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The Con of Inflation: From Gold to Fractional:

WHERE DO FINANCIAL DOES GOLD NEED A COMEBACK?


CRISES COME FROM?

The Evolution of Money


THE MONEY ISSUE Why We Love Money

IS OUR
FINANCIAL SYSTEM
A PYRAMID SCHEME
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EDITOR'S NOTE
To the Arbitrage Community,
As the Arbitrage Magazine enters
FALL 2010 into its forth issue, I’m proud to
say that we’re finally taking the
Editor-in-Chief+CEO David Alexander necessary steps to turn the “ARB”
Board of Director Samita Vasudeva into a groundbreaking publication.
Garin Kilpatrick
The first step in this process
is the ARB website (www.
MAGAZINE PRODUCTION TEAM
ArbitrageMagazine.com). It’s
Managing Editor Kevin Kang finally up, roaring and ready to
Section Editor Saif Quershi champion our mighty magazine
Writing Staff David Tal into the wide and wild world of
Pawan Shamdasani the Interweb.
Alfred Yim
Victoria Chau That said, its goal isn’t to simply regurgitate the content
Luis Fernando Arce offered in the ARB magazine, but to involve our readership
Troy Redick through meaningful conversation and debate (and a few cash
Writer-At-Large Nicki Mossavar- prizes along the way).
Rahmani
To that end, we very much hope that you put a little of
Contributor Rabeea Wajeeha yourselves into this website so that it provides you and others
Sushil Tailor
Alex Vo
more value, so that it becomes a better representative of its
Michael Moretto readership and in the end, so that it’ll be worth sharing to
Charles Dreezer your friends.
Art Director Ryan Trinidad On top of this, we’re on a hiring binge: we’ve already doubled
Design Staff David Tal the size of our staff, with plans to double it again within
Luis Ernesto Rojas three to four months. And with all these new hands on deck,
Gonzalez we plan to start invading all Toronto and GTA schools with
Akil Worrell innovative marketing campaigns, as well as reach out to all
Jennifer Lee our cross border and overseas readership.
Mary Zhao
Trishaala Ninan Finally, the ARB magazine itself.
Laura Gonsalves
Katie L. Serensits We’ve doubled our design staff to give your eyes more to
drool over. We’ve added new writers to provide your brains
ARBITRAGE SUPPORT STAFF with new perspectives. And together, we’ve provided you
Director HR Rabeea Wajeeha with a publication that (we hope) you’d be eager to share,
learn from and call your own.
HR Coordinator Natalie Sekiritsky
Amritha Godishala Going forward, the ARB hopes to continue entering new
Sakthi Subas territory by discussing controversial subjects and opinions,
Andrei Dias
exploring alternative perspectives on current events and
Marketing Staff Sushil Tailor sounding the alarm about those trends that will change your
Catherine Chen future over the coming decade.
Web Designer Fu-Chieh Yao
Enjoy the read!
Accountant Junwen (James) Wu

David Alexander
CEO & Editor-in-Chief
Arbitrage Magazine
Email: d.alexander@arbitragemagazine.com
LinkedIn: http://www.linkedin.com/in/davidalexander85
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Features:

ALL THE WORLD’S A CAGE   10

? WE
♥$
THE CON, OF INFLATION  32 FROM GOLD TO FRACTIONAL 55

40 THE EVOLUTION OF MONEY 67 WHY WE LOVE MONEY


By Nicki Mossavarrahmani, Writer-At-Large
Designed by David Tal
Rachel Cuthbert, CMA
Business Intelligence Analyst, Aritzia LP

I HELP TURN
DATA INTO
LITTLE BLACK
DRESSES.
What attracted Rachel Cuthbert to the Certified Management
Accountant program was the opportunity it gave her to work
in any industry. Fashion being one of her passions, it’s no
surprise Rachel landed at Aritzia, a North American fashion
boutique. She credits her CMA with giving her the tools to
understand the business side of fashion. It’s a career choice
that fits her perfectly. See Rachel’s film at becomeacma.com.

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becomeacma.com
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The Society of Management Accountants of Canada. Used under license.
Content:
POLITICS AND BUSINESS CANADA

26 37
The Chinese Marketplace CETA: Is this New
Why markets are needed for a Agreement Right for
nation to thrive.
Canada?

28 38
FIFA and South Africa:
CANADIAN CONSUMERS
a Mismatch of Interests
ARE GETTING LESS WHEN
THE DOLLAR IS WORTH
30 MORE
The albertan tar sands “Canadian retailers have yet to
Hidden Fortunes Or Empty pass on the gains of a strong Ca-
Dreams? nadian dollar.”

FINANCE EDITORIALS AND OPINIONS

46 59
Basic Money Management mutual funds
The Greatest Crime Perpetrated

47 to Humankind

Is the Stock Market


Really Just a Casino?
60
Have Canadian Banks
48 Played It Too Safe?
What is Short Selling?
62
49 Greed is NOT good
Spreading the Wealth:
Spread & Long/Short 64
Strategies Worthless Endeavours
Protesting the G20 Summit

50
Scare Tactics and the CAREER PLANNER
Blurring of Truth
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Is the
Financial
System
One Giant
Pyramid
Scheme?

OPINION by: David Tal


Designed by: Jennifer Lee
THESE ARE THE lullabies people say to comfort of a similar scam to the one suffered by Madoff’s
themselves. However, as you’ll see, it’s no defence. investors? And what if everyone is in on it, both
Take the case of Bernard “Bernie” L. Madoff. He as victims and perpetrators of the largest financial
got caught inside a whirlpool last March, 2009, when scam known to human history?
he pled guilty to running an elaborate Ponzi scheme     To be more blunt, what if our entire financial
that fooled a highlight reel of celebrities, charitable system—as it exists today—is a scam, one that’s
organizations and what many considered to be hardwired to funnel wealth from the masses to an
‘informed/professional’ investors. The fallout was elite few?
many tens of billions worth of investments written off    Don’t want to believe it?
into the red—this included the life-savings of many    Well, before you stop reading, how about we
who will now never know a comfortable retirement. play around with this theory?
    When such high profile scams make headlines,     To start, if we are going to put our financial
both the victims and the public are left to ask how system on trial, it is necessary to define the
so many high-powered, intelligent people could parameters of this charge.
be duped so easily. In retrospect, it seems obvious
that an eye of caution be directed upon people or SET UP
corporations who offer inexplicably high or consistent For one, how should we define our present financial
returns on monies invested. system?
   Haven’t these people ever heard the adage that     Well, we can start by focusing on the financial
if something sounds too good to be true, it usually system that the modern world’s majority uses:
is? Such questions generally conclude with people Monetarism. This is a theory whereby, according
mumbling another adage—buyer beware—and then to the American Heritage Dictionary, “economic
believing that the same thing could never happen variations within a given system, such as changing
to them. rates of inflation, are most often caused by increases
   But what if it can? or decreases in the money supply—usually enacted
What if you, dear reader, are already in the clutches by controlled government policy.” (For those new to
economics, don’t worry. This will be explained more money being funnelled to the top.
simply soon enough.)    That said, such schemes never make it to this
   No matter the country, nor the dominant level, as once it reaches a certain size, there will
ideology we ascribe to—be it communist, socialist always be a few who begin to smell a fish.
or capitalist—they all use a monetary system; only    So with these parameters set, let’s turn our
the degree of government intervention in the system attention to some of the prominent reasons why
varies. people get caught up in financial schemes. According
   Next, what kind of scam are we charging our to Skepdic.com, greed is probably the underlying
financial system of resembling? For the purposes of factor. The desire for wealth and power are easy
this article, we will use a pyramid scheme as a model levers that the crafty can wield against most anybody.
(albeit the most sophisticated pyramid scheme ever    This greed, or even just a basic desperation
devised). for money, can lead to varying states of wishful
   Briefly, a pyramid scheme is a scam where one thinking, where even the smartest of those involved
ringleader (sometimes a team) convinces a number forsake logic and reason for the hope that this
of individuals to invest money into a ‘new money ‘money-making system’ is actually legitimate. As
making system,’ which requires these new investors a result, asking those worthwhile questions that
to work—usually on a kind of commission—to recruit can save one’s wallet all of a sudden begins to feel
others to then invest money back into the said uncomfortable or impolite.
‘system.’ Those new recruits are then encouraged    Even those few who catch on to what they’ve
to lure even more individuals into this system and gotten themselves into continue playing along,
so on. thinking, “Hey, I’m not at the bottom of the pyramid;
   This scheme is called a pyramid scheme because I’m near the top. I can still get out of this making a
of its shape: if one person recruits ten people and profit!” Housing Meltdown, anyone?
those ten each recruit ten others and so on, the    Finally, one should also consider that it often
pyramid could potentially involve everyone on earth isn’t a shifty looking man in a trench coat trying to
within ten rounds of recruiting—with most or all the recruit you into these get-rich-quick-schemes, but
normal, honest-looking people. These people are another factor, one that makes this system thoroughly
quite often educated and/or well-respected, like unstable and perpetually in need of government
teachers, investors (ala Bernie) and even police intervention—like a crack fiend’s constant search for
officers. Anyone is susceptible, and the more the another fix.
initial ringmaster can attract respected participates    Interest.
into this system, the more it wraps around itself an    Sometimes called usury, interest (the charging
air of legitimacy borrowed from such individuals. of a fee for the use of money) was once banned in
This makes the system that much more attractive to the ancient world. All Abrahamic belief systems (i.e.
future recruits. Judaism, Christianity & Islam) likened it to a sin and
even philosophical titans like Aristotle deemed it
FOUNDATION unnatural. It was only until late into the 16th century
Now that we’ve explored how average financial that interest slowly began to gain acceptance
schemes scam people, it’s about time we investigate (primarily due to a push from the business classes),
our present financial system to see how it scams until charging interest became normalized in the
people in a positively above-average way. To do 17th century.
this, we first need to explore the system’s innards,    Now while the concerns about interest being
i.e. shed light on how money is created, how it’s sinful may be a tad antiquated, the way it affects
manipulated, and how you and I and all of society and distorts our financial system, our personal lives
are bound inside its cage. and our freedoms are very real.
   To begin, let’s show how money is created.    To explain, think back to the previous sidebar
(Refer to Sidebar A below.) that explained how money is created and now add
   Now that we know how money is created, let’s on top of it the next sidebar that explains the effect
take it one step further. Aside from the inflation of interest. (Refer to Figure 1 on the next spread.)
that’s structurally built into our financial system    From what The Effect of Interest infographic
(thanks to the Fractional Reserve System), there is shows us, interest has no place in a perfectly stable

HOW
SIDEBAR A: MONEY IS CREATED
HOW MONEY IS CREATED
Note:
Oh hi! I need 10
Sure! Anything for a
billion dollars. Can
you help me out?
friend. That said, I’d like Once the Federal Government receives the
10 billion in bonds.
new money, it places it into a bank account
to become legal tender money, adding 10
billion to the money supply.
And that’s how money is created, though
today it’s done electronically and within a
few seconds.
But it doesn’t end there.

The new money created is created out


of debt, i.e. the Central Bank created
the 10 billion with the expectation that
Super!
Now here’s it will all be paid back. So essentially,
Hey, no sweat! your money.
MONEY = DEBT. [In fact, under our
$$LL$ION
10 B
current system, one cannot exist without
10

I
BI

the other. If everyone paid off all their


BO
ND
LL
S
ION

debt, there would be no money for the


N economy to function. The crazy thing
LLIO
10 BIBONDS is, the world doesn’t even have enough
money to pay off all the debt that exists
(sidebar B will answer why this is so).]

Once the Federal Government receives the new money, it places it into a bank account to become
legal tender money, adding 10 billion to the money supply.
And that’s how money is created, though today it’s done electronically and within a few seconds.
But it doesn’t end there.
and sustainable monetary system, as its presence is disaster. Meanwhile, on a macro level, the expansion
an inherently destabilizing influence that works to of the money supply, leads to a reduction in buying
undermine the viability of a stable economic system. power (i.e. structurally built-in inflation) and as
   This is because not only is new money generated already mentioned, a hidden and ever-growing tax
out of nothing (ala sidebar A), but the money needed upon all society in the form of inflation.
to pay back the interest applied to this new money
doesn’t even exist! A CAGE UNMASKED
   So where does society find all this non-existent    On one hand we have a structurally flawed
money to pay down the interest on the money that financial system and on the other, we have a pyramid
was created out of nothing? scheme. How do the two relate?   
   It can’t.    To start, we must ask, “Who’s at the top of this
   The system in place now has a built-in perpetual pyramid?”
deficit, one that is destined to collapse the entire    The simple answer is: those who control the
system unless measures are taken to avoid it. world’s banks (especially the privately owned
   As luck would have it though, there are two central banks, like the US Fed) and thus have the
options to deal with this flaw. Individually, those who power to print money. Now, before this writer enters
don’t have the power to print more money and can’t the realm of conspiracy theory, let me add an extra
pay their debts or interest can simply go bankrupt dimension to this answer: that unlike your average
and have their assets liquidated. Meanwhile, pyramid scheme, there’s actually no one person or
governments, which can print more money, do so, group at the top.
and do so excessively (as we saw governments do    People come and go, just as fortunes come and
following the late 2008 Housing Meltdown). go. Instead, what you’ll see at the pyramid’s precipice
   Thus, on a micro level, the ill effect of both is a system, one that promotes profit maximization
fractional-reserve banking and interest is that a above all other values. tThis single-minded drive is
percentage of the population is destined for financial what the majority of global society has bought into

   Once the 10 billion is deposited car) to back up your mortgage, the bank place it can: from the existing money
into a bank, that bank can then lend out in turn creates and lends you money supply. The new money steals value from
that money. The only limit being said from nothing, money that’s backed up the existing money supply, expanding
bank needs to keep a percentage of the by nothing except a hypothetical liability: the money supply irrespective of the
original deposit on hold as a “reserve” money that you’re expected to pay back demand, thus reducing its worth and
(usually around 10%); e.g. out of the 10 and then some. creating inflation. This means that our
billion deposited, the bank can now lend    The implications of this are huge, Fractional Reserve System is inherently
out 9 billion. [This process is referred to as this process will happen all over inflationary, thus reducing the buying
as “Fractional Reserve Banking.”] again in the bank where that 9 billion is power of our money (see chart below).
   However, while logic would have next deposited (minus the 10% reserve)
you think that banks lend out that 9 and again in the next bank and the next, MONEY SUPPLY VS. DOLLAR BUYING POWER
billion from the original 10 billion, the etc.
$14 $0.90
truth is that 9 billion is lent ON TOP of    If this process runs its course, that $0.80
$12
that original 10 billion. That’s right, 9 initial 10 billion the Federal government $10
$0.70
$0.60
billion in brand new money is created called into existence has the potential to $8 $0.50
into the economy simply because there add another 90 billion into the economic $6
$0.40
$0.30
is a demand for this loan and there is system. All of this is money created out $4 $0.20
enough money in the bank to fulfil the of nothing. $2 $0.10
reserve requirements. So basically, after    But if the money came from nothing, 1950 2006

the bank asks you for assets (e.g. your where does it get its value? The only
and what the majority refuses to give up. Essentially, this pyramid scheme creates money
   Why? through banks that it gives out on mass, encouraging
   Because we all want to be at the top of that all individuals within the monetarist system to
pyramid. spend that money, thereby increasing their debt and
   That’s the genius of this system. There is no forcing them to pay back said money, with interest
one individual to point our fingers at because, at or through various forms of bankruptcy.
the end of the day, we’d only be pointing fingers at    For the minority of the world’s population who
ourselves. can pay these debts and remain debt free, this
   Until we, as a collective society, choose not arrangement is of no consequence. But for the
to live under a system where power through the gross majority, those who can’t pay off 100% their
accumulation of money is the core value—a system debts by the month’s end or are living paycheque
where greed and corruption aren’t built in—we will to paycheque, this system ensures a subtle form of
forever be beholden to a system where only a small veiled servitude—what some might call slavery.
minority at the top prosper and the mass at the    If you don’t work, you won’t be able to pay your
bottom struggle or go without. debts. If you can’t pay your debts, you won’t be able
   But some may counter, “Okay, there might be to keep your possessions and the standard of living to
people who let themselves be leashed by greed, but which you’ve grown accustomed. This fear of losing
what about the rest of us? How can one system, everything is what keeps the world in toe and what
or pyramid scheme, actually control the majority of ensures the wealth of the bottom continues to flow
the planet’s population? upward to the banks and those who control them.
   The answer lies in how money is created and the    So let’s recap:
existence of interest (both previously discussed).

FIGURE 1:
THE EFFECT OF INTEREST

1 4
In time, those who
Stable money supply charge interest will
i.e. amount of control the full
money is fixed money supply
*At this point, the economy
will no longer be able to
function as all the money
is controlled by the
interest-charging elite

2 5
To avoid the collapse
Introduction of the of the economy,
use of interest the money supply
with loans must grow

3 6
Overtime, those who
charge interest will This causes money
control more and to reduce in value
more of the pie and inflation to rise

This means people will have to work harder (in a variety of ways)
just to get by. And in a very real way, interest and the inflation it helps cause
is a ‘hidden tax’ levied upon us all
Who’s at the top?

Ringleader Banks

How people are lured into the scheme


Ringleader convinces a number Most of today’s global
of individuals to invest money population were born into the
into a ‘new money making current financial system, one
system,’ by promising easy which convinces society that
returns on investment (a “get- everyone has the potential
rich-quick” scheme). to be rich if they work hard
enough.

