The “Real” Economy Verses the “Paper” Economy and Our Pensions

Jim Stanford

Jim Stanford

Participants in the International Foundation of Employee Benefit Plans’ 47th Annual Canadian conference had a chance to listen to a keynote address by Jim Stanford, Unifor’s economist. Jim addresses the split between the Real Economy which produces useful goods and services and the Paper Economy which creates, sells and buys financial assets and the impact this has on the viability of our Pensions.

Jim drew attention to the Financialization of the Canadian and World economies. Quoting a definition for Financialization from G. Epstein, “Increasing importance of financial markets, financial institutions and financial elites in the operation of the economy and its governing institutions”, Jim characterized it as the over development and over importance of the financial sector (the “paper economy”) relative to the real economy.

real and paper

In the Paper Economy, the Stock Market sets values separate from need and use, whereas in the Real Economy a brewery produces product which have value and fills a real need.

Jim regretted that our pre-funded Pensions have contributed to the Financialization trend, creating a culture of stock marketing and assessing financial risks. This runs counter to the real economics of pensions. Future pensions will have to be paid out of real future production, not the paper of stocks and bonds.

The Myth of the Apple Tree

apples and paper

Financial apples and apples are not the same thing

Financial accumulation is not about “saving real apples”, Jim continued. In fact the reality is, financial markets hurt real growth. Countries with less Financialization invest and grow faster because money goes to real projects that make things rather than the moribund corporations in Canada which accumulate cash in the form of “dead money”. Money held but not used in the economy. Financialization does nothing to increase future apple production which will be shared between working and retired workers. In fact, financialization probably actually reduces future growth of production.

Looking at the three legs of retirement income in Canada, Jim noted the performance of Old Age Security (OAS), the Canada Pension Plan (CPP) and private and workplace plans and savings. Neither the OAS nor the CPP use financial institutions to manage their funds, both are reliable and give strong performance, unlike our RRSPs, which are controlled by financial institutions and have poor performance and are extremely volatile with wild swings in value.

For the future, Jim recommends concentrating on future growth of the Real Economy which will be shared by retirees and workers. Public plans (OAS and CCP) must be protected and expanded by public pressure. As for the third leg, we must do what we can to focus on efficiency and security. Pension Plans can and will play a role but RRSPs need to be replaced with something more secure and efficient.

The Collective Approach

By pooling risk and using good management, higher returns and lower fees make a substantial difference in the size of pensions paid than when financial institutions are extracting profits from retirement savings. The CPP is the best Defined Benefit program in the country and should be expanded but the financial institutions and business lobby groups would like to see it eliminated. Private sector employers feel no obligation to provide Pensions unless Unions put them forward in bargaining. West Jet has no pension for its employees, even though it earned over $260 million in 2013. This pressures Air Canada who does have Pension to cut or eliminate them just to compete.

Jim is clear that defending and expanding Public Pensions is primary, but we must be looking to expand the Real Economy so there will be increased resources to share in the years to come.

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Northwest News Publishes Retirement Income Special

The latest edition of our District 250 newsletter focuses solely on Retirement Income. It both describes government programs such as Old Age Security and the Canada Pension Plan and describes the pensions options available to Machinists in British Columbia.

Click here to download a copy

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Lastest Edition of Northwest News Published

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Pension Reform – CLC Calculator Shows Why RRSP Are a Bad Option

Think you have a good deal with your RRSP? Think again. RRSPs and mutual funds have failed to deliver. Too many retirees are left with a goose egg instead of a nest egg. See how:

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Market Volatility

Neil Watson, Vice-President of Leith Wheeler Investment Counsel Ltd.,
gives a professional investor’s view of the current crisis following the downgrading of US debt.

Given the significant declines we have seen in the markets recently, we thought that our clients would be interested in our views about the economic environment and, more specifically, the outlook for their portfolio including any action we are taking in response to market events.

July and August, which are usually a fairly quiet time for stocks, often produce a summer rally. Unfortunately, this is not the case this year as markets have retreated significantly, with the TSX declining another 4% yesterday while the S&P 500 has dropped 5.5%. As you will note in the news, yesterday’s weakness has been widely reported as being due to the downgrade on U.S. government long term debt from AAA to AA+ by S&P. Although this may have served as a catalyst for yesterday’s decline, the more significant concerns in the market are fears over debt levels in Europe which have spread to the larger economies of Italy and Spain as well as recent economic news which has been generally disappointing. Concern has increased that we may be entering another recession and interest rates may have to increase in the United States at a time when the government’s ability to respond to a slowdown is limited.

The downgrade by S&P was widely expected and we do not expect it to push up yields in any meaningful way which was, to some extent, confirmed by the lack of response from the bond market on Monday. On a positive note, it has put the fiscal situation of the U.S. under more of a spotlight and should, hopefully, push the politicians into a more credible long term plan to deal with their debt and deficits.

On the economic front, the last month has seen a significant revision in global growth prospects. These revisions have led to corrections in major equity markets globally and declines in interest rates for most developed bond markets. These concerns around growth expectations are somewhat a reaction to policy tightening in many regions of the world.

Emerging market countries have been leading the global economy higher since the end of the last recession. Unfortunately, price increases in these markets has led to persistent inflation with wage increases becoming routine. To battle this inflation, we have seen a tightening in monetary policy over the past year. In Brazil, overnight rates have increased from 8.5% to 12.5% while in China short term rates have been increased from 2% to 6%. Though these increases have had only a modest impact on economic performance to date, the market is concerned that a more significant slowdown is underway. Although we expect to see some slowing of growth, from lofty levels, in the emerging markets, we still expect these markets to be a key engine that keeps global GDP on an upward trend.

In Europe, the ECB has increased interest rates twice this year despite stresses within the periphery countries of Greece, Portugal, and Ireland. Last week’s market declines were precipitated by a lack of confidence in the Eurozone’s ability to manage larger debtor countries such as Italy and Spain. Recent economic data has shown only a modest softening in the industrial heartland within core Europe. However, the market has started to discount much slower growth throughout the Eurozone due to continued concerns around peripheral debt levels and the potential impact from weakening emerging economy exports.

In the U.S., most signs are pointing to an environment of continued slow economic growth, and the recent market volatility has increased the downside risk to these expectations. Our economy is closely linked to the U.S., as well as to the rest of the world, so our stock market has fallen in tandem.

The market is concerned that we will see a recession and with the recent economic weakness, the risks of a recession have increased. However, our base case scenario is for the U.S. economy and Europe not to enter a recession but rather to see a low level of growth in their economies despite their fiscal situation and debt levels.

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