The explainer: The Economy

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What is the Ivey Purchasing Managers Index?

The index was established in 2000 by the Richard Ivey School of Business at the University of Western Ontario and the Purchasing Management Association of Canada.

It gathers data monthly from a panel of 175 purchasing managers, who say whether the dollar value of their purchases is higher or lower than the previous month.

A reading of 50 indicates that an equal number said the value is rising and falling. A number above 50 means there were more increases in purchases, and if there were more decreases, the index will be under 50.

The latest number, in June, showed a reading of 58.2, a sharp move into positive territory from May's reading of 48.4.

The Ivey PMI is generally seen as a leading indicator for the economy, since it gauges the sentiment of key managers making purchasing decisions, said Millan Mulraine, an economics strategist at TD Securities.

"You are not likely to start purchasing stuff if you don't think there is going to be the opportunity down the road to offload that [through]sales activity," he said.

Why do some people consider it to be unreliable?

The biggest criticism of the Ivey PMI is that it is not seasonally adjusted.

That makes it less useful because it does not capture the underlying trends in the economy that it might otherwise, economists say.

In addition, said BMO Nesbitt Burns deputy chief economist Doug Porter, "it doesn't seem to really line up with other [economic variables]on a consistent basis, so it hasn't acted as a foolproof leading indicator."

In the 2004-2006 period, when the economy was expanding consistently, the Ivey PMI was "all over the place," he said.

Still, during some periods it has been a very good indicator of the state of the economy, Mr. Porter added.

For example, the index plunged late last year, bottomed out in January, and has risen lately, lining up very closely with other measures of the economy.

Mr. Porter said he doesn't use it as one of his key indicators. Others, such as employment, retail sales, gross national product or retail trade, are far more important, Mr. Porter said.

Is there a U.S. equivalent to the Ivey PMI?

Yes, the Institute for Supply Management index (usually called the ISM) is a similar indicator. But it is seasonally adjusted, and it "has a long, storied history of being a coincident economic indicator of the U.S. economy," Mr. Porter said.

Mr. Mulraine also noted that the ISM has far more subindexes than the Ivey index, and these make it more useful to economists. 

You recently explained the concept of net worth, but I wonder how much the average net worth of Canadians declined in 2008? (Most people calculate the value at year end.)

According to Statistics Canada, per capita net worth was $164,923 at the end of 2008, a decline of 6.4 per cent from $176,117 at the end of 2007. (That is the number for household net worth, which Statscan defines as assets minus liabilities for "persons and unincorporated businesses.")

The 2007 year-end number was up 4.7 per cent from the year earlier, and the 2006 number was up 9.4 per cent from the Dec. 31, 2005, value.

The new IMF forecast released last week was a bit more positive about economic growth in Canada and the world. Was it a bit more pessimistic about any individual nations?

The International Monetary Fund's projections for economic growth in 2010 were higher for most countries. For the world over all, the IMF expects to see 2.5-per-cent growth in 2010, an increase from the 1.9-per-cent projection it made in April.

Canada's expected growth for 2010 has been revised to 1.6 per cent from 1.2 per cent. (The Conference Board of Canada is more optimistic - it released a report yesterday predicting a 2.7-per-cent gain in the Canadian economy next year.)

The only country that has slipped, in the IMF's view, is Spain, which is now expected to see its economy shrink by 0.8 per cent in 2010, down from the April prediction of a 0.7-per-cent fall. And France was not revised upward, with economic growth in 2010 still expected to hit 0.4 per cent.

How have individual American states fared during the economic slowdown?

Recently released official numbers from the U.S. Department of Commerce break out the performance of each state, in terms of its change in real gross domestic product during 2008.

The best growth numbers were for North Dakota, which increased by 7.3 per cent in 2008. It was followed by Wyoming at 4.4 per cent and South Dakota at 3.5 per cent.

The worst numbers were in Alaska, with a 2-per-cent decline in GDP in 2008. Next to last were Florida and Delaware with 1.6-per-cent drops.

Over all, about 12 states showed declines in real GDP in 2008, while the rest showed some growth.

What is TD Securities' "surprise tracker" index?

TD created the surprise tracker to see how economic data differ from the consensus expectations of private sector forecasters. Essentially, it calculates how far off the actual data is from the forecasts - either above or below - and creates an index from those numbers. The economic indicators are weighted depending on their importance, so a big surprise in the GDP number will have more impact on the tracker than a unexpected figure for housing starts.

TD calculates the tracker for both U.S. and Canadian economic indicators.

What does the tracker tell us about the state of the economy?

If the surprise tracker is in positive territory, it suggests that there has been a spate of data releases that are better than economists expected.

While it might mainly reflect the current mindset of economists - or their predictive skills - it also correlates with economic fundamentals, TD says.

"If all of a sudden the data have become way better than expected, maybe there are a bunch of green shoots [boosting]the data," said TD economics strategist Ian Pollick.

A sustained positive tracker (which indicates a series of positive surprises) tends to correspond with a drop in bond prices and a lift in the stock market, the bank says.

Both the U.S. and Canadian surprise trackers are now relatively flat, indicating that economists' forecasts have been quite accurate and there have been few surprises recently.

A few weeks ago, the U.S. tracker was well into positive territory after a series of better-than-expected data releases.

Why is an individual's net worth such an important measure, when so much of it is made up of assets that aren't going to be sold in the short term?

Net worth adds up the value of everything an individual owns, and deducts the value of what they owe. For most people, by far the biggest constituent is the value of their house, while many others also may have a big portfolio of investments.

One reason net worth is important is because it helps inform you how much debt you can handle, said economist Benjamin Tal of CIBC World Markets.

But changes in net worth also have a strong influence on spending patterns, and thus can affect the overall economy.

If your net worth increases, you feel richer and will spend more. Some estimates suggest that for every $1 of increase in a person's real estate assets, this "wealth effect" will prompt a person to add 5 to 7 cents to their spending.

If someone realizes their house is worth $20,000 more than a year ago, they may go out and buy an expensive dinner that they wouldn't have otherwise, Mr. Tal said.

"You didn't get a cheque in the mail, but you still spent it."

What has happened to Canadians' net worth during the recession?

Numbers released recently by Statistics Canada show that overall household net worth dropped by $72-billion or 1.3 per cent in the first quarter of 2009. That was the third consecutive quarter of decline. In the past nine months, the cumulative drop in net worth has been more than $500-billion.

The drop in stock prices and the contraction of home prices is the key reason for the plunge. But Mr. Tal noted that Canadians are also still borrowing more money overall, and that too has contributed to a decline in net worth.

What is the euro zone, and how does it differ from the European Union?

The euro zone is the group of 16 countries that use the euro as currency. It is also called the euro area. The countries in it are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

Monetary policy for the group is set by the European Central Bank, which is based in Frankfurt, Germany.

There are 27 countries in the European Union, which includes all those in the euro zone plus 11 that don't use the euro. These are Britain, Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Sweden.

How long has the euro been around?

It was launched on Jan. 1, 1999, although at that point it was used only for accounting purposes. Euro cash first was introduced on Jan. 1, 2002, when it replaced the national currencies in the euro zone.

Some countries not officially in the euro zone use the currency as well. Monaco, San Marino and Vatican City use it under a formal arrangement with the European Union. Andorra, Kosovo and Montenegro also use it, but without formal approval.

When the euro was introduced in 1999 it was worth $1.18 (U.S.). It is now worth about $1.40.

Is the euro zone emerging strongly from the economic downturn?

There are conflicting views about whether the euro zone is on the road to a sharp recovery, or whether it will experience a slow economic comeback.

Erik Nilsson, senior international economist at Scotia Capital, said he is expecting a "subpar" recovery for the euro zone as a whole in 2010. There will likely be several quarters of growth that will still feel like a recession to individuals in the region, he said. "Their incomes are likely to remain squeezed, although in the very near term they are clearly benefiting from the complete loss of momentum in inflation."

Still, he added, European consumers seem to be a bit more positive in their outlook now than a few months ago, and this could translate into an upturn in consumer spending. Widespread subsidies for getting rid of old cars and buying new ones - the so-called "clunker rebates" - have helped, Mr. Nilsson said.

The national GDP numbers in Canada are still pretty grim, but what is the current outlook for individual provinces?

The economic outlook for the provinces varies sharply depending on the region, according to a recent projection from Royal Bank of Canada's economics department.

The bank projects that in 2009, only three provinces will show any growth in real GDP - Saskatchewan with 0.7 per cent, Manitoba at 0.5 per cent and Nova Scotia at 0.2 per cent.

Newfoundland and Labrador will show the biggest shrinkage of the provinces, with a GDP decline of 3.5 per cent, the bank says.

But for 2010, every one of the provinces is expected to see real GDP rise.

The biggest gain is projected for Newfoundland at 3.0 per cent, while the lowest is PEI at 2.0 per cent.

I've heard that the Australian government gives big grants for first-time home buyers. How does that work?

For a long time, Australians have been able to get a $7,000 Australian ($6,420) grant from their state government if they are buying their first home.

Then last October, as the recession was taking hold, the federal government added to the payments through what it calls the First Home Owner Boost.

That meant people buying their first home got a total of $14,000 (double the old amount) if they purchased an existing house, and $21,000 (triple the basic amount) if they bought a newly constructed home.

The "boost" was set to expire at the end of June, but the full subsidy has been extended to purchases made until the end of September, and then halved for the period from Oct. 1 to Dec. 31.