How the scam works


Ringleader encourages new Banks create and give out
recruits to work to recruit money on mass, encouraging
others to invest money back all individuals within the
into said ‘money making system to spend that money,
system.’ thereby increasing their debt
and forcing them to pay back
said money, with interest. The
culture of consumerism this
system fosters is another draw.
    At this point, a final question begs answering:
“If the financial system is just another fancy pyramid
How the scheme spreads scheme, then why hasn’t it failed like all other
pyramid schemes?”
The ringleader’s pyramid could Over centuries of growth, the     The simple reason is that, for centuries, this
potentially involve everyone current financial system now scheme worked.
on earth within 10 rounds of envelops most of the world’s    Yes, the system is far from balanced and the gap
recruiting—with most or all the population within its monetarist between rich and poor is large and growing everyday,
money being funnelled to the system, with money gradually but for all its flaws, the monetarist system of playing
top. being funnelled from the to people’s self-interest (greed and the pursuit of
bottom to the top, continuously. power) has resulted in a world far richer and better
off today than in any time in human history.
Why people stay with the scheme THE RED PILL
But here’s the catch. While it’s true our monetarist
People stay in the scheme People stay vested in the
system has provided humanity unprecedented
because of the air of legitimacy current financial system
wealth, it is also true that it was bankrolled almost
it borrows from its high-profile because of its legality, the
entirely by our largest and oldest benefactor: the
members or simply out of legitimacy it borrows from its
Earth.
greed or desperation. many high-profile proponents
    To be clear, in order for the economy to continue
and out of fear of losing their
growing, in order for it to avoid collapsing under
established quality of life.
the money supply’s constant expansion, more and
more economic resources need to be mined from the
Pyramid Scheme earth, processed by man and commercialized by our
Current Financial Scheme markets.
MONEY CREATION AND
THE
BASIC SHAPE OF THE ECONOMY

CENTRAL BANK

FEDERAL GOVERNMENT

OTHER COUNTRIES

loans
PROVINCIAL/STAT

I g
inv
PRIVATE BANKS
loans

leftover funds
returned to bank
debt repaid
with interest * COMPANI

> bankruptcy
> asset liquidation income
loans employment

NO YES

** can the entity repay the loan?


T

TYPE OF MEDIUM EXCHANGE SPENDING USES

bonds money used to buy earth’s


COMPANIES/INVESTORS resources to produce goods,
money services and infrastructure

new money money used to support living


standards and population growth
grants loan repay
I loans
savings
TE/MUNICIPAL GOVERNMENTS I money interest

grants purchases
nvestments investments
donations grants
* Businesses gain a great deal of their profits from
working with other businesses (B2B), not just
through the public and the government.
loans I loans
IES/INSTITUTIONS/NGOs ** This loan repayment process is mostly the same
of all loans.

welfare type of medium exchange


grants
I loans
PEOPLE
direction of flow
purchases tax
investments
donations grants
loans I loans
OTHER
spending use
   Doing this produces enough new wealth fast
enough to pay down all those new, interest-laden
loans the banks are generally all too happy to give.
It’s also what has allowed the human population
to grow as much as it has, providing ever-growing
numbers of new consumers for the system to exploit
and grow.
    In all, the flow of resources ensures the music    With each new discovery of how to use the Earth’s
continues to play. abundant resources, humanity fed, multiplied and
   So there you have it: prospered to new heights.
   In fact, from the discovery of agriculture
(approx. 8000 BC) to the Industrial Revolution
(approx. 1800s), global human population gradually
grew to around 800 million. Then within only 100
years after the Industrial Revolution, the population
grew to one billion. Then after learning to truly
harness oil, the most abundant and versatile energy
source humanity ever discovered, global population
exploded to roughly 6.3 billion and counting.
   Sad thing is, when the caribou herd grows to a
point where they exhaust their land’s richness, the
prosperity ends. Swaths of caribou starve and the
   It’s no different than what happens to a caribou herd shrinks back down to a level the land (Earth)
herd when they discover a new land, one rich in can support. The herd may try and search for a new,
food: they feed, multiply and prosper. richer land, but in the end, the cycle always repeat
   So too with humans. itself.
   When we learned the art of agriculture, it allowed    And again, so too with humans.
us to produce an excess of food from the Earth’s    Soon, a time will come when events transpire
soil and in turn, allowed us to shed off our nomadic to alter the very nature of modern society and
lifestyle and commit to and develop communal living “the system” as we know it. For pyramid schemes
(i.e. families, villages, townships, cities, countries). only continue expanding so long as there are more
Millennia later, humanity discovered how to harness recruits and more money (resources) to pull into its
energy from coal, leading to the first Industrial sphere of influence. In other words, such scams can
Revolution. A century later, humanity learned how only continue existing in a world of infinite growth.
to harness energy from oil and so the modern age    Sadly, that’s not the world we live in.
began.    While modern economics and society in general
-Andrew Gause, Monetary Historian

choose to assume otherwise, the reality is that we    Outlined in the Arbitrage’s previous issue, the
live inside a finite world, a world with limits, both on reality of a finite world is that it will run out of many
the number of human beings it can support and the of its non-renewable resources (especially oil) within
amount of resources it has available for consumption. the next 50 years or so. And over the next decade,
Eventually, something’s gotta give. And that we will begin to see the effects of this growing
something’s going to give within our lifetimes. scarcity in the form of increased prices (inflation) on
just about everything we buy.
CRYSTAL BALL    Meanwhile, when talking about demographics
So how exactly will an economic system that survived (the subject of the Arbitrage’s next issue), the well
for centuries and has seduced the world’s majority known, Comte adage holds true: demographics is
into its tentacles’ embrace suddenly fail? destiny.
   Answer: there are two trends slowly converging    Economists have few ideas about how to maintain
into one chaotic mess: resource scarcity and a country’s economic growth if its population is in
demographics. decline. Remember, our present financial system is
   The first trend, resource scarcity, was discussed predicated on infinite upward growth in resources
in detail in the previous issue of the Arbitrage (Winter and population. So without either, the columns of
2010) and so I won’t go into the specifics here. the system begin to crack.
   But to put the matter into perspective, we    Presently, the birth rates for much of the
can think of the Malthusian trap (the theory that developed world average out to 0.1%, far below
the human population growth rate will outpace the 2.1% needed for a population to replenish itself
humanity’s ability to farm enough food to feed this (sourced from the Population Reference Bureau’s
growth). For many decades, the world avoided mass 2006 World Population Data Sheet).
Malthusian starvation because we’ve consistently    Roughly speaking, with less people, the labour
developed new agriculture technologies to grow force shrinks, leading to higher wages whose cost
higher yields of food. Similarly, the world economy is past on to the consumer; this inflation leads to
continues to grow because we too freely and cheaply reduced demand, cut backs in the private sector,
reap from the Earth untold amounts of raw materials layoffs and may lead into a downward recessionary
that we then turn into riches. cycle.
   But how much longer can this go on?    Likewise on the government side: a country’s
tax base shrinks, causing a nasty chain reaction that ALTERNATIVES?
weakens its ability to pay for pension plans and public Given what we know, in order for the world to avert
services. This leads to across the board government catastrophe, we must shift to a financial system that
sending cuts, meaning greater unemployment and doesn’t depend on constant growth to function. We
increased employment insurance costs that the need a new, stable, and resilient system. One that
government won’t be able to afford. can both efficiently manage the world’s growing
   This will then lead to the government continually resource scarcity, while thriving amongst a steadily
turning to the central bank for loans to pay for declining population.
needed public services, and in time, once a country In all, we need something radical enough to save
reaches the point where it’s borrowing to pay down us, but familiar enough to be accepted by a world
debts of borrowed money, that’s one step away from population that may become increasingly sceptical
a country going bankrupt. and fearful of change.
   There are no crystal balls, but the fact remains    From this writer’s perspective, there are two
that these two trends are real, well documented, and core options/directions a future financial system
their effects are generally easy to predict: a gradual may evolve towards in order to meet the challenges
reduction in economic and population growth and a of tomorrow. In order of least to most disruptive and
possible breakdown in the current financial system’s familiar, these options include: a financial system
ability to continue functioning. influenced by Demurrage (using a kind of Scrip
currency) and a Resource Based Economy.
   Unfortunately, detailing how each may work And so too with our financial system.
will each take an article unto themselves. That’s Nothing is meant to last forever. In the end, a
why two further articles will be published in future revolution happens roughly every quarter century in
Arbitrage issues that will comprise a series exploring some form or another— and we’re about due for the
the different alternatives our flawed financial system next one. So when it happens, don’t be surprised if
may evolve into and how each may change the world it changes everything.
and how we will live in it.
   Such a change may seem impossible now. Click to read more & join us!
To imagine a world where a whole other financial
system takes over, one entirely different from what
has claimed dominance for so many generations,
certainly seems inconceivable. But as every historian
can tell you, what seems impossible today may just
become the commonplace reality of tomorrow.
   100 years ago, who knew that man would be able
to fly and then land on the moon? In our generation,
who knew that computers and the Internet would
revolutionize nearly every dimension of human
existence?

-Kenneth Boulding, Economist & founder of the Evolutionary Economics Movement


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POLITICS AND BUSINESS

The Chinese
Marketplace
Why markets are needed
for a nation to thrive.

By Sushil Tailor, Contributor


Designed by Luis Ernesto Rojas

AFTER THE REFORMS endowed


onto China by Deng Xiaoping in
the 80s, the nation became an
economic force to be reckoned
with in the decade after. With
foreign direct investment on
the rise, China’s GDP grew at
a rate of 9.5% a year. In 1999,
it became one of the largest
economies in the world, second
only to the United States.
This served as quite a shock
for the Western World. Once
again, liberal democracies were Two columns in Downtown Toronto’s Chinatown
no longer situated as sole world
powers. The Soviet Union was First, debt collection needs to ensues that allow businesses
toppled but a largely socialist be enforced and so regulatory and entrepreneurs to take risks,
China was now on the rise. mechanisms must be set in place while knowing roughly what the
Aside from military strength, in order to allow for said debt to general outcomes will be.
power and influence over world be collected. These rules provide for a
affairs is gained via a powerful Another important institution stable foundation from which
economy. Veto power is given are the courts that deal with the financial sector can grow,
to UN nations with strong common law. These courts as seen in action throughout
economies. The chairman of deal with affairs pertaining to history.
the board for the World Bank contracts, which are a required Hong Kong serves as a prime
is appointed by the United in order for creditors to dole example as seen by its proximity
States, its biggest shareholder. out money to debtors with a to mainland China and the
Agricultural subsidies in the USA greater sense of ease. Laws contrast it serves between the
are enough to crush local farms allow corporations to be limited two.
in Third World and developing liability institutions, entities After the First Opium War,
nations. A strong economy that are regarded as legal Hong Kong was ceded to the
provides leverage on matters of persons (not to mention, laws British under the Treaty of
international diplomacy. allow corporations to exist in Nanking. The Convention of
Nevertheless, how is this the first place). Peking after The Second Opium
economic strength gained? The Meanwhile, regulations unsure war resulted in more land
answer lies within a thriving general accounting guidelines gained by the British. Situated
financial sector. are adhered to in order to en as a trading outpost, English
A thriving financial sector sure investors have the correct Common Law was introduced
can only be attained if the financial information needed to into Hong Kong.
corresponding rules are make an investment decision. Now a special administrative
put into place, rules that These laws and regulations may zone of China, Hong Kong still
allow for a market economy. not be perfect, but once instated adheres to English Common
and enforced, greater stability Law. The rules set forth by

26 ArbitrageMagazine.ca | Summer 2010


POLITICS AND BUSINESS

Pacific Mall during the weekday

precedent within it on how to China’s reforms in the 80s by Ultimately, while Maoism
deal with matters of contract, Deng Xiaoping were the result and variants of communism
tort and business allowed for of emulating Hong Kong for the and socialism are the official
a market economy to thrive purposes of attracting foreign ideologies of the Communist
while mainland China’s financial business, as its tiny neighbour Party of China, ideas regarding
system suffered after Mao had succeeded in doing for so the economy proposed by
Zedong instated a command long. For this reason, special capitalist liberal democracies
economy. economic zones were set up with are often implemented.
The English Common Law rules that would garner foreign For a strong economy they
rules and regulations mentioned investment. Amongst these needed foreign direct investment
previously, along with a liberal zones were Shenzhen, Shantou and a thriving financial sector.
political environment, resulted and Xiamen. In order to accomplish this, they
in a growing free market From then on, central realized that they had to follow
economy. As a result, Hong Kong planning took a different route suite with what Western nations
shines today as an international and instead of directing goods have been doing for so long:
financial hub, giving birth to and services on a microeconomic have laws and regulations that
powerful banking institutions scale, more attention was allow for a market economy. 
such as HSBC and hosting a given to market-oriented
welcoming business climate macroeconomic planning. Hong Click to read more & join us!
for international banking Kong’s liberal market economy
institutions originally from served as an inspiration for the
places such as America, Canada, planners in the Communist Party.
Europe and Singapore.

Summer 2010 | ArbitrageMagazine.ca 27


POLITICS AND BUSINESS

FIFA and South and internationally, making it The Finance Minister, Pravin
easier to gauge the efforts the Gordhan, took the opportunity
Africa: a Mismatch government has made in terms to say that every aspect of the
of Interests of curing the social problems country will feel benefited, from
plaguing the country. the telecommunications and
According to most transportation infrastructures to
By Luis Fernando Arce,
government officials and the thousands of new employees
  Staff Writer
private companies offering needed for the newly created
Designed by Trishaala Ninan
transportation, hospitality and jobs in the construction,
tourist attractions, the figures service and security industries.
As the entire world knows, expected to be raked in from
South Africa has just undergone the FIFA tournament are by But even more revitalizing,
an experience that is sure to all means positive. Indeed, according to the Finance
have a myriad of effects on all according to brandsouthafrica. Minister, is the potential foreign
aspects of society. The FIFA com, an International Marketing investment opportunities that
World Cup, held for the first Council for South Africa (under have opened up as a result of
time ever in South Africa, has the executive authority of the all the media attention. These
allowed the world to peek inside Minister in the Presidency), benefits, he assures, are there
the doors of the country and see the tournament is expected to but will be felt only “long after
what it has to offer. bring in an estimated R93 billion the players return home.”
This opportunity, however, gross throughout the year, with However, despite all the
has shown itself to be a double- tourism accounting for 16% of positive hype, a large portion
edged sword. the gross impact (that’s over of the South African population
On the one hand there are US $12,311,162,650). This are angry with the government’s
obvious positive economic translates to around 0.5% of the spending priorities.
consequences for the country; country’s expected GDP growth They ask where the billions
but on the other, the attention for 2010, which compared with of dollars used to build
has placed political pressure the decline in the last quarter of stadiums and accommodate
on South Africa, domestically 2009, seems very encouraging. FIFA personnel were found while

Original image sourced from France 24 Community and Kora Awards Image redesigned by Trishaala Ninan

28 ArbitrageMagazine.ca | Summer 2010


POLITICS AND BUSINESS

money remained scarce for FIFA tournament to demonstrate wonder how the government
priorities such as poverty, AIDS their disagreement with the was able to spend over six years
and homelessness ran rampant. country’s FIFA spending. of time and money in building
Specifically, to hold the FIFA Examples of these protests stadiums rather than addressing
World Cup Tournament, South included ones that focused on the problem of unemployment
Africa shelled out over R18 the insignificant wages that more adequately.
billion (that is over US $2 billion) the private employers have The other problem has been in
for stadiums and other costs, been paying their employees. the government’s stubbornness
including accommodations and Although the stewards had been to follow guidelines set out by
additional infrastructure. The promised a payment of 1500 world-wide organizations, such
maintenance of each stadium Rand a day by FIFA, according to as the World Health Organization.
is estimated at US $2 million what one of the protestors told And although Avert.com, an
a year. At the same time, 40% the CBC associated press, they internationally acclaimed AIDS
of South Africa’s population is have only been given an eighth charity, reports that in 2010 the
living on less than US $2 dollars of that – 190 Rand a day. South African government has
a day or 60% under the poverty One article in the Toronto finally taken significant steps
line. Star, written by Craig and Marc towards complying with WHO
Even more disgraceful is that Kielburger, the founders of Free recommendations regarding
much of the population living the Children, reported that prevention of mother-to-child
in the towns the stadiums were some workers were receiving transmissions, there is still a
built in weren’t even able to even less than that, putting the need for better monitoring in
afford access to the games figures at US $1 a day wages, as regards to the collection of data
inside them. reported by Building and Wood and its quality, as suggested by
As a result, many South Workers International. the District Health Barometer.
Africans participated in Nonetheless, the South In the end, the FIFA players,
organized protests during the African government remains coordinators and fans are all
solid in its stance. packing to go home. Only time
In the speech for the 2010 will tell, whether the real
budget, the Finance Minister effects of the FIFA tournament
announced that there were are felt on the country and its
roughly R907 billion to be people. Although the government
allocated towards public has delivered its speech outlining
assistance, with the largest the budget, it remains to be
sums going towards HIV/AIDS seen if the money will be
programmes (R5.4 billion), properly allocated, properly
national and provincial health employed and if indeed it will
programmes (R105 billion), seep into those lives and
education (R165 billion) and communities most in need. 
infrastructure (R1.2 billion over
three years). Click to read more & join us!
The main issue, as such,
stems from the fact that many
South Africans seem to feel very
little of the positive effects of
the economy. As a large part
of the country dwells in slums,
Photographed by Trishaala Ninan with over 30% of the population
unemployed, it really is a

