Quote:
Originally Posted by Spoon
Not sure if this argument holds. Dropping rates (decreasing money supply) means the value of each dollar is worth more. Why would wages need to go up? With a lower currency, this usually drives foreign investments. I think you're forgetting that this also means the cost to invest in infrastruture and labour are also cheaper.
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Wot?!
I think we should all stop the economics talk as it is clear many don't understand the fundamentals.
A decrease in Cdn rates would cause the Cdn dollar to become less valuable versus the USD (assuming no change in US rates) as there would be less demand for Cdn as the safe haven (gov) returns would be lower.
Decreasing rates also indicates one's economy is not performing well, thus the argument that foreign money would rush in is somewhat confusing. Foreign money may come in, but it may also look at a weakening currency and be concerned that their Cdn investment, in their home currency equivalent, will go down as the Cdn $ decreases. Furthermore, one tends not to invest significantly in a country that has just indicated a weak economy.
Lower rates are used to spur domestic investment, as it makes the cost of borrowing lower, vis-a-vis the potential upside of an investment project even greater.
Economics is never just a one answer thing, though - a rate decrease may end up having totally abnormal results due to certain other relationships in the market.