Canada's Place in the Global Economy

[Edward Campbell]

And then there’s this, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post:

http://network.nationalpost.com/np/blogs/fullcomment/archive/2010/01/28/terence-corcoran-the-loopy-obama-sarkozy-axis-of-trade.aspx

Terence Corcoran:
The loopy Obama-Sarkozy axis of trade

January 28, 2010

Both leaders appear to want to manipulate world trade

By Terence Corcoran

Vive la France! For a country that today portrays itself to be in the midst of a great transformation form hog-tied protectionist welfare state to bold new global market player, France has a strange way of conveying that message.  On Wednesday, Francois Delattre, France’s ambassador to Canada, was telling the National Post’s editorial board in Toronto that his country had undergone a “sea change” and that a “new France” was set to become a “new player in a globalized world.” A few thousand kilometres away, his president, Nicolas Sarkozy, delivered a barn-burner speech in Davos, Switzerland,  filled with some very old France ideas. Vive la France contradictoire!


Forbes Media editor Paul Maidment, writing from Davos, said that in his address to the assembled panjandrums at the World Economic Forum Mr. Sarkozy seemed to be “sketching out a French version of the Scandinavian Mixed Economy Model for the post-crisis world.” Somebody else called it the most socialist speech he had ever heard from a self-proclaimed right-of-centre leader. It looked, said Mr. Maidment, like Mr. Sarkozy was staking out his ideological agenda for when France takes over leadership of the G20 later this year.


Heaven help the G20, which means heaven help Canada, among others.  Along with Mr. Sarkozy’s occasionally loopy economic analysis, Canada and the rest of the members of the G20 power circle are also going to have to grapple with the equally silly, even incoherent, economic agenda now being promoted by U.S. President Barack Obama.


In his State of the Union address Wednesday night in Washington, Mr. Obama’s populist bellringers struck the same notes as those clanged a few hours earlier by Mr. Sarkozy in Davos. They bashed banks, dumped on markets, vowed to revamp capitalism and blamed the crisis on everybody but government. Governments were riding to the rescue. Mr. Obama lamented that “bad behavior on Wall Street is rewarded, but hard work on Main Street isn’t.” Mr. Sarkozy said “We are not asking ourselves what will replace capitalism, but what kind of capitalism we want.”


To offset markets and globalization, said Mr. Sarkozy, we need “counterbalances and corrective measures.” Mr. Obama offered a long list of his own corrective measures to the endless list of perceived market failures.


But it is on trade issues that both leaders promoted ideas that should be  ringing bells. What seems to be taking shape is a new movement to begin manipulating trade.


Sarkozy the trade strategist: “It will not be possible to emerge from the crisis and protect ourselves against future crises, if we perpetuate the imbalances that are the root of the problem. Countries with trade surpluses must consume more and improve the living standards and social protection of their citizens. Countries with deficits must make an effort to consume a little less and repay their debts.”


Obama the  trade strategist: “We need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.”


The idea that trade is somehow out of balance around the world, and needs to be fixed by governments deliberately imposing policy and programs, is an economic idea long ago dismissed and even ridiculed. In Mr. Obama’s case, he is dragging America back to mercantilism — the idea that countries get rich and create jobs via exports. Imports — of oil and energy, for example — are seen as drags on the economy that suck jobs away. In Mr. Obama’s world, companies that produce shoes in India are depriving America’s economy of employment and prosperity.

What really creates jobs and prosperity is trade, not exports.  And trade on a global scale is never and cannot be balanced on a nation-to-nation basis. It is impossible. And it is undesirable and dangerous to want to bring about such balances by government action. Mr. Obama’s plan to “double our exports” over the next five years sets a goal that is unachievable by any government policy. No economic theory that’s still valid today supports the use of government policy to foster  exports for the sake of exports, on the grounds that any such measures can only lead to trade frictions, even trade wars, and a decline in the real wealth creator — free trade.


Even greater risks exist when groups of governments, through the G20 or via any other collective effort, attempt to manage multi-lateral trade or realign trade to achieve some fantastic ideal of multi-national “balance.” There’s no such thing. 


In the months to come, somebody needs to make sure Mr. Sarkozy and Mr. Obama never end up in the same room at the same time. We don’t want the U.S. to end up like France — new or old.

Corcoran is right: global trade is ‘in balance.’ Those with lots of cash on hand can buy whatever they want; those who need cash must sell at a discount, to gain market share. If American or French prices need to be lowered to remain competitive then Americans and the French must settle for lower wage and longer hours or they must learn to work smarter – something at which the Americans have, in the past, been very successful and at which the French have, broadly, failed.

One alternative is to do with less, accept a lower standard of living - which is what Canada has done since the 1970s; another is to borrow more - which is what America has been doing for a generation and what Canada did, to finance its unsustainable social safety net, from 1970 to 1995. But it’s not clear, to me that those awash in cash (China, India, too) are willing to keep buying USD Treasuries when Barak Obama appears intent of making the US dollar worthless. No one wants to be paid in monopoly money.

 

[a_majoor]

The more things change:

http://www.theglobeandmail.com/report-on-business/commentary/brutal-economy-of-1700s-has-an-eerie-similarity/article1448623/?cid=art-rail-marketing

Brutal economy of 1700s has an eerie similarity

A central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive state debt

Neil Reynolds

Published on Friday, Jan. 29, 2010 12:00AM EST

Last updated on Friday, Jan. 29, 2010 6:19AM EST

Robert Prechter, the iconoclastic Atlanta market analyst (publisher of the Elliott Wave Theorist), says the world remains in a bear market of "supercycle" degree - meaning that the world's current economic troubles will be "the deepest and longest since the 1700s." Assume for a disturbing moment that he is right. What went wrong in the 18th century? In what way are we replicating the wrong? What consequences should we anticipate?

Here is an instructive guide to the early 1700s: English author Janet Gleeson's Millionaire: The Philanderer, Gambler and Duelist Who Invented Modern Finance, a prescient 1999 book aptly reissued in paperback last year by Simon & Shuster.

Writing in fine narrative style, Ms. Gleeson tells the tale of John Law, the charismatic Scottish gambler who became the central banker of France and, for all practical purposes, of Europe - taking control of a bankrupt country after the death of Louis XIV in 1715, radically replacing gold coins with paper currency, and setting off one of the greatest spurts of economic expansion in history.

Ms. Gleeson tells more sobering tales as well - of John Law's infamous Mississippi Company, of government-decreed credit at 2 per cent, of banks without reserves, of the inevitable Great Crash when the irrational exuberance abruptly ended in 1720. Of extraordinary distress and profound want. "Thus ends the system of paper money," a contemporary wrote, "which has enriched a thousand beggars and impoverished a hundred thousand honest men."

So obvious are the parallels to the modern world, Ms. Gleeson observes, "Law's story holds uncanny relevance" for the 21st century.

The stock market gains of the 20th century pale in comparison to John Law's brief era of central bank innovation. "Law sparked the world's first major stock market boom," Ms. Gleeson writes. "So many people made so many vast fortunes that the word millionaire was coined to describe them. Almost overnight, [Law] became a heroic figure, feted throughout Europe and promoted [to] the most powerful public position in the world's most powerful nation."

Investors from England, Germany, Holland, Italy and Switzerland "stampeded" to Paris to play the markets, driving the share price of the Mississippi Company (which held monopoly trading rights in the French territories of the New World) from 150 livres to 18,000 livres in a matter of months. In comparison, Ms. Gleeson says, the best bull market of the 20th century occurred between 1990 and 1999 when the Dow rose by 380 per cent and Nasdaq by 790 per cent. Next to Law's stock play, she says, these excesses were paltry.

Beyond doubt a financial genius, Law anticipated - indeed, largely invented - the paper currency of modern times along with the central banks that control it. When Law established his own private bank in 1716, he improvised a paper currency and backed it with gold reserves equal to 25 per cent of the paper in circulation. It was highly successful. When nationalized in 1718, it became the Banque Royale, the State bank, and Law became its sole director. The State, though, was less patient. It dictated progressively more currency and progressively fewer reserves.

The Great Crash, when it came, was cataclysmic. Stock market prices collapsed; the Mississippi Company lost 98 per cent of its capitalization. Thousands of people, high and low, fell from riches to poverty. In Paris, mob violence ensued - with unprecedented numbers of robberies and killings. Law himself narrowly escaped death. Obsessed again by gold, France banned paper money and sought a royal monopoly on gold and silver. Naturally, it prohibited private ownership of jewellery and gold crucifixes.

Speculators exited France with whatever wealth they could salvage - and moved across the Channel to London where they proceeded to re-invest in already inflated South Sea shares, driving England toward a Great Crash of its own. Shares that traded for £130 in January changed hands for £1,050 in June. Everyone participated - "country parsons, impoverished widows, kings, princes, courtesans, yeoman farmers, eminent scientists, philosophers, writers, artists - all caught the contagion."

In Paris, the burning of paper currency became public spectacles, the bonfires witnessed by throngs of thousands. The poor scavenged for survival - even as the rich (the lucky gamblers who took their profits early) "danced on," as Ms. Gleeson puts it, putting in place the necessary conditions for the French Revolution. There is always, in hard times, wealth enough for decadence. "During the Great Depression of the 1930s," Ms. Gleeson notes, "[New York's] Waldorf Astoria was fully booked."