Summer 2010 | ArbitrageMagazine.ca 29


POLITICS AND BUSINESS

The albertan tar oil has opened up are immense Indeed, companies such as
and oil companies, as well ExxonMobil (who alone have
sands government officials, have all spent over $60 million on
Hidden Fortunes Or Empty been swift in recognizing the Canadian oil), have succeeded
Dreams? great economic boost that in lobbying the US government
this represents. Indeed, the to allow Albertan Oil inside
By Luis Fernando Arce, Canadian Energy Research its borders, persuading the
  Staff Writer Institute (CERI) released a amendment of a 2009 carbon-
Designed by Akil Worrell 236-page report in 2009 titled emission provision (lowering the
“Economic Impacts of the requirement from 20% to 17%,
WHEN THE SPANISH and other Petroleum Industry in Canada” and allowing for offshore drilling
adventurers went in search of that attempts to show, through expansion).
El Dorado nearly six centuries multiple sections dedicated to Social maladies have also seen
ago, they were not aware that research and to the calculations a rise from the new black-gold
they were chasing a ghost. After employed, the positive influence fever. As more and more families
two centuries of searching and on the economy that investment leave their homes to move to
finding nothing resembling the in the Tar Sands represents. Alberta in search of fortunes,
Golden Cities of which they had Summarily, the report places such as Fort McMurray
heard, the great El Dorado was estimates over $100 billion have become the epicenter of
relegated into the closets of in investment through 2020, seemingly unattainable dreams.
their minds, becoming mere yielding over $500 billion Some families, who moved to
However, in our present time, dollars in output; it expects an Fort McMurray with the intent of
Canadians seem to have stumbled increase in the GDP of over $800 returning home rich in just a few
onto their own treasures found billion – that is if prices stay at months, have been settled into
in the Tar Sands in Alberta, and the $32 US/barrel mark; and a unstable residences for over eight
investors, much like the seekers government revenue of over years. Rent has seen a dramatic
of El Dorado, have already begun $120 billion. increase and, consequently, so
their explorations. The Tar Sands Yet, although the economic has homelessness rates. As well,
found in Alberta, recognized advantages are obvious, there drug-trafficking has seen a rise
internationally as a legitimate are other issues that have as individuals attempt to cope
source of energy to be extracted prompted the intervention of with the harsh living conditions
in 2004, have placed Canada other groups of society. and the insufficient wages. But
second only to Saudi Arabia in One issue has been the after 9/11, the need to secure
terms of quantity. ecological side-effects that friendly sources of petroleum has
Thus far, it has been estimated the process of extracting the come to trump the costs of doing
that over 170 billion barrels of oil from bitumen causes. A so. Moreover, as President Hugo
recoverable oil are trapped in CBC sponsored documentary Chavez sweeps Venezuela under
the crude bitumen, the tar-like that took its cameras to Fort a socialist banner, nationalizing
material from which the oil is McMurray, the “epicenter of the the Oil Industry and distancing
extracted. This is enough to last oil boom in Alberta,” determined itself from the United States,
for over 100 years, by which time that it took about one barrel of the latter has been adamant
it is hoped new technology will oil (in energy) to produce two about securing a source in the
be made available to extract the barrels of oil. This ratio creates North. As a result, Canada has
rest of the estimated 1.73 trillion around three times as many been the first to capitalize on
barrels of crude bitumen. For carbon emissions as it takes to this opportunity.
now, the importance of securing mine conventional oil. Moreover, On the other hand, Chavez’
access to those 170 billion green groups, which criticize not reforms have inadvertently
barrels, particularly in the wake only the carbon emissions but placed Alberta in a similar
of global oil scarcity, has taken the trail of toxic waste and the position to the one Venezuela
precedence in the agendas of depletion of the Boreal Forest, found itself in before the industry
various groups of society. are concerned with the leverage was nationalized. The mining of
The investment opportunities that private companies seem to its oil represents ecological and
this unconventional source of have over governments.

30 ArbitrageMagazine.ca | Summer 2010


POLITICS AND BUSINESS

Image soucred from celsias.com

sociological exploitation that is who demanded royalties from of what they call ‘dirty oil’.
not being justly remunerated by the big oil companies drilling in As these protests gain fervor,
private oil companies. his province, demands to which the Canadian government will
Peter Loughheed, former they agreed. have to decide whether the
Premier of Alberta, has While the Albertan Tar Sands opportunity to become a leading
expressed concern over the lack have blown a new breath of world oil supplier can override
of expansion of the Heritage opportunity into the Canadian the social and ecological woes
Fund, a project he started 23 economy, it is important that that come with the title.
years ago as a way to ensure governments take note of the But perhaps this will prove
that the exploitation of natural effects this process has on harder than anticipated as most
resources in Alberta would the people as much as on the people have been left to wonder
produce long-term benefits for environment. Moreover, it is of when, or rather if, their local
the province. interest to the government to economy will feel any of the
He reminds Canadians that the realize that the exploitation of positive effects of being a top
oil is owned “by the people, not the people’s natural resources, oil-supplier, something that for
by the oil companies,” and urges physical strength and lack of some in Alberta seem more and
more investment in the province political sway prompted places more like an empty dream 
by the Alberta Investment such as Venezuela to adapt such
Management Corporation radical measures as nationalizing Click to read more & join us!
(a crown corporation since its industries.
2008, previously the Heritage Governments around the
Fund). A similar attitude world, including our very own,
was taken by the premier of are already facing protesters
Newfoundland and Labrador, demanding a stop to the trading

Summer 2010 | ArbitrageMagazine.ca 31


the
Con
of
,
inf lation
Where do financial crises come from?
By Charles Dreezer, Staff Writer
Designed by Ryan Trinidad

BUSINESS CYCLE, BUSINESS SHMYCLE


Where do financial crises come from? You know, those events
that pull the world into a recession and, just maybe, pull you out
of your job? Why do they happen? What turns a recession into a
depression?
The Austrian School of economics, which today has little to do
with Austria, can offer us some insight. A key tenet of the Austrian
argument is that central banks and their misguided monetary
policy are largely at fault.
The Austrian Business Cycle Theory (ABCT), which is mostly
ignored by mainstream economics, holds that ineffective monetary
policy tends to set interest rates too low for too long. This
invariably leads to excessive credit creation, speculative bubbles,
and unsustainably low savings and high consumption.
To illustrate, let us begin with a simple example. Low interest
rates tend to stimulate borrowing from the banking system.
Increased borrowing means an expansion of credit, which is really
an expansion of the money supply. An abundance of cheap money
leads to an unsustainable credit-fuelled boom in which artificially
stimulated lending seeks out diminishing investment opportunities.
Eventually, there are so few reasonable investments left that
capital resources are misallocated into areas that would not
attract investment if the money supply remained constant.
A recession then occurs when the central turned out to have been based on assumptions
bankers wise up to the over-inflated asset prices about future demands that did not come to pass.
and are forced to increase interest rates in The liquidation of such investments and businesses
order to stop the credit creation. The ensuing releases factors of production from unprofitable
period is characterized by debt default, a rush to uses; they can then be redeployed in other
divest from projects that are not feasible at the sectors of the technologically dynamic economy.
new higher interest rates, and a corresponding Without the initial liquidation the redeployment
contraction of the money supply (i.e. deflation). cannot take place. Depressions are this process of
At this point, central bankers become concerned liquidation and preparation for the redeployment
that the economy will funnel into a downward of resources.”
spiral (DS) when low demand leads to downsizing The ABCT explains the Fed’s (and most
and bankruptcy, which lead to job loss. Job loss of the workd’s) monetary shenanigans as a
further decreases consumption, which in turn shortsighted attempt to smooth out the business
leads to more downsizing and more bankruptcy. cycle. Unfortunately, among its true effects are
For fear of the DS, interest rates are dropped. misallocation of resources and prevention of the
Rinse and repeat. recession, which is the free market mechanism
Now let’s apply this model to the current that would purge the economy of improperly
financial crisis. The dot-com bubble exploded at employed resources. Why, then, does the Fed use
the beginning of the new millennium. Between such practices when it seems obvious that they
2000 and 2003, Alan Greenspan, then Chairman of are in fact intensifying the business cycle rather
the US Federal Reserve (Fed), lowered the Federal than easing it?
funds rate target from 6.5% to an all-time low of Let’s take a closer look at the subject of inflation
1%. As expected, low interest rates decreased to find out.
savings and increased consumption, fending off
the risk of the DS. Easily obtained credit and
money that would previously have flocked toward
dot-com companies now focused on the real estate
sector as a ‘safe investment alternative’.
So what happened?
As outlined, attractive investment opportunities
diminished, still free-flowing credit was used to
finance the bidding up of asset prices, as well
as other increasingly unattractive and risky
investments. Eventually, the Fed realized that
this was going on and, as predicted by the ABCT, CPI TRAIN WRECK
raised the interest rate from a low of 1% to 5.25% In introductory economics courses, students are
about two years later. told that inflation is a rise in the general level of
Loan defaults triggered a wave of destruction prices of goods and services in an economy over
in the financial sector as complex derivatives and a period of time. The preferred measure is the
the institutions that held them took a nosedive. Consumer price index (CPI) or, more recently, the
In true form, the Fed lowered interest rates again Personal Consumption Expenditures price index
for fear that a DS would cause a systematic failure (PCE). Both are calculated as the value-weighted
of the financial system. price of a basket of carefully selected goods.
Who wants to take bets on a repeat? This is actually a misleading view on inflation.
Remember that thing called the free market? More accurately, rising prices are the symptom of
F. A. Hayek, one of the early influential inflation, not the cause.
Austrian economists, reminds us that a recession The reality is that inflation is an increase in the
can be good for us. “Enterprises are gambles that money supply.
sometimes fail: a future comes to pass in which As expected from an increase in the supply of
certain investments should not have been made. any commodity (ceterus paribus), the value of
The best that can be done in such circumstances each unit will decrease. It is the value of the
is to shut down those production processes that money that is changing, not the value of the goods
truthis, theFed
the

sole
as the
gaurdian supply,
of the
money
is just the
old man behind the
curtain.
and services. For this reason, it is a waste of time THE WIZARD OF INFLATION
to try to accurately measure the value of money Price stability is one of two goals that make
by measuring the prices of goods and services. up the Fed’s mandate. Ben Bernanke, current
The prices of individual goods or services change Chairman of the Fed, said in his July 16, 2008
constantly irrespective of their value. Sometimes testimony before the Committee on Financial
the basket of goods is altered because of a price Services (U.S. House of Representatives) that
change in a particular category that is deemed to “upside risks to the inflation outlook have
be distortive. intensified lately, as the rising prices of energy
In fact, it is absurd that the Fed would use any and some other commodities have led to a sharp
other measure than the amount of money in the pickup in inflation … ”
economy. The math involved is much less complex Interesting. Didn’t Bernanke say that rising
and certainly not as prone to error. prices lead to inflation?
Peter Schiff, an American author, businessman, Either Bernanke does not realize that rising
financial commentator, and a 2010 candidate for prices are the result of inflation, or he does know
the U.S. Senate, used a witty analogy. Imagine a and is purposely misleading the public. Both
person, let’s call him Central Frank (I added the possibilities raise very real concerns.
name), is standing on train tracks. Understandably, The former would suggest that the most
Frank does not want to be on the tracks when the powerful economy in the world is run by a man
train passes. who doesn’t understand basic economics. The
But Frank is not a very bright person. latter entails an act of misdirection that would
Frank decides that seeing the caboose is the make even the great and powerful Wizard of Oz
best way to tell that the train is coming. We have blush.
warned Frank that he should be looking for the The Fed, disguised by fire, smoke and a giant
front of the train, the engine, if he doesn’t want head, says in a booming voice that the rising prices
to be pulverized. of several commodities are the cause of inflation.
But Frank is stubborn in his view and insists that Who are we to dare to question the great and
he use the caboose indicator. powerful Wizard of Oz?
Is Frank’s plan likely to work? The truth is, the Fed (of most any country), as
the sole guardian of the money supply, is just the
old man behind the curtain. His continued reign
as the Wizard of Inflation is protected by the fact
that the majority of people do just what he asks
of them: “Pay no attention to the man behind
the curtain.” How many people do you know that
understand what the CPE is?
Ludwig von Mises, one of the first Austrian
economists, explains: “[t]here is no longer any
word available to signify the phenomenon that
has been, up to now, called inflation… As you
cannot talk about something that has no name,
you cannot fight it. Those who pretend to fight
inflation are in fact only fighting what is the
inevitable consequence of inflation, rising prices.
Their ventures are doomed to failure because
they do not attack the root of the evil. They try
to keep prices low while firmly committed to a
policy of increasing the quantity of money that
must necessarily make them soar. As long as this
terminological confusion is not entirely wiped
out, there cannot be any question of stopping
inflation.” Inflation is therefore a type of indirect tax (and a
sneaky one at that). Given there is no foreseeable
WHY DO THEY DO IT? shortage of whims on which governments will be
Austrian economists agree that the state uses able to spend their taxpayers’ hard-earned money,
inflation as one of the three means by which it can it seems unlikely that this is a problem that will go
fund its activities (the other two being taxing and away on its own.
borrowing).
Taxation is relatively straightforward. Military THE CRITICS
spending is often cited as the reason for resorting Mainstream economists tend to ignore the
to inflation and borrowing. More recently we have concerns of the Austrian School. The most common
seen all sorts of fiscal recklessness (bailouts, etc.) criticism of the School is that it lacks scientific
that provides another possible motive. rigour. According to D. Walker, its theories are not
One method that central banks use to increase developed in formal mathematics, but by using
the money supply is to purchase government bonds mainly verbal logic and what proponents claim are
on the open market. The bank can then create self-evident axioms.
the money it uses to buy the securities and the In fact, as M. Thomas notes in his critique of
government can create the securities that it sells Boettke’s critique of mainstream economics, the
to the bank (basically a complicated but common Austrian School advocates a rejection of methods
borrowing practice). that involve the direct use of empirical data in the
This type of arrangement is one way the U.S. development of theories. A final criticism is that,
government is able to service its more than $13 while the School claims to highlight shortcomings
trillion in debt. Unfortunately, it also causes the of mainstream methodology, it does not offer a
money that everybody else holds to decrease in viable alternative.
value (thus causing inflation).
we
Do need
The Austrian School, however, offers up a
response to these criticisms.
According to Hayek, the lack of mathematic

inf lation
and econometric justification is a necessity.
He believed that economic theories cannot be
proven or disproven through the same methods of
or we
do needtobe
empirical observation that are commonly applied

protected
to the study of natural science.
Ludwig von Mises, another early Austrian
economist, explains that we cannot build a theory

from
to predict how humans will act in a “complex”
situation from how they will act in “simple” it
situations. Furthermore, there may be limits to
how much we can learn from observing even a
“simple situation.” corporations (see the next issue of Arbitrage for
Only the human actor knows to what ends he my article on Free banking).
acts. Observers may try to understand why an
actor behaved in a particular way but this reason
FOOD FOR THOUGHT:
must be inferred from a complex set of data,
Why do we need inflation?
which can only be gathered once. Reproducible
Do we need inflation or do we need to be
experiments are not possible because both the
protected from it?
actor and the observer have been altered by the
What would happen if the money supply were
experiment.
fixed?
Although the Austrian School does not offer a
Is the free market mechanism the most effective
completely viable alternative, it does advocate a
way to control interest rates?
laissez-faire approach to the economy.
Have central banks become much too involved
This conclusion follows from a key tenet of
in trying to manage a process that they don’t
the Austrian School: that the free market price
really understand?
mechanism (i.e. the natural interaction of supply
What would be the government’s response if
and demand) is the most efficient and effective
the economy were to make a move toward the
way of organizing and allocating the economy’s
free market control of the business cycle? Would
resources. Despite the criticism, there must be
it resist the removal of its power to finance its
something to it if Greenspan himself would say
activities through inflation? Would important
that «the Austrian School have reached far into
government programs suffer because they may
the future from when most of them practiced
not have access to consistent funding? 
and have had a profound and, in my judgment,
probably an irreversible effect on how most
Click to read more & join us!
mainstream economists think in this country.»

WHAT CAN BE DONE?


Many Austrian School economists support the
abolition of the central banks and the fractional-
reserve banking system. They would advocate
a return to the use of Free Banking, a monetary
arrangement in which banks are subject to no
regulations beyond those applicable to most other
CANADA

CETA: Is this New This agreement is said A study by Scott Sinclair, senior
to be more ambitious than research fellow at the Canadian
Agreement Right WTO and NAFTA and will Centre for Policy Alternatives,
for Canada? protect corporate activities outlines how the European Union
from government control. is taking advantage of Canada’s
Proponents of this agreement, weaker bargaining position in
Rabeea Wajeeha, Contributor seek to promote cooperation these negotiations.
Designed by Katie L. Serensits on key regulatory, labour and “These talks are really about
environmental topics, along the role of government and
with removal of trade barriers. driving domestic restructuring
This would open up a highly as we are the weaker party
attractive multi-trillion dollar in this negotiation,” Scott
foreign market for businesses. Sinclair explains, on April 19,
In fact, CETA would decrease 2010, at the press conference
Canada’s dependence on the US held by the Trade Justice
and proposes to provide Canada Network. He concludes that
with an excellent opportunity to European companies are
On May 6, 2009, negotiations develop and diversify trade with seeking unconditional access
for the Canada-European Union the European Union. to provincial and municipal
Comprehensive Economic and However, the lack of procurement markets.
Trade Agreement (CETA) were transparency around these talks CETAwill have a sizeable impact
launched. The trade talks is preventing meaningful public on Canadian culture and social
have progressed very rapidly debate on this agreement. structure, as this agreement
and quietly until recently. A draft consolidated text was is also looking for increased
Thus far, two official rounds leaked by the Trade Justice foreign ownership and control
of negotiations have been Network (a group of social justice, of our telecommunications
completed (in October 2009 and labour, environmental and other sector, which would have a
January 2010), while the aim is civil society organizations), on lasting impact on the Canadian
to close negations by 2011. April 19, 2010, in the hopes of intellectual property legislation.
Considering the impact this sparking a much need public Other proposals include changes
agreement will have on public debate about the effects this to the public services and social
policy in Canada and the broad agreement would have on procurement, food sovereignty,
scope of this agreement, many various public policy areas. manufacturing industry, public
feel that considerable public Members of this organization postal services and numerous
debate is warranted. Yet both suggest that, “The Canada-E.U. other public sectors.
the media and our elected (CETA) negotiations are based on It’s clear why the European
officials have reported little of commitments to place corporate Union is pursuing this agreement;
these talks thus far. rights before social and economic it currently has a trade deficit
For the first time ever, justice, democratic control, and with the rest of the world and is
provincial governments are ecological sustainability.” aggressively seeking open
invited to directly participate The government procurement foreign markets. Accordingly,
in the negotiations. Meanwhile, market has been one of the this agreement will help set the
the agreement will cover such EU’s top priorities in these terms of global trade in its
topics as greater protection for negotiations. This is a major favour, but is it at Canada’s
foreign investors, competition cause for concern as the biggest expense? 
policy, simplifying or removing purchasers of goods and services
regulatory barriers to imported are mainly provincial and Click to read more & join us!
goods, reduction of tariffs, municipal governments that
regulatory cooperation, use tax dollars for economic
government procurement, and social development. This
opportunities for cross- agreement would take away
border sales of services and their power by opening public
sustainable development. service contracts to international
competition.
Summer 2010 | ArbitrageMagazine.ca 37
CANADA

CANADIAN this time that there’d be a


mark-up on our items since they
CONSUMERS ARE actually did cost more.
GETTING LESS WHEN The next few years though, we
continued to see an increase in
THE DOLLAR IS the value of our dollar, climbing
WORTH MORE from US $0.80 to US $0.95. But
“Canadian retailers have despite this steady upward climb
yet to pass on the gains of a in value, Canadians continued to
pay a similar mark-up to the one
strong Canadian dollar.”
seen in previous years during
substantially lower values.
By Victoria Chau, Staff Writer Finally, in September 2007,
Designed by Luis Ernesto Rojas we hit parity with the US dollar Aren’t we shocked sometimes by the
rising dollar?
amid a scrambling US market;
If one were to walk into a then two months later, the
Canadian bookstore today, one lobby for more substantial price-
Canadian dollar continued to
would pay anywhere from 15 cuts, a different issue emerged
increase and hit a high of just
to 30 percent more than if one regarding supply costs.
under US $1.10.
were to buy the same item in Canadian retailers claimed
It was at this time in 2007,
the United States. For the past that they were unable to lower
that complaints from Canadian
few decades, because of the their prices on all goods because
consumers began to surface in
Canadian dollar’s subordinate their suppliers were charging
regards to unreasonably high
stance in front of the United them more than the retailers in
prices despite a stronger value
States’ dollar, this mark-up on the United States. In fact, Liberal
right here at home. It simply
virtually everything from flat Industry Critic Scott Brison told
didn’t make sense that we were
screens to even food made sense the CBC that the manufacturers
paying more for our goods when
and has gone unnoticed by most providing the goods to Canadian
our dollar should have given us
of us. retailers are charging them up
more value in return.
But times are changing. For to 90 percent more than their
Then, as more Canadians
a few years now, the Canadian American counterparts.
began to purchase their items
dollar has lingered around Instead of suggesting retailers
from online US retailers or
parity with the US. So why have to lower their prices, Brison calls
by crossing the border itself,
Canadian consumers not felt the for the Canadian government
retailers began to announce
benefits of a strong currency? To to re-evaluate the tariffs being
price cuts and special discounts
put things in perspective, let’s charged on the goods entering
for Canadian consumers;
go back a decade and analyze the country, as the taxes and the
larger Canadian retailers like
our dollar’s value trajectory. transportation costs are causing
Zellers and Wal-Mart followed
Using the Bank of Canada’s the mark-up to remain in place.
by announcing cutbacks on
online Currency Converter, it is On the one hand, it does make
hundreds of items to persuade
evident that there has been a sense that products in Canada
Canadians to buy at home.
more or less systematic increase might be more expensive than
Following these events, and
in the value of the Canadian in the United States when taking
in response to the public outcry,
dollar since 2000. In fact, from into consideration transportation
Finance Minister Jim Flaherty
January 2000 to April 2003, the costs and tariffs. After all, every
claimed in a Toronto Star article
Canadian dollar shot-up in value business student will recall
to “want the market to work…
from US $0.60 to US $0.70. Porter’s Five Forces Model
[and for] prices to go down to
After a year, the Canadian dollar explaining purchasing power.
reflect the increased purchasing
continued to increase and its We—as Canadian consumers of
power of the Canadian dollar.”
value came up just under US However, after Flaherty met some 30 million people— have
$0.80. As our dollar’s value was with several large retailers to a smaller purchasing power
still worth less than the US’ by discuss the pricing issue and than the Americans who have a
quite a bit, it made sense during population of over 300 million.

38 ArbitrageMagazine.ca | Summer 2010


CANADA

A loonie in front of a laptop monitor. How much is it worth in the U.S. here?

We also have to bear in mind that have chosen to make the drive concede deals (apparently these
some of the regional retailers in across the border, making sure deals had an expiration tag
the US are actually the same size, to remain there at least 48 hours beginning after the 2007 holiday
if not bigger, than some of our so as to avoid the extra custom season), consumers seem to
Canadian national retailers. As fees. have forgotten their anger and
National Affairs Vice-President In fact, Direct-Marketing passively accepted the return to
of the Retail Council of Canada, Strategist, Paulina Sazon, has marked-up prices.
Derek Nighbor, puts it, “it’s an reported that thanks to the It seems to be a losing battle
issue of scale.” World Wide Web “the volume of to put our hopes on the retailers
Nonetheless, back in 2007, shipments through the Canadian and suppliers; until they realize
retailers promised that given postal service’s special service the threat online or cross-
time prices would begin to adjust for American retailers [has] border shopping presents to
accordingly to the increased increased 38 percent over the them, Canadian consumers will
value of the Canadian dollar, as last year,” while PayPal Canada simply have to continue looking
many items (particularly books) states that it sees “an average of elsewhere for those best deals.
are priced anywhere from six to 1200 cross-border transactions So to move this along, why
twelve months in advance. per hour.” not make yourself comfortable
Yet even after three years, However, even with the threat in front of a computer or take a
Canadians have seen no major of online and cross-border small trip over the border? 
difference. And as hopes that shopping, Canadian retailers
we will ever see the benefits have yet to pass on the gains Click to read more & join us!
of a soaring loonie begin to of a strong Canadian dollar.
ebb, Canadians have instead Despite the consumer outrage in
turned to online shopping or 2007, which forced retailers to

Summer 2010 | ArbitrageMagazine.ca 39


EVOLUTION
THE
Of money
By Saif Qureshi, Section Editor
Designed by Ryan Trinidad

MONEY IS ONE of the most important things in our lives. It helps ensure our
survival and is a key to power. It is also one of the earliest and most significant
inventions by humans and has become the foundation of our modern economies.
Hardly a day goes by without some discussion of money, its promises and its
consequences. Almost everything around us has a cost attached to it and obtaining
ownership requires money.
Yet, when it comes down to it, we are essentially paying for these goods or
services through pieces of paper or through electronic signals (e.g. credit card or
online banking).
In fact, we have become so accustomed to these forms of payment that many
have never even paused to think about why and how they work. So in order to
properly understand the current forms of money we take for granted, it is important
to understand how our payment systems have evolved over time … and later, what
they may evolve into.
THE DAYS OF WAY BACK WHEN Similarly, much later on in history, American
As surprising as it may seem, money didn’t exist Indians highly valued wampum shells and
among early human societies. In fact, barter was used them for decoration, jewellery, religious
the first system of payment: an arrangement ceremonies (buried in graves) and of course as
where two parties agree to exchange one good or money. In fact, these shells were acceptable for
service for another, thereby making a transaction. payments of debts, fines, tributes and even for
It is not known exactly when this first started ransom. All of these uses for the wampum shells
but it is quite possible that it dates back to the and its symbolic value ensured that their demand
first humans. But although this system is very and value remained strong.
easy to understand and remained dominant for Around 7th century BC, money evolved once
quite some time, there are few to no rules and again and started to become familiar to what
the rate of exchange is vague. we have today. In Turkey, bean-shaped currency
But from 9000 to 6000 BC, with the advent of new was produced using gold and silver. These
farming techniques, a new form of barter grew in primitive coins had a special mark on them, which
popularity. It became commonplace for farmers represented the coin’s specific value. Previous
to trade commodities, such as cattle or grain, for to this creation, the metal was simply exchanged
some other good. This commodity money became based on its weight and purity, which made it very
an ideal currency because everyone knew what a difficult to engage in a transaction since both of
bushel or cow was worth. those qualities had to be measured.
That said, in order for money to be a medium About 100 years later, in the kingdom of Lydia
of exchange, it also needs to also be easily (located in modern day Turkey), circular coins
transportable and divisible, so that it can become as we know them today were invented. Seeing
easy to use. This is one reason why cattle are the benefits of this standardized currency, other
not used today as a form of currency; as it’s very nations such as the Persian and Roman empires
inconvenient to hack a cow into small pieces, keep were quick to follow and further refined their
it refrigerated and bring enough of its carcass to a currencies. (Coincidentally, at around the same
store to purchase a new shoe. time, craftsmen in China were making coins with
Considering the three functions shown in the very elaborate shapes such as spades and knives,
infographic above, the first known primitive form of which the flat surfaces were decorated with
of money was cowrie shells, which came into use Chinese characters.) It was not until the 3rd
around 1200 BC in China. These shells were found century BC that the Roman emperor decided to
around the Maldives and were highly regarded in create a more practical round coin, but with a
China and India, due to their attractiveness and square hole in the centre.
rarity.

This is one reason why cattle are not used today as a form
of currency; as it’s very inconvenient to hack a cow into small
pieces, keep it refrigerated and bring enough of its carcass
to a store to purchase a new shoe.
MEDIUM OF EXCHANGE:
widely accepted in exchange for goods and services in a market.

UNIT OF ACCOUNT:
unit in which we measure our economic transactions, such as prices

STORE OF VALUE:
possesses value that can be stored and retrieved over time.

With the rise of money, different sorts this currency was eventually abolished because
of financial transactions started to take place, there was mass printing of bank notes, which led
which could be called the beginning of banking. to rising inflation. Notably, this was still several
In Greece, starting from 4th century BC, private years before the Europeans would adopt paper
entrepreneurs and institutions (such as temples currency and several centuries before it would
and public governments) began taking deposits, become widely used.
making loans, exchanging different currencies and Then came Stockholms Banco, a private bank in
testing the coins for weight and purity. Many of Sweden founded in 1657 by Johan Palmstruch. Four
these transactions were unheard of since this time years after its foundation with the collaboration of
and provided the citizens with more services and the government, it became the first bank to issue
convenience European banknotes, which could be exchanged
for a specific amount of silver coins at the bank.
ITS JUST PAPER I TELL YOU These banknotes became very popular, as they
Around the 9th century AD, the first official were easy to carry around (rather than the metal
paper currency was introduced in China under the currency of the time) and could be exchanged for
Song dynasty. It was quite different from today’s goods at the market.
modern currency though because it was in very Unfortunately, the bank issued more notes than
short supply, had an expiration date and was only it could redeem for silver coins and so when people
available in some regions. However, the main started asking to have their notes honoured, the
benefit was that wealthy people did not have to bank did not have enough reserves. This led to a
carry a ton of currency around. In fact, the origin loss of confidence in paper currency, ending with
of paper currency was that rich merchants who the Swedish government taking control over the
owned lots of coins, started to leave their wealth bank, settling debts and quickly thereafter closing
with a trustworthy person and in turn received a it down.
promissory note (representative money), which As these two examples show, establishing
could be redeemed afterwards. paper currency was far from easy. For the next
These occurrences coupled with a shortage few centuries, several attempts were made
of copper, led to the government implementing with banknotes, until eventually they became
one of the first forms of fiat money in human accepted by the public. The only reason why
history. However, about five hundred years later, people did eventually become comfortable with
through monetary policy (i.e. increasing the

recently, we have seen a money supply to pump funds into the market,
as we saw governments do following the 08-09

completely new form of money


economic meltdown).
The new system that followed arose at the end

emerge: digital money


of World War II, where the International Breton
Woods System replaced the gold standard. Under
this agreement, all countries agreed to tie their
currencies to the US dollar, which was pegged
paper (fiat) money that was worth nothing was at $35 per ounce of gold. This occurred mainly
when governments backed them with their own because the US was the world’s largest economic
reserves. This prevented banks like the Stockholms power and because it held the majority of gold
Banco, from becoming bankrupt but introduced a reserves.
truly new evil to the world: inflation. This system endured until 1971, when the dollar
To battle this problem, several countries started to devalue and other countries did not
started to adopt the gold standard, which is when want to appreciate (raise) their currency value
countries start to fix their currencies to a set due to the damage it would do to their export
value in gold. dependant industries. As a result, the United
The gold standard reduces inflation because States abandoned the fixed value of the dollar
it is very difficult to manipulate the economy’s and let it float in the world’s money markets (fiat
demand for money when it’s backed up by gold. currency).
Specifically, one can only produce as much money This is how the world’s monetary system
as there is gold; but since the world’s gold supply now works and has become very important in
is fixed, the amount of money in the world would international trade and globalization. Fiat
remain the same unless one discovers a new gold currency, which is used in most of today’s developed
mine or new method of alchemy. countries, is issued by the government as legal
Unfortunately, this strength was also its tender and is not convertible into anything such
eventual undoing, as the gold standard was short as gold or silver; making it virtually useless were
lived. During the Great Depression, the system it not for its acceptance in transactions (i.e. by
completely collapsed after many economists society’s willingness to believe that government
blamed it for being unable to revive the economy backed pieces of paper have value).

Evolution of man.
THE DIGITAL AGE
Just to stop and put this all into perspective: In fact, while the traditional credit card model
there were many forms of currency not even has held sway for quite some time, with the rise
discussed above because the thousands of small of more advanced computing power and complex
societies in human history each had their own programming, the payment system can be made
different methods for commerce. However, much more efficient and does not need to be
most of these can be classified as some form of such a burden on sellers. Thanks you influential
commodity or representative money. online payment web services like PayPal, the cost
But more recently, we have seen a completely of accepting credit card payments have fallen
new form of money emerge: digital money. The dramatically.
categories within this form of money are broad, This concludes our version of the history of
including: credit cards, banking, online trading money. One thing that is clear from all of this is
and internet payment systems. that money in one form or another will probably
•  CREDIT CARDS: When a credit card is swiped, be around for a long time. Other payment systems
an electronic signal is sent through the card that could become dominant in the future and
network over phone or cable lines, carrying all have already started to take shape around the
that transaction’s information. The benefits world include payment through mobile airtime,
from this are that it makes it very easy for through public transit passes and Twitpay (paying
consumers to conduct transactions and that through twitter).
there is always an available line of credit. Although we still don’t know what that dominant
•  BANKING: In regards to banking, computers form of money will be in the future, one thing
fit very well in banks, because they are that’s for certain is that we will continue to spend
ideal for storing information and performing those precious dollars in a completely different
calculations. Today, they are used in way and as the trend shows, spending will likely
electronic fund transfers between banks, in become easier. 
ATMs and also in online banking, which makes
it very convenient to pay your bills. Click to read more & join us!
•  ONLINE TRADING: Additionally, digital money
has also found its place in the capital markets,
since most trading is now done electronically.
There are also many online brokerage websites
with very low commissions that now allow you
to trade stocks.
•  INTERNET PAYMENT: The next context in
which digital money has become so important
is e-commerce. While privacy is always
a concern, with internet security growing
more secure year by year, online credit card
transactions has grown each year over this
past decade.
FINANCE

Basic Money harder part of budgeting is the The best way to proceed
actual cutting down of your with your investments is to
Management expenses, which involves asking talk to your financial advisor
yourself difficult questions, such or, alternatively, do your own
By Saif Qureshi, Section Editor as, “Do I really need a big screen homework (for which there
Designed by Luis Ernesto Rojas television in my room?” are infinite materials online)
Once you have mastered and manage your investments
budgeting, you might one day yourself.
MOST STUDENTS COMPLAIN
notice that you have extra To further convince you to
about their financial situation
money in your bank account. invest, here is a numerical
yet continue not doing anything
You now have two options: you example. If one were to invest a
about it.
can either spend it all again (in $1000 every year from the age of
So instead of waiting to
which case you need to go back 20 till the age of retirement at
win the lottery, the following
to the beginning of this article) 65 (with reasonable a 5% return
are a number of tips you can
or you can use the next very on your investments), one would
use to help ensure that your
important financial skill called end up with a total of $159,700
wealth grows over time. Just
saving. in their investment account.
remember, what you’re about
Saving is important, as it You might be thinking how
to read requires some financial
allows you to pay for major that’s possible, if one only
discipline and will certainly not
expenditures or for costs that invested $45,000 over the 45
make you a millionaire over
you had not previously expected. years?
night (but if followed, will likely
Having some sort of reserve is The answer to that lies in the
keep you out of the poor house).
essential and will mean that you return of 5% you will be making,
The first thing you need to do
can avoid having to go and get a with the combination of the
is compare your income versus
loan in the future. You might wish magical power of compounding.
your expenses. Obviously the
to open a Savings Account and as Compounding means that in
latter should not exceed the
a general principle keep about a addition to the 5% you make
former—unless, of course, you
year’s worth of expenses, just so from your investment every
have lots of assets already.
that you are free from financial year, you make an additional 5%
Assuming you don’t, then you
problems. from your previous investment
need to rely on a very important
An additional skill that returns. Over a long period, this
financial skill called budgeting.
comes along with saving that strategy makes a big difference
Essentially, this involves
you should seriously consider and can lead to large amounts of
dividing your current expenses
is investing. For this skill, you income.
into categories (e.g. food,
need to consider what your Just remember that in the
utilities, entertainment, etc.)
financial goals are and estimate long term, whether you are
and then monitoring the totals
your future expenses. budgeting, saving or investing,
in these areas to ensure they
Whether you are investing so all of this requires some sort of
are under control. Using this
that you can buy your dream financial discipline on your part
method will allow you to quickly
car or for retirement, you need and will first require you to
realize which areas you need
to build a portfolio, one which devise a financial strategy based
to cut down on, so you can use
combines stocks, bonds and on your needs and goals. Once
that money more wisely in other
other financial instruments, in you figure out those basics, then
places or (if possible) to save it
order to reduce your risk. How all you have to do is stick to
for the future.
much you allocate to each stock/ them. 
Many banks have an online
bond depends on the return on
spending manager for your
investment you are looking for Click to read more & join us!
credit card account, which
and the risk that you are willing
shows the amounts you spent
to take. Usually, the higher the
in several categories. If this is
return on investment, the higher
not available for you, then it’s
your risk will be, meaning your
probably a good idea to use
return will deviate by higher
spreadsheet software to budget
values.
your expenses. However, the

