A NEW MEANING TO THE TERM ‘ FREE MARKET ‘

Taxpayers also victims of ‘hot money’ behind Canada’s condo bubbles



The condo bubbles in Toronto and Vancouver are caused by foreign speculation and are making housing unaffordable and creating financial risk for the country in terms of government-insured mortgages. But there’s another issue of vital concern to taxpayers.

There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago. This boom is not the market at work, but is manipulation by “hot money” from abroad.

“I have come across something that I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.

He explained how it works:

1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to buy the unit in future at a fixed price. In financial markets, this is known as a derivative.

2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.

The Australians were victims of the same shenanigans and shut it down and now Canada must too

3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.

4. The paperwork for these agreements is kept in-house and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so that taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.

“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say we do it all day long,” said the investor who asked to remain anonymous.

Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.

The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.

Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.

So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada as Australia did in 2010 after foreign speculation and tax evasion damaged its housing market.

The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.

The Ontario and other securities commissions should get involved because what is happening, if these reports hold true, is that an unregulated financial futures market is being created using and abusing Canadian residential properties as vehicles. Likewise, the federal and provincial government tax collectors should get involved.

If speculators who owe taxes are long gone – many of them are offshore funds that buy out entire buildings then sell units abroad – then the intermediaries and developers should pay the taxes.

This frenzy is forcing prices upwards. Meanwhile, condos in the suburbs often take months to sell because buyers want them as homes, not as convenient money machines to flip.

The investor who described the tax shenanigans took his information to several politicians and called the CRA hotline, but got nowhere. Tax officials said they needed specific names and addresses to investigate, but this is beyond a simple case. This requires a task force to look into this.

A realtor said ordinary foreigners are buying from “funds” that are bundling units in Toronto and promising huge returns.

“Foreigners have been lured into so-called investment products, property units, with promises of high yields,” wrote this real estate professional. “They are often small investors who go to property seminars overseas. Many of these buildings do not allow Canadians to buy these units, obviously because of the tax implications.”

The Australians were victims of the same shenanigans and shut it down and now Canada must too.

Posted in: Diane Francis Tags: condos, Housing bubbles

THE GOP'S WILL TO FANTASY - 'DON'T LET THE FACTS OR THE TRUTH GET IN THE WAY'

The GOP's Will to Fantasy

Jonathan Schell

This article appeared in the September 10, 2012 edition of The Nation.

Mitt Romney’s choice of Paul Ryan as his running mate is the latest episode in a story of conflict within the Republican Party that has many chapters. It has been said a thousand times that, in the long competition between the party’s radical base and its slightly less radical leadership, the choice of the extreme budget-cutter Ryan represents a shift toward the base, and that is certainly true. But it is also a development in another, related story.

The record of the last decade or so suggests that the GOP these days is animated by two main goals. First, it seeks unchallengeable, absolute power. Its modus operandi for achieving that goal has been to use institutional power—of corporations, the courts and legislatures—to acquire even more institutional power. A recent case in point is the drive in Republican-dominated states around the country to disenfranchise Democratic-leaning constituencies, such as the poor and minorities, by legislating onerous requirements for voting.

The other goal has been a less familiar one. More and more, Republicans have exhibited a strong desire to take up residence in an imaginary world, an alternate reality—one in which global warming is found to be a fraud perpetrated by the world’s top scientists, Obama turns out to be a Kenyan-born Muslim (and a socialist), budgets can be slashed without social pain, firing government employees reduces unemployment, tax cuts for the wealthy replenish government coffers, and so forth. Perhaps it seems odd to identify this retreat from reality as a political goal, but past ideological movements on the left as well as the right offer many examples of the power of such a longing.

Conscientious fact-checkers in the media have rebutted individual items that make up the GOP’s factitious universe. Such efforts are always worthwhile but are likely to backfire with the believers. Once they have been lured away from reality by ideology, fantasy is no longer a disadvantage for them; rather, it is the source of the appeal. The deceptions are popular not in spite of their untruthfulness but precisely because of it. When the target of the insurrection is not only some hated rival or establishment but the factual universe, with all its unwelcome restrictions and psychological burdens, then the more flagrant the violation of truth, the keener the thrill.

Often, the will to power and the will to fantasy go together. As the totalitarian regimes of the twentieth century discovered, the two can reinforce each other. Such seemed to be the explicit ambition of a top Bush adviser when, at the height of the Iraq War, he famously said that the administration had delivered a coup de grâce to nothing less than “the reality-based community,” for “we’re an empire now, and when we act, we create our own reality.” It was a classic statement of the totalitarian logic of the propaganda artist in power. What better way to win support for propaganda than to abolish the reality that contradicts it? The adviser’s boast was premature, but his logic was clear: If we don’t like the real world, we can do away with it.

Those dreams of omnipotence expired in the sands of Iraq and Afghanistan, but the conflict between the will to power and the will to fantasy lived on in new forms. The career of Sarah Palin offers an illustration. She and reality were strangers, as the world saw in her interviews. Her mind was almost a blank slate, and she showed neither inclination nor aptitude to remedy the lack. To draw her into that world was a kind of cruel mistake. She soon withdrew from it, deciding, after protracted dithering, to stay out of this year’s presidential race and retreat into a world in which her talents and temperament were in fact stellar: the world of mythmaking and spin on Fox News. It is entirely in keeping with this choice that her husband, Todd Palin, has now turned up in NBC’s militarized “reality” show, Stars Earn Stripes.