The checklist from 1720 remains relevant: a central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive State debt to appease the populace. Was 1720 a unique calamity? Perhaps. As Ms. Gleeson says, though, these same forces have since then combined repeatedly to produce economic disasters. They appear "little altered," she says, "in 300 years."

 

[Edward Campbell]

Every so often, even when he talks economics (not his strong suit), Jeffrey Simpson gets it right, as he does is this column, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail:

http://www.theglobeandmail.com/news/opinions/balanced-budgets-are-lifesavers-in-turbulent-times/article1449947/

Balanced budgets are lifesavers in turbulent times
Canada must protect itself from its neighbour's terrible habits

Jeffrey Simpson

Saturday, Jan. 30, 2010

Six trillion U.S. dollars. Or, for those of you with a taste for numbers: $6,000,000,000,000.

That is the sum the United States will be borrowing in the next decade, adding the $6-trillion to the country's already bloated national debt of almost $9-trillion.

It might be worse. The $6-trillion projection from the bipartisan Congressional Budget Office this week presumes good news: no steep rise in interest rates, no external shocks, no renewal of former president George W. Bush's tax cuts, some modest degree of spending restraint. Subtract any of those, and the borrowing will be more than $6-trillion.

U.S. legislators know these alarming numbers, because the CBO reports them to Congress. So does President Barack Obama. Politicians know how dangerous is this level of borrowing, how much more indebted their country will be to China and other lenders, how much more of every tax dollar will go to service the debt rather than pay for services.

And yet, there is almost no chance that the U.S. political system can deal with the forthcoming decade of massive borrowing. Those who think it can be dealt with by spending cuts alone are dreaming, given that the defence budget is apparently inviolate and eats up almost half of discretionary spending. The very word “tax” is so toxic in U.S. politics that neither Republicans nor Democrats will even utter it.

This massive forthcoming borrowing will push the country's debt to GDP ratio from 53 per cent in 2009 to 67 per cent in 2019, so that the world's biggest debtor will be heading deeper and deeper into the red. The result will be the further long-term enfeeblement of the United States, the country with which Canada has so closely tied and aligned itself.

This massive U.S. indebtedness poses the single biggest uncertainty for the world economy in the years ahead. How will the debt be financed? How high will interest rates have to go to finance it? What will be its effects on the U.S. dollar and other currencies? What's the danger of inflation? What's the level of confidence in the country, its economy and its currency?

For Canada, the debtor's neighbour, the U.S.'s inability to get a grip on any of its major national problems, and especially its borrowing, leads to the uncomfortable question: How do we protect ourselves from our neighbour's terrible habits?

Sadly, we cannot. When the CBO projects a slow recovery – 2- to 2.5-per-cent growth for the next several years, with unemployment at about 9 per cent – only a Canadian government in denial would suggest our economy can do appreciably better. Remember, too, that studies of financial meltdowns such as the one that created this recession suggest a full recovery time of about seven years. Put another way, the Conservative government's strategy of growing our way out of deficit with strong growth and spending restraint is every day looking more like a political illusion.

More seriously, what should Canada do with so much economic uncertainty spilling into the world economy from the voracious borrowing demands of the United States and, in fairness, other uncertainties such as the huge deficits of Europe and Japan?

Metaphorically, think of Canada as a rather small boat with clouds and storms showing on the radar screen. You might try to steer around them, but that won't be possible. The best precaution, however inadequate, is to don a life preserver.

Think therefore of a balanced budget as a life preserver, something that greatly helped the Canadian economy before, and might be called upon to do so again.

From 1995 to the onset of recession, Canadian governments ran surpluses or balanced the budget. The country benefited from strong economic growth. The result was a declining debt, debt-to-GDP ratio, solid credit ratings, better growth than almost anywhere else and excellent job creation, despite predictions that tighter fiscal policy would be a job-killer.

Today, when Prime Minister Stephen Harper and his colleagues brag that Canada came through the recession better than any country, the credit is due to the life jacket of those balanced budgets and surpluses.

It seems odd, therefore, for the same government that underscores how relatively well off Canada now finds itself to ignore the reason why, and to say that a return to a balanced budget can wait many years. It is as if the lessons of recent history have been willfully forgotten, to say nothing of prudent planning for the likely economic turbulence ahead, to which the massive borrowing of the U.S. will contribute.

As for the Liberals, they are comporting themselves now in an even more irresponsible fashion, pooh-poohing the importance of fiscal balance, ignoring the risks of economic turbulence ahead, forgetting their own excellent record of taming past deficits, ruling out any responsible debate about raising taxes, all because they tremble at the prospect of being politically bludgeoned by the Conservatives' ferocious attack ads.

So, how do we balance the budget?

First, ‘grow’ the economy by making it more productive. See e.g. here;

Second, cut spending – massively, even in the face of HUGE public opposition, because every programme and project has a public, political constituency. Then cut some more. But do not cut funding for education and R&D;

Third, cut, preferably eliminate, corporate taxes;

Fourth, introduce a new, green consumption tax which is paid, directly and measurably, by end users – by home owners in Halifax, drivers in Drummondville and grocery shoppers in Scarborough; and

Fifth, See here again, expand our trade and commercial limks with the 'Asian triangle’ (China, India and Japan) to help offset our unhealthy dependence on the US market.

None of it, especially cutting spending, adding a new green consumption tax, cutting the corporate taxes, and making the economy more productive, is easy. Some are damned hard, but all five steps should be taken.

The defence budget? Constrained growth, at best.

 

[GAP]

To add one more....

eliminate the grants/subsidies/whatever they are called to favored businesses previously granted by both Liberal and Conservative governments to big businesses.... These were done in the days of back channeling $$ back to the political parties, but have hung on by the parties feeling they can't slight these businesses by eliminating their place at the trough.....

Bombardier, Oil Patch, Rail lines, for a few come to mind. If they are truely big competive businesses, then they can go it alone....

Oh, and eliminate the CBC totally....

 

[Kirkhill]

Perhaps a simpler formulation:

Decrease deficit - Increase Revenues - Decrease Costs

Costs are politically hard to cut - productivity increases are more palatable but often they translate into lost jobs

National Revenues, I believe, are easier to increase - not by taxing ourselves more but by selling more of what we own and the world wants to buy.

That is the lesson of Norway, Pre-Stelmach Alberta and Wall's Saskatchewan.

It makes no sense to leave resources in the ground when the demand is high and our need for revenue is great.

If, at some point in the future, we get to the point that we, Canadians, have run out of resources to support ourselves then the rest of the world is going be even deeper in the hurt locker.  Consequently cost analyses will be driving the markets to a different set of resources ( and maybe tide and wind power will be viable) and we will adapt accordingly.


The Canadian way out of being locked into Obama's  basket case is moving more resources to the coasts and loading them on to low cost (preferably Cnadian) transport.

 

[a_majoor]

European debt threatens economic recovery. The question I have is will the EU cut loose anyone who threatens the stability of the combined recovery, or will they dig themselves in deeper trying to keep underperforming national economies afloat. (History suggests plan "B")

http://www.theglobeandmail.com/report-on-business/economy/recovery-teeters-as-debt-threat-spreads/article1458282/

Recovery teeters as debt threat spreads

Portuguese civil servants on Friday protest in Lisbon over the government's decision not to raise wages in 2010.
Portuguese parliament defeats austerity plan, spooking investors; hangover from financial meltdown shows no sign of ending soon

Washington — Globe and Mail Update
Published on Friday, Feb. 05, 2010 7:29PM EST

Last updated on Friday, Feb. 05, 2010 7:36PM EST

The world may have averted another Great Depression, but the aftershocks of the 2008 financial meltdown continue to rattle the global economy.

The debt threat stalking some of Europe's weaker economies, the tumbling euro, the United States' eye-popping deficit and its still-deteriorating job market are all powerful reminders that the deep-rooted fiscal problems that pushed the global financial system to the brink continue to pose serious risks to stability.

The latest flashpoint is Portugal, where the country's parliament defeated an austerity plan Friday. The rejection spooked investors from Toronto to Tokyo, pushing stocks sharply lower again Friday before North American buyers returned in the late afternoon and brought markets back into the black near the close.

Although U.S. (DJIA-I10,012.2310.050.10%) and Canadian (TSX-I11,223.1294.360.85%) stocks climbed back Friday, most major global indexes lost ground again for the week, leaving stocks with a poor start for the year as investors continue to flee risk. European shares were particularly hard hit amid fears of ripple effects from a growing debt crisis in Portugal, Greece, and Spain.

The renewed concerns about countries' fiscal situations come as G7 finance ministers gather in Iqaluit to address key financial regulatory issues. Canadian Finance Minister Jim Flaherty said Europe's deteriorating fiscal picture will be a point of discussion.

German Finance Minister Wolfgang Schaeuble told reporters in Iqaluit that Greece has to “pay the price” for running up the largest budget deficit in the European Union.

A major European stock index – the Dow Jones Euro Stoxx 50 – sank more than 5 per cent on the week, pushing losses to more than 11 per cent so far this year. The U.S. S&P 500 slipped nearly 1 per cent on the week, while the S&P/TSX composite index managed a gain of about 1.2 per cent, leaving both indexes with year-to-date losses of more than 4 per cent.

