I’m sure Cktimes.ca editor and publisher John Gardiner will be commenting on some rich guys this week. That’s because rich guy Warren Buffet is giving 85% of his wealth away to charity, mostly to the Bill and Melinda Gates Foundation. At the end of the day Buffett will give away $37 billion. After that, he’ll just continue to go to work at his firm Berkshire Hathaway.
The Gates foundation attacks poverty in third world countries. Stopping infectious diseases in underdeveloped is at the top of its agenda. Seeing Warren Buffet sign the money over to Bill Gates was a seminal moment. Could you imagine signing over $37 billion? No, so maybe those rich guys aren’t so bad, eh John?
That transfer was like a breath of fresh air in a world, which rarely sees that. Buffet said “I’m not an enthusiast for dynastic wealth, especially when the alternative is six billion people much poorer (than we are) having a chance to benefit from the money.” Thank goodness for Warren Buffet.
Some might argue there is something particularly wrong about one individual amassing such wealth. However, it is what it is in our capitalistic society. Capital ends up sometimes in the strangest of places. Managing that capital is the challenge of not only people like Buffet but also our government leaders and central bankers. Having too much money in the wrong place can be a very bad thing.
You might wish for such problems. However, they do happen and one of the most common problems, which arise from “too much money” in small places, is the spectre of inflation. In our overheated Canadian economy, there is some fear that the inflation bogeyman might be coming back again.
What you say? Well, think about it. The non-farm Canadian economy is spinning quickly, humming like it has a V-8 engine circa 1978. Unemployment is at 6.1% the lowest in over 30 years. Inflation in May was 2.8%. The loonie continues to hover in the 89-90-91 cent level. To me its good news, but it also means inflation is sure to follow.
In any business cycle as time goes on inflationary and speculative pressures build. Think of this in the Alberta context. In that environment companies can raise prices easier and workers can demand more money very easily. This optimistic, almost “gold rush” mentality encourages fast money into very risky ventures. Inflation invariably will arise from this environment. That’s one reason the Bank of Canada has been raising interest rates.
You might argue this inflationary fear might have everything with the price of oil and an overheated western Canadian economy. Any inflationary fear won’t happen to us locally in southwestern Ontario. In many ways it’s too bad that argument doesn’t hold a lot of water. Bank of Canada governor David Dodge has to balance the whole Canadian economy. Keeping a leash on Alberta has its own hangover here in southwestern Ontario.
Take interest rates for example. The prime interest rate is now 6.0%. This still seems very low compared to days gone by. One result of this over the last few years has been the boom in real estate. I recently read a news story that said residential home sales in Chatham-Kent were exceptionally strong in May exceeding May 2005’s values by $4.5 million. Interest rates were lower in May 2005 than they are now, but it seemingly didn’t make a difference. Ditto across Canada.
So what happens when the Bank of Canada raises interest rates as their weapon of choice to slay the inflation dragon? At a certain point it’ll have a real effect on the Canadian housing market. Consumers highly levered to take advantage of the boom, may be jumping out windows if interest rates send real estate into a bust. Yes, we are a long way from that, but at a certain point real estate will be a loser. Double-digit interest rates will sharpen us all up.
Hopefully it won’t get there. However some of these inflationary fears in Canada and the United States have sent the stock market quirky with big declines. Central banks will have to be careful, because “inflationary psychology” can be a persuasive thing. Once it gets into the mindsets of consumers and in turn into wage settlements it can be very destructive.
It brings back visions of Pierre Trudeau’s Anti-Inflation Board. (AIB) Or how about former President Gerald Ford’s “Whip Inflation Now” campaign. (WIN)? No we don’t want to go there. I’ll take Warren Buffet’s “too much money” any day. Having too much money chasing too few resources is another thing. That’s exactly what we have in some parts of Canada now. The challenge for David Dodge and Finance Minister Jim Flaherty is too fight back effectively. Any slip up will cause us a world of economic pain.