There was a lesson in Sarah Palin’s withdrawal. For all the triumphs of cash-fueled political manipulation, the sphere of policy and governmental decisions has its dangers for the addicts of unreality. Fantasies can be a path to power, but they can also become a costly self-indulgence.

Palin’s balking at reality’s edge was only one of many twists and turns in the winding path the GOP has followed between power and fantasy. Sometimes it has tipped one way, sometimes the other. Twice—in the presidential primaries of 2008 and 2012—the party hearkened for a time to the siren call of the unreal world of its base (Mike Huckabee in 2008; Rick Perry, Rick Santorum and Newt Gingrich this year) before veering away to enter, with conspicuous distaste, into an arranged marriage with the more sober choice (John McCain in 2008, Romney this year).

But now comes the choice of Ryan. It is a decided—possibly a decisive—tip in the direction of fantasy. To be sure, Paul Ryan is no Sarah Palin. He is a veritable policy wonk, but also an ideologue. Ideologues can know a lot, and Ryan does, but their knowledge is so tendentiously selected that information, instead of connecting them to what is real, actually armors them against it. Such is the case with Ryan. The media spotlight has been on the renowned Ryan budget, passed twice by the Republican majority in the House, but even more telling is his stand on global warming: he is a major-league denier. All the most prestigious academies of science around the world, including the American National Academy of Sciences, agree that warming is real, man-made and well advanced. Ryan demurs. He has accused climate scientists of a “perversion of the scientific method, where data were manipulated to support a predetermined conclusion” in order to “intentionally mislead the public on the issue of climate change.” He has voted against all measures to remedy the problem. He has suggested that winter in Wisconsin is evidence against warming, which he has called “a tough sell in our communities, where much of the state is buried under snow.”

As for that budget, it promises to achieve balance while providing no such thing, instead calling for broad tax cuts without specifying spending cuts anywhere near the level that would be needed as offsets to bring it into balance. Ryan’s budget depends entirely on one of the hoariest false promises in politics, the free lunch, thereby contributing to what Paul Krugman rightly calls an economic “culture of fraud.”

About the Author

Jonathan Schell

Jonathan Schell is the Doris Shaffer Fellow at The Nation Institute and teaches a course on the nuclear dilemma at Yale...

 

EDUCATION: ITS IMPACT ON LONGEVITY

Education: A Predictor of Longer Life

If you want to know how long you will live, you might stop fretting over genetics and family history and instead look at your educational achievements. Education is certainly not the only variable associated with longer lives, but it may be the most powerful.

Recent study findings published in the journal Health Affairs present a remarkable update to the already considerable research showing education to be a powerful predictor of longer life spans.

"The lifelong relationships of education and its correlates with health and longevity are striking," the article said. "Education exerts its direct beneficial effects on health through the adoption of healthier lifestyles, better ability to cope with stress, and more effective management of chronic diseases. However, the indirect effects of education through access to more privileged social position, better-paying jobs, and higher income are also profound."

While the findings are good news for educated Americans, they also indicate that medical and lifestyle breakthroughs that have triggered the much-publicized longevity revolution are not being enjoyed by less-educated Americans whose lifespans have fallen further behind over time. This trend has implications for the debate about raising the Social Security retirement age. It also adds a compelling mortality tale to the economic costs of the nation's falling educational-achievement levels compared with other nations.

Within U.S. racial groups, educational achievement is associated with significant longevity benefits. But compared across racial groups, the longevity gap is even greater, which indicates continued race-based differences in how long Americans live. The Health Affairs article was co-authored by 15 leading academic experts in aging and longevity. The research was conducted by the MacArthur Foundation Research Network on an Aging Society.

"We found that in 2008 U.S. adult men and women with fewer than twelve years of education had life expectancies not much better than those of all adults in the 1950s and 1960s," the article said. "When race and education are combined, the disparity is even more striking."

Within racial and ethnic groups, there was a pronounced longevity benefit when comparing people with 16 or more years of school with those with less than 12 years. Among women, the differences in life expectancy at birth were 10.4 years among whites, 6.5 years among blacks, and 2.9 years for Hispanics. Among men, the gaps were 12.9 years among whites, 9.7 years among blacks, and 5.5 years for Hispanics.

But the differences were more striking across all racial groups. "White U.S. men and women with 16 years or more of schooling had life expectancies far greater than black Americans with fewer than 12 years of education--14.2 years more for white men than black men, and 10.3 years more for white women than black women," the article said.

"These gaps have widened over time and have led to at least two 'Americas,' if not multiple others, in terms of life expectancy, demarcated by level of education and racial-group membership." Compared with similar 1990 measures, by 2008, the gap among men had widened by nearly a year, and among women, by more than two-and-a-half  years.

"The current life expectancy at birth for U.S. blacks with fewer than twelve years of education is equivalent to the life expectancy observed in the 1960s and 1970s for all people in the United States, but blacks' longevity has been improving with time," the article said.

That hasn't been the case for whites. "White males with fewer than twelve years of education currently have a life expectancy at birth equivalent to that of all men in the United States born in 1972, while white females with similar education have the life expectancy of all women in the country born in 1964," it added. "And the longevity of these white males and females is growing worse over time."

The impact of education on lifespans is so powerful, the authors said, that improving people's health and lifestyle behaviors alone "are not likely to have a major impact on disparities in longevity." The authors called on policymakers to "implement educational enhancements at young, middle, and older ages for people of all races, to reduce the large gap in health and longevity that persists today."