The global stock market's sudden weakness unwinds some of the months-long rebound as investors awake to the possibility that recovery could be a decade-long project, rather than a quick turnaround.

The reality of a slow recovery was underscored by another month of disappointing jobs data in the United States. The unemployment rate fell to 9.7 per cent, but the economy shed another 20,000 jobs. And a staggering 8.4 million U.S. jobs are now estimated to have been lost since the recession began.

The big worry in late 2008 and early 2009 was the collapse of the banking system. Now, the angst is about government debt.

“The legacy of the credit crisis is long-running and has a lot of reach,” explained Sal Guatieri, an economist at BMO Nesbitt Burns in Toronto.

“What we've done essentially is move debt from the private sector to the public sector, and spread the payments over generations. We haven't addressed the fundamental issues [needed] to limit the risk of another crisis.”

The good news is that bank bailouts, easy money and gushers of government stimulus probably saved the global economy from collapse.

The downside is that those efforts shifted the world's debt hangover from consumers and businesses onto the backs of taxpayers.

“There is no easy way out,” Mr. Guatieri said. “People have to pay down their debts. Eventually, governments will also have to reduce their debts. So you're not talking a one or two-quarter workout for the economy, or a year. You could be talking about a couple of years, if not a decade.”

The stock market correction also reflects mounting economic and political uncertainty that extends well beyond a handful of countries in Europe.

Since 2007, governments and central banks have spent eye-popping amounts of borrowed cash to save the system – $11-trillion (U.S.) to prop up banks and another $6-trillion in stimulus.

The big question now is what countries can afford the mortgage. And in recent months, speculators have taken aim at countries they see as the weakest links, including Dubai, Ireland and the so-called PIIGS of Europe – Portugal, Italy, Ireland, Greece and Spain.

But economists warn that the larger industrialized economies of North America, Japan and Europe won't be immune to similar sovereign debt pressures forever. Without exception, countries are facing rising deficits as they try to spend their way out recession amid falling tax revenues.

The same problems plaguing Portugal and Greece could be “dress rehearsal for what the U.S. and U.K. may face further down the road,” Jim Reid, a strategist at Deutsche Bank in London, warned in a research note.

And in a sobering opinion piece in Friday's Wall Street Journal, New York University economist Nouriel Roubini and Eurasia Group president Ian Bremmer argued that the same pressures will eventually force the United States to put its fiscal house in order by raising taxes and slashing government entitlements, such as Medicare and Social Security.

“As the Federal Reserve begins to raise interest rates to head off inflation … foreign investors and central banks will be willing to finance the U.S. only at higher yields,” they wrote. “That's where sovereign risk meets sovereign reality.”

In the U.S. jobs report, particularly sobering is the revision of jobs data back to April, 2008, by the U.S. Bureau of Labour Statistics. The 8.4 million jobs that have been lost since the recession began eclipsed the previous estimate of 7.2 million.

Those 8.4 million jobs represent 6.1 per cent of the work force, making this by far the worst recessionary contraction in the labour market since the Great Depression. Even during the 1980-82 recession, the labour force shrank by only 3 per cent.

“Nothing even comes close in the modern era,” BMO Nesbitt Burn's Mr. Guatieri said.

With files from Bloomberg News

Some interpolations.

The US unemployment rate is far higher than the official estimates, and has been calculated to run as high as 17 toi 22%. This includes "discouraged workers" who no longer seek employment and under the table workers eaking out a living in "the gig economy" performing odd jobs whenever they can.

Canada has the ability to eliminate the debt in six years by eliminating transfers to governments, subsidies and crown corporations (ignoring virtuous circle effects like savings in government operations and reductions in payments to the $30 billion/year carrying costs of the national debt). Of course the theoretical ability to eliminate the debt in a short period of time does not translate into the political will to do so; lots of pressure will need to be applied and political rent seekers who feed off these transfers will fight to the last taxpayer to maintain their positions at the trough. Still, the possibility of getting out from under the debt trap should be appealing at some level.

 

[a_majoor]

Yo yo yo, listen up an get the lowdown on da boom an da bust:

http://www.youtube.com/watch?v=d0nERTFo-Sk

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

 

[Edward Campbell]

I don’t often agree with Lawrence Martin but this time he is quoting one of the brainy Liberals: Donald Macdonald whose multi-volume study of the Economic Union and Development Prospects for Canada (1985) is one of the few of those Royal Commission reports that actually spelled out useful solutions to a well defined problem. This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, repeats what many others, me included - in my own small way in these fora, have been saying for years, but it is still worth a read:

http://www.theglobeandmail.com/news/opinions/the-us-economy-is-in-turmoil-royal-commission/article1463474/

The U.S. economy is in turmoil. Royal commission?
To redefine Canada's global prospects, we must develop alternative strategies

Lawrence Martin

Published on Wednesday, Feb. 10, 2010

The way things are going with the United States, Donald Macdonald was saying this week, it may be time to appoint another royal commission on Canada's future economic prospects, like the one he headed in the early 1980s.

That commission, appointed by Pierre Trudeau, reported 25 years ago and recommended free trade, which was brought in by Brian Mulroney.

America's future seemed unlimited then, so the idea was to find a way to tighten the bond. America's future seems limited now, so the idea may well need to change.

“We in North America have passed away from really having a dominant position in world economic trade,” Mr. Macdonald said, adding that the rise of China is no fleeting thing. A commission to redefine Canada's global prospects may be the way to go.

The country's trade levels with the United States maxed out a few years ago, started downward and, as Mr. Macdonald said, will probably continue to move that way. The United States has bounced back from lows in the past, he said, but “I just feel it's a very different situation today.”

The American deficit of $1.6-trillion is “just stunning, absolutely incredible,” he said. “I'm an old bugger, in my 70s. I can't believe in a trillion of anything.”

What's more, said the 78-year-old, who is still working at a Toronto law firm, the political conditions in United States are so destructive that there is little room for optimism. “It's a mandate for stalemate.”

In Ottawa, meanwhile, minority governments have created a situation wherein most everything is looked at in the short term. So it is unlikely that the idea of a commission would be welcome, Mr. Macdonald said.

He's probably right. In Canada, we tend to look on rather complacently at the developments south of the border and respond in an ad-hoc manner. The idea that the crisis in the United States is our crisis as well doesn't seem to register.

Our economy is currently performing better than theirs, but it is still true that as the United States goes, so goes Canada. That could well mean downward unless alternative strategies for a less America-centric world are developed. Such strategies would take a long time to bear fruit, but you have to start somewhere.

A year-long study by a blue-ribbon commission could help determine what course we should follow with the Americans, where our best foreign opportunities will be and what new political and cultural partnerships should be fashioned.

The Harper government has awoken, to some degree at least, to the changing global dynamic. Prime Minister Stephen Harper got around to visiting China and India. Last week, he won a smallish exemption from the Buy American laws.

But neither the Conservatives nor the opposition parties seem to view the American situation with any sense of alarm or long-range planning.

“It's a fair point,” said Paul Dewar, the NDP's foreign-affairs critic. “Nobody is discussing this in real terms.”

He said he would favour a new Macdonald-styled commission so long as it looked at a wide range of issues, not just trade. The government is still piggybacking the U.S. on matters such as the environment, he noted. “On acid rain, we led them,” he said, recalling actions by the Mulroney government. “We didn't wait.”

The Liberals' Bob Rae has faith that the Americans will pull themselves out of this jam as they have before. Although Ottawa has been slow off the mark in exploring new options, he noted that the premiers of Quebec, Ontario and British Columbia are very active on the Asian front.

A commission may be a good idea, although in the Internet age, Mr. Rae said, we look to do things faster.

Optimists point to the recovery that the U.S. made after the morass it fell into with Vietnam, Watergate and stagflation. But post-9/11, George W. Bush left the country with two wars, with staggering deficit and debt levels, in a paranoid state over terrorism and in a bleak recession. In the 1970s, there was no rival near the magnitude of China today, nor was the country in hock to the degree it is now.

No matter how enlightened the new President – and Barack Obama is enlightened – the lynch-mob mentality of the Republican right offers little hope for a bold way forward.

In the new Asia-driven century, a bold way forward is what Canada needs. It's what the Macdonald commission gave the country in the 1980s. We could do worse than a bipartisan panel to try to do the same today.

There were rumours, back in the ‘80s and beyond, that the primary reason Macdonald was given the opportunity to study and report on the Economic Union and Development Prospects for Canada was that Trudeau wanted him out of the way because he was the only effective voice for fiscal probity and economic responsibility in Trudeau’s cabinet. Whatever the reason, his report was tightly reasoned and persuasive and it established him as a legitimate Canadian ‘wise man’ in the economic strategic sphere – a very rare commodity in Canada.

Like Bob Rae, I have confidence in America’s ability to recover, but it’s not going to ‘bounce’ back and when it does recover it, and we, are going to discover that the top spot is no longer exclusive terrain – America will still be rich and strong, maybe even the strongest, but it will be one amongst a few, not even, necessarily, first amongst equals. The current (this whole generation) problem is that Americans are fiscally ignorant and irresponsible and they have perfected the ‘retail politics’ system so that their elected representatives – even those who know better – will pander to the mob that wants to either tax and spend or borrow and spend. America will claw its way back to the global economic/political top tier when it grows up and reforms itself and there is little prospect of that happening soon.

