easy terms.


The federal Mortgage Insurance Fund (MIF) wasn't introduced until 1954.




Just a Guy said:


> As an add on to your response to #1) the guys with the high net worth aren't also the ones with the high debt levels...there are many people trying to "keep up with the joneses" who only have the debt, not the assets.


The low interest rates have accelerated the process ... but my sister had a co-worker prior to 2001 where the claim was that the couple couldn't affort their mortgage payment but then they added on *two* car loans.


Cheers


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## BoringInvestor (Sep 12, 2013)

emperor said:


> 3.) Why is the US dollar going up, they have a debt load so large they can never pay it down. Has this issue been resolved?


For #3, what's your source/assumption that it can never be paid down?
Why does it matter if it's never fully paid down?


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## MoreMiles (Apr 20, 2011)

USD$ is the ONLY currency in the world that can be printed and still accepted by other countries as good value. If you can print your own money, would you ever run out? So what is backing it up? Its superpower in military. Until another country replaces it one day (like how US navy surpassed British navy), its currency is always the most valuable.


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## dogcom (May 23, 2009)

The US dollar was backed by gold and then oil and now it is mostly backed by the military. It otherwise goes up because you don't really have many liquid options other then different fiat currencies to choose from. Also so many countries have borrowed in US dollars and must obtain dollars to pay back the debt.

On oil much of it is controlled by geopolitics and you should probably go to the oil threads to read the discussions there. Gold and silver prices are controlled by bullion banks and central banks through the paper market manipulations and fundamentals or the market doesn't matter as much until the game ends and true market price discovery can be found.

Housing prices are high because of the lack of supply in big cities, low interest rates, foreign buyers like the Chinese in Vancouver and the inflation from the money printing through low interest rates and QE programs. Also the sentiment of never ending home prices rising making homes a must buy before they go higher or the can't lose investment mentality.


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## Eclectic12 (Oct 20, 2010)

^^^^

Then there's two other situations that likely bolster the USD.

Countries that have dumped their currency to replace it with the USD and countries that supposedly have their own currency but in practice, everyone uses the USD.



As for the "the sentiment of never ending home prices rising" - there are those who waited for the drop in housing due to Nortel failing/tech firms busting etc. and then gave up after the expected drop did not happen on their schedule.


Cheers


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## bmoney (Jun 22, 2013)

emperor, the more you learn the more you'll realize how disconnected from reality economics is. Why? Politics. 

Get your hands on a first year Econ 101 text book, that will lay the ground work for Macro and Micro theory. Then read up about Chicago School, Austrian School, Marxist economic theory. Afterwards, read up on some history; a good one is Lords of Finance by Liaquat Ahamed, or anything by Niall Ferguson and you'll start to get the picture. It's the powers that be, that make up the rules as they go along and write history. Early 20th century economists were fooled into thinking financial principles were akin to the laws of physics - boy they were wrong. The new economic schools are interested in behavioural finance. Try and understand the big picture, develop a world a view. The nicest part about it, there is more than one way to invest and make money.


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