Other state government grants can add substantially to these amounts, depending on where in Australia prospective first-time home buyers plan to live.

Has this had a big impact on the Australian economy?

Krishen Rangasamy, an economist at CIBC World Markets, said the grants were very effective in staving off a collapse of the Australian housing market, which was in freefall before they were implemented. Demand for homes quickly increased, and prices recovered sharply.

The grants, and low interest rates, seem to have ensured that the recession has been relatively mild in Australia, compared with other countries.

By the time the federal grants are gone at the end of the year, the overall economy should have recovered significantly, Mr. Rangasamy said.

Housing is a crucial part of the economy, and by boosting home prices though these kinds of programs, people feel wealthier and they tend to spend more, lighting a fire under the entire economy, Mr. Rangasamy said.

"With the benefit of hindsight, maybe the U.S. should have done something similar," he said.

Have there been any unforeseen consequences from the home buyer grants?

Many speculators have held off on investing in residential real estate while the grants are in place, because there is so much competition from first-time buyers, which is driving up prices.

There's expected to be a rush of investor activity when the federal grants end.

Also, there have been some cases of fraud, where people who don't qualify have falsified applications to try to get the grants.

The recent consumer price index numbers showed prices are just barely increasing in Canada, but what is the picture elsewhere in the world?

The annual inflation rate in Canada was 0.1 per cent last month, and that's pretty low by world standards.

Bespoke Investment Group LLC recently tabulated inflation in 77 countries, and only 18 had inflation at a lower rate than in Canada, with prices unchanged or falling in the past year.

The rest had inflation rates ranging from 0.3 per cent (Austria and Luxembourg) to 27.7 per cent in Venezuela.

The United States saw prices fall 1.3 per cent in the past year, while Britain had inflation of 2.2 per cent.

Why did the World Bank report on economic growth released Monday take the wind out of the stock market to such a degree?

Richard Kelly, senior economist at TD Securities Inc., says market participants seemed to be looking for a reason to sell stocks, and the World Bank report provided that, even though it contained little new information. Some investors who were thinking that the "power of positive thinking was going to get us through all this" may have suddenly realized that economic growth is going to take quite some time to recover, he said.

The World Bank report said the global economy will shrink 2.9 per cent in 2009 and grow 2 per cent in 2010, followed by 3.2 per cent growth in 2011.

Mr. Kelly said there will probably be positive quarterly growth in some countries by the end of this year, but on average most of the world will have a negative 2009.

Sustained positive growth won't likely come until the middle of next year, he said. And it will be 2011 before most countries see their economies expand at their long-term average growth rates.

Mr. Kelly said Brazil may be the first country to shift from a shrinking economy to a growing one this year. "They're going to be back into positive growth in [the second quarter]of this year, so they're going to be pretty early."

I see economic growth sometimes reported as being based on "market exchange rates" and other times based on "purchasing power parity adjusted exchange rates." What is the difference?

The World Bank figures weigh different economies against each other based on market exchange rates, which means they take into account goods that can be traded. If economies are weighted using purchasing power parity exchange (PPP) rates, services that can't be traded (such as haircuts) are also included. When the numbers are calculated this way, developing economies often get higher weights (because their services are often much lower in price, and thus more can be acquired for the same expenditure), and that can change the overall global forecast.

If the World Bank numbers were done on a PPP basis, they would give more weight to faster-growing developing countries such as India and China. Under that calculation, the World Bank projections would see the global economy shrink just 1.7 per cent in 2009 and grow by 2.8 per cent in 2010.

With some economists suggesting that the loonie will reach parity by the end of this year, I'm trying to remember how long ago we were at that point, and how long the Canadian dollar was worth more than the U.S. dollar?

The Canadian dollar hit parity with the U.S. dollar on Sept. 20, 2007, for the first time in 31 years.

By early November of that year, our dollar was worth more than $1.10 (U.S.), a thrill for travellers going across the border for a vacation but a disaster for Canadian exporters.

In early December, the dollar dipped back below parity, and bounced above and below the value of the U.S. dollar for several more months.

By last summer, however, the loonie began a dive, and it has been well below parity for most of the past year.

Millan Mulraine, an economic strategist at TD Securities, forecast recently that the dollar will reach parity by the end of the year.

What is 'core inflation' and why is it more important than the overall inflation rate? 

In Canada, core inflation has a slightly different definition than in most of the rest of the industrialized world.

In most countries, core inflation is the change in the consumer price index for all items except energy and food products.

Those are usually the two most volatile categories, and they can move sharply from month to month because of changes in weather or shifts in oil supply.

If they are removed, economists get a better picture of broad economic trends and price levels.

The Bank of Canada, however, decided in 2001 that we would take a more subtle approach to core inflation in this country.

Here, core inflation is the change in the consumer price index with eight volatile items removed. These are fruit, vegetables, gasoline, fuel oil, natural gas, tobacco, intercity transportation and mortgage interest. 

Why the difference in Canada? Why not exempt all food prices from the core rate?

BMO Nesbitt Burns deputy chief economist Douglas Porter said some food items tend to be affected less by environmental factors, and are thus less volatile.

That's why milk, meat and bread are not on the "exempt" list.

The price of electricity is also less volatile, so it stays on the core list while other energy items are removed.

Tobacco is taken out of the core rate because prices can fluctuate sharply, and "air fares can bounce around a lot because of price wars," Mr. Porter said.

Mortgage interest is removed because the central bank doesn't want its own interest rate policies to have a direct impact on the core inflation rate.

At many times, there are only minor differences between the core inflation rate and the headline rate with all energy and food removed, Mr. Porter said, although sometimes there is a significant gap. 

Does the Bank of Canada set its inflation targets for core inflation or overall 'headline' inflation?

The central bank wants overall inflation to stay in the 2-per-cent range over the long term.

However, the bank looks at the core rate as a guide to what inflation is likely to be in the shorter term - over the next six months to a year, Mr. Porter said. "The reality is that they look at both, but they tend to use core inflation as a guide to whether they are going off the rails or not."

Do the recent consumer price index numbers suggest there is still a threat of deflation in the Canadian economy, or could the government stimulus packages prompt inflation?

Mr. Porter said he feels deflation is still the bigger risk over the next few years, because there is so much slack in the global economy.

Over the longer term, government stimulus - particularly the U.S. Federal Reserve Board's quantitative easing program - could produce a risk of inflation, he said.

Watching core inflation could give a hint if economies are moving in that direction.

"I'll worry about [inflation]after the recovery takes hold, and we're not there yet," Mr. Porter said.

I see the leaders of the BRIC countries are meeting for their first summit. What do these countries really have in common?

The main thing Brazil, Russia, India and China have in common is size - all are large in land area and population - and recent economic growth. The fact that they each have increasing economic clout, yet are excluded from the G7 group of industrialized countries, also gives them common ground.

Many critics have pointed out, however, that in many ways they are not a cohesive group. Aside from the BRIC organization, they are not all part of any major trade or political pact, and they are separated geographically.

They also have dramatically different political systems, ranging from India's entrenched democracy to China's long history of communism.

By contrast, each of the G7 countries (the U.S., Britain, Germany, Japan, France, Italy and Canada) is a mature democracy, with all the institutions that go with it, such as a free press.

Just how fast are the BRIC countries growing?

When Merrill Lynch economist Jim O'Neill first coined the term BRIC in a 2001 paper, he projected the group would overtake the collective economic might of the G7 countries by 2050. Now, that is expected to happen well before 2030.

But the International Monetary Fund has wildly different projections for the growth of the four countries in the short term. China's economy is expected to grow 6.5 per cent this year, and India's by 4.5 per cent. But Brazil will shrink 1.3 per cent and Russia will contract by a substantial 6 per cent, the IMF said.

I get the feeling Canadians are now better off, relative to Americans, than we were a few years ago. Is there any real evidence of this?

An analysis from CIBC World Markets suggests that over the past four years, Canadians have made substantial gains over our U.S. counterparts when it comes to real per capita disposable income.

Canadians' disposable income has jumped 11 per cent since 2004, while the rise is less than 5 per cent in the United States, CIBC said.

Until 2004, Canada wasn't doing very well compared with the United States, but the recent surge has wiped out 15 years of underperformance, CIBC economist Benjamin Tal said.

What are the reasons for the gains?

The main reasons are that Canada has seen higher wage increases, far more jobs have been created here, and employment growth in Canada has been concentrated in relatively high-paying industries such as finance, utilities and transportation.

As the economy recovers, and commodities rise in price, Canada is in a good position to make more gains relative to the U.S., Mr. Tal said.

I am looking for new ways to finance my small business, and I've been told to consider factoring. What is that?

A factor is a company that essentially buys your accounts receivable. It will pay you for your receivables, at a discount, and assume the effort of collecting from those customers.

Using a factor is a way to improve your cash flow and provide an alternative to borrowing money from the bank or others. Factors often see increased business when banks are tightening their lending practices, such as in the current environment.

It can work particularly well if your customers are solid, creditworthy businesses. It is also a good way to finance your business if it is expanding quickly.

In Canada, about $4-billion in factoring business is done every year. Worldwide, it is a $2-trillion business. 

How much does it cost to use a factor?

It usually works this way: A factor pays you about 75 to 85 per cent of the value of your receivables within a day or two. When they actually collect the money, you get some more of it back, so that you end up paying a charge of about 2 to 5 per cent of the total.

Can I negotiate the amount of tax I owe to the Canada Revenue Agency - the way Brian Mulroney's lawyers seem to have done - if I am in financial difficulty?