The big problem with Martin’s suggestion, a bipartisan panel, is that it’s not clear to me that Ignatieff knows or Harper cares enough to appoint one, much less listen to it.

At 78 Don (Thumper) Macdonald is too old to do anything except point the way. Pity.

 

[Edward Campbell]

An interesting bit of informed speculation, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Guardian web site:

http://www.guardian.co.uk/business/2010/feb/14/canada-china-investment-oil-sands

Canada looks to China to exploit oil sands rejected by US
Canada courts Chinese investment in Alberta oil projects as US firms boycott tar sands fuel

Suzanne Goldenberg - US environment correspondent

Sunday 14 February 2010

Canada, faced with growing political pressure over the extraction of oilfrom its highly polluting tar sands, has begun courting China and other Asian countries to exploit the resource.

The move comes as American firms are turning away from tar sands because of its heavy carbon footprint and damage to the landscape.

Whole Foods, the high-end organic grocery chain, and retailer Bed Bath & Beyond last week both signed up to a campaign by ForestEthics to stop US firms using oil from Canadian tar sands. The Pentagon is also scaling down its use of tar sands oil to meet a 2007 law requiring the US government to source fuels with lower greenhouse gas emissions.

Major oil companies such as Shell are also coming under shareholder pressure to pull out of the Canadian projects. Earlier this year, Shell announced it was scaling back its expansion plans for the tar sands after a revolt by shareholders. Producing oil from the Alberta tar sands causes up to five times more greenhouse gas emissions than conventional crude oil, according to the campaign group Greenpeace.

In the most significant deal to date, the Canadian government recently approved a C$1.9bn (£1.5bn) investment giving the Chinese state-owned oil company Petro China a majority share in two projects. Prime minister Stephen Harper said: "Expect more Chinese investment in the resource and energy sectors … there will definitely be more." China's growing investment in the tar sands is seen in Canada as a useful counter to waning demand for tar sands oil from the US, its biggest customer. The moves, which have largely gone unnoticed outside north America, could add further tension to efforts to try to reach a global action plan on climate change.

The state department envoy, Todd Stern, on Tuesday accused China of being "a bit ambiguous" in its commitments to reducing greenhouse gas emissions. Efforts to impose national carbon limits in the US have stalled in Congress, but a number of leading US firms are moving to reduce their carbon footprint by moving away from abandoning tar sands oil.

Canada is the biggest source of US oil imports, with 65% of tar sands production going to refineries in the midwest. "Companies have been hitting the pause button on projects," said Simon Dyer, of the Pembina Institute oil sands watch project.

But not China. PetroChina has taken a 60% stake in two new tar sands projects due to get under way in the MacKay River and Dover areas next year, with plans to produce up to 35,000 barrels a day by 2014, and eventually up to 500,000 a day.

China made its first investment in the tar sands in 2005, with state-owned China National Offshore Oil Corporation spending C$150m for a 17% stake in a startup MEG Energy Corp. Another Chinese state-owned firm, Sinopec, last year increased its interest in the Northern Lights oil project to 50%. China's National Petroleum Corp has also bought oil sands leases that it has not yet developed.

The projects, which will begin coming on line over the next decade, are seen as crucial to a long term strategy of finding new sources of energy as China's economy continues to expand. "Right now I would characterise it as a token toehold," said Peter Tertzakian, chief energy economist at ARC Financial Corporation, an energy-focused private equity firm in Calgary, Alberta.

But he said the move by China could also represent the beginnings of a major shift in control of the tar sands. "Hitherto we were very accustomed to have western countries coming here, particularly American companies or companies from the UK, taking an interest in oil and gas companiesand we were OK with that," he said. "From a continental energy security perspective of course, there is a little more hesitation when emerging powers come here, but the Canadian government has over the last year indicated more willingness to do business with China."

Japanese and South Korean companies have also begun moving in, opening up potential new markets for Canada at a time when forecasts show a fall in global demand for oil. India's Reliance Industries is also reportedly bidding on a project. The move by China has also crystalised increased concerns among conservationists and First Nation groups about a proposed 1,200 kilometre pipeline that would carry tar sands oil from northern Alberta, across British Columbia to oil tankers off the Pacific coast.

The facts are that:

• There is a concerted effort by some US environmental groups and the oxymoronic US ‘clean coal’ lobby and the US natural gas industry to boycott the Canadian tar sands. All three have deep pockets and all three are well connected in the Obama While House and the US Congress. All three actually aim to damage the US economy and sexurity but that never stopped a lobby group;

• The resource, especially energy hungry Chinese are investing in the Canadian heavy oil fields and they are lobbying for a new pipeline to a Pacific coast Canadian seaport; and

• Canada remains ‘open for business,’ especially for business that will retain existing or create new jobs.


It’s all a neat fit but I’m not so sure one can make the leap of logic fro those few facts to Canada is ‘courting China.' Canada is ‘courting’ new investment, to be sure and China is one of the few countries in the world with a big surplus of US dollars that it wants to invest overseas.

But, at the risk of repeating myself yet again, we need to look West, to East and South Asia for trade and investment. Europe is in absolute decline and America is stagnant – for a generation or more, probably, in each case. Asia is where the money is and we need a Willy Sutton sort of approach to our future and look to “where the money is.”
 

 

[Kirkhill]

Agreed across the board E.R.

Personally I wouldn't be surprised if, as the article states, everybody is just hitting the "Pause" button, not the "Stop" or worse "Rewind". 

In a matter of 9 months there will be a much clearer picture of Obamaland and whether he will have a chance to inflict further damage by legislative means and/or whether he will succumb to the temptation to chase his own demons by Presidential Fiat (Executive Order). 

It may be 2012 before the "Start" button is pressed again.

In the meantime Harper may be taking the opportunity to fire a couple of shots across the Yanks' bow, reminding them that they are not the only player and that other countries have real money.  As well this Chinese investment helps to build Canadian infrastructure that makes our resources available to the world at large.


I still don't like getting into bed with the Chinese but I guess I am enough of a whore that I wouldn't mind being paid for a roll in the sack that I might actually enjoy.  Especially if I get to kick them out int the morning if they misbehave.

 

[Antoine]

You might find the following topic in Science magazine (one of the highest ranking journal in the science world) of interest. They are making access to this for FREE on line but keep in mind that some articles might fall in ``scientific reductionism`` which is not always the best angle to solve humanitarian problems.

Special Online Collection: Food Security, Science, 12 February 2010

www.sciencemag.org/special/foodsecurity

In the 12 February 2010 issue, Science examines the obstacles to achieving global food security and some promising solutions. News articles introduce farmers and researchers who are finding ways to boost harvests, especially in the developing world. Reviews, Perspectives, and an audio interview provide a broader context for the causes and effects of food insecurity and point to paths to ending hunger. A special podcast includes interviews about measuring food insecurity, rethinking agriculture, and reducing meat consumption. And Science Careers looks at interdisciplinary careers associated with food security. Science is making access to this special section FREE (non-subscribers require a simple registration).

 

[a_majoor]

The apocalypse of debt. If you have the resources you might be able to capitalize on this, otherwise invest in home gardens, home and car repair skills and distributed energy systems:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb_print.html

The Global Debt Bomb
Daniel Fisher, 02.08.10, 12:00 AM ET

Kyle Bass has bet the house against Japan--his own house, that is. The Dallas hedge fund manager (no relation to the famous Bass family of Fort Worth) is so convinced the Japanese government's profligate spending will drive the nation to the brink of default that he financed his home with a five-year loan denominated in yen, which he hopes will be cheaper to pay back than dollars. Through his hedge fund, Hayman Advisors, Bass has also bought $6 million worth of securities that will jump in value if interest rates on ten-year Japanese government bonds, currently a minuscule 1.3%, rise to something more like ten-year Treasuries in the U.S. (a recent 3.4%). A former Bear Stearns trader, Bass turned $110 million into $700 million by betting against subprime debt in 2006. "Japan is the most asymmetric opportunity I have ever seen," he says, "way better than subprime."

Bass could be wrong on Japan. The island nation (and the world's second-largest economy) has defied skeptics for so long that experienced traders call betting against it "the widowmaker." But he may be right on the bigger picture. If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke.

The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble.

National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.

Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. The coauthor, with Harvard professor Kenneth Rogoff, of This Time It's Different: Eight Centuries of Financial Folly (Princeton, 2009), Reinhart has found that a 90% ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line. (The danger point is lower in emerging markets.) "It's not a linear process," she says. "You increase it over and beyond a high threshold, and boom!" The U.S. government-debt-to-GDP ratio is 84%.

We've been through this scenario before. It's especially ugly because we get hit by inflation, too. In the years immediately after World War II inflation surged past 6%, while economic growth flagged and the government-debt-to-GDP level exceeded 90%, note Reinhart and Rogoff. The country worked that ratio down over the next half-century. Now the ratio is shooting up again.

