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Currency Wars: The Maple Syrup Edition [Chart]

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Currency Wars: The Maple Syrup Edition [Chart]

Currency Wars: The Maple Syrup Edition [Chart]

Loonie plunges to 6-year lows, BoC concerned about “financial stability risks”

The Chart of the Week is a weekly feature in Visual Capitalist on Fridays.

Global monetary policy these days is a fast moving stream. It’s far easier to paddle along with the current and simply hope that there are no waterfalls or sharp rocks further down the way.

That’s why two days ago, the Bank of Canada decided to cut its overnight rate for the second time in the last six months. Rates now stand at 0.5%, and the the last time they were this low was during an emergency one-year stretch at the tail end of the Great Recession.

The Canadian dollar reacted as expected. The currency had gotten thoroughly crushed in trading since the beginning of the year, and the hammering didn’t stop after the rate announcement. It accelerated, putting the Canadian dollar at six-year lows in terms of dollars and pounds. It’s now down -10.2% to the US dollar and -10.4% to the pound sterling year-to-date. Somehow the loonie even managed to lose ground (-0.72%) to the euro, which is currently in the middle of a historic crisis.

All is Fair in Love and War

Even though it is knowingly participating in an ongoing currency war, Canada doesn’t really have a reputation for being a particularly aggressive nation. Heck, Prime Minister Stephen Harper has even been compared to “Jesus” for his saintly efforts in pushing through draconian terror legislation.

So why the rate cuts and competitive devaluation? The problem is that it is a “Prisoner’s Dilemma” from a global macro perspective: when every other country is either creating money out of thin air, cutting rates, using monetary stimulus, or borrowing extra debt, it makes it extremely difficult to go against the grain. Imagine playing the board game Monopoly in which other players amend the rules so they can take money straight from the bank. If you don’t follow suit, you’re going to lose.

It’s not that countries like Canada want to be in a currency war of competitive devaluation. These rate decisions always seem like a good idea in isolation because the situation always forces the central bank’s hand. We don’t blame the Bank of Canada for the decision itself – it is simply the inevitable result of loose and ineffective monetary policy worldwide that is spiraling out of control.

The gamble of this vicious cycle has been that global growth would resume and the status quo could be pieced back together. Instead, Canada finds itself in the middle of a technical recession with two consecutive quarters of negative growth, crashing commodity prices, an iffy recovery for the United States, and the eurozone held together by a thread.

Against that backdrop, there’s only one thing to do: cut rates again!

“Financial Stability Risks”

There are some interesting side effects that bubble to the top during all of this rate-cutting business. Forget the effects worldwide – to see the results of this policy, one only needs to look domestically within Canada. Even despite the Canadian economy treading water as of late, there are two concerning metrics that have been peaking.

Firstly, the Canadian housing market is the most overvalued in the world. Even last month, it continued to set records on the back of Chinese buying, with Vancouver closing 29.1% more sales in June than the 10-year average. In Toronto, luxury market sales have sailed 56% over the first six months of the year. This is what happens when the cost of money is zero.

Second, household debt for Canadians has reached an alarming 163.3% of disposable income. Since 2007, it is estimated that only Greece has grown its household debt more than Canada. Further, a recent report by BMO says that Canadian households carry an average of $92,699 in debt, and pay $1,165 each month to service it. In the poll, respondents said that if interest rates were raised two percentage points, that 64% of them would feel “stressed” servicing their debt. One quarter of respondents would feel “very stressed” if that happened. A two percent increase at the time of the poll would have brought the benchmark interest rate to 2.75%, which is basically the lowest it ever bottomed at in the ’80s and ’90s.

Stephen Poloz, the Governor of the Bank of Canada, is aware of these concerns. “Financial stability risks remain elevated,” Governor Stephen Poloz told reporters on the day of the rate cuts. “Of particular note are the vulnerabilities associated with household debt and rising housing prices. And we must acknowledge that today’s action could exacerbate these vulnerabilities.”

Paddle away, Mr. Poloz. Let’s hope there’s no rocky spots downstream that could capsize the boat.

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has become increasingly centralized.

In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.

There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.

Flaws of the Global Financial System

Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.

1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.

2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.

Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.

3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.

However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.

4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.

5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.

These are people who have:

  • Access to many financial opportunities and asset classes
  • Capital to deploy
  • Informational advantages
  • Access to financial expertise

In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.

On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.

6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.

In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.

Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.

7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.

With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.

This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.

The Future of the Global Financial System?

The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.

With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.

But is the world ready?

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The World’s Most Valuable Bank Brands

These charts visualize the most valuable bank brands around the world, while also showing the rise of China’s financial services sector over time.

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Visualizing The World’s Most Valuable Bank Brands

When most people think about brands, they often picture iconic consumer marks like Coca-Cola or Apple.

But in the realm of financial services, the importance of having a strong consumer brand is also rapidly growing. After all, with hundreds of new fintech entrants positioning themselves to be the “banks” of the future, it seems that brand awareness may be one of the major competitive advantages that incumbent banks can use to protect themselves.

Which financial institutions have the strongest brands, and which brands are the most valuable?

Valuable Bank Brands in 2019

Today’s chart looks at the world’s most valuable bank brands, according to a recent report from Brand Finance.

It should be noted that brand value in this context is a measure of the “value of the trade mark and associated marketing IP within the branded business”. In other words, it’s measuring the value of intangible marketing assets, and not the overall worth of a business itself.

Here are the top bank brands by value in 2019:

Top bank brands by value

For the third year in a row, the Industrial and Commercial Bank of China (ICBC) takes the top spot, with a brand value of $79.8 billion.

Wells Fargo is the top U.S. bank by brand value, coming in 5th place – however, the bank actually fell two spots from last year’s ranking while simultaneously losing 9% of its brand value. This is not surprising in light of the recent publicity challenges faced by the bank.

The Ascent of Chinese Banks

It’s also interesting to note that Chinese banks have taken all four of the top spots on the list, with ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China having a combined brand value of over $250 billion.

Here’s a look at the ascent of Chinese banks over time:

Ascent of China Banks

In contrast, in the entire span of 2009-2014, there were zero Chinese banks that cracked the top five.

The Strongest Bank Brands

Finally, here is a look at the strongest bank brands.

It’s worth noting that in contrast to value, these are banks that have executed on their branding, marketing, and sales strategies to have brands that ultimately create a competitive advantage for their business.

Strongest bank brands

Brand Finance measures brand strength by looking at a balanced scorecard of metrics evaluating marketing investment, stakeholder equity, and business performance.

For more insights, don’t forget to check out Brand Finance’s report.

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