46 ArbitrageMagazine.ca | Summer 2010


FINANCE

Is the Stock study past behaviour. For course the house who takes it
example, players playing poker share). Investing on the other
Market Really look at their opponents for clues hand enhances the economy,
Just a Casino? and try to determine whether or and in the long run more capital
not they are bluffing. They also leads to improved productivity
study the betting patterns of and wealth for everyone.
By Saif Qureshi, Section Editor their opponents, and some good You might also have noticed
Designed by Saif Quershi players can remember what that when you gamble, after the
their opponents wagered 20 game you are playing is over and
hands back. Understanding this you have lost, you lose all the
information, allows gamblers money you put in and there is
to predict the future to some nothing you can do about this.
extent. This example demonstrates
On the other hand, investors the two major ways in which
try to predict the future by investing differs from gambling.
examining and analyzing stock First, investing is not a time
Image sourced from Telegraph.co.uk charts using various techniques bound event, meaning that you
called technical analysis. are free to invest for however
Many have heard people claim However, this is not an exact long you want. However, when
that investing in the stock science because of the efficient- you are gambling, you don’t
market is like gambling in a markets theory, which claims have a choice because once the
casino. While there’s some that the current stock price game is over, the bet is finished
truth to that, overall, investing reflects all past prices. This is and the money is distributed.
has been proven the more because there are millions of The second major difference
lucrative choice. investors out there looking to is that when you are investing,
However, there are many exploit the same opportunities you don’t usually lose all your
successful gamblers just as there as you, and thus it is most likely money. The reason for this is
are many successful professional that the current price already that first of all the company you
investors. So one has to wonder: reflects all past events. have invested in would have
is it all really just luck? So if, both stocks and casinos to go bankrupt for you to lose
Let’s compare. have risk and both rely on past all your money, and this rarely
Firstly, whether you are uncertain information to predict happens. On the other hand,
investing or gambling, you have the future, then what’s the point this is very common in gambling
to compare the risk of your of putting your money in either because if you lose the game,
money towards the possible of them? The case for buying then you lose your entire bet.
gain. Investors can lower stocks in a company is that it Next time someone mentions
their risk by following risk gives the investor an ownership to you that gambling and
management strategies such as stake in that firm and allows the investing are the same, you can
diversification or by investing in investor to take a share out of inform them about how there
stocks with strong histories and the company’s earnings. are both major similarities and
low measures of beta. Over the long term, it has differences. Both involve risking
Gamblers on the other been proven that business your money and hoping to get
hand can look at the odds and profits increase more often than high returns, but in the long run
decide whether or not it is a not, and if profits go up, so does investing in stocks has a higher
worthwhile risk, or how much to the stock price. That is one of chance of making you a
put into play. Most professional the main reasons why investing millionaire than playing at a
gamblers, like investors, have a is so much safer than going to casino 
pretty good idea after a while your local casino.
on how to increase their reward, In the long run, gambling is a Click to read more & join us!
while minimizing risk. zero-sum game, meaning that
Another surprising similarity is it only transfers money from
that both investors and gamblers the loser to the winner (and of

Summer 2010 | ArbitrageMagazine.ca 47


FINANCE

What is Short examples below). And while Going short can be contrasted
the short seller may suffer from with the more conventional
Selling? a loss if the price of the assets practice of going long, whereby
rises, the lender will experience an investor profits from any
a gain. increase in the price of the
Nicki Mossavarrahmani, Staff asset.
Example: Market conditions
  Writer In comparison, investors who
are such that the shares in
Designed by Katie L. Serensits employ short selling often use
company X are currently being
this technique to allow them
traded at $10 per share.
Short selling, shorting or to profit on securities which
Scenario 1: The short seller
going short; this is the financial they believe are overvalued,
decides to borrow 100 shares,
practice of an intermediary whereas long investors attempt
for a total value of $1000 and
borrowing an asset from a to profit on securities by buying
immediately sells those shares.
lender and then selling it to a those which they believe to be
If the price of the shares falls to
third party on the market, in the undervalued.
$6, the short selling can buy the
hopes of making a profit from So if one is sure that a stock
same number of shares back at
the variations of the borrowed is going to decline and wants
the price of $600 (100 shares x
asset’s worth. to profit from its regrettable
$6). Once he returns the shares
Confused? Well, hopefully demise, then short selling is
to the lender, the borrower has
the following will clear up the the best option. Thanks to
made a $400 profit, minus any
this investing technique, many
borrowing fees.
investors make money on the
Scenario 2: If the price of
decline of an individual stock or
the shares in company X instead
during a bear market.
rises to $14 per share following
Most of the time, you can hold
the short sale, and the short
a short position for as long as you
seller is required to return the
want, but the downside is that
shares, the short seller would
interest is charged on margin
have to buy back 100 shares at
accounts. (Margin accounts
$1,400 and would suffer from a
are collateral that the holder
loss of $400, plus any borrowing
basics. of a financial instrument has
fees.
The intention of the borrower to deposit to cover some or all
(also known as the short seller) This example illustrates how of the credit risk.) Therefore,
is to sell the lender’s assets at a investors can make a profit on a keeping a short position open for
higher price and then buy them declining market by short selling a long time will likely cost you
back when they drop in price in an individual stock. more.
the markets. The borrower is But you may ask, “why would Additionally, an added risk in
thus betting that the borrowed a person lend his/her securities short selling is that you can be
assets he/she sold will reduce in the first place?” forced to cover (buy the shares)
in value in the long run, so that Well, regardless of the change if the lender demands you to
he/she can buy them back at a in price, the lender will receive return the borrowed shares. As
fraction of the cost they were a fee for borrowing the assets always, the principal rule of
sold for. and payment of any dividends investing applies; the investor
This idea works because paid on the borrowed assets. faces high risks for potentially
the original lender will have Additionally, the lender is hoping high returns. 
all his securities (in this case, for the market price of his/
securities being the assets sold her securities to rise, thereby Click to read more & join us!
to third parties) returned, not receiving both the borrowing fee
the value of the securities (see and the securities that are now
the short selling infographic and valued at a higher price.

48 ArbitrageMagazine.ca | Summer 2010


FINANCE

Spreading the In any given sector, an a pair of securities. A break in


investor can select what they these traditional trading bands,
Wealth: Spread & think to be the leader(s) and ranges in which securities trade,
Long/Short Strategies underperformer(s) and exploit can be caused by moments of
the spread (difference) between market panic or euphoria. This
them. This would be achieved in turn can be problematic for
by going long the outperformer investors with a long/short
By Michael Morretto, and short (i.e. short selling) the spread trade, because the
  Contributor underperformer. two securities are out of their
Designed by Laura Gonsalves In an ideal situation, profit normal trading range and may
would be achieved from the not respond in the predictable
The magnitude and speed leader generating positive way the investor expected.
at which financial innovation returns and the lagger producing A matter of moments is all
has occurred over the past negative returns, thus returning that it may take to break a
thirty years is nothing short a profit on both the short and historical relationship that has
of astonishing. Increasingly long positions. existed for such a long period of
complex financial products The same logic could be time and that we have almost
give investors the flexibility applied to a sector and either a taken for granted. This reliance
to implement more complex strong/poor company within that on empirical observations is not
investment strategies. same sector. For example, with unique to this particular
Accordingly, it is impossible a negative outlook on the sector, investment approach; however,
to find the ‘perfect’ investment one could short it and long a this investment style is
style or strategy; rather different market leader. The logic being susceptible to this type of
strategies cater to different that even if the market leader problem. 
levels of investor sophistication and the sector both fall, the
and goals. market leader will fall less than
Before trying to decide on a the overall sector. This means
particular investing style, one that the short on the sector will
must consider his own particular return more profit than the loss
risk tolerance, time horizon, will be on the market leader,
investment objective, need for leaving the investor with an
liquidity and so on. Investing in overall positive return from the
a financial product with an initial combined two positions.
lockup period might provide an It goes without saying that
excellent risk-adjusted return; there are risks with this investing
however, it would be completely style. Some are more specific to
inappropriate for an individual this style whereas others that
that needs unobstructed access apply generally to investing.
to their funds. One of the principal risks
Market leaders are companies is that both the long and the
that are expected to show more short positions move against
potential than their peers or the the investor; this could produce
market and possess a position even greater losses than simply
of dominance compared to the being long or short. Proper risk
offerings or market position of management measures, such as
their peers. The opposite can Click to read more & join us!
a stop loss on the long position
also be said for companies that and a limit buy on the short
are ‘underperformers’ relative position, will help to limit the
to their sector, industry and extent of losses.
index. Another risk for a trader could
This is where the concept of a be a break from a historical
spread trade comes in. relationship that exists between

Summer 2010 | ArbitrageMagazine.ca 49


FINANCE

Scare Tactics and the


Blurring of Truth
By Alfred Yim, Staff Writer
Designed by Laura Gonsalves

Have you ever heard the


news warn of an impending
Zimbabwean-like hyperinflation?
Why the US will sooner, rather
than later, become the next
Greece? Or that the government
is bankrupt and that you should
expect the dollar to take a nose
dive?
For the layperson who comes
across these messages, it would
be easy to understand why
they may become frightened
and mislead. This article’s
purpose then is to analyze some
of the more common claims
and arguments that serve
to perpetuate this hysteria,
allowing you—the level headed
individual—to analyze opposing
views and make informed
conclusions regarding deficits,
debt, devaluation of the dollar
and hyperinflation scares.

“Deficits Lead to Certain


Economic Ruin”
Just as interesting, is the fact American on a desert Island;
DEBT AND DEFICITS
that rising deficits have been where the American, whose
Daniel Griswold of the
witnessed alongside improving job is to eat, pays the Asians
Libertarian CATO institute lends
employment numbers; when for their hard days foraging and
support to the idea that deficits
deficits were at their worst, hunting with IOUs.
may be misrepresented. He
unemployment fell by 0.7 Murphy goes on to say that
states that in periods where
percent, while unemployment if a country’s comparative
the current account deficit is
jumped by 0.8 percent per year advantage is in intangible
worsening, GDP growth has been
when deficits were considered financial services, then trade
more substantial than in periods
to be improving. deficits will naturally arise due
where the deficit is decreasing.
Another Libertarian argument to other country’s lending in
For instance, in the 1980s when
comes from Robert Murphy hopes of returns; the cost of
the current account deficit
who, in his article “Perpetual growth for the country would
declined as a percentage of GDP,
Trade Deficits Can Be Good,” then be interest paid rather
the economy grew at a modest
analyzes the apparent danger of than physical items imported;
1.9 percent; but when deficits
deficits. In the piece, Murphy this necessarily requires us to
grew moderately, GDP grew at
begins outlining Peter Schiff’s put financial cost in context
3 percent; and finally, when
comparison of the US debt with a nation’s growth metric,
deficits were rapidly increasing,
situation with 5 Asians and 1 that is GDP.
GDP grew at 4.4 percent.

50 ArbitrageMagazine.ca | Summer 2010


FINANCE

The discussion of historical differently than they normally So to apply the notion of dual
data necessarily requires the would. usage of borrowed funds, instead
discussion of the purpose or However, as Joseph Heath of education and housing, the
necessity of said deficits. The points out, incentives do not federal governments’ borrowing
reasons for running a deficit necessarily lead to outcomes can bring about boons in the
should, at the very least, bear that were intuited on the outset. form of more employment and
as much significance as the size For instance, one would expect increased production
of the deficit. taxi drivers to work longer hours
For instance, Krugman says on days with high volume of “Deficit Spending is
deficits are needed in the short customers to take advantage of Wasteful, Let’s Do
term to alleviate the problems extra income; but on average,
of the present, echoing Maynard these drivers work less hours
Without It”
Keynes’ statement that, “In in these conditions, contrary to A counterargument to the
the long run, we are all dead.” what incentives tell him or her aforementioned ‘potential
The spending fills in the deficit to do. benefits’ of leveraged spending,
in private spending and lack of This analogy by Heath shows would point to the ineffectual
consumption, greatly needed in that the possibility of bad nature of spending in general and
times of crisis. investment due to some kind that government intervention
Krugman goes on to say that of incentive shouldn’t preclude simply serves to crowd out
during the Great Depression, quantitative easing altogether. private investment driving
what precipitated further Not only are incentives more the economy further away
hardship in 1937 was the complicated than first seen, from Pareto optimal economic
incorrect assumption that the other secondary alternatives conditions (Pareto Optimal
problem was resolved, which lead such as tweaking regulation being, a state where changing
to the tightening of monetary and rules, as mentioned before, any one variable would result in
policy and as a result, prolonged can achieve the same desired a negative change elsewhere).
suffering. In general, deficits are outcome of a non-existent In response to that, one
not one dimensional and require bubble. should consider Lipsey’s and
a look at the opportunity cost of Lancaster’s Theory of Second
slashing deficits.
“Families Can’t Best, where in a market/
A counterargument to Live Beyond Their economy with one or more of
spending usually involves Means—Neither Can the assumed conditions in the
the mention of the potential Governments” General Equilibrium Theory are
for asset bubbles and mal- broken, any attempts to move
investment. On the issue of asset This argument is one of the towards Pareto Optimality
bubbles, there is a way to enact strongest cases for a fiscal will actually be worse off than
spending policies while avoiding tightening of the belt. Indeed, letting 2 seemingly ‘un-optimal’
the negative corollary-and that why should governments have factors cancel themselves out.
is to implement regulation and a different fiscal standard than
controls. In the case of the the nuclear family?
housing bubble, higher lending Such arguments however,
standards (i.e. down payments cloud certain realities, in that
needed) led to a much smaller families DO take loans out on
sub-prime market in Canada, things, such as education and
which was only 6% of the market homes, as well as borrowing
2006 through 2008, as noted in for consumption. And this
the Vancouver Sun. same dichotomy exists for
The threat of mal-investment government spending as well.
is based on the notion that When expenditures are made
individuals, faced with the with an investment mindset, it’s
opportunity for cheap money a wholly different thing from
will be incentivized to spend consumptive borrowing.

Summer 2010 | ArbitrageMagazine.ca 51


FINANCE

To Illustrate, take a polluting amount, largely owing from the the present, in Greece.
company which possesses a fact the US economy is 40 times If this lack of lending and
monopoly and therefore and larger than Greece (14 trillion borrowing vigor persists into
produces less than it could to versus 302 billion). However, if the future, hyperinflation would
maintain high prices. If there is one takes a look at total debt, likewise be a case of Chicken
a move to increase the number including intergovernmental Little. However, predictions of
of competitors, the level of debt, the ratio to GDP is much sentiment in the future would
harm would be increased— closer, with both countries be speculating at best, just as it
simply letting the factor of around 100% with Greece sitting would be to attempt to predict
monopoly offset the problem at 115% and the US at around the sharp reverse in the US bond
of externalities (pollution) is a 94.27% market.
better route in this case. Despite the apparent parity, These factors illustrate the
Drawing on this and applying the US debt situation has 2 differences one must take
it to deficits and spending, elements that make it different, into account between Greece
advocating thrift in an attempt as discussed by Robert Green: and the US debt. Objections
to move towards Pareto (1) Greece pays higher would include the issue of
Optimality, when the market has interest on its debt than the US. intergovernmental debt and
severe problems of contracted The average coupon interest the point in time where social
demand and lending reticence rate for outstanding US debt security payments necessitate
by the banks, will not only NOT (Debt To The Public) is just 2.5% the agency to reclaim its lent
guarantee a net benefit but can (as of March 31, 2010, according money. However, the transition
worsen it, as in the case of the to the Bureau of the Public Debt) period when such redemptions
polluting company. and the Fiscal year 2011 budget of bonds aside, this debt owed
projects an average interest to itself essentially indicates
“USA Will be the Next rate for the fiscal year 2011 of how a portion of debt is more
Greece… And Soon” just 2.0%. Confidence in the US flexible than public debt.
is what primarily allows interest
A popular argument for lifting rates demanded to be so low. HYPERINFLATION
up fiscal bootstraps involves (2) Greece cannot finance its Printing Of Money &
Greece. It’s easy to relate debt with the printing of money Hyperinflation Scares
Greece’s problems to the US, (double-edged advantage). If Overzealous doomsayers like
making forthcoming chaos sound push comes to shove, the US to prey on misconceptions about
quite possible. That said, this is can ‘print’ or finance its debt just how close hyperinflation
a scare tactic. Propaganda. by buying treasuries, Greece is to becoming reality. One
And at first glance, the cannot. Hyperinflation is must note however, that the
comparison seems true. Debt purported to result from any increase in money supply does
comparisons between these 2 mass printing of money, however not necessitate inflation if
countries in terms of the public inflation requires there to be that money is not being lent,
debt are shown in the table. a willingness to lend (on the which means at the minimum,
In absolute terms, US trounces banks’ part) and a willingness hyperinflation will not arise.
Greece’s interest payment to take out loans (on the part Moreover, there has not been a
amount. As a percentage of GDP of consumers), both elements perfect correlation of inflation
though, it is actually a smaller clearly depressed and missing at and the money supply-this is
without taking into account any
other variables behind the data.
The reason for the lack of
more lockstep interaction could
be laden in how M2 money
supply is defined. M2 among
other things, such as deposits
Source: USA statistics: Office of Management and Budget, US FY2011 White House at banks, includes the holdings
Budget; US Treasury March 2010 Schedule of Federal Debt; Greece statistics:
European Commission Eurostat  
of cash outside of banks. In