America is a nation of spendthrifts, addicted to easy credit and dependent on the kindness of savers overseas to keep us comfortable. Our retail industry hangs on credit cards and our real estate on 95% financing and the tax rewards for mortgage interest. The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that is still a pathetic figure for a nation whose government is un-saving all that and more with its deficit budget. Politicians on this continent are good at compassion, whether trying to help people stay in their overpriced homes or offering health care to millions of those without it. They are not so adept at nurturing growth.

If the GDP doesn't expand at "normal" rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher tax rates on many fronts. The Congressional Budget Office currently projects the fiscal deficit will decline from 10% of GDP next year to around 4.4% from 2013 to 2015. But that assumes economic expansion of at least 4%, not the 2% predicted in the study by Reinhart and Rogoff. You see the vicious cycle here: Debt depresses growth, and then low growth makes paying down the debt an impossible task.

U.S. corporate income tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. It may be a long while before these tax collections get back to where they were. As corporate profits recover, factory utilization will be up and inflation will be close behind. At that point the 0% yield on Treasury bills will be history. Rolling over the national debt will become a lot more expensive. Higher rates on Treasuries will work their way through the debt market, driving up the cost of money for homeowners, businesses and already struggling state and local governments.

"The economy over the last six months has been on a sugar high," says Benn Steil, senior fellow at the Council on Foreign Relations and author of Money, Markets and Sovereignty (Yale, 2009), a survey of the relationship between money and the state. If Congress and the Obama Administration don't trim deficits, he says, "we will get to the point where credit is much more expensive in the U.S. than it ever has been in the past."

Most states are already having trouble paying their bills and, of course, don't have printing presses with which to finance their debts. They are turning to Washington for help and may succeed in putting some of their liabilities on the federal balance sheet. With growing off-balance-sheet obligations, notably unfunded pension liabilities (see graphic in "Debt Weight Scorecore"), the states will be competing for years with the federal government for scarce taxpayer dollars.

"U.S. states are like emerging markets," says Reinhart. "They spend a lot during the boom years and then are forced to retrench during the down years." Cutting expenses sounds good theoretically, but look at California: Students (and faculty) are up in arms over proposed tuition increases and cutbacks at the state's once prestigious university system; state employees are mounting a fierce legal battle against furloughs and other wage concessions.

Mainstream credit analysts are worried. The U.S. has been able to sell vast amounts of debt because the Treasury market, with $500 billion a day in turnover, is considered safe and dwarfs all other debt markets. But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the U.S. and the U.K. could join shakier nations like Japan and Ireland in losing their aaa ratings if they don't get their bad habits under control. "While aaas can borrow in the short term, very high and rising government debt-to-GDP ratios are ultimately not consistent with aaa status," Coulton says.

Unchartered Waters
Governments around the world will issue an estimated $4.5 trillion in debt this year, triple the five-year average for industrial countries.

It's the Total Debt, Stupid
Private banking assets tend to become public problems in a crisis. By that measure European countries are far worse off than the U.S.

A FORBES survey of sovereign credit, taking into account trends in spending and revenue, economic freedom and the price of the debt insurance, a.k.a. credit default swaps, ranks the U.S. number 35 in a class of 85, below Germany, the Netherlands and China. The cds market is priced to imply a 3.1% chance of default over five years on Treasury debt. Other countries are likely to hit the debt wall sooner, and with greater impact. The U.K., for example, is 38 on the list, two notches above Slovenia. One culprit is much higher levels of private banking debt that could land on the British government balance sheet á la Fannie Mae and Freddie Mac in the U.S. The sovereign debt of the U.K., plus the assets of its five largest banks, exceeds 500% of GDP, compared with 200% in the U.S. Even closer to the edge is Ireland. Sovereign debt is at 41% of GDP. But total banking-system assets are another 800% of GDP (see graph above). If those assets sour, the government will almost certainly step in to protect the banking system, as Iceland was forced to do in 2008. Iceland's currency and stock market collapsed soon thereafter, and its president recently blocked a law to repay $5 billion-plus to British and Dutch investors. That move puts at risk a pending bailout package for Iceland from the International Monetary Fund and its application to join the European Union.

Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that "countries don't go bust." The opposite is true. "There was a massive default wave in 1980s and 1990s," says Reinhart. Investors may not have paid much attention since the defaults were mostly in emerging market countries like Guatemala and Romania. But the deadbeats included current investor favorites like Brazil, which defaulted in 1983, went through a bout of hyperinflation in 1990 and effectively defaulted again, for the same reason, in 2000. Reinhart and Rogoff show that, on average, nations add 86% to their debt loads within three years of a credit crisis. At the same time, government revenue falls an average of 2% in the second year after the onset of the troubles (see timeline, below).

The Stumble Cycle
Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.

The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it impossible for the country to pay its debt. Greece doesn't have to worry about this last syndrome, because it uses the euro. But that might make things worse since it can't print its way out of its financial difficulties. "It's like entering a prize fight with one hand tied behind your back," Bass says. Argentina takes a different tack. Still struggling in the wake of its 2002 default on foreign-held debt, its president recently tried, and failed, to seize central-bank dollar deposits (and cashier her central banker) in order to repay overseas debt.

Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation. Reinhart and Rogoff found this to be the case in roughly one-third of the countries they tracked that had currency depreciation rates above 15% a year, following the 1980-81 recession. Of course, this works only for debt denominated in the home currency and only if investors are taken by surprise. If they see inflation and devaluation coming, they price it into the interest they collect.

Making money on sovereign defaults isn't as easy as picking off subprime mortgages. Credit default swaps on potential basket cases like Dubai, Greece and Ukraine have doubled and tripled in price over the past 12 months as their debt loads grew. To buy insurance against a default in Greece over the next five years costs 3.4% a year.

How about Switzerland--once considered an impregnable money center? Credit default swaps on Swiss debt cost 46 basis points (0.46% a year), compared with 33 for the U.S. The Swiss government is not itself deeply in hock, but it may have to bail out its private banks in the manner of Iceland or Uncle Sam. Swiss private-bank debt is seven times GDP. The U.S. isn't a disinterested bystander: The Swiss central bank borrowed $40 billion from the Federal Reserve under a little-known swaps program last year to remove bad assets denominated in dollars from private banks. The Fed considers the transaction low risk because the Swiss promise to repay in dollars. But it signals how losses on private loans--in this case, U.S. subprime mortgages--can cycle back into a problem for the Swiss government. As hedge fund operator Bass notes, a 10% hit on Swiss banking assets would represent 80% of its 2008 GDP of $488 billion and 400% of annual government revenue. "You can invest a very small portion of capital, so if you're wrong it costs very little," says Bass. "If you're right it can pay hundreds of percent."

Shorting countries comes naturally to Bass, 40, who has spent most of his career investigating overvalued stocks and bonds. The son of the onetime manager of the Fountainbleau Hotel in Miami, Bass grew up in Dallas and won a diving scholarship from Texas Christian University in Fort Worth, where he studied real estate and finance.

He spent most of the 1990s at Bear Stearns in Dallas, attracting a group of well-heeled clients who took his advice on shorting stocks like Delgratia Mining Corp. of Vancouver, B.C., which plunged after a highly touted gold find in Nevada turned out to be a hoax.

Around that time Bass learned the danger of betting too much on his own research. He shorted the stock of RadiSys, a telecom technology maker in Hillsboro, Ore., after he called the company's recently departed chief financial officer at home and was told of possible financial irregularities. (None was ever uncovered.) Bass was forced to take steep losses after Carlton Lutz, then an influential stock promoter, called RadiSys "the son of Intel" in his newsletter and the stock doubled. (More recently the company lost $58 million on revenue of $320 million in the 12 months ended Sept. 30.) "Even when you do great investigative work and you understand the accounting, it doesn't matter if you know everything," Bass says. "You can still lose a fortune."

Last spring Bass lost $110 million buying credit default swaps on Portugal, Ireland, Italy and Greece. He may have been right but too early. He is holding on.

His biggest potential score is in Japan. Government debt has soared to 190% of GDP from 50% in the mid-1990s, hitting an estimated $10 trillion in 2009. But because interest rates are so low, the government paid only 2.6% of GDP to service its debt in 2008, less than the U.S. at 2.9%.

Yet low rates mask a growing problem for Japan. The government took in $500 billion in taxes last year, plus another $100 billion in other revenue that included money borrowed by a government investment program. But the Tokyo feds spent $980 billion, including $100 billion-plus on interest and $190 billion or so it transferred to regional and municipal governments. That left a $360 billion hole it could plug only by writing more IOUs, on top of the debt it must roll over each year as bonds mature.

Today Japan can borrow all it wants from its own citizens. Over the decades they have dutifully (if mechanically) piled up a $7.7 trillion cache of savings they keep mostly in low-yielding bank deposits. Those savings equal two-thirds of the total household wealth of Germany, France and the U.K. combined, says John Richards, North American head of strategy at RBS, who spent the early 1990s in Japan trying to build a channel for selling Japanese government bonds overseas (the country still sells but 6% of its debt to foreigners). "You ask how would Japan turn into a sovereign debt crisis and you can't find the trigger," Richards says. "Shorting the yen because you think there's going to be a rollover crisis makes no sense at all."

The trigger could be demographics. Japan's population is aging quickly. Today 22% of Japanese are 65 or older; in 20 years it will rise to 30% or so (compared with a current 13% of Americans and 20% in 2030). At the same time Japan's total population peaked at 128 million in 2004 and has settled into long-term decline.