By Philip Moeller

U.S.News & World Report

13 Aug, 2012

ROMNEY/RYAN: THE REAL TARGET by Paul Krugman

So, let me clarify what I believe is really going on in the choice of Paul Ryan as VP nominee. It is not about satisfying the conservative base, which was motivated anyway by Obama-hatred; it is not about refocusing on the issues, because R&R are both determined to avoid providing any of the crucial specifics about their plans. It is — as Jonathan Chait also seems to understand — about exploiting the gullibility and vanity of the news media, in much the same way that George W. Bush did in 2000.


Like Bush in 2000, Ryan has a completely undeserved reputation in the media as a bluff, honest guy, in Ryan’s case supplemented by a reputation as a serious policy wonk. None of this has any basis in reality; Ryan’s much-touted plan, far from being a real solution, relies crucially on stuff that is just pulled out of thin air — huge revenue increases from closing unspecified loopholes, huge spending cuts achieved in ways not mentioned. See Matt Miller for more.

So whence comes the Ryan reputation? As I said in my last post, it’s because many commentators want to tell a story about US politics that makes them feel and look good — a story in which both parties are equally at fault in our national stalemate, and in which said commentators stand above the fray. This story requires that there be good, honest, technically savvy conservative politicians, so that you can point to these politicians and say how much you admire them, even if you disagree with some of their ideas; after all, unless you lavish praise on some conservatives, you don’t come across as nobly even-handed.

The trouble, of course, is that it’s really really hard to find any actual conservative politicians who deserve that praise. Ryan, with his flaky numbers (and actually very hard-line stance on social issues), certainly doesn’t. But a large part of the commentariat decided early on that they were going to cast Ryan in the role of Serious Honest Conservative, and have been very unwilling to reconsider that casting call in the light of evidence.

So that’s the constituency Romney is targeting: not a large segment of the electorate, but a few hundred at most editors, reporters, programmers, and pundits. His hope is that Ryan’s unjustified reputation for honest wonkery will transfer to the ticket as a whole.

So, a memo to the news media: you have now become players in this campaign, not just reporters. Mitt Romney isn’t seeking a debate on the issues; on the contrary, he’s betting that your gullibility and vanity will let him avoid a debate on the issues, including the issue of his own fitness for the presidency. I guess we’ll see if it works.

Paul Krugman
August 13, 2012

MOVING FROM 'ME' TO 'WE' IS TOUGH ON THE GOP

What is there about Universal Health Care that conservatives don't comprehend?  It is an obligation of the state - not that of  free enterprise. What an embarrassing commentary on US conservative culture!

ALL'S FAIR IN LOVE, WAR & THEFT

Samsung: Apple wouldn’t have sold a single iPhone without stealing our tech

The two consumer electronics companies are preparing to do battle in San Jose, California next week, and now-public court documents shed light on the positions each firm is taking.

Another day, another Apple (AAPL) vs. Samsung (005930) trial. The two consumer electronics companies are preparing to do battle in San Jose, California next week, and now-public court documents shed light on the positions each firm is taking. On Tuesday, Apple told Samsung exactly what it thinks its technology patents are worth (spoiler: barely anything at all), and subsequent filings from Samsung reveal that the South Korea-based company has a few choice words for Apple as well.

As highlighted by The Wall Street Journal, Samsung’s trial brief pulls no punches in telling the court exactly where it stands regarding Apple’s repeated patent-related accusations. In short, Apple is the thief here, not Samsung. A few key excerpts (emphasis is ours):

Samsung has been researching and developing mobile telecommunications technology since at least as early as 1991 and invented much of the technology for today‘s smartphones. Indeed, Apple, which sold its first iPhone nearly twenty years after Samsung started developing mobile phone technology, could not have sold a single iPhone without the benefit of Samsung‘s patented technology.

For good measure, Apple seeks to exclude Samsung from the market, based on its complaints that Samsung has used the very same public domain design concepts that Apple borrowed from other competitors, including Sony, to develop the iPhone. Apple‘s own internal documents show this. In February 2006, before the claimed iPhone design was conceived of, Apple executive Tony Fadell circulated a news article that contained an interview of a Sony designer to Steve Jobs, Jonathan Ive and others. In the article, the Sony designer discussed Sony portable electronic device designs that lacked “excessive ornamentation” such as buttons, fit in the hand, were “square with a screen” and had “corners [which] have been rounded out.”

Contrary to the image it has cultivated in the popular press, Apple has admitted in internal documents that its strength is not in developing new technologies first, but in successfully commercializing them. . . . Also contrary to Apple‘s accusations, Samsung does not need or want to copy; rather, it strives to best the competition by developing multiple, unique products. Samsung internal documents from 2006, well before the iPhone was announced, show rectangular phones with rounded corners, large displays, flat front faces, and graphic interfaces with icons with grid layouts.

Apple relied heavily on Samsung‘s technology to enter the telecommunications space, and it continues to use Samsung‘s technology to this day in its iPhone and iPad products. For example, Samsung supplies the flash memory, main memory, and application processor for the iPhone. . . . But Apple also uses patented Samsung technology that it has not paid for. This includes standards-essential technology required for Apple‘s products to interact with products from other manufacturers, and several device features that Samsung developed for use in its products.

By Zach Epstein
BGR News
25 Jul, 2012

MOVING FROM PROFESSIONAL SALES TO PROFESSIONAL (FIDUCIARY) ADVICE

Financial sales professionals are viewed through a sales/production industry prism.

Our challenge is to move from 'sales' to 'advice'.

As a fiduciary our fees do not include MER's.

They are client centric values based.

Not all sales professionals aspire to a professional advisor's fiduciary role.