It is not clear how Mr. Mulroney's lawyer managed to negotiate a deal to pay tax on only half of the $225,000 he received from Karlheinz Schreiber. In general, however, there is some flexibility in negotiating what you owe to the CRA.

However, CRA spokeswoman Caitlin Workman points out that the flexibility comes only in figuring out penalties and interest. The rules say you must eventually fork over the full tax you owe, but the CRA can forgive interest or penalties when taxpayers cannot pay on time because of circumstances beyond their control.

If you are in financial difficulty, or you have a serious illness, or there has been a death in the family, a fire in your house or something similar, you may be able to get the CRA to cancel or reduce the penalties or interest for late filing. And you may be able to get it to set up an extended payment plan, or to extend filing deadlines.

There's a special form to fill out to ask for help: "Request for Taxpayer Relief" form RC4288.

Is it my imagination or has the price of oil gone up even faster recently than it did a year ago?

According to Bespoke Investment Group, oil has gone up faster in the past few months than it did at any time between 2001 and 2008.

It has now gone up by more than 100 per cent in less than three months, moving from below $34 (U.S.) a barrel on Feb. 12 to more than $68 in recent days.

In a similar period, from December, 2001, to April, 2002, the price of oil went up by about 55 per cent. That was the fastest gain, until now, since the start of the decade, according to Bespoke.

I see that Zimbabwe is considering replacing its currency with the South African rand. How common is it for country to use another country's currency?

It is more common than you might think.

In many countries, there is considerable use of foreign currencies unofficially for day-to-day transactions or savings, but in some the official currency is that of another nation.

This is particularly true for small countries. Several tiny nations in the South Pacific use Australian or New Zealand dollars, for example.

In the Americas, Ecuador, El Salvador and Panama officially use U.S. dollars as their currency.

In Liechtenstein, the Swiss franc is the legal currency.

Some countries have, at times, used more than one foreign currency.

Before the euro was adopted, the tiny nation of Andorra on the Spanish-French border used both francs and the peseta.

Generally, the term for the use of another nation's currency is "dollarization," although it does not necessarily involve use of the U.S. dollar.

Why is Zimbabwe considering dropping its own currency?

The Zimbabwean dollar is now virtually worthless after years of extreme inflation, and the rand and the U.S. dollar are already used widely.

But if Zimbabwe adopts the rand, it means that it will give up the ability to set its own monetary policy and interest rates, which would essentially be controlled by South Africa.

Still, Zimbabwean Finance Minister Tendai Biti said this week that the shift to the rand is one option the country is considering.

Would South Africa have to agree to the change?

Generally, a nation can dollarize without the agreement of the country that is issuing the currency.

But in the case of Zimbabwe, the transition would likely be much smoother if South Africa co-operated, and lent its neighbour substantial funds to help make the switch work efficiently.

The Canadian dollar always seems to go up when oil prices rise. Is there a direct correlation between the two?

Basic trade theory suggests that when the price of a country's significant export product rises, and that commodity is a necessity, there will be increased demand for the country's currency and it will rise.

That's pretty much the scenario that sees the Canadian dollar rise when oil prices go up.

However, economist Dale Orr says that theory is a simplification of the overall relationship.

For one thing, the price of other commodities we export, such a forest products, metals and wheat, often have an even greater impact on the dollar.

And there are several other offsets. Among them: When higher oil prices weaken the world economy, our energy exports fall, putting downward pressure on the Canadian dollar. As well, international investors often buy U.S. dollars as a safe haven, pushing it up against other currencies, including the Canadian dollar.

And significant parts of the Canadian economy weaken with higher oil prices - and higher gasoline prices - helping to dampen the dollar.

What's the relationship between the U.S. dollar and oil?

Generally, because the U.S. is a net importer of oil, higher oil prices tend to put downward pressure on the U.S. dollar.

Another theory, Mr. Orr says, is that a lower U.S. dollar actually causes oil prices to rise. There are a number of possible reasons behind this idea. One is that derivative traders will buy oil contracts as a hedge when the dollar is down, pushing up oil prices.

Another suggests that countries that purchase oil will buy more when the U.S. dollar is down, because oil is priced in U.S. currency. This would put upward pressure on oil prices.

Has Ottawa always been able to use the money it collects from employment insurance premiums as part of its consolidated revenue fund?

When Canada's employment insurance system was set up in the early 1940s, the idea was to keep the money from premiums within the government's general revenue fund, but in a special account that would be earmarked only for jobless benefits.

Ottawa soon bent its own rule and borrowed against the funds for wartime expenses during the Second World War, says Trent University professor Jim Struthers, who has studied the history of EI.

Except for that case, the insurance premiums were generally kept separate and used to pay EI benefits until 1977, he said, when the government began to dip in to pay for job training, which became a part of its wider labour program.

By the 1990s, excess funds were being counted as an offset against the deficit, and they were a key part of the shift to an overall budget surplus.

In 2000, the auditor-general said the EI funds were essentially part of Ottawa's overall revenue pool, and any distinction pretty much disappeared.

Because of the recession, I'm planning to retire early, and I'd like to start receiving my CPP when I do. I hear that the rules are changing. Can you explain them?

Last week the Finance Department announced changes to the Canada Pension Plan that will be phased in from 2011 to 2016. They will affect people who start receiving payments early, or who delay getting them until after they are 65.

Under the proposed changes, if you retire before 65, your pension will be cut by 7.2 per cent for each early year, instead of 6 per cent under the old rules. That means if you start collecting CPP at age 60 (the earliest you can), your monthly benefit will be cut by 36 per cent instead of 30 per cent.

If you keep working past age 65 and delay collecting CPP, however, you will get more than before. For each year you wait, you'll get an extra 8.4 per cent (instead of 6 per cent under the old rules). That means someone who waits until age 70 will get a 42 per cent higher payment than they would have at age 65, compared with 30 per cent higher under the old rules.

Are there other significant reforms?

Another change will allow you to collect CPP before age 65, even if you are still working. Previously, you had to quit work and stay off the job for at least two months to qualify for payments.

Ottawa says the idea is to let people use CPP income to supplement earnings or to phase into retirement. Another adjustment will allow people over 65 who are collecting CPP, but still working, to make further contributions if they want, so their benefits will increase.

And finally, workers will be able to remove eight low-earning years from those that are used to calculate average pay for CPP purposes. That's up from seven years. That change will help individuals whose careers have been interrupted.

Are we likely to see large numbers of unemployed workers run out of their employment insurance benefits before they find a new job?

That's a highly probably scenario in the current environment.

According to an analysis from Andrew Jackson, chief economist at the Canadian Labour Congress, even before the recession, about 28 per cent of people who claimed EI used up their benefits before they found a job.

With around 1.9 million new claims expected in 2009, the number of people who exhaust their benefits could be about 500,000 this year if that rate is maintained.

The numbers may be much worse, however, because it is usually much harder to find a new job during the depths of a recession, and sometimes tough job markets remain for several years after a recession is officially over.

One mitigating factor is that Ottawa has added five weeks of EI benefits to the maximum everyone can get, and the duration of benefits also grows as the jobless rate increases.

With the price of crude oil on the rise, how does it compare now to the long-term average?

Oil, at about $63 (U.S.) a barrel, is well below the peak of $147 it hit last summer, but the price is still substantially above its long-term average.

Of course, that average depends on when you start the calculations.

If you start the clock around the time of the oil shocks of the early 1970s, the average price has been roughly $35 a barrel (adjusting for inflation). If you look at data since the Second World War, the average price is about $25, and going back to the start of the 20th century, the average is about $23 (also adjusted for inflation). 

If the price stays well above the average, which sectors will be affected?

Just about every sector will be affected, but one of the key effects will be felt in agriculture and food, according to a recent report from economist Benjamin Tal at CIBC World Markets.

He noted that modern agribusiness has been based on cheap energy, in the form of fertilizer and transportation fuel. High energy costs are reflected in recent inflation numbers, which show the increase in the overall consumer price index in the United States at about zero, while food inflation is at 5 per cent.

In Canada, food inflation is about 7.4 per cent, with the overall CPI up about 1.4 per cent. There are substantial spreads in most other countries, too. One consequence of high oil prices will be a shift to low-energy organic practices, Mr. Tal said, and a move to local production to cut transportation costs.

That jibes with the views of former CIBC chief economist Jeff Rubin, whose new book, Why Your World is About to Get a Whole Lot Smaller, suggests that high oil prices will reverse some of the forces of globalization, because long-distance trade will be less practical.

The North American automotive industry seems to be in the dumps, but how is the sector in other countries?

In some emerging markets, the car business is going gangbusters. In China, for example, the number of vehicle sales jumped 37 per cent in April. Annualized sales in that country are now at 6.2 million.

There are now far more cars sold in Brazil, India and China as a whole than are sold in the United States, according to a recent Bank of Nova Scotia report. As recently as 2007, the United States outsold these three markets by more than eight million units.

Sales in Europe also improved sharply in April, although car purchases there are still down significantly from the levels of the past few years. Governments in several European countries now offer incentives to replace older vehicles, which has helped boost the business.

I noted that the consumer confidence report from the U.S. Conference Board was quite positive. What is the Conference Board and why do its studies matter?

Conference Board Inc. is a New York-based non-profit organization that has been around since 1916.

It was founded by business leaders to try to deal with some of the turbulent business and labour issues of the time in a more objective and ethical manner than the existing trade associations.

As the name suggests, it organizes conferences related to business and management issues, but it also does it own forecasts and analysis and conducts research.

The board now has operations around the world, and members include 2,000 companies in more than 50 countries.

One of the board's key research areas is in consumer attitudes, and the monthly reports of its U.S. consumer confidence index are followed closely by economists and policy makers.

Another one of its high-profile products is an index of leading indicators, which the organization generates for the United States and several other countries.

Is it related to the Conference Board of Canada?

The Conference Board of Canada is affiliated with the U.S. organization, but is a separate entity. The U.S. Conference Board first set up an office in Montreal in 1954, but the Canadian unit became independent in 1981 and is now based in Ottawa.

The Canadian organization has produced many influential reports on business and public policy, but its regular economic data are not followed quite as closely as that produced by its U.S. counterpart.

How significant are those consumer confidence numbers from the U.S.?

The Conference Board's consumer confidence index rose sharply to 54.9 in May from 40.8 in April, well up from the trough of 25.3 in February.

These numbers are considered a crucial sign of economic recovery because they presage consumer spending, which makes up about 70 per cent of the U.S. economy. (In Canada it is about 56 per cent.)

The large infusions of liquidity by Group of Seven governments appear likely to lead to worldwide inflation. What kinds of investments do well in inflationary conditions? 

There are a number of classic inflation hedges, says Peter Lindley, head of investments at State Street Global Advisors (Canada). One approach is to buy real estate, real estate-related instruments such as real estate investment trusts (REITs), or shares of companies in the commercial real estate business.

Mr. Lindley also recommends some solid Canadian resource investments, such as energy and metals stocks. Among the metals group, gold is often seen as a good inflation hedge, and buying stocks of gold producers is a good a way of getting exposure to the sector, he said.

On the fixed-income side, real return bonds - issued by the federal government and some of the provinces - are a good bet if inflation catches hold, he said. These are readily available to individuals, with fairly low minimum investments required. 

What does badly when inflation is high?

"Cash is the worst possible choice," Mr. Lindley said, so be careful if inflation takes off and you've got a big cash cushion tucked away. Consumer product stocks don't usually do well in that environment, he said, because those companies have a tough time passing price shocks through to consumers. Financial firms often don't do well when interest rates are rising, something that is likely to happen if central banks feel they have to boost rates to fight inflation. 

The North American automotive industry seems to be in the dumper, but how are things in other countries?

In some emerging markets, the car business is going gangbusters. In China, for example, the number of vehicle sales jumped 37 per cent in April. Annualized sales in that country are now at 6.2 million.

There are now far more cars sold in Brazil, India and China as a whole than are sold in the United States, according to a recent Bank of Nova Scotia report. As recently as 2007, the United States outsold these three markets by more than eight million units.

Sales in Europe also improved sharply in April, although car purchases there are still down significantly from the levels of the past few years. Governments in several European countries now offer incentives to replace older vehicles, which has helped boost the business.

How does reducing the number of dealerships in North America save General Motors and Chrysler significant amounts of money, when most of those dealers are independently owned?

While the auto makers don't own the individual dealerships, it costs a lot to supply them with cars and support.

Those costs have gotten out of hand, the car companies say, because there are so many dealers and they run so inefficiently.

In a recent U.S. court filing, Chrysler said its large dealer network requires it to spend too much money on training, oversight and support.

Foreign-owned car companies tend to have smaller dealer networks, Chrysler said, allowing them to generate more profits that can be used for marketing and customer service.

In addition, if an auto maker has too many dealers in one market, those outlets begin to compete with others selling the same brands - instead of other vehicle makers. And with entire brands being cut, there just isn't the need for as many retail outlets.

The price of gas seems to be much higher in Toronto than in some parts of Eastern Ontario. Why is this?

Generally, the price of gas is a bit less expensive in big cities, says Cathy Hay, an analyst at Calgary gasoline consultancy MJ Ervin & Associates. That's because gas stations that sell a higher volume of gas can survive on slightly lower margins, and competition is often strongest in the big cities.

However, she says, there are some exceptions and sometimes there is intense competition in specific local markets that keeps prices a few cents lower.

Ms. Hay said studies have shown that prices are often lower in Kingston, Ont., and Airdrie, Alta., for example, compared with other parts of those two provinces. That's likely because of strong local competition, she said.

Could there be collusion going on to keep prices up in some areas?

The only proven cases of collusion in setting gas prices have been in Quebec, where a federal Competition Bureau investigation resulted in charges against 13 people and 11 companies last year.

Six of the accused and four companies have pleaded guilty so far, and $2.6-million in fines have been levied. Some of the guilty parties received jail terms, although most served their sentences through community service.

The bureau is still investigating possible price fixing in other Canadian markets.

We see lots of overall unemployment numbers, but does anyone keep track of the number of top executives who lose their jobs?

Chicago outplacement firm Challenger Gray & Christmas - best known for its calculations of announced job cuts by industry - also keeps track of the departures of chief executive officers in the United States.

Their latest numbers, from April, show that CEO departures have slowed down considerably after sharp increases in 2008 - possibly a sign of a more stable economy.

In the first four months of this year, 387 CEOs left their jobs in the U.S., almost 100 fewer than in the same period last year.

I may be joining the growing list of individuals who declare personal bankruptcy. What are the long-term consequences of doing this, after I get back on my feet?

After your bankruptcy is discharged (which usually happens nine months after you declare bankruptcy, but might take as long as 21 months), the main long-term consequence is that your credit rating will be damaged.

Information about your bankruptcy will stay on your credit record for six or seven years after the discharge, says Laurie Campbell, executive director of credit counselling organization Credit Canada. If it's your second bankruptcy, it will stay on your record for up to 14 years, she says.

That means it could be very hard to get credit (such as a mortgage, mortgage renewal, or credit card), although that might be possible if you are near the end of that period.

However, bankruptcy trustee Jeremy Kroll of A. Farber & Partners points out that if you don't declare bankruptcy, but you can't pay creditors on time, your credit rating could end up in just as bad shape - or worse - than if you filed.

Will my bankruptcy record make it hard to get a job?

Most potential employers will not know of your bankruptcy, although if they need to see your credit record to have you bonded, it will show up.

Some financial institutions may also want to see your credit record if you are applying for a sensitive job than involves handling money.

And information about your bankruptcy will stay on government databases indefinitely, so if someone wants to do enough digging, they will be able to find out about it even after it is erased from the credit bureau files.

Will any of my debts still be in place after I file?

While declaring bankruptcy will clear most of your debts, you will be left with some obligations. If you have been able to hang on to your house, you will have to keep up the mortgage payments. These could be higher than they were before bankruptcy, if you had to hand over the equity that was built up. You'll still have to pay off any student loans (if they are less than 10 years old) and keep up child or spousal support payments.

What assets can I hang on to through the process?

It depends on the province, but you can usually keep clothing and household items up to a certain value.

You might be able to keep your car, if it is not an expensive model.

Recent federal legislation also ensures that you can keep the money in your registered retirement savings plan, as long as it was in the plan for at least a year before you declared bankruptcy.

I hear the Bilderberg group is meeting this week. What is it?

The Bilderberg group consists of about 140 wealthy and powerful people who meet annually to discuss key global issues. Named after the Bilderberg hotel in Oosterbeek, the Netherlands, where it held its first meeting in 1954, the group is highly secretive, doesn't let journalists attend unless they agree beforehand not to report on the proceedings, and won't even say who is a member.

It's known that attendees include politicians, royalty, wealthy industrialists and back-room power brokers. Conspiracy theorists say the group essentially controls the world and makes key decisions on international policy.

Canadians who have gone to the meetings in the past include Heather Reisman, chief executive officer of Indigo Books & Music Inc., former Torstar Corp. CEO Robert Prichard, former prime minister Jean Chrétien and former New Brunswick premier Frank McKenna. Conrad Black has attended many times and he organized the 1996 meeting that was held just north of Toronto. The last time the Bilderberg group met in Canada was in June, 2006.

When and where is it meeting this year?

This year's session is set to start this Thursday in Vouliagmeni, Greece, just south of Athens. The global financial crisis will undoubtedly be on the agenda. Needless to say, Lord Black won't be in attendance.

Superstar investor George Soros says Asia will lead the world out of recession. How likely is this to happen?

While China and other Asian countries have been hit hard by the recession, economies in the region are continuing to grow while the West has been shrinking. The International Monetary Fund recently forecast 6.5-per-cent growth in China in 2009 (down from 13 per cent in 2007 and 9 per cent in 2008). The advanced economies of the West are expected to shrink 3.8 per cent on average this year.

Mr. Soros said yesterday that Asia will be the first region to pull out of the crisis and that China could overtake the United States as the engine of global growth. Still, China represents only about 7 per cent of the global economy, so there needs to be a more widespread recovery for the world to pull out of its funk.

Are developing countries really improving that much faster than the West?

BMO Nesbitt Burns economist Douglas Porter noted last week that some indicators in China and India are showing solid gains relative to similar markers in the West. Retail and auto sales statistics in China, for example, are much better than in North America, and industrial purchasing in both India and China is on the rise. Stock markets in developing countries have also risen much more quickly than those in Europe and North America.

Does debtor-in-possession (DIP) financing usually take precedence over the claims of secured creditors under bankruptcy protection laws in the United States and Canada?

When companies are in court protection from creditors, they often need DIP financing to keep operations functioning while they reorganize their affairs.

It is up to the judge presiding over a bankruptcy protection case to decide on the position of the DIP provider. Usually the DIP lender has precedence over all other creditors - otherwise no one would likely consider lending money under those circumstances.

However, in the case of Chrysler LLC's recent bankruptcy filing, the DIP financing from the U.S. and Canadian governments is subordinate to other Chrysler debt. This has raised the issue of whether the governments will ever get their money back.

Even when the DIP financing gets the top spot on the creditors' list, the cost of borrowing the money is usually very high because of the risks involved.

In Canada, pending changes to our bankruptcy laws - passed by the federal government but not yet proclaimed - will clarify the rules on DIP financing. But judges will still have final discretion on how it will work in any specific creditor protection case.

What's the worst-case scenario for the economy if there is a full-fledged swine flu pandemic?

Last year, the World Bank issued a report that said a severe worldwide flu pandemic of the proportions of the 1918-19 Spanish flu outbreak could cost $3.1-trillion (U.S.) and dent global gross domestic product by 4.8 per cent.

The report, written in the wake of concerns about a possible avian flu pandemic, said a severe influenza outbreak could kill as many as 71 million people worldwide.

Considering that the current economic meltdown will cut worldwide GDP by 1.3 per cent this year (according to the International Monetary Fund), a drop of almost four times that magnitude would be devastating. However, the chances of an outbreak that severe are considered very remote.

What did the World Bank project for a milder outbreak?

In a less severe scenario, with about 1.4 million deaths around the world, global GDP would fall by about 0.7 per cent, the agency said. This simulation is based on the Hong Kong flu outbreak of 1968-1969.

The employment insurance numbers released yesterday looked pretty grim, especially in the West. How bad are things in Alberta now?

The number of people receiving employment insurance benefits in Western Canada has risen dramatically.

In Alberta, the number of recipients jumped 27 per cent between January and February, and almost doubled year over year to 30,630.

In Calgary alone, there were 114 per cent more people on EI in February than a year earlier, reaching 11,690. In Edmonton the numbers rose 96 per cent, to 10,880.

Outside Alberta, the city with the worst rise in EI claims was Windsor, Ont., the home of several automotive manufacturing plants. There, the number of claimants jumped 104 per cent year over year to 11,660.

I keep hearing the optimistic expression "green shoots of recovery" in reference to the first signs of a turnaround in the economy. Where does this come from?

The expression stems from the recession of the early 1990s. Britain's then-chancellor of the exchequer, Norman Lamont, told a Conservative Party convention in October, 1991, that the economic downturn was about to reverse, as "the green shoots of economic spring are appearing once again."

Mr. Lamont was later mocked by the opposition for those comments because the recovery took a lot longer to get started than he expected.

This time, the expression gained currency after Ben Bernanke, chairman of the U.S. Federal Reserve Board, used it in a March 15 interview on the CBS program 60 Minutes.

"I do see green shoots ... not everywhere, but certainly in some of the markets that we've been functioning in," he said.

What is needed for those green shoots to grow?

In a recent report, TD Securities chief economist Eric Lascelles suggested green shoots might have a tough time taking hold. While "this could be the beginning of a delightfully smooth ride home for credit markets and the economy," he said, there could also be potentially disastrous setbacks involving credit cards, commercial real estate, emerging markets, inflation, or a number of other key issues.

Sometimes setbacks can come out of left field, such as emerging concerns that a swine flu pandemic might dampen a recovery.

Before the green shoots can really become established, Mr. Lascelles said, U.S. house prices have to stop falling, financial firms have to complete their writedowns, credit conditions have to improve significantly and consumer confidence must return. And none of those has happened yet.

What is it then that is making some people optimistic, and propelling recent stock market gains?

So far, most of the positive news reflects economic numbers that are still getting worse, but not as quickly as before.

And some specific leading indicators - such as the stock market - seem to reflect a positive outlook. But most economies around the world are still contracting, even if not as severely as they were.

Economist Robert Kavcic of BMO Nesbitt Burns summed up the view of many, when he suggested that recent earnings reports show "business is still bad, but less bad."

I was thrilled to see the market recover over the past few weeks. How far are we from making up all the losses since the market topped out?

There is still a very long way to go. The S&P/TSX composite index peaked at about 15,150 last June, and plunged to about 7,480 in March (a drop of more than 50 per cent). It is now up about 26 per cent from the trough, but still more than 5,700 points away from the high.

The Bank of Canada seems to have a different definition of "credit easing" than the U.S. Fed. Why the distinction?

The two central banks seem to agree on the definition of "quantitative easing," but not on the slightly different concept of "credit easing."

Quantitative easing involves the central bank buying assets such as government (or sometimes corporate) bonds, with the goal of pushing down overall yields, and thus reducing borrowing costs. This is done, essentially, by printing new money and using it to buy those assets.

Credit easing is a bit harder to define, and is a more subtle approach. The Bank of Canada says it involves purchasing certain private sector assets in markets that are important to the functioning of the financial system. It doesn't necessarily involve creating new money, the bank says.

The Fed, on the other hand, suggests that credit easing does involve the printing of new money, in a similar but more targeted approach than quantitative easing. This may all become clearer tomorrow when the Bank of Canada reveals more details on its plans in its monetary policy report.

Lately I've been hearing of some economic indicators that are new to me, such as the Empire State Manufacturing Index. What is that?

Economists are poring over economic indicators these days like fortune tellers with tea leaves, looking for signs the economy is improving - or not.

There are dozens of indicators out there, and some of the obscure ones are getting more attention than they used to.

The Empire State Manufacturing Index comes from a monthly survey of manufacturing executives in New York State conducted by the Federal Reserve Bank of New York. It is fairly new; the first survey was done in mid-2001.

While it is a regional indicator, it shows what is happening in one of the most populous states, and thus it gives a sign of the health of the overall U.S. economy.

The latest survey, released yesterday, showed that conditions for New York manufacturers continued to deteriorate in April, but at a much slower pace than in recent months.

Another one I keep hearing about is the "Beige Book." What is that?

The Beige Book is a broad overview of the U.S. economy produced eight times a year by the Federal Reserve Board.

Rather than a single indicator, it is a discussion of the state of the economy that considers many factors, including anecdotes and information from each of the Federal Reserve districts. It looks at the future direction of the economy, and it carries a lot of weight because of the Fed's expertise and access to data.

The latest Beige Book release (April) suggested economic activity in the United States is still very weak, but there are some signs of stabilization or slight improvements.

Why is it called the Beige Book?

The cover of the publication is traditionally coloured beige. The printed version still features a beige cover.

The official name of the Beige Book is "Summary of Commentary on Current Economic Conditions." It is prepared in the runup to the Fed's key policy-making committee meeting, and is released two weeks before that gathering. The publication was first opened up for public scrutiny in 1983.

Is there a "correct" exchange rate for the Canadian dollar relative to the U.S. dollar?

There's no perfect exchange rate, but there are opinions about what the relationship between the two currencies should be.

TD Bank does a calculation, based on a series of complex formulas that take into account commodity prices and a wide range of economic data. It suggests that the Canadian dollar is currently overvalued by as much as 2 cents, relative to the U.S. dollar.

I know last week's employment numbers were bad, but isn't that a lagging indicator that doesn't tell us much about the current state of the economy?

Despite what many people believe, employment is not a lagging indicator, says CIBC World Markets chief economist Avery Shenfeld. In fact, he notes, the first month of job losses is sometimes used as an indication that a recession is just beginning. That's often the case when the U.S. National Bureau of Economic Research sets the official date for the start of a U.S. recession.

The unemployment rate - the percentage of workers out of a job - is a different kettle of fish, however. When a recession is ending, the unemployment rate often moves up, because people who had given up looking for work go out and start searching.

What's a better indicator?

Mr. Shenfeld likes the National Activity Index calculated by the Federal Reserve Bank of Chicago. It is a weighted average of 85 separate indicators, including measures of manufacturing, employment, consumption and housing.

The NAI improved slightly in February, but is still far into negative territory, suggesting the U.S. recession is far from over. The next NAI will be released on April 20.

A lot of my net worth is tied up in my house, but its value has slipped sharply. Is this going to reverse when the recession is over?

Some analysts think house prices were overvalued in the years leading up to the current slump, and will therefore take quite a while to come back.

In a report this week, Toronto-Dominion Bank economists say that during the stretch from 2004 to 2008, the price of houses exceeded their true value by about 9 per cent.

The high prices - driven by speculation - caused so much building that overcapacity will keep prices down for at least three years.

Even when the recession is over, they said, prices will rebound slowly and there won't be a lot of new building.

Are there particular problem areas?

TD says Calgary and Edmonton have built up inventories of unsold single family homes, while Montreal has too many condos and apartments.

Toronto and Vancouver could have too many multiple units too, when the condos under construction are finished.

Even when the recession is over, they said, prices will rebound slowly and there won't be a lot of new building.

Are my bank deposits safe ?

Bank deposits in this country - GICs or other deposits that mature in five years or less - are insured by the CDIC, a government agency. But the limit is $100,000 per person per institution and not all financial institutions are members.

Depending on the type of account in question, more than one account may be covered to $100,000 at a given bank. In Europe, some countries have recently removed any limits, to make sure that there is no rush of worried customers taking their money out and stuffing it under their mattresses. In Canada there has been no move to change the limit.

The CDIC points out on its website that banks in Canada don't fail often, but "it has happened and it could happen again." In fact, 43 CDIC members - mostly small ones - have collapsed since it was formed in 1967.