The Leverage Factor
Total U.S. debt, including banking liabilities, has soared relative to economic growth over the past 20 years.

The combination means Japan's government pension fund has become a net seller of government bonds, while the nation's savings rate has plunged from 18.4% in 1982 to 3.3% today. When that drops to zero, Japan will be forced to look overseas for financing--and risks exposing itself to international rates.

JPMorgan Chase analyst Masaaki Kanno in Tokyo says that Japanese bonds are in a bubble that could pop in the next three to five years, as savings rates drop. Even if the government can somehow keep borrowing at a 1.4% interest rate, he says, interest expense will rise to roughly $200 billion by 2019, or 45% of government revenue, unless it pushes through a big increase in the national value-added tax.

But those rates are unlikely to hold. For years the government has been able to replace bonds paying as much as 7% interest with steadily lower-rate debt. The favorable rollovers ended in 2007, leaving the government much more vulnerable if it has to sell debt overseas, where ten-year rates are two to three percentage points higher than Japan's. If rates rise past 3%--the scenario Bass is betting on--interest expense will exceed total government revenue by 2019.

The process will accelerate if the yen falls and interest rates rise, prompting Japanese savers to pull their money from low-yielding bank accounts, which, in turn, are invested in government bonds. "That will be the beginning of a vicious cycle," Kanno says, when "consumers will realize what is happening" and shift their money to more attractive investments overseas. Bass thinks the crisis will come sooner. For $6 million he has secured options on $12 billion in ten-year government bonds that will pay $125 million if Japanese rates rise to 4%.

"The good news is the wolf's at the door in Japan and that we in the U.S. have front row seats to see what's going to happen," he says. "I hope we learn something from it."

 

[a_majoor]

The contagion of debt spreads:

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/21/AR2010022102914_pf.html

Greece and the welfare state in ruins

By Robert J. Samuelson
Monday, February 22, 2010; A15

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, disabled and aged. All welfare states face similar problems: burgeoning costs as populations age; an over-reliance on debt financing; and pressures to reduce borrowing that create pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece is the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt -- basically, the sum of past annual deficits -- was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two-thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost 17 billion euros in bonds (about $23 billion) maturing this April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others. These expectations constituted an implicit guarantee of the debt of Greece and other euro countries. If Greece defaulted, the guarantee would vanish and, possibly, trigger a flight from other countries' debt.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut its government workforce and raise taxes on alcohol, tobacco and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, Greece's situation is so dire that default is inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen existing unemployment, already about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and revert to its old currency: the "drachma."

Conceived as a way to unite Europe, the euro increasingly divides. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece would pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. The threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birth rate and rapidly graying population automatically increase old-age assistance even as the government tries to cut its spending. At issue is the viability of its present welfare state.

Almost every advanced country -- the United States, Britain, Germany, Italy, France, Japan, Belgium and others -- faces some combination of huge budget deficits, high debts, aging populations and political paralysis. It's an unstable mix. Present deficits may aid economic recovery, but the persistence of those deficits threatens long-term prosperity. The same unpleasant choices confronting Greece await most wealthy nations, even if they pretend otherwise.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is a good analysis of the European economic problems by Timothy Garton Ash:

http://www.theglobeandmail.com/news/opinions/agonies-of-the-euro-zone/article1480148/

Agonies of the euro zone
This Greek tragedy is also a defining moment for the whole project of a European Union

Timothy Garton Ash

Thursday, Feb. 25, 2010

So Antigone had a part in this tragedy too. That's Antigone Loudiadis of Goldman Sachs, who arranged a complex currency swap deal that helped Greece conceal the scale of its debt as the country snuck into the euro zone. Pity Greece didn't consult someone as wise as Socrates; and I don't mean Jose Socrates, the Portuguese Prime Minister, whose own country the gods – that is, bond markets – are also eyeing leerily.

Joking apart, we need to recognize this is not just the first great test of the euro zone but also a defining moment for the whole project of a European Union. Since this is Europe, not Apollo 13, failure is definitely an option. More likely, however, is a muddling through, leaving the old and demographically aging continent even more preoccupied with its own internal problems. And the world will not wait while Europeans spend another decade navel-gazing. Call me Cassandra, if you will, but that's how I see it.

No special gift of prophecy was needed to foresee the dilemmas that now face the euro zone. They were extensively debated before it was launched. I wrote in 1998 that monetary union was “an unprecedented, high-risk gamble,” and argued that it was the wrong priority for Europe at that time. Subsequently, I was lulled into a false sense of security by the euro's apparent success, and by the practical and symbolic pleasures of travelling around the continent with just one currency in my pocket. Now we have the predicted difficulties. As George Soros observes, a “fully fledged” currency needs not just a central bank but also a treasury. It requires a degree of fiscal as well as monetary discipline, linked with the capacity to make fiscal transfers to suffering areas (complemented by labour mobility from those areas), as you have in a country like the United States or the United Kingdom.

To survive and prosper, a European monetary union must develop at least a stronger element of economic union, and that in turn requires a stronger element of political union. Which, by the way, was one of the main motives for some of the chief political architects of what was then deliberately called “economic and monetary union,” including François Mitterrand and Helmut Kohl. This was not just, as is often said, Europe putting the (monetary) cart before the (political) horse. It was an attempt to use the cart to bring on the horse. It was the last big fling of the so-called “functionalist” approach, by which you build a politically integrated Europe through economic integration. Broadly speaking, that worked for half a century, from the 1950s to the 1990s; but in this case, it has not.

By its mendacious and self-harming profligacy, Greece has precipitated the crunch. Greece is unique, even among the PIIGS (Portugal, Italy, Ireland, Greece, Spain), in its combination of massive deficit (an estimated 12.7 per cent of GDP last year) and massive debt (some 125 per cent of GDP and rising). It has not only lived beyond its means; it has used its years in the euro zone to become even less competitive.

Yesterday, the country was hit by the second general strike in two weeks, and we ain't seen nothing yet. Greece has promised its euro zone allies to get its deficit down from 12.7 per cent to 8.7 per cent this year. Oh yes, and pigs can fly. Even if the Greeks let their government do the right thing, such deep cuts, as well as structural reforms, can make things worse before they get better. Meanwhile, it seems the Greek government needs to borrow about €55-billion this year, up to half of it within the next three months. What if the gods (bond markets) grow angry and decline to play?

Well, that third act has not been written. Anything could happen. But my guess is this: through gritted teeth, Germany will agree to some form of euro zone bailout. However, it will only support the minimum needed to placate the gods, and only with the most astringent, Creon-like conditions being imposed on Greece. It is an important but ultimately secondary question whether this help comes in the form of bilateral loans, loans from the European Investment Bank, purchases of Greek government debt, EU spending transfers, jointly issued eurobonds or any of the other mechanisms suggested. EU leaders will deny that this is a bailout and everyone will know that it is a bailout.

Anthony Jenkins/The Globe and Mail

Both Greeks and Germans will then be furious. One well-placed diplomatic observer in Athens suggested to me that, as part of the European supervision of Greece's fiscal discipline, “there'll be a German under every desk.” Just don't mention the war. Except Greece's deputy prime minister, Theodoros Pangalos, already has. Recalling the Nazi occupation, he said this week: “They took away the gold that was in the Bank of Greece, they took away Greek money, and they never gave it back. This is an issue that has to be faced some time in the future.”

To which furious Germans will reply: “They took away our d-mark, and nobody asked us if we wanted to give it up. We were assured, in solemn treaties and rulings of our Constitutional Court, that we'd never have to bail anyone out. We took 10 years of painful reform to make ourselves competitive again, while those PIIGS lived high on the hog. Now we're being asked to work till age 67 so the Greeks can retire at 63.” And so on.

Euro zone Europeans are grown-up enough to get over this, but it will take a large toll of effort, anger and internal strains. In the long run, the crisis might even make the euro zone a little stronger, adding an element of what is carefully called “economic governance.” In the meantime, European economic growth is limping while Asians forge ahead. The always over-ambitious goal of the 2000 Lisbon Agenda, to make Europe the world's most competitive knowledge-based economy by 2010, looks ridiculous now, in 2010. And Europe's economic and political weakness compound each other.

Behind the monetary lurks the fiscal; behind the fiscal, the economic; behind the economic, the political; and behind the political, the historical. The deepest reality underlying this crisis is that the personal experiences and memories that have pushed European integration ahead for 65 years, since 1945, are losing their force. The personal memory of war, occupation, humiliation, European barbarism; fear of Germany, including Germany's fear of itself; the Soviet threat, the Cold War, the “return to Europe” as a guarantee of hard-won freedom; the hope of restored European greatness. These were massive biographical motivators that drove people like François Mitterrand and Helmut Kohl even unto the euro. Can Europeans go on building Europe without such profound motivators? Are there new ones in sight?

Timothy Garton Ash is professor of European studies at Oxford University.