With 14,000,000 boomers who need professional financial planning advice (vs product comparison advice) the opportunity to satisfy this need is in front of us.

Dan Zwicker
Toronto

Website:  http://www.dan-zwicker.blogspot.com

 

Taxpayers also victims of 'hot money' behind Canada's condo bubbles

A NEW MEANING TO THE TERM  ‘ FREE MARKET ‘

The condo bubbles in Toronto and Vancouver are caused by foreign speculation and are making housing unaffordable and creating financial risk for the country in terms of government-insured mortgages. But there’s another issue of vital concern to taxpayers.


There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago. This boom is not the market at work, but is manipulation by “hot money” from abroad.


“I have come across something that I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.


He explained how it works:


1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to buy the unit in future at a fixed price. In financial markets, this is known as a derivative.


2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.

The Australians were victims of the same shenanigans and shut it down and now Canada must too

3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.


4. The paperwork for these agreements is kept in-house and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so that taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.


“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say we do it all day long,” said the investor who asked to remain anonymous.


Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.


The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.


Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.


So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada as Australia did in 2010 after foreign speculation and tax evasion damaged its housing market.
The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.


The Ontario and other securities commissions should get involved because what is happening, if these reports hold true, is that an unregulated financial futures market is being created using and abusing Canadian residential properties as vehicles. Likewise, the federal and provincial government tax collectors should get involved.


If speculators who owe taxes are long gone – many of them are offshore funds that buy out entire buildings then sell units abroad – then the intermediaries and developers should pay the taxes.


This frenzy is forcing prices upwards. Meanwhile, condos in the suburbs often take months to sell because buyers want them as homes, not as convenient money machines to flip
.
The investor who described the tax shenanigans took his information to several politicians and called the CRA hotline, but got nowhere. Tax officials said they needed specific names and addresses to investigate, but this is beyond a simple case. This requires a task force to look into this.


A realtor said ordinary foreigners are buying from “funds” that are bundling units in Toronto and promising huge returns.


“Foreigners have been lured into so-called investment products, property units, with promises of high yields,” wrote this real estate professional. “They are often small investors who go to property seminars overseas. Many of these buildings do not allow Canadians to buy these units, obviously because of the tax implications.”


The Australians were victims of the same shenanigans and shut it down and now Canada must too.




Diane Francis
Financial Post
05/05/2012

  

MY PURPOSE ON LINKEDIN - DAN ZWICKER

In the delivery of high performance complex financial information and knowledge the delivery platform moves from ‘ME’ to ‘WE’, namely, it is:

 Collaborative

Integrative

Transparent

   Client Centric Fiduciary Based


It is based upon a delivery model which is the antithesis of a top down product driven platform.


Complex ideas are not commodities. Those responsible for their delivery are held to a high performance standard of lifetime preparation, delivery and a commitment to unbiased fiduciary based client centric focus and long term care.


Exponential economic growth of complex knowledge and information based services (Medical,, Legal, Financial) requires open and direct dialogue among each of the professional participants contributing within the delivery platform.


For a better understanding of impartial advice


Check this link:


http://dan-zwicker.blogspot.com/2010/01/ability-to-provide-impartial-advice-to.html


For a better understanding of Integrative thinking


Check this link:


http://dan-zwicker.blogspot.com/2010/09/integrative-thinking-constructive.html


My pupose on Linkedin is to deliver a greater understanding of what it takes to deliver the above.


Dan Zwicker
Toronto, Canada
02 27 2012

'Raising The Bar'

WORKING OUT OF DEBT: HOW ARE WE DOING? A MCKINSEY REPORT JANUARY 2012

An update of our research on the efforts of developed countries to work out from under a massive overhang of debt shows how uneven progress has been. US households have made the greatest gains so far.

The deleveraging process that began in 2008 is proving to be long and painful. Historical experience, particularly post–World War II debt reduction episodes, which the McKinsey Global Institute reviewed in a report two years ago, suggested this would be the case.1 And the eurozone’s debt crisis is just the latest demonstration of how toxic the consequences can be when countries have too much debt and too little growth.


We recently took another look forward and back—at the relevant lessons from history about how governments can support economic recovery amid deleveraging and at the signposts business leaders can watch to see where economies are in that process. We reviewed the experience of the United States, the United Kingdom, and Spain in depth, but the signals should be relevant for any country that’s deleveraging.


Deleveraging: Where are we now?

The financial crisis highlighted the danger of too much debt, a message that has only been reinforced by Europe’s recent sovereign-debt challenges. And new McKinsey Global Institute research shows that the unwinding of debt—or deleveraging—has barely begun. Since 2008, debt ratios have grown rapidly in France, Japan, and Spain and have edged downward only in Australia, South Korea, and the United States. Overall, the ratio of debt to GDP has grown in the world’s ten largest economies.


Overall, the deleveraging process has only just begun. During the past two and a half years, the ratio of debt to GDP, driven by rising government debt, has actually grown in the aggregate in the world’s ten largest developed economies (for more, see sidebar, “Deleveraging: Where are we now?”). Private-sector debt has fallen, however, which is in line with historical experience: overextended households and corporations typically lead the deleveraging process; governments begin to reduce their debts later, once they have supported the economy into recovery.


Different countries, different paths


In the United States, the United Kingdom, and Spain, all of which experienced significant credit bubbles before the financial crisis of 2008, households have been reducing their debt at different speeds. The most significant reduction occurred among US households. Let’s review each country in turn.