52 ArbitrageMagazine.ca | Summer 2010


FINANCE

Zimbabwe social climate, then you should


Other arguments one should do it with a sound rationale.
be wary of are those that bring An example of a more prudent
up the printing of money and way of going about commodity
the hyperinflation in places investment is to invest in broad
like Zimbabwe. Saying a based commodity ETFs. The
country will become the next reasoning for this is because
Zimbabwe is hyperbole at best, commodities have very low
as Zimbabwe’s hyperinflation correlations with each other. In
is a result of extremely poor addition, research has shown
rule, which is manifested in its that if there is any possible long
management of the economy. run return, in excess of the risk
To avoid this state, a country free rate in commodities, it is
like the United States would achieved by holding a portfolio
need to do the following: of equally weighted periodically
drastically reduce its level of rebalanced commodity contracts
democratization, turn youth (which Erb and Harvey details
groups into paramilitary wings, in their paper “Tactical and
seize farms and run them into the Strategic Value of Long run
ground, deter foreign investment Commodity Futures”).
by using said paramilitary wings The implication for the
to seize assets and terrorize average investor is this: buy a
the populace and commit a broad based ETF (which holds
host of other counter-intuitive portfolios of contracts, so that
actions before any exaggerated you the investor can avoid the
statements can avoid being duty of rollover and rebalancing),
regarded as a monetary if you do not have many other
equivalent of Godwin’s law. assets like stocks or bonds. Also,
Many other instances of buy ETFs which don’t have many
hyper-inflation such as those pre commodities when you have
1980 were accompanied with other non-commodity assets to
the fact that fiat money systems speak of.
were in place; however this fact In all, besides avoiding the
was always accompanied with a arguments which use hard and
weak central government and absolute statements (which are
times of great apprehension on civil/social unrest, including a red light in terms of
the public’s part, there will be war. fallaciousness), one should also
a larger amount of dollars held, take great care in realizing that
representing the atmosphere of economics is not perfect;
pessimism. What Should You Take therefore arguments which
This in turn, can slightly Away From This? depend on what may or may not
increase the M2 figure, but what Given that such themes happen are either individuals’
should be focused on is that of deficit and hyperinflation best guesses and/or estimates.
the willingness of individuals to doom are less apocalyptic than Regardless, having a more
spend is depressed. The final first observed, investing in pragmatic approach with your
link to this argument is the commodities (gold included) money is never the worst choice. 
aforementioned other variable should not be undertaken
which is the velocity of money with overconfidence. As well,
(amount of economic activity complete divestment from US Click to read more & join us!
associated with a given money bonds and cash is unwarranted.
supply); which is weak due to If you are going to make a bet
said pessimism. that commodities will continue
to benefit from the economic and

Summer 2010 | ArbitrageMagazine.ca 53


From Gold To Fractional
Which Financial System is the
Better Choice Today? Designed by Mary Zhao
By Pawan Shamdasani, Staff Writter

Once the world was run by gold, Reserve system is the still most in terms of gold. But this system
now it’s by paper and plastic. But appropriate for the current was no better than the last, as it
how did this transition happen? financial system. Now it’s our turn broke down in the early 1930s.
Why is it important? Why does to join that debate. Then came “the Bretton Woods
it affect our lives, and did the System” around 1944. This system
world make the right choice in this GOLDEN HISTORY was based on the convertibility
switch? Before World War I, the world of U.S. dollars into gold (for
To start, the gold standard was economy operated under the foreign governments and central
a monetary system where each gold standard. The standard was banks only) at thirty-five dollars
participating country fixed the adopted by England in 1717, per ounce. With this system,
value of its currency to a specific the United States in 1834, and the majority of countries settled
amount of gold. Most developed by other major countries in the their international balances in
countries adopted this system 1870s. During 1880 to 1914, most U.S. dollars. However, continuous
during much of the nineteenth countries adhered to the “Classical U.S. balance-of-payments deficits
century and early twentieth Gold Standard”; this was also a steadily reduced their gold
century. period of unprecedented economic reserves, thus lowering the ability
Meanwhile, the Fractional growth and relatively free trade in of the United States to redeem its
Reserve system—the most current goods, labour and capital. currency in gold.
monetary system—has existed But WWII changed everything. Finally, on August 1971 the gold
since the early nineteenth century. The gold standard collapsed as standard was abolished.
This system involves banks keeping countries demanded monetary
a fraction of their deposits as flexibility to finance the war. FRACTIONAL HISTORY
reserves while lending out the Only after Germany’s defeat did Since the end of gold’s
remaining and having the obligation developed countries initiated the dominance, the world economy
to redeem all these deposits upon “Gold Exchange Standard”, where has largely operated under the
demand. all countries fixed the value of their Fractional Reserve system.
Amid this latest financial currencies in terms of the U.S. Savers of money were in search
downturn, there has been a lot dollar. Likewise, the U.S. Central of safekeeping depositories for
of heated debate by economists Bank fixed the value of the dollar their valuables, including gold and
about whether the Fractional
10%

ACCUMULATION OF BANKING 20%

$100 THROUGH 30%

FRACTIONAL RESERVE 40%

50%

$100

From one to the next and the next and next next
person

silver coins, eventually lending MIDAS’ TIP SHEET example, could be exchanged for
these to goldsmiths who would The gold standard was used to approximately 1/20 ounce of gold.
return a receipt (an IOU or note) regulate the quantity and growth Likewise, the British Treasury
for their deposits. Gaining the rate of a country’s money supply. would exchange 1/4 ounce of gold
trust of people, these goldsmiths’ It ensured that, for most countries, for one pound.
notes became a popular medium the money supply (and thus the Because a Canadian could
of exchange and an early form of inflation rate) was relatively convert twenty dollars into one
paper money was created. stable as new production of gold ounce of gold, which could be used
But during this process, goldsmiths added only a small amount to the to buy four pounds, the exchange
began to notice another trend. accumulated stock. An exception rate between the pound and the
During trades, people would to this was when Australia and Canadian dollar was effectively
not usually redeem all their notes California discovered many gold fixed at approximately five dollars
at once and so the to the pound.
goldsmiths took this
opportunity to re-
If the gold standard was to function As exchange rates
were fixed, the gold
invest their gold coin effectively, the Central Bank had to standard was the
reserves in interest- cause of parallel
bearing loans and play by the “rules of the game.” movements in the
bills. Clearly, income price levels around
was generated for the goldsmiths reserves in the early 1850’s, the world. This movement mainly
leaving them with more issued causing global price levels to occurred through an automatic
receipts than gold reserves. The shortly become very volatile. balance-of-payments adjustment
goldsmiths’ role as a guardian of The gold standard was an process known as the “price-
gold and charging fees for secure example of a fixed exchange rate specie-flow mechanism.”
storage was altered to that of regime where most currencies To explain, this mechanism
an interest-paying and interest- were convertible directly into operated like so: using the US as
earning bank. gold at fixed rates, so exchange an example, if a technological
And that’s how the Fractional rates between countries were also innovation was the result of quicker
Reserve system was birthed. fixed. Canadian dollar bills, for real economic growth in the United
$1000

$500
$300
$200
$100 Dolloars

further next further more even further and further further still

States and the supply of gold in nominal income, real income, and of money. To initiate the process,
the short run was fixed, the U.S. the price level in another country. people deposit their money
price level would fall. Therefore, An example of a monetary shock in banks, who then lend out a
U.S. exports were less expensive was the California gold discovery fraction of their depositors money
relative to their competing imports in 1848. to other customers. The remaining
(say, from the UK); as such, the If the gold standard was to funds are held with the banks as
British would demand more exports function effectively, the Central reserves.
while the Americans would demand Bank had to play by the “rules of These customers pay interest on
less imports. the game.” Michael D. Bordo, a the borrowed funds used to finance
professor of economics at Rutgers the banks’ expenses of conducting
THE RESULT? University explains that these business (that is, to pay interest to
The U.S. balance-of-payments banks were supposed to “raise their depositors) and as a source of
system is at a surplus causing gold their discount rates (the interest profits for the banks’ owners. The
(specie) to flow from the United rate at which the central bank bank behaves as an intermediary
Kingdom to the United States. The lends money to member banks) between the people who have a
inflow of gold increased the U.S. to speed a gold inflow, and to surplus of resources and those who
money supply having the reverse lower their discount rates to have a lack of it. When lending
effect of increasing prices while facilitate a gold outflow. Thus, if a out money, the bank absorbs
the outflow of gold reduced the country was running a balance-of- most of the risk and must return
U.K. money supply, lowering prices. payments deficit, the rules of the the principal to the depositor
The net effect was balanced prices game required it to allow a gold irrespective of their return on the
among the two countries. outflow until the ratio of its price investment.
The drawback of the gold level to that of its principal trading The practice of Fractional
standard is that it was known to partners was restored to the par Reserve banking has a cumulative
cause both monetary and non- exchange rate.” effect on the banking system,
monetary (real) shocks. These allowing it to create money. For
were transmitted through flows THE FRACTIONAL GUIDE instance, if Jason deposits $100
of gold and capital between As for the Fractional Reserve in Bank A, which lends out $50 to
countries. A monetary shock in one system, this is where commercial Ray who spends it, the money is
country would affect the money banks (not the government) are eventually deposited in Bank B by a
supply, domestic expenditure, ultimately involved in the creation different person. Bank B then lends
out $25 to Mary, which is spent and For the United States, the currency notes back to gold,
deposited in Bank C. The process coefficient of variation was 17.0 causing the total money supply to
continues indefinitely until the between 1879 and 1913 under Gold, shrink.
total amount of deposits equals a while it was only 0.88 between As mentioned earlier, the
multiple of the initial amount of 1946 and 1990 under Fractional. severity of the Great Depression
cash deposited in Bank A. Also, under the gold standard, was largely a consequence of
In this example, the total amount the government could not use staying with the gold standard.
of deposits, $200, is exactly twice monetary policy to stabilise Once the United States withdrew
the initial amount of cash, $100. output, so economies were not from its commitment to operate
This multiple is known as the able to avoid or offset monetary or on the standard, the money supply
money multiplier, which depends real shocks. This meant that real stopped shrinking.
on the required reserve ratio and output was more variable under With the Fractional Reserve
the currency ratio. the gold standard. Unemployment system however, it is more
was also higher during the gold difficult to determine whether
THE BENEFITS standard era, averaging at 6.8 the costs outweigh the benefits
The main advantage of the gold percent in the United States or vice versa. The 2008 financial
standard was it ensured long-term between 1879 and 1913. crisis has spurred much debate
price stability. Between 1880 and The most common issue with about reforming the financial
1914, the average annual inflation the Fractional Reserve system system and how the banking
rate was 0.1 percent, whereas however, is that it is responsible for system operates. Returning to a
under the Fractional Reserve inflation. Money creation by banks system of one-hundred percent
system, between 1946 and 2003, causes the money supply to grow reserve banking (but with a gold
the average was 4.1 percent. faster than the commodity supply, standard) is a possibility, yet the
On the other hand, the Fractional resulting in the price of goods main consequence of this would
Reserve system benefits a large and services to rise and generate be deflation, which is strictly more
number of players in the economy higher inflation. harmful than inflation. In fact,
including depositors, borrowers, Meanwhile, a problem claimed some inflation is vital to stimulate
bankers and society. Depositors by few Austrian Economists is that a growing economy and lowering
are able to earn interest on their the system subjects the economy unemployment levels. So at least
deposits instead of having to pay to boom-bust cycles it cannot for now it’s safe to say that we
to keep their money at the bank. avoid. won’t be seeing any dramatic
Borrowers have access to these changes in the financial system …
funds at competitive interest rates CONCLUSION at least not until the next financial
that they would not otherwise As of today, the consensus disaster. 
obtain. Bankers are able to among most economists is that it
generate profits and society can would not be wise to return back Click to read more & join us!
efficiently channel idle resources to the gold standard.
into economic productive use. The key issue with gold
functioning as a monetary standard
THE COSTS is that there is no guarantee gold
The main disadvantage of the stocks will grow at rates necessary
gold standard was that prices were to keep prices stable.
highly volatile in the short run, In the past, new discoveries of
mainly because economies were so gold reserves created substantial
susceptible to real and monetary inflation and had adverse
shocks. A measure of short-term macroeconomic effects. At other
price instability is what D. Bordo times, it was observed that prices
states as the “coefficient of would fall as a result of the gold
variation—the ratio of the standard stock failing to grow fast enough.
deviation of annual percentage But the core problem occurred
changes in the price level to when the public began doubting
the average annual percentage the redeemability of the currency.
change.” There was a rush to convert those
EDITORIALS AND OPINIONS

mutual funds gain or lose and the funds are


The Greatest Crime not covered by insurance, as
opposed to a savings account.
Perpetrated to Humankind
Secondly, they are not
designed for short term investors.
By Alex Vo, Coordinator As many people know, stock
Designed by Akil Worrell markets go through a business
cycle with ups and downs. Mutual
YOU PROBABLY KNOW someone funds are designed for long-term
who has money invested in a investors if they want to profit,
mutual fund. Maybe you have as well as the fact that fees may
money invested into a mutual be charged for liquidating them
fund. And who wouldn’t, prior to maturity.
right? With benefits such as Third, mutual funds have tax
diversification, high liquidity, consequences depending on an Image soucred from
small up-front investments and individual’s situation. You may propublishingservices.com
professional management, it still end up paying taxes from (exchange-traded funds) are
doesn’t seem like we need any your mutual funds even if it another alternative to mutual
more convincing. It’s a way loses money. funds, but that’s a different
where less wealthy people can Furthermore, mutual funds topic on its own.
get into the action of the stock cannot short sell and that is As a final point, diversification
market without having to check probably the most important is useful for those who want to
their stock prices on a daily fact to be aware of. This means preserve wealth, hence those
basis. Your money is safe with a that in a down-trending market, who have a large sum of money.
professional. like the one we had recently, Because of the expenses incurred
Or is it? Investing in mutual you will lose money. It will when purchasing a mutual fund
funds is generally much more be inevitable. It is illegal for is percent based, it will cost a
beneficial than leaving it in a mutual funds to short stocks, wealthy investor more money.
savings account.That’s where which is when you profit when On the other hand, less wealthy
the knowledge of it ends, while share prices decline. individuals don’t have the goal
they pretend to understand what How much do these of preservation. They instead
the mutual fund salesperson is “professionals” know anyway? want to make capital gains.
saying to them. Most mutual fund holdings There’s a saying in the mutual
Fees are the most obvious include businesses from the fund world. “Two out of three
negative to mutual funds, S&P/TSX 60 index. This means ain’t bad.” So, tell me, where’s
as they easily eat into your that an individual who would the mutual in mutual funds?
returns. Management fees, for like to invest in stocks could Author Bio: Alex Vo is the
example, get paid whether the purchase the index or create primary blogger of www.
fund achieves a gain or a loss. a portfolio similar to a mutual voindustriesblog.com, where he
If your job is to make money fund’s portfolio, without having discusses financial and
for other people, why should to know anything about stocks. investment strategies on a
you be paid if you aren’t doing Less than half of Canadian frequent basis, using methods
your job? Why should you have mutual fund companies produce from articles to videos to in-
to pay a fee when your portfolio a higher rate of return than the class lessons. He loves to answer
actually declined in value? index and therefore purchasing questions and help beginner
Because of the recent economic the index could be a much better investors achieve financial
downturn we experienced, you alternative. freedom 
might have postponed your Anyone, even busy individuals
summer vacations. These people who would like to invest, will Click to read more & join us!
probably didn’t. be able to do so without a lot of
In addition to the fees, returns work and avoid the expenses that
are not guaranteed. You will not come with mutual funds. ETFs
know how much money you will

Summer 2010 | ArbitrageMagazine.ca 59


EDITORIALS AND OPINIONS

Have Canadian Banks rootedin a sense of conservatism. expand. This should, of course,
However, the conservatism of continue to be done according
Played It Too Safe? the Canadian Banking system to the more conservative nature
was merely a cloak that that is the core of the Canadian
postponed a crisis, but it would banking system.
By Victoria Chau, Staff Writer never have entirely averted it. However, we haven’t seen
Designed by Laura Gonsalves Had the crisis occurred a year or much movement from Canadian
even a few months later, even banks in terms of acquiring new
IN THE MIDST of the subprime the system’s conservatism would sources of revenue. Mainly, the
debacle that resulted in the have succumbed to the same banks have been revelling in the
global financial crisis (beginning bleak realities that the rest of stagnant global limelight that
some three years ago), Canadian the world wallowed in. had been previously pointed
banks were hailed as the All that has happened in this south of the border as the world
forerunners of banking systems past recession does not mean reveres our prudence.
everywhere. Ranked first in a that Canadian banks are the best The profit structure of
survey by the World Economic in the world; it merely means Canadian banks are much
Forum in 2008, Canada was that we were conservative different than their American
declared to have “the soundest enough not to take the huge risks counterparts. Canadian banks
banking system” while the thatour global counterparts did earn a lot more revenue from
United States and Britain were and consequently did not fall in service charges and fees from
ranked No. 40 and No. 44 the same holes. Therefore, as it their everyday customers,
respectively. stands, Canadian Banks are in an whereas American banks look
However, now that we have advantageous position as global towards making investments and
established our banking system financiers look towards Canada profiting from those decisions.
is sound, Canadian banks should as a secure and financially sound Consequently, Canadian banks
be taking great strides to take place to invest their funds. haven’t felt the need to expand
advantage of this position Canadian banks are or innovate new financial
and place themselves more experiencing historically high instruments that could be used
competitively on a global scale. yields while banks worldwide to earn more revenue.
Canadian banks have are insolvent and are relying on For example, in March of 2008,
never really been known as their respective governments following the financial meltdown,
powerhouses in terms of size, as a crutch. The solvency the market capitalization of the
profits, innovation, or anything of Canadian banks can be Canadian banks exceeded many
else. The one thing we have attributed to the conservative of their US counterparts, such
always been—and probably measures that the Office of the as those of Merrill Lynch and
always will be—is prudent. Superintendent of Financial Morgan Stanley. This placed the
This isn’t necessarily a bad Institutions (OSFI) and the Canadian banks in the optimal
thing, as it’s the reason why banksthemselves have placed on position to continue expansion
Canadian banks did so well their capital restrictions. into the States.
during the economic crisis when As a result of these measures, But it did not happen as
the larger and more competitive Canadian banks have enjoyed simply as it seems it could
banks the world over failed capital reserves that on average have. In fact, although there
and looked toward government are two times higher than those have been numerous ‘scouting’
bailouts. Yet, whenever the in the United States and three opportunities for Canadian
global economy does well, times higher than those in the banks since the crisis began in
Canadian banks are left behind European Union. September 2007, many of these
and miss out on the big profit These good times for Canadian opportunities have been turned
party. banks should mean that they’re down or ignored as a result of
That is not to say that out there looking for good deals risk avoidance.
Canadian banks have not proven and bargains on smaller and American banks meanwhile,
that the system itself is sound, more regional banks worldwide such as JPMorgan Chase,
and that much of this security is so that they can continue to Goldman Sachs and Wells

60 ArbitrageMagazine.ca | Summer 2010


EDITORIALS AND OPINIONS

Fargo, all made purchases and begin to find ways to become The top 10 soundest banking
expansions within the States. more globally competitive. countries are as follows:
Across the ocean, Barclays Whether this means a more •  Canada (6.8)
(based out of London) purchased extensive expansion into the •  Sweden (6.7)
Lehman Brothers after it sank, American and other world •  Luxembourg (6.7)
and BBVA of Spain bought what markets, committing to the •  Australia (6.7)
was left of Guaranty Financial. research and development of •  Denmark (6.7)
Canada doesn’t have much to other not so dangerous financial •  Netherlands (6.7)
say in response, aside from TD instruments, or a little bit of •  Belgium (6.6)
purchasing Commerce Bancorp both, these choices are up to •  New Zealand (6.6)
and CIBC unveiling its plans to each individual bank. •  Ireland (6.6)
purchase Citigroup’s $2.1 billion One thing that should be •  Malta (6.6)
Canadian MasterCard credit card agreed upon though, is that Based on a scale of one to
portfolio last month. Overall, Canadian banks should not be seven (one being insolvent and
Canadian banks have been quite relying on their current profit in need of government
lethargic in making use of these structure any longer, as it has assistance, seven being
basement-bargains. resulted in stagnation while the completely healthy). 
In the end, this is the optimal rest of the financial world has
time for Canadian banks to take become much more developed. Click to read more & join us!
advantage of their positions and

Summer 2010 | ArbitrageMagazine.ca 61


EDITORIALS AND OPINIONS

Greed is NOT good cap on CEOs. These events The result?


make it clear that the laissez- The Chinese government has
faire pursuit of profit leads to no choice but to pay farmers
Kevin Kang, Managing Editor inefficient outcomes. more than what their land was
Designed by Katie L. Serensits The unrestrained profit originally worth. In the end,
incentive can be examined at a regardless of what happens in
In the famous words of Wall micro level in China, where small the buying process, all of the
Street’s Gordon Gecko, “greed is village farmers have stopped houses that are “grown” will be
good.” According to free-market growing crops to “grow” houses torn down by the government
economists, the incentive of instead. for development. Thus, all
profit is what drives efficiency This strange phenomenon construction and demolition that
and innovation in the modern started years ago when the occurs is completely pointless.
world. Chinese government began When more money can be
Why work hard if you do not buying large plots of farmland made without actually having
get paid for it? for urban development. To do to create value for society,
Who would share a new idea so, farmers were reimbursed the profit incentive leads to
or invention with the world if for the fair value of their land. inefficiency. Like the farmers,
there was no payment in return? However, farmers saw that businesses and individuals
The opportunity for profit profit was to be made: if they without a strong sense of
pushes businesses to produce constructed buildings on their morality would be encouraged
efficiently and constantly create plots, the value of their land to cut corners and invent ways of
new ways of improving our lives. would increase. creating profit without having to
For supporters of the profit Soon, poorly built brick- work as hard for it. The Chinese
incentive, money is truly what and-mud houses sprung up all government is in the process of
makes the world go round. over the countryside, crowding creating further legislation and
However, greed is also known out fields of crops. Although boosting law enforcement, but
to provoke unethical and illegal some are built illegally without the legal process is always two
behaviour. So the question must permits, they quickly grow into steps behind.
be asked: is money making the communities and homes, making Milton Friedman, famous
world turn the wrong way? Does it difficult for the government to economist and free market
your paycheque always reflect step in and demolish them. Even advocate, once wrote an
the value you have added to if the houses were demolished, essay stating that “the social
society? crowds of farmers would illegally responsibility of business is to
Countless examples of build them again overnight. increase its profits”. Friedman
controversial compensation argued that the modern concept
can be drawn from the recent
global financial crisis. Often,
those who were to blame for the
economy’s troubles were those
who reaped the most rewards.
At the height of the crisis,
AIG Inc. distributed millions of
dollars of government bailout
money as executive bonuses.
Major investment banks were
taking executives to expensive
corporate retreats, while
middle-class Americans were
evicted from their homes. The
realization of this growing
disparity even led the Obama
administration to place a salary

62 ArbitrageMagazine.ca | Summer 2010


EDITORIALS AND OPINIONS

of corporate social responsibility As shown in the recent financial purely for the sake of providing
was idiotic and inefficient: if crisis, regulations on financial food to the nation. Otherwise,
businesses operated according markets that should have existed they may be able to find other
to the law and focused purely were simply not there. As we ways of making profit without
on profit, they would be acting amend our regulatory policies, being truly productive.
morally enough. we realize that innovation in the Of course, Kant’s philosophy is
He added that by spending financial services sector evolves neither practical nor possible. A
the business’s money on social more quickly than the law, and world that tries to live by those
initiatives, businesses are using that something else is needed rules would be too inefficient
up a substantial chunk of their in order to prevent such a crisis and could never exist. However,
employees’ and shareholders’ from happening again. it is obvious that we each need
paycheques. Thus, Friedman The famous philosopher, our own sense of morality and
argued that by pursuing profit Immanuel Kant, had a utopian social justice.
and at the same time, playing by solution for such moral dilemmas. To be practical, we can and
“the rules of the game”, society He believed that morality could should seek profit. Nevertheless,
is pursuing a better future. only be achieved if we pursue an when unrestrained by a strong
Unfortunately, the theoretical action as a “means in itself.” code of ethics, greed is definitely
free market works very This means that to be moral, not good. 
differently from the real we must do things because we
world. In practice, profits believe in what we do and not Click to read more & join us!
have a tendency to lead people because we are pursuing ulterior
astray and encourage them to motives.
commit unethical, illegal and What does this mean for
economically inefficient acts. profit?
In the perfect world, everyone It means that people should
would follow greed to the limits work and contribute to the
of the law. However, our legal society simply for the purpose of
system is infamous for being improving our collective quality
slow and critically flawed in of life—not for making a profit.
dealing with white-collar crime. Farmers in China should farm

Summer 2010 | ArbitrageMagazine.ca 63


EDITORIALS AND OPINIONS

Worthless Europe does not bring forth the


concept of reducing CO2 outputs
Endeavours since that would be met with
Protesting the G20 Summit opposition from China and India.
Many protestors and Western
By Sushil Tailor, Staff Writer nations wish to propagate liberal
Designed by Sushil Tailor democracy but China, Vietnam,
and Saudi Arabia would not find
A WEEK BEFORE the Group of that in their favour.
Twenty (G20), a congregation In order to make meetings
of leaders from 20 current and successful, issues that evoke
rising economic powerhouses, I controversy between member
had a run in with an executive of states are often left untouched.
the York Federation of Students This is why the meetings held
(YFS). They were advertising largely pertain to regulating
their protest that they planned banks, reducing budget deficits
to hold at the G20. While a and paying off debt.
campaign for public education Furthermore, given the
was commendable, I cringed fact that the majority of the
at the sight of our student protestors were Canadian, it
union wasting the money we should be noted that 19 members
collectively paid into it on a of the G20 were not. Other
venture with no tangible gains in world leaders are beholden Image Sourced from Kowaleski, Flikr.com
sight. to the interests of their own
The then G20 went underway populace and thus are not likely of peace activists. When more
and my suspicions were to pay mind to catchphrases groups are added to the list of
confirmed. Their protest chanted by Canadian activists on protestors, the overall message
yielded no results and all of Toronto’s streets. for each group becomes more
those advertising dollars went Conversely, protesting at the muddled and incongruent due to
to waste. G20 not only serves no purpose the added clutter. Ultimately,
The G20 exists primarily as a because of a discrepancy your message gets lost in the
forum to discuss issues pertaining between the agendas of activists noise and the sea of banners,
to international finance and the and that of world leaders, but while your efforts in raising
global economy, be it banking, due to a discrepancy between awareness are left in vain.
stimulus or budgets. Its member the agendas of the activists And then there is the Black
nations prefer not to add issues themselves. Bloc.
into the mix that go beyond this Activists in Toronto hailed Many activists should have
scope. The main reason behind from many different groups at learned by now that protests
this is that when dealing with the G20. Environmentalists, at large international events
these various different member women’s rights activists, peace are bound to be derailed by
states, a common agreement activists, labour rights activists, the actions of the Black Bloc.
that there should be a stable conspiracy theorists, anarchists, The burning and breaking of
global economy exists whereas and socialists were amongst public and private property has
agreements on the vast brunt of the many. From a marketing become a common occurrence
other issues vary. perspective, given this situation, in such big-ticket events due to
The Americans don’t talk it is not logical to go out and this elusive group and protest
about Iran’s nuclear program protest since your message tactic.
because the Russians would would be less likely to be heard. This ragtag group of vandals
disagree on the issue. China and For example, you could be organize either individually or
Vietnam do not propose socialist a labour rights activist whose in a cell. Many have no relation
ideas for contentions would be message would be drowned out to one another and may even
met by various Western nations. by a larger and louder crowd disagree with one another on a

64 ArbitrageMagazine.ca | Summer 2010


EDITORIALS AND OPINIONS

breaking windows and in Toronto,


burning police cars. Some try to
attack corporate headquarters
and franchises situated in the
surrounding area as a symbolic
message against capitalism
while others prefer acting out
on their nihilist fantasies.
Upon completion of their
random acts of vandalism and
violence, they rid themselves of
their black attire and meld into
the crowd of otherwise peaceful
protestors. Like a hurricane,
they come and go leaving only
destruction in their wake. Law
enforcement is left baffled at
the prospect of capturing the
dark clothed attackers without
knowing their identities.
The real victims of the Black
Bloc end up being the peaceful
protestors who wished to raise
their concerns. The media no
longer direct their cameras
and microphones towards
the messages of the various
protestors but towards the
broken windows, fires, the
rioters and the police.
And so we come back to the
York Federation of Students
and their campaign for keeping
education public. Given the
subject matter of the G20,
which focused largely upon
financial issues, the fact that
their message competed with
that of other groups and the
riots induced by the Black Bloc,
the following question arises:
what gains were realized by the
YFS executives for protesting at
the G20?
By now you can answer that
Image sourced from Carl W. Heindl, Flikr.com
on your own 

fundamental ideological level. bandanas or ski masks in order Click to read more & join us!
However, they are grouped to maintain anonymity.
together by their common Once assembled in a vast
tactic of donning all black crowd of regular protestors,
attire over their existing clothes they begin to wreak havoc on
and covering their faces with the environment around them

Summer 2010 | ArbitrageMagazine.ca 65


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Email: letters@arbitragemagazine.com length. Not all material may be published.
By Nicki Mossavarrahmani, Writer-At-Large
Designed by David Tal
You can’t eat it, drink it or use it directly
for anything. It’s a poor substitute for
wood when starting a fire. And yet we
all work our butts off, 9-to-5, for it.

MONEY.
YOU KNOW, THAT thing that really makes the
world go round. purchase a lesson cannot offer a car in
But let’s start by taking a step back. What is return. This dilemma causes inefficiencies in
money? How does it work? the economy and leads us back to reasons as to
Money is generally considered an object that which people prefer to hold money (as they can
circulates widely as a means of payment. Broken use it for any purpose).
down further, there are actually two types of The increased buying power, freedom and
money: commodity money and fiat money. control consumers have using money is what
Today, use of commodity money can be seen motivates and maintains fiat money.
in prison. There, cigarettes can be used to In fact, let’s assume for a second that we do
trade for goods and services but it can also be not have money to use as a means of exchange
consumed for ones utility. Then there is fiat and we revert back to the barter system. Let’s
money (i.e. a form of money, like a $20 bill, explore the consequences.
declared as legal tender by the government), As individuals partake in fewer economic
which is intrinsically useless and does not have transactions the economy gets closer to what
any direct utility. So then why would anybody is called autarky. This represents a state
want to hold fiat money? when individuals are unable to make mutually
Money has three functions: it’s a store of beneficial trades and as a result each individual
value, a unit of account and a medium of can only consume what he or she produces and
exchange. nothing else.
To act as a store of value, money must be able Consumer theory holds us to that consumers
to be reliably saved, stored, and retrieved. prefer to have diversity in their consumption.
A unit of account is a monetary measurement For instance, farmer Joe produces only wheat
of the market value or cost of goods, services, but would like a variety of goods and services
or assets. It gives meaning to profits, losses, such as clothing, shelter, meat and furniture.
liability, or assets. However, since the barter system brings us
The third function of money, medium of closer to autarky due to restrictions in trade,
exchange, is a sole feature of money. It thereby that means that farmer Joe will have lower
avoids the inefficiencies of a barter system, such variety of goods and services which translates
as the 'double coincidence of wants' problem. into lower utility in his lifestyle. Therefore,
This problem lies in the improbability of the when Joe is faced with the option of holding
wants, needs or events that cause or motivate money versus barter, he will choose money.
a transaction occurring at the same time, same But what is it about today’s fiat money—these
place and by the same people. For instance, easily destroyable pieces of paper—that makes
an economics professor may have economics it so valuable?
lessons to offer but in exchange would like Simply our belief in its value.
to purchase a car. However, the student that
would like to
If one believes that fiat money will not be Meanwhile, other economists believe that
valued in the future, then fiat money will have different motives (three in all) lie behind
no value in the present. Therefore, no one peoople’s desire for money. These motives
would be willing to give up goods and services include: the “transactions” motive (having
for money. If people’s belief in the value of sufficient funds for day-to-day individual
money disappears, it becomes a self-fulfilling and business purposes); the “precautionary”
prophecy. motive (having money on hand for unforeseen
So what happens when our belief in (fiat) circumstances); and the “speculative” motive
money is shaken? (holding money because prices of your desired

Money is not
a particular
thing.
Money is an

Inflation is a good example of something


Idea.
goods may decrease).
that deteriorates people’s belief in the value Since people’s desires to hold money rely
of money. If in the next period your money is on these motives, when these motives grow
worth less, you will be inclined to hold less of it. stronger, people will hold on to more money,
Therefore, inflation is one of many determining which results in a drop of total individuals and
factor in how much money people would like to business expenditure.
hold. Conversely, when these motives weaken, you
On the other hand, when people’s belief can see an increase in total expenditure.
in money is strong, when we really love our In the end though, even if we were to abolish
money, people tend to hold onto their money. money, it would always be reinvented in some
Some economists suggest that this is because way. For money is not a particular thing.
the demand for money is a function of two Money is an Idea.
variables: interest rates on close substitutes to Dollars, pounds, lire, whatever it may be, as
money like bonds and the level of income. long as we are bound by markets, by trade to
Higher income means a higher demand for share resources, money in any of its forms will
holding money as the number and value of ones always be something we lust after. 
transactions increase. On the other hand, if an
individual sees a higher return from an interest- Click to read more & join us!
yielding asset instead of the interest given by
the bank, the individual is likely to hold less
money in liquid form (coins and bills).
CAREER PLANNER

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CLICK HERE!

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70 ArbitrageMagazine.ca | Summer 2010 CLICK HERE!
CAREER PLANNER

career
planner

the intro
By Kevin Kang, Managing Editor and Trishaala Ninan, Designer

job profiles
selection
training directory

Summer 2010 | ArbitrageMagazine.ca 71


CAREER PLANNER

the intro M aking career choices is seldom an easy task. Everyone eventually comes to
a point in their professional lives when they have to pick between a promising
path and another that looks equally attractive. The yellow brick road of a
career in finance is full of both hope and uncertainty. If you make all the right
self reflection

moves, you have a shot of living out your dreams with the money and fame
of a successful trader. If you don’t, you might be led away from your ultimate
goals. In the end, we all seek to arrive at our destinations having walked a
road paved with victories. However, without a road map, finding your way may
prove difficult. Let the Arbitrage’s Career Planner be your guide!