What is a credit default swap ?

These were originally set up as a kind of insurance against bad debts. A holder would pay a series of "premiums," and in return they would get a payout if a specified organization failed. It's the same idea as paying a life insurance premium, where the beneficiary gets a payout only if the specified person dies.

Like life insurance, everything is in balance unless there is an epidemic and people start dying left and right. With more companies going under, or threatening to do so, firms that issued swaps are themselves in trouble. That's what happened to insurer AIG, which sold credit default swaps that protected investors against bond defaults. When bonds started defaulting, AIG itself was left vulnerable.

What is counterparty risk ?

When you lend $20 to a friend, the counterparty risk is the chance that he or she won't pay you back. It works the same way with corporations or financial institutions, although their measurement of risk is a little more sophisticated. If the counterparty risk is high, traders and banks won't lend money unless they get some solid collateral or loan guarantees, or they might just say "forget it."

Where will the $700-billion (U.S.) in the Wall Street bailout package go and how will prices be determined ?

The money will be paid to Wall Street firms, banks, pension funds and other companies that hold bad mortgages and other toxic assets. The values aren't known at this point, and the amount paid will be decided in a reverse auction, in which the sellers of the assets compete with each other and decide how cheaply they will sell the toxic debts. The government, through the newly appointed Office of Financial Stability, then pays the lowest price offered.

Will the money ever be recovered ?

The U.S. Treasury Department has said there is a good chance it will recover some if not all of the money, although observers are not so certain. Previous rescue efforts have actually turned a profit, although others have cost billions.

Who wins and who loses ?

While it's theoretical at this point, financial institutions could win out by having their toxic assets bought by the government at what is effectively a premium. While banks can dispose of some of these assets now, they would be doing so at firesale prices if buyers are found. In an ideal world, the U.S. government would hold on to the troubled assets until maturity, when hopefully the real estate market will have recovered, and then dispose of them at at least breakeven. But it is a long-term process, and thus it is too early to tell how the taxpayer makes out.

What is money ?

Money represents stored value and is used to make transactions easier and assign value to goods and services. Prior to its introduction, people would barter for what they wanted. But problems inevitably arose: What if you wanted to get a shiny new axe from the vegetarian down the road, but all you had to trade was a side of beef? To get around such issues, money was created so that everyone could get their hands on what they wanted, regardless of what they had to offer in exchange. Currency, on the other hand, is the type of money everyone in the country agrees to use. Money can be virtually anything. Playing cards were used in New France from 1685 to 1728 after the colonial government ran out of livres.

Should you lock in your mortgage ?

The perpetual question for people renewing or taking out new mortgages is whether to lock in to a fixed-rate mortgage, or go with a variable-rate mortgage under which the rate floats along with the prime rate used by the banks for top borrowers. Today, the choice has never been more complicated as a result of a credit crunch that has caused lenders to ratchet up borrowing costs for both consumers and businesses.

Example: Lenders of all types have been offering fixed-rate mortgages at rates that are inflated well beyond what they would be under normal circumstances, even after the usual discounts are applied. Meanwhile, discounts on variable-rate mortgages have all but disappeared at the dominant lenders, and at least one of the big banks, Toronto-Dominion, has added a rate premium of 1 percentage point to its variable-rate loan. Prime today is 4.75 per cent. Rather than follow the previous custom of offering a discount of 0.6 to 0.9 of a point or more off prime, TD is offering this kind of mortgage at prime plus a percentage point, or 5.75 per cent.

Fully discounted five-year mortgages (that's what people usually choose if they go with a fixed rate) are running at about 5.45 per cent. That's not a bad rate by historical standards, but here's the thing: With the economy weakening, it's widely thought that the Bank of Canada will start a declining rate trend that will push the prime rate lower. If that happens, borrowers with variable-rate mortgages will immediately benefit. Of course, people with variable-rate mortgages will be vulnerable when the economy rallies and interest rates start to move up again. But that could be a long time off. Bottom line, fixed-rate mortgages offer security in uncertain times at a fair price. Variable-rate mortgages, if you can still get one at prime, offer a chance to wring some personal benefit out of an economic slowdown that causes interest rates to fall.

What's the worst-case scenario ?

Apocalyptic scenarios are tempting, but this isn't the Great Depression. Economists are close to universal in predicting a U.S. recession. France and Ireland are already in one. Canada's growth is the slowest in almost two decades, and a couple of banks are predicting Canada's gross domestic product is set to contract for at least two quarters in a row (the classic definition of a recession). But these won't be severe contractions. For now, most economists predict sluggish growth in the world's richest countries through most of next year. That's because demand from China, India and other emerging markets, which give exporters somewhere to ship their goods, will buoy faltering commodity prices. Try to put those heady days of the last few years out of your mind, but there's no need to stock up on canned goods and sell the family jewels just yet.

Do the interest rate cuts mean my mortgage rates or credit card interest rates will go down ?

Yesterday several banks lowered their prime rates by just a quarter-point, instead of matching the half-point cut in the Bank of Canada's key lending rate.

One bank said it couldn't afford a steeper cut because it pays so much these days to fund its own borrowing through global credit markets. You will see that quarter-point cut in interest rates if you have a variable-rate mortgage that is tied directly to prime.

Other short-term loan rates - on certain car loans, for example - that are measured off prime will also go down. But other rates - for five-year mortgages, for example - are set based on bond yields which have been rising sharply, so don't expect any relief. Credit card rates are a function of credit risk, and won't likely see any decline because of the drop in the prime rate.

Can I lose my credit card if banks tighten credit even further ?

It is very unlikely that a bank will cancel your credit card, if you have been making the minimum payments every month. The banks make enormous amounts of money off credit cards, because they carry such high interest rates on unpaid balances.

That said, it could be harder to get a card if you're applying for one, because banks will likely be cautious about issuing new cards in an uncertain economy.

If businesses can set up globally, and governments borrow internationally, why can't Canadians easily establish foreign bank accounts that offer higher interest rates ?

The rules that govern who can set up a bank account are set by the country where the account is located. There are no Canadian rules that regulate what money a Canadian can or cannot hold outside this country. (There are some exceptions for countries run by "rogue" regimes. And there are specific tax rules regarding the income you earn outside the country.) So if you want to set up an account in the United States, for example, you have only to meet the rules that exist there. You'll need to have a U.S. address, and some form of government-sanctioned identification number.

Most U.S. banks will want you to give them a Social Security number. If you don't have one, some financial institutions might let you use some other form of ID, such as a passport number.

Don't interest rate cuts tend to fuel inflation ?

In normal circumstances this is true, and that is one of the reasons the U.S. Federal Reserve Board held rates steady for several months before the current crisis hit.

But with oil prices now dropping sharply, and commodity prices falling as well, the threat of inflation is taking a backseat to worries about credit and the functioning of the economy.

How exactly is the American taxpayer going to pay, directly or indirectly, for the $700-billion (U.S.) bailout ?

The U.S. government's treasury will likely borrow the $700-billion from the public, corporations and perhaps other national governments, by issuing bonds and Treasury bills. They will then use this money to buy, at a discount, the distressed assets from the financial institutions that are in trouble.

The hope is that when these assets are eventually sold, they could bring in a substantial return to the government, and possibly even make a profit.

If it works out as planned, the process should not cost the U.S. taxpayer anywhere near $700-billion. Because the process of selling the assets will take time, there should be no impact on the U.S. budget deficit in the short term.

If the government eventually takes a loss on the assets it is buying, then it will deepen the deficit down the road.

Who owns Canada Mortgage and Housing Corp. and can it go under ?

CMHC was set up by the federal government just after the Second World War to help deal with a housing shortage exacerbated by the huge number of soldiers returning home. It helped finance home construction and provided funds for low-income housing. In the 1950s, when banks got into mortgage lending, CMHC started insuring "high-ratio" mortgages where home buyers initially made only a small down payment. This summer CMHC stopped insuring mortgages with zero down payment or 40 year amortizations.

CMHC also subsidizes aboriginal housing, provides loans and grants for certain kinds of renovations, and gathers statistics on the housing market. It also buys mortgages from financial institutions, and repackages them as mortgage-backed securities, which it sells to investors.

Because CMHC is a Crown corporation - unlike Fannie Mae and Freddie Mac which were private companies - it is backed by Ottawa and could not really "go under."

With housing starts continuing to fall, won't we get to the point where there aren't enough houses for people?

Canadian housing starts have been dropping sharply, and were down more than 12 per cent in February. If that month's level of starts are maintained over the year, there would only be about 135,000 new homes built this year.

Bank of Montreal economist Robert Kavcic points out that new households are formed in Canada at a rate of about 180,000 a year. (That includes immigration, children moving out of the family home, natural population growth, etc.) Housing starts have been above that level for six years, so the slowdown should help things get back into equilibrium.

But eventually, the decline in starts should put upward pressure on prices, because of the lower supply. And at some point housing starts will likely begin to grow again, to meet increased demand. The question is, when?

What is Tier 1 capital and what does it tell you about a bank's health ?

Tier 1 capital includes a bank's common equity - the value of the shares it has sold to the public - plus the value of its non-cumulative preferred shares, and its retained earnings. These are instruments that can't easily be redeemed by holders, so they are considered permanent.

Tier 1 capital, as a proportion of a bank's overall assets, is a key measure of its financial strength. There are international standards, set by the Swiss-based Bank for International Settlements, for this Tier 1 capital ratio. In Canada, the Office of the Superintendent for Financial Institutions sets the minimums.

Most Canadian banks have Tier 1 capital ratios of around 10 per cent (meaning that Tier 1 capital represents about one-10th of overall assets), well above the OSFI minimum of 7 per cent. The banks also measure second level, or Tier 2, capital which includes not-quite-so-permanent items such as reserves, loan loss provisions, and subordinated debt.

Do small companies make use of the commercial paper markets that have been propped up by the U.S. Fed ?

Commercial paper is normally issued only by the most credit-worthy companies, providing them with short-term cash to run their day-to-day operations. Issuers almost always need to have a credit rating on their commercial paper, because the buyers want assurance that their money is very safe, and will be paid back quickly. But getting a credit rating is an expensive and time-consuming process that is conducted by bond-rating agencies. As a result, most commercial paper is issued only by large, stable companies, or entities such as utilities.

What is the TED spread ?

The TED spread is a measure of how much premium banks have to pay when they borrow from each other, and it is a reflection of worries over possible defaults.

Originally, the TED spread was the difference in interest rates between three-month U.S. treasury bill contracts (the "T") and three-month Eurodollar contracts (the "ED").

Now, it usually represents the spread between risk-free three month T-bills and not-so-risk-free three-month LIBOR (the London inter-bank offered rate that banks use for interbank borrowing).

When the TED spread goes up, that suggests bank lenders are worried their counterparties on interbank loans might default. In today's paranoid environment, the TED spread has increased to more than 400 basis points (a basis point is one-hundredth of a percentage point) from "normal" levels of around 30 basis points.

Everybody keeps talking about a recession, but when will we know if we're really in one ?

The classic definition of a recession is a period when the economy shrinks for two consecutive quarters. But that is considered very rough and imprecise by most economists.

By that measure we won't know whether Canada or the United States is in recession now until well into next year. The third-quarter gross domestic product (GDP) numbers are due at the end of November, and the fourth-quarter stats will be out at the end of February. In the second quarter, both economies grew.

One of the problems with the simple definition of recession is that it doesn't take into account swings in the economy. If GDP shrinks in one quarter by 2 per cent, rises in the next by 0.5 per cent, then shrinks in the third by another 2 per cent, then the country is not in recession under the definition, although it very likely is, in reality.

On the other hand, two consecutive 0.2-per-cent drops would mean we're in recession, even if there was strong growth in earlier quarters. That's not very realistic either.

GDP numbers can also be skewed by population growth, which can disguise a possible recession. And they are often revised months after the fact, so that what initially looked like a recession might not actually have been one.

"We've had situations in history where a recession has been revised away, two years later," says Dale Orr, chief economist at Global Insight Canada.

Is there a better way to define recession ?

Many economists prefer to do a much more complex analysis to determine whether a country is in a recession. What needs to be added into the equation, says Mr. Orr, is data on industrial production, consumer spending and labour markets.

In the United States, the National Bureau of Economic Research (NBER) takes these and other numbers into account to officially declare whether a recession has happened.

The NBER (or more specifically, the NBER's "business cycle dating committee") says that a recession is the period that begins just after the economy reaches a peak of activity, and ends as the economy reaches its trough.

Sometimes NBER data show there is a recession, even if GDP hasn't declined for two quarters.

That was the case in 2001, when the U.S. was deemed to be in recession even though there were no successive quarterly GDP declines. (Later revisions showed there were GDP declines in the first three quarters of 2001.)

So is Canada in recession? Is the U.S. in recession ?

Mr. Orr says Global Insight's view is that Canada is not in a recession. While the economy is pretty much stalled, with little or no GDP growth expected this year, "the labour market is moving along at a pretty good pace."

At the same time, consumer spending appears to be holding up, although some analysts are projecting a very weak fourth quarter.

The Conference Board of Canada weighed in yesterday, saying it thinks Canada will likely avoid a recession.

In the United States, however, all the signs suggest a recession is already under way. Estimates indicate the U.S. economy shrank in the third quarter, and will fall again sharply in the fourth, and again in the first quarter of 2009. Employment also has been falling since the start of the year and there is a definite decline in consumer spending. "There is a wide range of people who are feeling a lot of pain; a lot more than in Canada," Mr. Orr said.

If I lose my job, that puts me personally in a recession, doesn't it ?

There is an old joke (recently retold in the Economist) which says that when your neighbour loses her job, it is called an economic slowdown. When you lose your job, it is a recession. But when an economist loses his job, it becomes a depression.

What is a depression, anyway?

There doesn't seem to be any formal definition of a depression. But economists say it would involve a sharp drop in economic activity, as measured by GDP, over a prolonged period of more than two years. That shrinkage would also be accompanied by a rapidly rising unemployment rate and a severe drop in personal consumption.

During the most bleak stretch of the Great Depression between August, 1929, and March, 1933, the U.S. economy shrank by 27 per cent, about 10 times as much as during the worst postwar recession.

We keep hearing that the financial regulatory system is "tighter" in Canada than in the U.S., and that's why our banks are healthier. What are some of the differences in regulation ?

For one thing, the Canadian Bankers Association says, there are fewer bank regulators in Canada, so rules are a bit more streamlined. Here, the Office of the Superintendent of Financial Institutions sets the rules on capital levels, etc., while the Financial Consumer Agency of Canada tells them how they have to conduct themselves in the marketplace.

In the U.S., banks are governed by many regulators, including the Federal Reserve Board, the Office of the Controller of the Currency, and the Office of Thrift Supervision.

Another key difference is that the Canadian Bank Act says that anyone who borrows money to buy a home must get mortgage insurance if their mortgage is more than 80 per cent of the value of the home. That, along with a tendency to give out fewer "sub-prime" loans to borrowers with dubious credit history, has kept the banks here in better shape.

Canada's banks also benefit from the fact that regulations encourage them to operate nationally. That means they can move capital from one region to another, and when risk in the eastern manufacturing sector is higher, it can be offset by lower risk among western oil and gas customers, for instance.

What is "currency intervention? "

When a country doesn't think its currency has the right value compared with that of another nation, its government or central bank can make large purchases or sales of currency to try to right the imbalance.

For example, if country A wants to see its currency lower relative to country B, it will sell its own currency and buy large amounts of country B's currency. That would increase supply of the domestic currency and drive down demand, likely depressing its value.

If a number of countries work together, they can have an even bigger impact on currency value.

There has been speculation that the largest industrial nations might attempt to intervene in currency markets in the near future, to try to trim the value of the Japanese yen, which is near a 13-year high compared with the U.S. dollar. The finance ministers of the G7 countries said yesterday that they will monitor markets closely and "co-operate as appropriate" because they are concerned about the volatility in the yen.

In the past, the Japanese have been among the most active countries in using currency intervention to shift the value of the yen. Several times since the mid-1970s the Japanese government purchased billions of U.S. dollars and sold yen to try to slow the appreciation of the yen, which was hurting Japan's exports.

The last major multinational intervention was in September, 2000, when central banks in Europe, the United States and Japan sold massive amounts of U.S. dollars and bought euros in order to prop up the European currency, which had fallen about 30 per cent since it was launched in January, 1999.

Who regulates pension plans in Canada ?

Ottawa, through the Office of the Superintendent of Financial Institutions, regulates pension plans at companies that fall under federal jurisdiction. This includes the big transportation companies, telecommunications firms, and the big banks. That group represents about 10 per cent of all pension plans in Canada - although they tend to be very large ones.

The provinces set the rules for all the other pension plans, through various regulatory agencies such as the Financial Services Commission of Ontario.

If Ottawa gives relief to pension plans, loosening the rules on funding shortfalls, would that apply to my pension ?

The changes would apply only if you work for a federally regulated company. The provinces would have to change their rules too, if plans under their jurisdiction were to get the same relief.

In 2006, when the federal government gave employers twice as long to cover deficits in their plans under certain circumstances, not all provinces followed suit. Ontario, which regulates about half of all pension funds, did not alter its rules. Quebec and Alberta did make similar changes.

Rules are already different in each province, so how your plan will be affected depends on where you live.

Why do economists always say that the consumer is 70 per cent of the economy? Isn't the consumer really 100 per cent of the economy, since all business is just an intermediary activity that ultimately sells to the consumer ?

In a broad sense, you are right that individual consumers ultimately make up the entire economy, said Doug Porter, deputy chief economist at BMO Nesbitt Burns. But the way economic activity is measured, there are different categories that make up the overall picture, he said. This includes government spending, residential construction, domestic business purchases and exports, along with consumer spending.

But Mr. Porter notes that the 70-per-cent number you are referring to actually applies only to the United States, "which is the real outlier compared to most of the rest of the world." Elsewhere, consumer spending makes up a much smaller proportion of the economy.

In Canada, consumer spending is about 55 per cent of the economy. The big difference between us and the Americans is that health care purchases are mainly made by government here, while in the United States most of that spending comes under the consumer category, because individuals write the cheques.

Government consumption makes up almost 20 per cent of the economy in Canada.

What is the purpose of countries having foreign currency reserves ?

Foreign reserves usually include cash held in foreign currency, along with gold, and reserves set aside for the International Monetary Fund.

Holding foreign reserves gives a country flexibility in influencing the exchange rate of its own currency. If Japan wants to prop up the value of the yen, for example, it can sell some of its vast foreign reserve holdings to buy yen, a move that effectively increases demand for the currency, which will tend to increase its value.