The United States: Light at the end of the tunnel


Household debt outstanding has fallen by $584 billion (4 percent) from the end of 2008 through the second quarter of 2011 in the United States. Defaults account for about 70 and 80 percent of the decrease in mortgage debt and consumer credit, respectively. A majority of the defaults reflect financial distress: overextended homeowners who lost jobs during the recession or faced medical emergencies found that they could not afford to keep up with debt payments. It is estimated that up to 35 percent of the defaults resulted from strategic decisions by households to walk away from their homes, since they owed far more than their properties were worth. This option is more available in the United States than in other countries, because in 11 of the 50 states—including hard-hit Arizona and California—mortgages are nonrecourse loans, so lenders cannot pursue the other assets or income of borrowers who default. Even in recourse states, US banks historically have rarely pursued borrowers.


Historical precedent suggests that US households could be up to halfway through the deleveraging process, with one to two years of further debt reduction ahead. We base this estimate partly on the long-term trend line for the ratio of household debt to disposable income. Americans have constantly increased their debt levels over the past 60 years, reflecting the development of mortgage markets, consumer credit, student loans, and other forms of credit. But after 2000, the ratio of household debt to income soared, exceeding the trend line by about 30 percentage points at the peak  As of the second quarter of 2011, this ratio had fallen by 11 percent from the peak; at the current rate of deleveraging, it would return to trend by mid-2013. Faster growth of disposable income would, of course, speed this process.


We came to a similar conclusion when we compared the experiences of US households with those of households in Sweden and Finland in the 1990s. During that decade, these Nordic countries endured similar banking crises, recessions, and deleveraging. In both, the ratio of household debt to income declined by roughly 30 percent from its peak. As Exhibit 2 indicates, the United States is closely tracking the Swedish experience, and the picture looks even better considering that clearing the backlog of mortgages already in the foreclosure pipeline could reduce US household debt ratios by an additional six percentage points.


As for the debt service ratio of US households, it’s now down to 11.5 percent—well below the peak of 14.0 percent, in the third quarter of 2007, and lower than it was even at the start of the bubble, in 2000. Given current low interest rates, this metric may overstate the sustainability of current US household debt levels, but it provides another indication that they are moving in the right direction.


Nonetheless, after US consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis. That’s because home equity loans and cash-out refinancing, which from 2003 to 2007 let US consumers extract $2.2 trillion of equity from their homes—an amount more than twice the size of the US fiscal-stimulus package—will not be available. The refinancing era is over: housing prices have declined, the equity in residential real estate has fallen severely, and lending standards are tighter. Excluding the impact of home equity extraction, real consumption growth in the pre-crisis years would have been around 2 percent per annum—similar to the annualized rate in the third quarter of 2011.


The United Kingdom: Debt has only just begun to fall


Three years after the start of the financial crisis, UK households have deleveraged only slightly, with the ratio of debt to disposable income falling from 156 percent in the fourth quarter of 2008 to 146 percent in second quarter of 2011. This ratio remains significantly higher than that of US households at the bubble’s peak. Moreover, the outstanding stock of household debt has fallen by less than 1 percent. Residential mortgages have continued to grow in the United Kingdom, albeit at a much slower pace than they did before 2008, and this has offset some of the £25 billion decline in consumer credit.


Still, many UK residential mortgages may be in trouble. The Bank of England estimates that up to 12 percent of them may be in some kind of forbearance process, and an additional 2 percent are delinquent— similar to the 14 percent of US mortgages that are in arrears, have been restructured, or are now in the foreclosure pipeline (Exhibit 3). This process of quiet forbearance in the United Kingdom, combined with record-low interest rates, may be masking significant dangers ahead. Some 23 percent of UK households report that they are already “somewhat” or “heavily” burdened in paying off unsecured debt.2 Indeed, the debt payments of UK households are one-third higher than those of their US counterparts—and 10 percent higher than they were in 2000, before the bubble. This statistic is particularly problematic because at least two-thirds of UK mortgages have variable interest rates, which expose borrowers to the potential for soaring debt payments should interest rates rise.


Given the minimal amount of deleveraging among UK households, they do not appear to be following Sweden or Finland on the path of significant, rapid deleveraging. Extrapolating the recent pace of UK household deleveraging, we find that the ratio of household debt to disposable income would not return to its long-term trend until 2020. Alternatively, it’s possible that developments in UK home prices, interest rates, and GDP growth will cause households to reduce debt slowly over the next several years, to levels that are more sustainable but still higher than historic trends. Overall, the United Kingdom needs to steer a difficult course that reduces household debt steadily, but at a pace that doesn’t stifle growth in consumption, which remains the critical driver of UK GDP


Spain: The long unwinding road


Since the credit crisis first broke, Spain’s ratio of household debt to disposable income has fallen by 4 percent and the outstanding stock of household debt by just 1 percent. As in the United Kingdom, home mortgages and other forms of credit have continued to grow while consumer credit has fallen sharply.


Spain’s mortgage default rate climbed following the crisis but remains relatively low, at approximately 2.5 percent, thanks to low interest rates. The number of mortgages in forbearance has also risen since the crisis broke, however. And more trouble may lie ahead. Almost half of the households in the lowest-income quintile face debt payments representing more than 40 percent of their income, compared with slightly less than 20 percent for low-income US households. Meanwhile, the unemployment rate in Spain is now 21.5 percent, up from 9 percent in 2006. For now, households continue to make payments to avoid the country’s conservative recourse laws, which allow lenders to go after borrowers’ assets and income for a long period.