There are lessons here for those, myself included, who advocate varying levels of increased North American union or creeping continentalism as I sometimes call it:

1. Customs unions, like the original, pre-Euro, EU work – they grow the economies of all members, albeit at varying rates and with some stumbles. Canada and the USA are 95% of the way along to a customs union. The final step is to harmonize or, more likely, standardize how we treat the outside world in terms of tariffs and trade rules;

2. Currency unions, à la the Eurozone, are much, much harder because, as described above, they require a higher degree of political integration than many are willing to accept;

3. Lesser agreements on e.g. labour mobility and travel, perhaps even analogous to the Schengen Agreement are possible for countries that are already in a customs union but do not wish to form a currency union.
Both Canada and the USA have or are practicing ”mendacious and self-harming profligacy” à la Greece and the other PIIGS and it is unlikely that, in a currency union Canada could bail out the USA or the USA would bail out Canada. It is even more unlikely that either country would surrender the sort of political sovereignty (to some super-national body) necessary to make the two economies work as one and prevent the PIIGS problems.

Thus: Canada and the USA (but not Mexico) can and should, for their mutual economic benefit, proceed to a full customs union and make labour mobility and travel simple and easy – essentially by erasing the Canada/US border, rather than, as two less than smart administrations have tried, thickening it. (The US Department of Homeland Security is doing real, measurable harm to the US economic future. It is a hazard to the recovery which is as essential component of US security, in general. Homeland Security makes the USA less secure. Way to Go Janet Napolitano!)

Canada and the USA should not move towards a currency union because the two economies are too disparate, the relative size of strength of each is too different and there is neither a will nor a need for the necessary degree of political union.

 

[a_majoor]

Cashing in on the crisis?

http://www.dailymail.co.uk/news/worldnews/article-1253791/Is-man-broke-Bank-England-George-Soros-centre-hedge-funds-betting-crisis-hit-euro.html#

Man who broke the Bank of England, George Soros, 'at centre of hedge funds plot to cash in on fall of the euro'

By Karl West
Last updated at 8:52 AM on 27th February 2010
   
The man about to break the euro? George Soros is said to be placing large bearish bets against the single currency

A secretive group of Wall Street hedge fund bosses are said to be behind a plot to cash in on the decline of the euro.

Representatives of George Soros's investment business were among an all-star line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports.

A spokesman for Soros Fund Management said the legendary investor did not attend the dinner on February 8, but did not deny that his firm was represented.

At the dinner, the speculators are said to have argued that the euro is likely to plunge in value to parity with the dollar.

The single currency has been under enormous pressure because of Greece's debt crisis, plus financial worries in Portugal, Italy, Spain and Ireland.

But, it has also struggled because hedge funds have been placing huge bets on the currency's decline, which could make the speculators hundreds of millions of pounds.

The euro traded at $1.51 in December, but has since fallen to $1.34. Details of the secretive dinner emerged days after Mr Soros, chairman of Soros

Fund Management, warned in a newspaper article that the euro could 'fall apart' even if the European Union can agree a deal to shore up support for stricken Greece.

Mr Soros, who made more than $1billion by currency speculation when the pound was ejected from the Exchange Rate Mechanism on Black Wednesday in 1992, believes the structure of the euro is 'patently flawed'.

Hitting back: Greek PM George Papandreou blames 'speculators' for preying on the country's troubles

He said: 'Makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland.

'Together they constitute too large a portion of euroland to be helped in this way.'

He believes that unless the European Commission is given sweeping powers over taxation and spending, the single currency will always be vulnerable to financial turbulence in individual states.

'If member countries cannot take the next steps forward, the euro may fall apart,' he added.

Last night, Greek prime minister George Papandreou hit back at the 'speculators' who he blames for preying on the country's troubles.

Following a visit by EU economic inspectors and experts from the International Monetary Fund, he told the country's parliament that the worst fears about Greece's economy had been confirmed.

Greece is desperate to restore the confidence of investors in its debt after revealing that the previous government understated its budget deficit by half.

Outlining the precarious nature of Greece's finances, Mr Papandreou said: 'There is only one dilemma: Will we let the country go bankrupt or will we react?

'Will we let the speculators strangle us, or will we take our fate in our own hands?'

The Greek leader also called for more help from the EU with its debt crisis. Until now, the EU has offered political support but no bailout.

With friends like this: The cover of the German magazine 'Focus' this week, which shows the Venus de Milo giving the finger by a headline accusing Greece of swindling its way into the euro

Row: Greek daily Eleftheros Typos ran this depiction of the statue of the goddess Victoria, atop the Siegessaeule in Berlin, holding a swastika earlier this week in reaction to the Focus cover

But a row is still festering between Berlin and Athens over the crisis.
cabinet chancellery

Tight spot: German Chancellor Angela Merkel said the situation was 'difficult'

A Greek consumer group called for a boycott of German goods today after a German magazine blasted the country as 'cheats.

The new trade war came as Angela Merkel admitted the euro is in 'a difficult situation' for the first time.

She spoke as German magazine Focus ran a cover image of the armless Venus de Milo somehow raising her middle finger under the headline 'Cheats in the euro family' to suggest that Greece deliberately misled EU peers to swindle its way into the euro.

The cover sparked outrage in Greece, prompting the demands for a boycott. A Greek newspaper has also hit back, running an image showing the statue of the goddess Victoria atop the Siegessaeule in Berlin holding a swastika.

'The falsification of a statue of Greek history, beauty and civilisation, from a time when there (in Germany) they were eating bananas on trees is impermissible and unforgivable,' a statement from the Consumer Institute (INKA) said.

'Greeks are no crooks, we want the German government to condemn this most improper publication,' said INKA president George Lakouritis.

'If you have such friends, what do you need enemies for?'

INKA distributed leaflets in central Athens and in front of German-owned consumer electronics store Media Markt, urging Greeks to heed the boycott.

Merkel's government has so far deflected appeals to promise aid to heavily indebted Greece. Opinion polls show that a majority of Germans oppose a bailout.

Germany's ambassador to Greece, Wolfgang Schultheiss, said yesterday he regretted that German press reports caused offence. 'Germany is firmly on Greece's side,' Schultheiss said after being summoned by Greece's parliament speaker Filippos Petsalnikos.

But it wasn't enough for Mr Lakouritis. 'The ambassador's statements were not satisfactory,' he said.

Yesterday Mrs Merkel admitted that Greece's debt crisis has plunged the euro into a ‘difficult situation'.

The admission from the leader of Europe's biggest economy prompted fresh fears about the collapse of the single currency.

In the gravest sign yet of the international threat posed by Greece’s crippling debt crisis, Mrs Merkel warned for the first time that the eurozone faces a ‘ dangerous’ period.

 

[Edward Campbell]

This reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, illustrates a potential problem for the EU and the world:

http://www.theglobeandmail.com/report-on-business/economy/euro-in-most-difficult-phase-angela-merkel-says/article1484453/

Euro in ‘most difficult phase,' Angela Merkel says
‘At the roots are the high Greek deficits and lost credibility'

Berlin — Reuters and Globe and Mail

Sunday, Feb. 28, 2010

Europe's single currency project is facing its toughest period since its launch over a decade ago and it is essential that Greece tackle the roots of its troubles to restore confidence, German Chancellor Angela Merkel said Sunday.

In an interview with public television station ARD, Ms. Merkel also stressed that no decisions had been taken on providing financialassistance  to Greece, which is under acute pressure to reduce its debt mountain and bloated deficit.

“The euro is certainly in the most difficult phase since it was created,” Ms. Merkel told ARD in the interview. “And that's why it's so important that we're conscious of the fact that, on the one hand, it's our common currency but on the other hand of the need to really tackle the causes of the troubles at their roots,” she added.

“And at the roots are the high Greek deficits and lost credibility. That's why I'm very grateful that the Greek government is planning very couragous savings measures and other measures to improve the deficit situation.”

Ms. Merkel brushed aside media reports that the German government has been quietly setting aside provisions in its 2010 budget for possible aid to Greece.

“That is definitely not the case. We've got a treaty that does not include any provision for bailing states out, to help them out of a jam. We can best help Greece at the moment by making clear that Greece has to do its own homework, just like it is doing at the moment.”

She said the European Commission  was monitoring Greece to ensure it took the necessary steps and that no further decisions on aid had been taken.
“There have been absolutely no other decisions taken. I would like to say that quite clearly,” Ms. Merkel said. “Greece has to do what's necessary for Greece. But that is also important for all of us.”

Ms. Merkel repeated her view that the European Commission, European Central Bank and International Monetary Fund needed to endorse the Greek consolidation measures.

“I've also said that there have to be assurances now that the EU Commission, the ECB and the IMF are convinced that the Greek consolidation and savings programme is designed so that the problems are really solved,” Ms. Merkel said.

Her comments came after A Wall Street Journal report that Germany and France are leading a plan to put together an aid package for Greece worth up to €30-billion.

Separately, in Paris Sunday, French Economy Minister Christine Lagarde said she personally believed that derivatives on sovereign debt, such as credit default swaps (CDS), had to be either tightly regulated, limited or even banned.

CDS, which are used by investors to hedge against the risk of default by a borrower, together with other derivatives, have been the subject of mounting criticism as they may have helped conceal Greece's debt problems.

“I think that derivative products ... the CDS on sovereign debt have to be at least very, very regulated, rigorously regulated, limited or banned, this is a personal position on financial instruments,” Ms. Lagarde told Europe 1 radio.

Lagarde said she had no doubt Greece would be able to refinance its debt with the help of public, private funds or both.