Choosing to work in finance means becoming a part of the immense


system of capital that flows throughout the world. In previous issues of the
Career Planner, we mapped out a career in wealth management and an overview
of a career in the industry. This issue’s Career Planner focuses on one of the
most important areas of the system: commercial banking.
job profiles

We created this planner for you in the hopes of helping you make
informed decisions. Our goal is to tell you about a position that you never knew
existed, and help you realize your career ambitions. Follow your yellow brick
road and you’ll get exactly where you want to be—and maybe even further.

what is commercial banking?


selection

the basics

Unlike investment banking, commercial banking is a broad term for services


dealing with the daily functions of large companies, governments, and
consumers. Dealing with large businesses is known as corporate banking and
dealing with the transactions of consumers (known as retail banking). Typically,
commercial bankers deal with everything from managing consumer deposits to
managing changes in foreign exchange rates. This area of finance involves a
very broad range of positions, each with different job descriptions and salaries.
Each role within commercial banking offers a unique experience so be careful
training directory

when you are deciding on a path.

Corporate Banking (excerpt from efinancialcareers.com)

Corporate banking is the range of different services that large companies,


governments, or other big institutions need in order to function day to day.
Responsibilities range from the relatively simple business of issuing loans
to more complex matters, such as helping minimize taxes paid by overseas
subsidiaries, managing changes in foreign exchange rates, or working out
the details of financing packages necessary for the construction of a new
office,plant or other facility.

72 ArbitrageMagazine.ca | Summer 2010


CAREER PLANNER

the basics
Corporate Banking continued

In many cases, there's an overlap between corporate banking and capital


markets. Bankers working in capital markets help companies raise money
by issuing equities or debt. Corporate bankers typically help clients raise

the intro
money through loans. When necessary, corporate bankers will bring in the
expertise of their capital markets colleagues.

Retail Banking

Retail banking encompasses the services provided for individual consumers,


including arranging loans, handling mortgages, and keeping various types of
accounts. Like corporate banking, this type of banking is largely traditional
and gains profit from transactions and the “spread” between borrowing and
lending.

job profiles
self refelction
One person’s dream can be another person’s nightmare. Don’t just make your
career decisions based on what your peers are interested in. You need to be
aware of your own interests and values in order to pick the right career for
you. This starts with a self-evaluation: look at your skill set, personality, and
interests. If you select a position that suits you, you will have a much more
successful professional life. Below is a list of items that you should review

selection
before stubbornly departing upon a path leading away from your penthouse
and garage of expensive cars.

Categories for Career Interests

Skills
What kind of technical and/or occupational skills are you enthusiastic in
utilizing on a daily basis?
What kind of skills are you passionate about to attaining?
Knowledge and Expertise training directory
What kind of knowledge do you most look forward to gain?
What kind of knowledge and/or expertise are you most passionate about to
working toward that will support career ambitions?
Experience
What are the types of challenges and on-the-job intrinsic rewards that will
make your future career satisfying and fulfilling?
Abilities
What abilities do you have to contribute and which ones do you want to
improve on?

Summer 2010 | ArbitrageMagazine.ca 73


CAREER PLANNER

self reflection
Categories for Career Interests continued

Opportunities for Growth


What future opportunities are you hoping to achieve? How high up the
corporate ladder do you hope to climb over the course of your career?)
self reflection

Prestige and Recognition


How much respect and popularity does your ego need [i.e. if a lot, then
chose an occupation that commands a great deal of respect and popularity
from your peers, co-workers and the general public]?
What level of authority do you envision your ideal position possessing in
regards to your team, your division and your firm?
Work & Team Environment
What kind of surroundings are you most comfortable working within?
Characteristics of Personalities
Do you feel that the qualities of your personality allow you to meet and
exceed the demands of your ideal job?
job profiles

The Objective of the Job


Does the purpose of your desired career align with the core organizational
goals of your ideal company, as well as your own career expectations and
objectives?
Will your desired career allow you to achieve a sense of accomplishment
when reflecting on your job on a daily basis?
Responsibilities & Duties
Do you believe that you will be passionate and enthusiastic about the
responsibilities and tasks you will likely carry out on a daily basis?
Salary Levels
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What is your target salary range that you hope to aspire to over the course
of your career?
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The following are general descriptions of the most prominent roles unique to
commercial banking. When reading these overviews, please consider them as
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a kind of realistic job preview that will help prepare you for making the career
choices of your future.
These overviews are by no means definitive and will likely be out of
date within another few months (as the financial industry tends to evolve quite
regularly). Thus, while we recommend using this guide to aid in your career
choices, we also recommend reviewing secondary sources before you make
your final decision. Keeping this, as well as your self-reflection answers in
mind, we hope you find the following career planner section quite eye opening.

(Compiled from careers-in-finance.com and careerplanner.com)

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CAREER PLANNER

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Credit Analysist

Job Description
This is a common entry level job which requires that you evaluate business
and consumer loan applications made to your bank. Your duties include

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projecting a company’s future cash flow, evaluating its current financial
soundness, visiting and interacting with financial people at businesses
and dealing with lenders. You will learn a lot about business in this job.
Your success in this job will depend on how detail-oriented you are, your
knowledge of accounting, and your ability to communicate.

Salary
$39 000 - $50 000

Education and Qualifications


• University degree in Finance, Accounting or related field

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• CCP or FCI (Certified Credit Professional) an asset

Duties
• Analyze credit data and financial statements to determine the degree of
risk involved in extending credit or lending money.
• Prepare reports that include the degree of risk involved in extending
credit or lending money.
• Evaluate customer records and recommend payment plans based on
earnings, savings data, payment history, and purchase activity.

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• Confer with credit association and other business representatives to
exchange credit information.
• Complete loan applications, including credit analyses and summaries of
loan requests, and submit to loan committees for approval.
• Generate financial ratios, using computer programs, to evaluate
customers' financial status.
• Review individual or commercial customer files to identify and select
delinquent accounts for collection.
• Compare liquidity, profitability, and credit histories of establishments
being evaluated with those of similar establishments in the same
industries and geographic locations. training directory
• Consult with customers to resolve complaints and verify financial and
credit transactions.
• Analyze financial data such as income growth, quality of management,
and market share to determine expected profitability of loans.

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Loan Officer

Job Description
This is a highly desirable job in banking which involves making loans to
businesses and consumers. Being a loan officer requires that you have good
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selling skills, an ability to understand a business and a solid understanding of


how banking works. Most people in upper management at banks were once
loan officers.

Salary
$40 000 - $115 000

Education and Qualifications


• University degree in Finance, Accounting or related field
• CCP or FCI (Certified Credit Professional) an asset
• CFA designation an asset
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Duties
• Approve loans within specified limits, and refer loan applications outside
those limits to management for approval.
• Meet with applicants to obtain information for loan applications and to
answer questions about the process.
• Analyze applicants' financial status, credit, and property evaluations to
determine feasibility of granting loans.
• Explain to customers the different types of loans and credit options that
are available, as well as the terms of those services.
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• Obtain and compile copies of loan applicants' credit histories, corporate


financial statements, and other financial information.
• Review loan agreements to ensure that they are complete and accurate
according to policy.
• Work with clients to identify their financial goals and to find ways of
reaching those goals.
• Market bank products to individuals and firms, promoting bank services
that may meet customers' needs.
• Set credit policies, credit lines, procedures and standards in conjunction
with senior managers.
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• Provide special services such as investment banking for clients with


more specialized needs.
• Analyze potential loan markets and develop referral networks in order
to locate prospects for loans.
• Arrange for maintenance and liquidation of delinquent properties.
• Interview, hire, and train new employees.
• Petition courts to transfer titles and deeds of collateral to banks.

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Branch Manager

Job Description
You would be responsible for overseeing all activities at your branch including
opening new accounts, loan origination, solving customer problems, foreign

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exchange, and safe deposit boxes. Most importantly, you are responsible
for establishing relations with customers. This job can be very satisfying,
is never boring and requires you to be hands-on. Many bank managers start
as tellers or customer service representatives. Key things go have for this
position are customer service skills, empathy, quantitative ability, strong
work ethic, organization and a solid understanding of banking. Can move up
to be a market manager and oversee branches in a market.

Salary
$56 000 - $100 000

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Education and Qualifications
• Bachelors degree in Finance, Accounting, or Business Administration
• PMP an asset
• CFA an asset
• 8-10 years experience working at a branch

Duties
• Effectively retains existing business and expands/attracts/acquires new
business.

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• Translates branch sales goals into sales plan and oversees execution.
• Communicates, motivates, monitors and coaches branch staff in
attaining production and referral goals.
• Assures operations standards are met through branch adherence to bank
policies
• Oversees direct reports to deliver branch sales growth and assures
product suitability for customer needs:
• Monitors and controls expenses and fees.
• Performs platform sales and service responsibilities as required.
• Conducts sales activities outside of the branch.
• Promotes professional growth of employees through planned development training directory
activities and experiences for succession advancement.
• Participates in productive community and civic events to extend name
recognition and reputation of Bank.
• Networks by joining key organizations or groups within the marketplace.

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Trust Officer

Job Description
In this job you would deliver trust services, financial products and advice to
bank customers (often more upscale ones). This work will give you knowledge
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of business, investing, estate planning, taxes, probate law and will involve
a lot of counseling.

Salary
$60 000 - $80 000

Education and Qualifications


• Accounting experience
• Bachelors degree in accounting or finance
• CGA or CFA preferred
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Duties
• Gathering of client information for new accounts, existing accounts or
account terminations.
• Coordinating that data through Operations for execution.
• Interacting with clients via phone, mail and client meetings to handle
client requests.
• Prepare special reports for clients to supplement account statements,
summarizing their financial, cash flow, tax, gifting and/or estate
planning information.
• Collect and create disbursement requests while ensuring adequate
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documentation.
• Manage and oversee the preparation of proper documentation and
compliance backup for client family gifts and charitable gifts,
crummey notices, etc.
• Coordinate the process of calculating Charitable Trust distributions and
communicating to the client regarding such.
• Coordinate the process of calculating Required Minimum Distributions
from IRAs and communicating to the client regarding such.
• Meet with clients to review their accounts, assist in financial planning
and organization.
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• Work closely with accountants of clients to ensure timely filings and


taxes paid.
• Prepare client accounts documentation for their annual trust account
review.
• Reviewing investment policies, account performance, cash liquidity
needs, historical or prospective changes in client situations or
activities, etc.

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Mortgage Banker

Job Description
Your primary responsibility as a mortgage banker is to supply potential
homeowners and businesses with loan opportunities. You will work closely

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with real estate agents, perform credit checks, and coordinate with
purchasers. Often loans are sold on the securities market. Because the
number of homeowners in the country continues to increase, mortgage
bankers enjoy a fair amount of job security.

Salary
$50 000 - $83 000

Education and Qualifications


• Bachelors degree in business administration or related field
• Experience as a credit analyst

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Duties
• Originate mortgage loans.
• Establish and maintain relationships with realtors, builders, developers
and other potential business development sources.
• Conduct applicant interview and review & evaluate applicant financial
and credit data to determine acceptable risk.
• Negotiate terms and conditions of loans with mortgagors.
• Provide superior customer service to existing and prospective customers.

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• Provide loan origination and related service and support to internal bank
personnel.
• Keep informed on current real estate market trends and the rules,
regulations, & upcoming changes pertaining to residential
construction and residential mortgages.

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Now that you know more about the major career options in commercial
banking, take a few moments to brew it over in your mind and weigh each with training directory
your vision of your future self. You now should have a good idea of the types of
duties associated with each of the roles, as well as the type of education and
experience required.
The final section of the Career Planner will provide you with more
information on the various designations you may choose to pursue. Having a
designation beside your name will make you look much appealing to employers
and are an investment in your career path. Even if a designation is not
specifically stated under a job description, it may still be relevant and give
you a leg up during the recruitment process.

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CAREER PLANNER

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selection explanation continued

It is our hope that reading this planner has granted you a better understanding
of your yellow brick road. Be sure to follow your ambition and never be afraid
to apply for the jobs of your dreams.
self reflection

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Note: Some of these designations are available in both Canada and the US,
while others are only offered in the US. Who knows where your career will take
you, so we figured we would stay safe and offer information on designations
from both sides of the border.

Canadian Securities Institute Designations


The CSI offers a variety of respected designations that are highly prized
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in the Canadian market place; those include: Chartered Professional (Ch.


P), Fellow of CSI (FCSI)™, Derivatives Market Specialist (DMS), Canadian
Investment Manager (CIM)™ and Financial Management Advisor (FMA). Each
designation has their own extensive requirements to obtain them.
WEBSITE: www.csi.ca

Certified Financial Planner® (CFP®)


Those with the CFP® designation have demonstrated competency in all areas
of finance related to financial planning. Candidates complete studies on over
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100 topics, including stocks, bonds, taxes, insurance, retirement planning


and estate planning. The program is administered by the Certified Financial
Planner Board of Standards Inc. In addition to passing the CFP certification
exam, candidates must also complete qualifying work experience and agree
to adhere to the CFP Board's code of ethics and professional responsibility and
financial planning standards. (Definition sourced from www.investopedia.
com/)
WEBSITE: www.fpsc.ca

Chartered Financial Analyst® (CFA®)


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This designation is offered by the CFA Institute. To obtain the CFA charter,
candidates must successfully complete three difficult exams and gain at
least three years of qualifying work experience, among other requirements.
In passing these exams, candidates demonstrate their competence, integrity
and extensive knowledge in accounting, ethical and professional standards,
economics, portfolio management and security analysis. (Definition sourced
from www.investopedia.com/)
WEBSITE: www.cfainstitute.org

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Certified Fund Specialist (CFS)s
As the name implies, an individual with this certification has demonstrated
his or her expertise in mutual funds and the mutual fund industry. These
individuals often advise clients on which funds to invest in and, depending
on whether or not they have their license, they will buy and sell funds for

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clients. The Institute of Business & Finance (IBF), provides training for the
CFS, and the course focuses on a variety of mutual fund topics, including
portfolio theory, dollar*cost averaging and annuities. (Definition sourced
from www.investopedia.com/)

Chartered Financial Consultant (ChFC)


Individuals with the ChFC designation have demonstrated their vast and
thorough knowledge of financial planning. The ChFC program is administered
by the American College. In addition to successful completion of an exam on
areas of financial planning, including income tax, insurance, investment and
estate planning, candidates are required to have a minimum of three years

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experience in a financial industry position. (Definition sourced from www.
investopedia.com/)

Chartered Investment Counsellor (CIC)


Given by the Investment Counsel Association, this is a designation which CFA
charter holders who are currently registered investment advisors can study
for. The focus of the CIC program is portfolio management. In addition to
proving their high level expertise in portfolio management, these individuals
must also adhere to a strict code of ethics and provide character reference
letters. (Definition sourced from www.investopedia.com/)

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Certified Investment Management Analyst (CIMA)
This designation focuses on asset allocation, ethics, due diligence, risk
measurement, investment policy and performance measurement. Only
individuals who are investment consultants with at least three years of
professional experience are eligible to try to obtain this certification, which
signifies a high level of consulting expertise. The Investment Management
Consultants Association offers the CIMA courses. (Definition sourced from
www.investopedia.com/)
WEBSITE: www.imca.org
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Certified Public Accountant and Personal Financial Specialist
Those holding the CPA designation have passed examinations on accounting
and tax preparation, but their title does not indicate training in other areas
of finance. So, those CPA holders who are interested in gaining expertise in
financial planning in order to supplement their accounting careers need to
become certified as personal finance specialists (PFS). The PFS designation is
awarded by the American Institute of Certified Public Accountants to those
who have taken additional training and already have a CFP designation.
(Definition sourced from www.investopedia.com/)
WEBSITE: www.aicpa.org

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Chartered Life Underwriter (CLU)
This designation is issued by the American College and those who hold it
work mostly as insurance agents. The CLU designation is awarded to persons
who complete a 10*course program of study and 20 hours worth of exams.
The course covers the fundamentals of life and health insurance, pension
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planning, insurance law, income taxation, investments, financial and estate


planning, and group benefits. (Definition sourced from www.investopedia.
com/)

Chartered Accountant (CA)


Being a Chartered Accountant is a valuable designation to put beside your
name regardless of your career path, but by combing a Charter Accountant
designation alongside your financial degree (and other financial designations
and certifications) is a killer combination in the eyes of just about any
employer in this competitive market place. To obtain this designation,
you will have had to complete all the appropriate university courses (or
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equivalent training), before being admitted into the CA training program


where you will take part in a kind of multiyear apprenticeship. Specifically,
you will gain work experience in a CA Training Office under the supervision
of experienced CAs. As well, during your training you will be continually
assessed on your development by CA board representatives, before finally
submitting to a three day Uniform Evaluation (UFE) to gauge your knowledge
and place you on the next step to your CA designation.
WEBSITE: www.cica.ca/index.aspx

CMA (Certified Management Accountant)


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Similar to a CA, a CMA is a valuable asset to place in your CV. CMAs focus
primarily on managerial accounting and are usually often found in industry.
Following university graduation, CMA candidates write a two*day CMA
Entrance Examination that tests business knowledge, analytical thinking and
written communication. If you pass, you enter through series of successive
phases in the CMA Strategic Leadership Program that will take 24 months
to complete and include substantial practical work experience in the field.
A final examination and assessment take place at the end of this program
before one attains their CMA designation.
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WEBSITE: www.cma-canada.org

CGA (Certified General Accountant)


The CGA incorporates aspects from both the financial and management
streams of accounting. While not as prestigious as the other accounting
designations, the CGA offers practical tools for those interested in the
accounting field. Attaining this designation is much more flexible than the
other accounting designation and can be started while attending university.
WEBSITE: www.cga-ontario.org
Click to read more & join us!

82 ArbitrageMagazine.ca | Summer 2010


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