In Spain, unlike most other developed economies, the corporate sector’s debt levels have risen sharply over the past decade. A significant drop in interest rates after the country joined the eurozone, in 1999, unleashed a run-up in real-estate spending and an enormous expansion in corporate debt. Today, Spanish corporations hold twice as much debt relative to national output as do US companies, and six times as much as German companies. Debt reduction in the corporate sector may weigh on growth in the years to come


Signposts for recovery


Paring debt and laying a foundation for sustainable long-term growth should take place simultaneously, difficult as that may seem. For economies facing this dual challenge today, a review of history offers key lessons. Three historical episodes of deleveraging are particularly relevant: those of Finland and Sweden in the 1990s and of South Korea after the 1997 financial crisis. All these countries followed a similar path: bank deregulation (or lax regulation) led to a credit boom, which in turn fueled real-estate and other asset bubbles. When they collapsed, these economies fell into deep recession, and debt levels fell.


In all three countries, growth was essential for completing a five- to seven-year-long deleveraging process. Although the private sector may start to reduce debt even as GDP contracts, significant public-sector deleveraging, absent a sovereign default, typically occurs only when GDP growth rebounds, in the later years of deleveraging (Exhibit 4). That’s true because the primary factor causing public deficits to rise after a banking crisis is declining tax revenue, followed by an increase in automatic stabilizer payments, such as unemployment benefits.3 A rebound of economic growth in most deleveraging episodes allows countries to grow out of their debts, as the rate of GDP growth exceeds the rate of credit growth.




No two deleveraging economies are the same, of course. As relatively small economies deleveraging in times of strong global economic expansion, Finland, South Korea, and Sweden could rely on exports to make a substantial contribution to growth. Today’s deleveraging economies are larger and face more difficult circumstances.


Still, historical experience suggests five questions that business and government leaders should consider as they evaluate where today’s deleveraging economies are heading and what policy priorities to emphasize


1. Is the banking system stable?


In Finland and Sweden, banks were recapitalized and some were nationalized. In South Korea, some banks were merged and some were shuttered, and foreign investors for the first time got the right to become majority investors in financial institutions. The decisive resolution of bad loans was critical to kick-start lending in the economic- rebound phase of deleveraging.


The financial sectors in today’s deleveraging economies began to deleverage significantly in 2009, and US banks have accomplished the most in that effort. Even so, banks will generally need to raise significant amounts of additional capital in the years ahead to comply with Basel III and national regulations. In most European countries, business demand for credit has fallen amid slow growth. The supply of credit, to date, has not been severely constrained. A continuation of the eurozone crisis, however, poses a risk of a significant credit contraction in 2012 if banks are forced to reduce lending in the face of funding constraints. Such a forced deleveraging would significantly damage the region’s ability to escape recession.


2. Are structural reforms in place?


In the 1990s, each of the crisis countries embarked on a program of structural reform. For Finland and Sweden, accession to the European Union led to greater economies of scale and higher direct investment. Deregulation in specific industry sectors—for example, retailing—also played an important role.4 South Korea followed a remarkably similar course as it restructured its large corporate conglomerates, or chaebol, and opened its economy wider to foreign investment. These reforms unleashed growth by increasing competition within the economy and pushing companies to raise their productivity.


Today’s troubled economies need reforms tailored to the circumstances of each country. The United States, for instance, ought to streamline and accelerate regulatory approvals for business investment, particularly by foreign companies. The United Kingdom should revise its planning and zoning rules to enable the expansion of successful high-growth cities and to accelerate home building. Spain should drastically simplify business regulations to ease the formation of new companies, help improve productivity by promoting the creation of larger ones, and reform labor laws.5 Such structural changes are particularly important for Spain because the fiscal constraints now buffeting the European Union mean that the country cannot continue to boost its public debt to stimulate the economy. Moreover, as part of the eurozone, Spain does not have the option of currency depreciation to stimulate export growth.


3. Have exports surged?


In Sweden and Finland, exports grew by 10 and 9.4 percent a year, respectively, between 1994 and 1998, when growth rebounded in the later years of deleveraging. This boom was aided by strong export-oriented companies and the significant currency devaluations that occurred during the crisis (34 percent in Sweden from 1991 to 1993). South Korea’s 50 percent devaluation of the won, in 1997, helped the nation boost its share of exports in electronics and automobiles.


Even if exports alone cannot spur a broad recovery, they will be important contributors to economic growth in today’s deleveraging economies. In this fragile environment, policy makers must resist protectionism. Bilateral trade agreements, such as those recently passed by the United States, can help. Salvaging what we can from the Doha round of trade talks will be important. Service exports, including the “hidden” ones that foreign students and tourists generate, can be a key component of export growth in the United Kingdom and the United States.


4. Is private investment rising?


Another important factor that boosted growth in Finland, South Korea, and Sweden was the rapid expansion of investment. In Sweden, it rose by 9.7 percent annually during the economic rebound that began in 1994. Accession to the European Union was part of the impetus. Something similar happened in South Korea after 1998 as barriers to foreign direct investment fell. These soaring inflows helped offset slower private-consumption growth as households deleveraged.


Given the current very low interest rates in the United Kingdom and the United States, there is no better time to embark upon investments. Those for infrastructure represent an important enabler, and today there are ample opportunities to renew the aging energy and transportation networks in those countries. With public funding limited, the private sector can play an important role in providing equity capital, if pricing and regulatory structures enable companies to earn a fair return.