There are a limited number of options for Greece, Europe and the international financial community – none of them very good.

In the longer term Europe must come to grips with its propensity to allow the PIIGS (Portugal, Ireland, Italy, Greece and Spain) to lie to the EU and get away with it. None of the five can be in the Eurozone under its own rules. Most should be expelled, even if they can bring their economies into line with the rules, because their governments are chronically dishonest and inept. There can be no case for making the Euro (€) a new, competitive reserve currency, or even for using SDRs that are heavily weighted with Euros, so long as the PIIGS remain € members.

Germany, France, the Netherlands and a few other respectable/responsible European governments need to sauve qui peut while there is still something, the € and the reasonably stable economies of North-West Europe, to be saved. The PIIGS should be "invited" to withdraw from the Eurozone (before they destroy it) as a precondition for massive help from the solvent members of the EU.

As an aside, the US debt:GDP ratio makes it a ‘pig,’ too, and adds fuel to China’s push to replace the $ with SDRs as the global reserve currency. The Chinese motive is not, totally, monetary/fiscal; China’s long term policy interests would be served by seeing the US humiliated by the world’s ‘rejection’ of the greenback.

 

[a_majoor]

Mark Steyn:

http://article.nationalreview.com/426405/when-responsibility-doesnt-pay/mark-steyn

When Responsibility Doesn’t Pay
Welfare always breeds contempt.

While Barack Obama was making his latest pitch for a brand-new, even-more-unsustainable entitlement at the health-care “summit,” thousands of Greeks took to the streets to riot. An enterprising cable network might have shown the two scenes on a continuous split-screen — because they’re part of the same story. It’s just that Greece is a little further along in the plot: They’re at the point where the canoe is about to plunge over the falls. America is farther upstream and can still pull for shore, but has decided instead that what it needs to do is catch up with the Greek canoe. Chapter One (the introduction of unsustainable entitlements) leads eventually to Chapter Twenty (total societal collapse): The Greeks are at Chapter Seventeen or Eighteen.

What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. In Europe, they’ve reached the next stage in social-democratic evolution: There are no kids or grandkids to screw over. The United States has a fertility rate of around 2.1 — or just over two kids per couple. Greece has a fertility rate of about 1.3: Ten grandparents have six kids have four grandkids — ie, the family tree is upside down. Demographers call 1.3 “lowest-low” fertility — the point from which no society has ever recovered. And, compared to Spain and Italy, Greece has the least worst fertility rate in Mediterranean Europe.

So you can’t borrow against the future because, in the most basic sense, you don’t have one. Greeks in the public sector retire at 58, which sounds great. But, when ten grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?

By the way, you don’t have to go to Greece to experience Greek-style retirement: The Athenian “public service” of California has been metaphorically face down in the ouzo for a generation. Still, America as a whole is not yet Greece. A couple of years ago, when I wrote my book America Alone, I put the then–Social Security debate in a bit of perspective: On 2005 figures, projected public-pensions liabilities were expected to rise by 2040 to about 6.8 percent of GDP. In Greece, the figure was 25 percent: in other words, head for the hills, Armageddon outta here, The End. Since then, the situation has worsened in both countries. And really the comparison is academic: Whereas America still has a choice, Greece isn’t going to have a 2040 — not without a massive shot of Reality Juice.

Is that likely to happen? At such moments, I like to modify Gerald Ford. When seeking to ingratiate himself with conservative audiences, President Ford liked to say: “A government big enough to give you everything you want is big enough to take away everything you have.” Which is true enough. But there’s an intermediate stage: A government big enough to give you everything you want isn’t big enough to get you to give any of it back. That’s the point Greece is at. Its socialist government has been forced into supporting a package of austerity measures. The Greek people’s response is: Nuts to that. Public-sector workers have succeeded in redefining time itself: Every year, they receive 14 monthly payments. You do the math. And for about seven months’ work: For many of them, the work day ends at 2:30 p.m. And, when they retire, they get 14 monthly pension payments. In other words: Economic reality is not my problem. I want my benefits. And, if it bankrupts the entire state a generation from now, who cares as long as they keep the checks coming until I croak?

We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense.
The perfect spokesman for the entitlement mentality is the deputy prime minister of Greece. The European Union has concluded that the Greek government’s austerity measures are insufficient and, as a condition of bailout, has demanded something more robust. Greece is no longer a sovereign state: It’s General Motors, and the EU is Washington, and the Greek electorate is happy to play the part of the UAW — everything’s on the table except anything that would actually make a difference. In practice, because Spain, Portugal, Italy, and Ireland are also on the brink of the abyss, a “European” bailout will be paid for by Germany. So the aforementioned Greek deputy prime minister, Theodoros Pangalos, has denounced the conditions of the EU deal on the grounds that the Germans stole all the bullion from the Bank of Greece during the Second World War. Welfare always breeds contempt, in nations as much as inner-city housing projects: How dare you tell us how to live! Just give us your money and push off.

Unfortunately, Germany is no longer an economic powerhouse. As Angela Merkel pointed out a year ago, for Germany, an Obama-sized stimulus was out of the question simply because its foreign creditors know there are not enough young Germans around ever to repay it. Over 30 percent of German women are childless; among German university graduates, it’s over 40 percent. And for the ever-dwindling band of young Germans who make it out of the maternity ward, there’s precious little reason to stick around. Why be the last handsome blond lederhosen-clad Aryan lad working the late shift at the beer garden in order to prop up singlehandedly entire retirement homes? And that’s before the EU decides to add the Greeks to your burdens. Germans, who retire at 67, are now expected to sustain the unsustainable 14 monthly payments per year of Greeks who retire at 58.

Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. And think of Germany as one of the less profligate, still-just-about-functioning corners of America such as my own state of New Hampshire: Responsibility doesn’t pay. You’ll wind up bailing out anyway. The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance to the basic survival instinct, as represented by the fertility rate. In Greece, they’ve run out Greeks, so they’ll stick it to the Germans, like French farmers do. In Germany, the Germans have only been able to afford to subsidize French farming because they stick their defense tab to the Americans. And in America, Obama, Pelosi, and Reid are saying we need to paddle faster to catch up with the Greeks and Germans. What could go wrong?

— Mark Steyn, a NATIONAL REVIEW columnist, is author of America Alone. © 2010 Mark Steyn

 

[tomahawk6]

Some US analysts feel that the Greece and Spain's debt problems  could cause a collapse of the EU. Soros and a cabal of billionaires have already started to short the Euro,not good. The American public seems to have finally awoken to the fact that profligate spending is a huge threat to the US economy. Since the democrats are determined to collapse the economy that doesnt bode well for them in November. As a hedge against a falling dollar I have bought Loonies via FXC on the NYSE and I have bought into UUP a dollar hedge fund that cant print shares fast enough.

 

[a_majoor]

Comparison of Canada's banking system to the US:

http://american.com/archive/2010/february/due-north-canadas-marvelous-mortgage-and-banking-system

Due North: Canada’s Marvelous Mortgage and Banking System

By Mark J. Perry Friday, February 26, 2010

What about the Canadian banking system allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking?

There were some significant differences between Canada and the United States during the recent financial crisis. In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses. Taking a closer look at these differences might tell us how the United States got into the mess it is in, and illuminate some ideas for future reforms.

Consider, for example, some of the following facts, illustrated with charts.

Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:

Bank2.A

Canada has had nowhere near the problems with mortgage delinquencies and home foreclosures as the United States:

Bank3.B

Yet Canadian banks remained profitable and reported positive return on equity even in the worst year of the meltdown, 2008, when U.S. banks (and banks in the United Kingdom and Europe) lost money and had negative returns on equity.

Banks1.B

These were some of the more interesting banking statistics present recently at the American Enterprise Institute’s seminar, “Canadian versus U.S. Housing Finance: Comparison and Implications,” organized by AEI resident fellow Alex Pollock.

And this recent financial crisis isn’t the first time that Canada’s banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great Depression, not a single bank in Canada failed. When almost 3,000 American banks failed during the Savings and Loan (S&L) Crisis, only two small Canadian banks failed in 1985, and those were the first bank failures in Canada since 1923. And while almost 200 U.S. banks have failed since the start of the global recession in early 2008, Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

    Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

What about the Canadian banking system allowed it to survive the recent worldwide slowdown, and even the Great Depression, without a single bank failure, and what can the United States learn from Canada about sound banking? Below is a summary of some of the distinctly different features of Canada’s banks and mortgage markets discussed at the AEI seminar, which help explain the greater financial stress resiliency of Canadian banks compared to American banks.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

    The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

    Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the U.S.) holding more than 80 percent of total bank assets.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

    Home mortgage interest has never been tax-deductible in Canada.

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

    Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the U.S. (67.2 percent).

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.

Canada’s banks are generally ranked as the safest and soundest in the world, and their non-politicized banking system could provide a model for banking reform in the United States. Moving towards the Canadian banking system could go a long way towards stabilizing our mortgage, credit, and housing markets and make us less vulnerable to financial shocks in the future.

Mark J. Perry is a professor of economics in the School of Management at the Flint campus of the University of Michigan, and a visiting scholar at the American Enterprise Institute.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail web site is a snapshot of some of the the Canadian recession and recovery data, measured against the USA and Europe: