Retailers' Pain in the Cards

To be able to offer credit cards as a payment option, businesses have to pay an average 2% fee which has started to put a toll on their expenses. Premium cards which offer travel insurance, financial rewards (air miles), have small businesses in a tough situation. The interchange fees for regulars like Visa and MasterCard range from 1.6-1.9% but premium cards require a high fee of 2.3-2.5%. Mr. Simmonds, one business owner, says "It has increased our average monthly cost of credit card processing for Visa by 10%, and for MasterCard by 18%." It is a big cost but recently the Senate and Commons committee has started to investigate the issue, due to companies across Canada suffering through the recession.


There are individuals who are willing to buy(demand) and lend money(supply). At times, the consumer also has to pay a service fee when they decide to bring out the plastic. If the government decides to put a limit on intercharge fees, consumers may be more willing to borrow the money and businesses aren't sweating to provide the payment option. This increases the amount of money circulation in Canada which influence the levels of unemployment and economic growth. (If people spend more, jobs are created, and more money is put into consumers hands.)




I think that credit or debit cards are a great option when trying to get consumers to buy more. Using the card almost doesn't hurt as much as using money because no actual money is being exchanged. It is almost like paying with someone else's money, although you are paying at the end of the month. Credit cards allow companies to create money by creating deposits through loans. If more money is loaned out, more money can be created. I think limiting the intercharge fees will help both consumers and businesses in the recession because it allows them to keep more money.



http://www.vancouversun.com/business/fp/story.html?id=1393636

Lowering Interest Rates to Stimulate Economy

In an effort to fuel the declining economy, the Bank of Canada governor Mark Carney has cut interest rates from 4.5% to 0.5% (within 15 months). The idea is that other banks will also be influenced to change their rates, giving people more incentive and a better chance at borrowing money, as well as paying it back. Statistics Canada report indicated that Canada’s economy had shrank by 3.4%, and while lowering interest rates are supposed to stimulate the economy, there will be a slow (12 to 18 months) or very minimal effect. The decline in the last quarter of 2008 has been the biggest since the recession of 1991 and Prime Minister Stephen Harper will only comment, "the economic plan of the minister of finance has spoken very clearly about the government's views on this and our action plan to deal with it."

GDP refers to the value of goods and services produced in Canada in a given year. When the level of savings and investments equal, GDP is said to be at an equilibrium (or stable). In an economic recession, people tend to try and save money which reduces the amount of money circulating (for businesses). Without consumers spending, businesses must cut back on production or lay off workers to maintain their profit (cutting costs). This reduces the flow of money to consumers and households have a lower amount of disposable income. If people do not spend money, business investment (spending) also decreases. When there is little investment, the GDP falls. With lower interest rates, consumer spending should increase because it is sometimes necessary for people to borrow money before they spend it. With low interest rates, the cost of borrowing is little (barely anything at 0.5% interest) and the opportunity cost of not saving is also less.

In most households, spending is determined by future prices and levels of income. During a recession, future incomes are definately not secure which leads people to believe that they need to save now so they will be ready to absorb a likely job loss. With lower bank rates, consumers are only affected indirectly and only affects consumers who are willing to spend money during a recession. Consumers don't benefit right away (like they do if the PST or GST is declined) which is what they need now to reassure them that they should be spending. I think that decreasing interest rates are a good thing, especially in the long run because recessions don't go away overnight. Eventually, as the situation gets worse, people will have the ability to obtain credit and spend money.

http://toronto.ctv.ca/servlet/an/local/CTVNews/20090303/BoC_cut_090303/20090303/?hub=TorontoNewHome