5. Has the housing market stabilized?


During the three historical episodes discussed here, the housing market stabilized and began to expand again as the economy rebounded. In the Nordic countries, equity markets also rebounded strongly at the start of the recovery. This development provided additional support for a sustainable rate of consumption growth by further increasing the “wealth effect” on household balance sheets.


In the United States, new housing starts remain at roughly one-third of their long-term average levels, and home prices have continued to decline in many parts of the country through 2011. Without price stabilization and an uptick in housing starts, a stronger recovery of GDP will be difficult,6 since residential real-estate construction alone contributed 4 to 5 percent of GDP in the United States before the housing bubble. Housing also spurs consumer demand for durable goods such as appliances and furnishings and therefore boosts the sale and manufacture of these products.


At a time when the economic recovery is sputtering, the eurozone crisis threatens to accelerate, and trust in business and the financial sector is at a low point, it may be tempting for senior executives to hunker down and wait out macroeconomic conditions that seem beyond anyone’s control. That approach would be a mistake. Business leaders who understand the signposts, and support government leaders trying to establish the preconditions for growth, can make a difference to their own and the global economy.

JANUARY 2012 •

Karen Croxson, Susan Lund, and Charles Roxburgh
Source: McKinsey Global Institute


The authors wish to thank Toos Daruvala and James Manyika for their thoughtful input, as well as Albert Bollard and Dennis Bron for their contributions to the research supporting this article.


About the Authors


Karen Croxson, a fellow of the McKinsey Global Institute (MGI), is based in McKinsey’s London office; Susan Lund is director of research at MGI and a principal in the Washington, DC, office; Charles Roxburgh is a director of MGI and a director in the London office.

THE RETIREE MARKET: A TRILLION DOLLAR MARKET - HOW MANY ADVISORS ARE PROFESSIONALLY PREPARED?

AS a large segment of Canada's population moves into retirement, successful financial advisors will be those who tailor their practices to serving the needs of retirees, according to a recent Investor Economics report.



In the past two decades, the baby boomers, those born after the Second World War between 1946 and 1965, became investors and generated a tremendous amount of growth in the wealth management business. "In those years, Canadian boomers moved from being borrowers to investors," Goshka Folda, Investor Economic's Toronto-based senior managing director, noted in an interview discussing the highlights of The 2011 Fee-based Report. "Their assets under management - investments, assets in their chequing and savings accounts, and fixed-term deposits, but excluding real estate - went from $335 billion in 1997 to $1.1 trillion at the end of 2010.


"They were fortunate enough to benefit from the longest-running bull market of the 20th century that continued into the 21st century, with a disruption when the technology bubble burst," she added." And providers of wealth services also benefitted from this trend."


But boomers are now moving uut uf their accumulation phase as they retire from the workforce. Investor Economics' research shows there were 3.4 million Canadian households over the age of 65 at the end of 201O. "We expect that number to reach 4.7 million by 2020," Ms. Folda said. "By then, one out of every three households will bc made up of retired people who will control $4 of every $10 under management."


Challenge for wealth managers


This poses a real challenge for wealth managers, she added. "In 2020, Canadians over the age of 65 will control 40% of all financial wealth under management. And one out of every three advisors' clients will be part of this group."


This is no surprise to Canada's financial services industry. The 2011 Fee-based Report notes that investment product manufacturers have already introduced a range of products designed for people in retirement, including guaranteed withdrawal bcnefit funds, segregated funds, principal-protected notes, reverse mortgages and payout annuities.


"A long scquence of products has emerged and other products have been repositioned to serve retirees," Ms. Folda said. These address a variety

"In 2020, Canadians over the age of 65 will control 40% of all financial wealth under man¬agement. And one out of every three advisors' clients will be part of this group."


- Goshka Folda


of needs such as principal protections, guaranteed income, risk management, tax efficiency and pre-assembled advice, among others.


The product landscape has exploded in terms of solutions, she noted, "but manufacturers realize there is no single product that will satisfy all the needs of a retired household.

While it is fairly easy to determine the risk profile and appetite for investment growth of investors who are in the accumulative phase, this doesn't hold true for retired households. Retirees have a variety of needs that need to be addressed, including risk management, the need for principal protection, income planning, tax planning and estate planning. No one single product will do it."


Expanding expertise


This bodes well for advisors as retired clients will need financial advice on how to combine these products to scrve their individual needs. "The product shelf is already there," Ms. Folda said. "But retirees will need help in putting together baskets of the right products for them."


But advisors may need to expand their areas of expertise in order to serve this market adequately. They'll have to address issues beyond the investment strategy that have a direct bearing on retired clients' financial standing, the report notes, such as housing, health issues, family dynamics, and the needs of spouses and children.


Retirement planning designations


Most advisors realize that the advice they'll give clients in retirement will differ from the advice they gave in the accumulative phase, and the financial services industry has been quick to position its members as retirement planning experts. "We've uncovered a lot of designations," said Guy Armstrong, a senior consultant with Investor Ecunumics. "In the U.S. where there has been a high uptake on retirement planning designations, we found 14 bodies conferring these designations and a total of 24 retirement planning designations. Canada has seen a stcady growth, with seven bodies conferring retirement planning designations and 11 designations, but our regulatory environment has prevented a real explosion."


And giving advice to a retired client base will be complicated by the fact that, in Canada, financial advice has always focused on the delivery of investment or insurance products, Ms. Folda noted. "The way in which firms and advisors generate their revenues is so highly linked to the investment strategy component of financial planning. But the focus has to shift from prod-
ucts to holistic financial planning. The advisor will need to address issues beyond the invcstment strategy."'