(In recent years, the Japanese have been doing exactly the opposite. They have purchased billions of U.S. dollars and sold yen to try to slow the appreciation of the yen, which was hurting Japan's exports.)

When the Canadian dollar took its recent dip, did it come close to its lowest point ever relative to the U.S. dollar ?

The Canadian dollar bottomed out at 61.75 cents (U.S.) in January, 2002, so the fall to 77.59 cents on Oct. 27 was quite a way from that point. What was more unusual about the recent drop was the speed with which it occurred. The dollar tumbled more than 19 cents in the space of a month.

The recovery has also been quick, however. The dollar is up more than 7 cents in the five trading days since it hit the trough a week ago.

The Canadian dollar's highest point compared with the American dollar, at least in modern times, came just last November, when it briefly nudged above $1.10. Way back, during the U.S. Civil War in the 1860s, the Canadian dollar reached $2.78.

What is the difference between a residential mortgage that is recourse, and one that is non-recourse. Is it true that most mortgages in the United States are non-recourse but here in Canada mortgages are of the recourse variety ?

If someone who borrowed money to buy a house fails to make the payments, the lender can seize the property. If the mortgage was non-recourse, that's all that can be taken.

In a recourse loan, however, the lender can go after the homeowner's other assets, if the value of the house isn't high enough to pay back the loan.

In the United States most mortgage loans are non-recourse. That's why so many people have just walked away from houses that have dropped substantially in value. The lender can take possession of the undervalued home, but they can't try to get any more money back to make up the difference between that value and the mortgage loan.

In most Canadian provinces mortgages are recourse, which allows lenders to go after other assets. The exceptions are Saskatchewan and Alberta (although in Alberta high-ratio mortgages are recourse).

This has not been a widespread issue in Canada because our housing market has been much stronger than in the United States, and we haven't seen people trying to walk away from homes that have dropped sharply below the value of their mortgages. That did happen back in the 1980s in Alberta, when the housing market there collapsed.

Why have European interest rates been so much higher than those in North America in recent months ?

In Europe, as in every other developed economy, the central banks generally set interest rates to spur economic growth (by moving rates down) and to control inflation (by moving them up).

Until recently, inflation has been a bigger concern in Europe, so rates there were set higher to try to keep upward price pressures in check. In the U.S., growth has been subpar for several years, so the Fed has already moved rates down to try to stimulate the economy. Over all, Europeans tend to be more concerned about inflation than North Americans, said TD senior economist Richard Kelly, because in Europe many wages are indexed to inflation. As a result, a jump in prices can accelerate wage costs and damage the economy. Now, the focus in Europe has shifted to economic growth, as the consequences of the implosion of U.S. financial markets spread. Inflation is much less of a worry, so we're seeing big interest rate cuts to try to curb the shrinking of European economies.

With the economic downturn, is Canada's unemployment rate anywhere near a record high ?

The unemployment rate is rising, but it is still very low in historical terms. The October rate, at 6.2 per cent, was not far above the 33-year low of 5.8 per cent that was hit in the early months of this year.

We have had much higher unemployment rates at several times in the past. During the depths of the Depression, in 1933, the rate peaked at about 25 per cent. By the end of the Second World War, there was virtually no unemployment, and for the next three decades the rate stayed below 7 per cent. In the early 1980s and again in the early 1990s, there were spikes when unemployment rose above 11-per-cent.

The OECD and Conference Board forecasts issued yesterday painted a bleak picture for Canada's future unemployment rate, but right now it's at 6.2 per cent, one of the rare times our number has been lower than in the U.S. Why is our rate almost always above the U.S. unemployment rate ?

One reason is that Canada calculates its unemployment rate differently from the method used in the United States. There aren't huge variations, but enough to skew our number higher compared with our neighbours to the south.

There are several small technical differences, but a key one is that Canada counts unemployed people who are 15 years of age and older, while the U.S. only includes those who are 16 and over.

The other big factor is that in Canada, someone is counted as unemployed even if they are doing a "passive" job search. That means they are looking at want ads, but not actually applying for jobs, or picking up applications, but not filling them out.

In the U.S. the rules are more strict, and people doing passive searches are not included in the unemployment numbers.

What difference does this make?

The differences in calculation make Canada's rate as much as 1 percentage point higher than it would be if we used the U.S. method. Including "passive" job searchers is the biggest factor, said Derek Holt, vice-president of economics at Scotia Capital Inc.

Even if the adjustment is made, however, the U.S. unemployment rate has for long periods been lower than Canada's. That changed in May of this year, when the adjusted Canadian rate slipped below the U.S rate for the first time in 26 years.

Now, even without any adjustment, the Canadian rate (at 6.2 per cent) is lower than the U.S. rate (at 6.5 per cent).

So why was our rate, even adjusted for the differences, higher for 26 years ?

A big factor is that Canada's employment insurance payments are higher, and last longer than in the U.S., said Michael Gregory, a senior economist with BMO Nesbitt Burns.

This provides less incentive for Canadians to find work, and pumps up our jobless numbers, he said.

The Americans "stimulated" their economy by issuing cheques to millions of citizens this past spring. Has Canada ever done anything like that ?

Canada has never sent cheques directly to its citizens to try to stimulate the economy. The closest thing to that took place early in 2006 when the Alberta government sent $400 "resource rebate cheques" to every resident of the province - the so-called Ralphbucks. In that case, the idea was to share an unbudgeted surplus, not an attempt to stimulate the economy.

Occasionally in the past, Ottawa has cut income tax rates retroactively at the end of a year, so that many people got tax refund cheques in the spring, but that's not quite the same thing.

Wouldn't this kind of direct payment be a good idea ?

The problem with direct rebates, and even tax cuts, is that a lot of the money doesn't actually help the domestic economy. Many people save the money, pay down debt, or buy consumer goods that are made in other countries.

How did the National Bureau of Economic Research (NBER) figure out that the United States has officially been in a recession for a year ?

The NBER doesn't use the usual definition of a recession - two consecutive quarters of decline in gross domestic product (GDP). It instead looks for the peak of economic activity by considering GDP and several other factors, such as production, employment, consumption and real income.

When the peak is reached and the economy begins to decline significantly, that's when the recession has started, according to the NBER.

This often means that an official recession is not declared by the NBER until it is well under way, or is even over. And it means that there can sometimes be an official recession under way when there aren't two consecutive quarters of GDP decline. So far, that's the case this time. (U.S. GDP fell in the third quarter, but was up in the second.) The recession will not be considered finished until the economy reaches its trough. But that, too, won't be determined until much later.

What is the NBER anyway ?

The NBER was founded in 1920 by a group of economists who wanted to understand business cycles. It is a non-profit research organization with more than 1,000 university professors and researchers functioning as "associates" who study how the U.S. economy works. Since the 1960s, it has been considered the official arbiter of when the United States is in recession.

An NBER subgroup, the business-cycle-dating committee, actually makes the decision to declare a recession. That key committee is currently composed of economists from Harvard, Stanford, the Massachusetts Institute of Technology, Northwestern University, the University of California at Berkeley, and the U.S. Conference Board.

Has the NBER said when the recession will end ?

The NBER refuses to make any forecasts, so they've given no public opinion on when the recession will end. They'll only tell us after the fact.

What's the point of declaring a recession a year after it has begun ?

Economists, historians and bureaucrats study the NBER's analysis to help them figure out how recessions work, and what patterns are repeated. But to make short-term decisions, politicians usually use more immediate data such as the GDP figures or employment data.

Why are foundations having to cut their grants? As long as the equities and bonds in which they've invested their funds continue to throw off dividends and interest, shouldn't they be able to sustain the grants regardless of the drop in value of the invested capital ?

The rules governing what charities and foundations must disburse each year are very complex, so it is not just a matter of giving away the money generated by investments.

One key rule is that foundations must disburse a certain percentage of the value of their assets each year.

So if a foundation's assets are shrinking because of poor market performance, the amount they are likely to give away will shrink as well.

The Bank of Canada's rate cut didn't give much comfort. How long do recessions last?

If you look at a recession as the number of quarters of economic decline, we may have quite a way to go.

This week's gross domestic product figures showed a 3.4-per-cent annualized decline in the fourth quarter of 2008, after a 1.3-per-cent rise in the third quarter. That suggests the recession in Canada - which most admit is well under way - began in the last three months of last year.

Measured by GDP contraction, the previous major recession in Canada lasted four quarters, from the second quarter of 1990 to the first quarter of 1991 (although unemployment kept rising for another year). The one before that lasted six quarters, from the third quarter of 1981 until the end of 1982.

The Bank of Canada projects a short, sharp recession, with a strong recovery in 2010.

Has the fact that it has been so long since the last bad recession made this one worse?

Many people can barely remember the last recession, and younger people have never lived through one. That might have made us less prepared, and more willing to take risks.

Former U.S. Federal Reserve Board chairman Paul Volcker once wrote that "a long period of prosperity breeds confidence, and confidence breeds new standards of what is prudent and what is risky."

What is a "jobless recovery"?

Between 1950 and 1990, every time the economy recovered from a dip into recession, there were substantial numbers of new jobs that were created.

But after the recession of 1990-91, very few new jobs opened up when the economy bounced back, thus creating a "jobless recovery." Unemployment remained high until 1994.

Essentially, companies managed to squeeze more productivity out of a smaller work force, partly through the use of new technology.

That strategy was good for profits and the stock market, but it left many workers out in the cold.

It happened again, to a lesser degree, in the early years of this decade, when the economy was rebounding from a mild recession and employment increases were sporadic.