The small number of fee-only planners practising in Canada has only a limited reach into the Canadian population. "The main channels now delivering advice are bank and credit union branch advisors, full-service brokers, financial advisors, including MFDA-Iicensed advisors, and insurance advisors. These are not necessarily all commission-based advisors," Ms. Folda said, "but the major focus of their work is executing investment or insurance strategies. The clients of these channels can now say they are being given financial planning services, sometimes at no extra cost." Fee-based planners need to give serious consideration to how thcy position themselves in the market.


Content of retirement plans


In the coming year, Investor Economics will focus on getting a measure of the number and the content of retirement plans that are being delivered in the industry, Mr. Armstrong said. 

"With the exception of the fee-based advisors, everyone else is delivering financial plans at no additional charge to clients, but the content of these plans are all over the map."


Another challenge that fee-based advisors face, he noted, is that the channels that are currently delivering advice will do their best to hold onto their clients as they move into retirement. Some firms have already started to help clients move into retirement with programs that focus on understanding retirement lifestyle goals and financial needs. These include RBC Royal Bank's Your Future By Design and Sun Life Financial's My Retirement Cafe.


Fee-based business


But it is possible to run a fee-based business, Mr. Armstrong said. 'The trust business has always offered services for fees, and its clients readily accept this arrangement."


With a growing number of retired clients, advisors will also have to come to terms with the fact that retirement is a payout phase and, in many cases, clients' capital will be depleted as they age. To counter this, Ms. Fold a said advisors will need to develop strategies to engage younger generations. "A proper application of retirement planning is in itself a good way to engage younger family members. Thc fact that mom and dad's needs are being taken care of speaks well for the advisor. And the fact that the parents' estate planning wishes were carried out is another big plus."


The greying of Canada's population should also prompt advisors to take a team approach to their businesses, she added. This will allow the client to benefit from the skills and areas of expertise or different professionals.


ROSEMARY MCCRACKEN
The Insurance and Investment Journal
January 2012 

UNDERSTANDING WHAT DRIVES US HEALTH CARE SPENDING

US employers, health care providers, and other stakeholders are running hard to prepare for implementation of health care reform under the Affordable Care Act. In a new report, Accounting for the cost of US health care: Pre-reform trends and the impact of the recession, McKinsey’s Center for US Health System Reform examines trends from 2006–09, a period when health care spending reached record levels, and helps frame the forces shaping the health care industry in this period of rapid change.


Read about the findings or download the full report on the center’s Web site.


http://healthreform.mckinsey.com/Home/Insights/Latest_thinking/Accounting_for_the_cost_of_US_health_care.aspx

CARPE DIEM: The Energy Treasures Beneath Our Feet

CARPE DIEM: The Energy Treasures Beneath Our Feet

TD AGE OF RETIREMENT REPORT - 01 06 2012

Report –



Manitoba and Saskatchewan Fact Sheet



Results for the TD Report on the Age of Retirement were collected through a custom, online survey fielded by Environics


Research Group. A total of 1,006 completed surveys were collected with Canadians aged 25 – 64 who are not retired, including 132 in Manitoba and Saskatchewan. Data was collected between November 22 and December 2, 2011.


Crystal Wong, Senior Regional Manager, TD Waterhouse Financial Planning, based in Calgary, Alberta, is available to discuss the results of the TD Age of Retirement Report and offer advice to residents of Manitoba and Saskatchewan for how to reach retirement in good financial shape.


Age of Retirement in Manitoba and Saskatchewan


The average age people in Manitoba and Saskatchewan think they will retire is 61.


Residents of these provinces are the most likely in the country to say that if given the opportunity, they would retire before age 65 (74% versus 65% nationally).


o More than one quarter (27%) expect they will be older than 65 when they retire.


Residents of Manitoba and Saskatchewan who will keep working past the age of 65, were equally likely to cite a variety of reasons why they’ll stay in the workforce:


o They won’t have enough money saved and will still have debt to repay or kids to support (44%).


o They won’t have enough money to maintain the lifestyle they want (44%).


o Working gives a sense of purpose and they can’t imagine not working in some capacity (44%).


o Another 11% said they love their job and will still have goals to achieve.



Manitoba and Saskatchewan Residents and their Finances


While 61 may be the average expected retirement age in Manitoba and Saskatchewan, some may not be taking into account the amount of savings and investments they’ll need to retire comfortably.


The majority (56%) have less than $100,000 in household financial assets, not including company pensions, life insurance policies and home equity.


o 15% say they have no financial assets whatsoever.


Residents of Manitoba and Saskatchewan on Debt and Retirement


Another major consideration when it comes to retirement is debt. 40% of residents in Manitoba and Saskatchewan expect to have debt when they retire; 15% say it will be a significant amount of debt.


Of those who expect to carry debt into retirement:


o 59% will carry consumer debt into retirement.


o 51% will carry mortgage debt into retirement.


o 6% will carry investment loans into retirement.


o 13% classify their debt as “other”.



What does retirement mean for residents of Manitoba and Saskatchewan?


Residents of Manitoba and Saskatchewan are the most likely in the country (51% versus 47% nationally) to say the see retirement as a gradual slowing down. They’ll likely continue to work part-time or volunteer, but will enjoy
spending more time with family.


36% say retirement is a new beginning and a chance to follow their passions, start new ventures, experience new things and live the life they weren’t able to while working.


Contact Information


For more information or to set up an interview, please contact:


Ali Duncan Martin


TD Bank Group


416-983-4412




Karen Williams / Steve Presant


Paradigm Public Relations


416-203-2223