Canada's Place in the Global Economy

[a_majoor]

Jerry Pournelle looks at the long term:

http://jerrypournelle.com/view/2011/Q2/view672.html#Monday

Gold and silver prices are up again. There's a fairly cool-headed analysis in the International Business Times http://www.ibtimes.com/articles/
137709/20110425/gold-silver-prices
-inflation-bubble.htm that's worth your reading; do understand that there's no industrial justification for the prices gold and silver have climbed to. To some extent the price of gold depends on the price of oil, and of course the price of the dollar. Don't bet the farm on gold, but if there's a real runaway inflation, having physical possession of gold and silver is one hedge. Note that wheat futures are up around $8 a bushel, which is quite a lot compared to the $3 wheat of last spring. Wheat prices depend on consumption and production. Unlike oil, wheat production depends on a number of factors like drought and climate (as well as oil prices which affect fertilizer and transportation costs) more than on political decisions such as the US decisions on oil production in Iraq and the OPEC production schedules. Speculation oil prices -- futures -- are driven by expectations. An OPEC announcement of greatly increased production would drive spot oil prices down dramatically, as history has shown -- note that Reagan's announcement of increased drilling, which had no immediate effect on oil production, drive down gas prices at the pump within weeks. (Interpolation, the same thing happend in 2008 when President George W Bush signed an executive order lifting drilling bans. PErhaps he is talking about that event)

It's not so clear about food prices. Note that demand for wheat is rising in China and will slowly but steadily rise as long as the Chinese economic boom continues. As Chinese wealth trickles down, more Chinese want meat, and that increases demand for animal feed and --  All the same for India. So long as China, and increasingly India, have growing middle clases who want higher quality foods, the demands for wheat will grow. Meanwhile Arab Spring brings economic collapse in Egypt and other Middle East areas, but doesn't much lower food requirements for those populations. The oil kingdoms will simply bid against the Chinese. Egypt, the largest and hungriest of the Arab lands, can't do that. Economic freedom can produce economic booms, but that doesn't happen immediately, and isn't all that likely an outcome of the Arab Spring movements anyway.

The US could have some effect on food price futures by ending the alcohol as fuel subsidies and requirements. If you don't burn coal in your car, the price of masa will fall almost immediately.

We have an election coming up. We also have $5/gallon gasoline and $5/loaf bread coming up. I do not expect the real unemployment rate to fall, although there will be frantic attempts to make it look lower, largely through statistical manipulations based on the definition of unemployment: if you're not looking for work, you aren't unemployed even if you have no job and never again expect to find one. As more give up looking, the unemployment rate goes down. And since the unions do not intend to lower their wages and perks, and the states are out of money, there will be "furloughs" among public employees including teachers. You can manipulate those numbers so the "furloughed" are not unemployed. It promises to be an interesting summer, but it will end with $5/gallon gasoline and $5/loaf bread. Look for the price of a can of beans to get higher. Look for the price of Top Ramen to rise...

This will continue so long as the current economic and foreign policies continue.

Note that I'm not giving advice on metals and food futures investments. I'm just saying...

 

[a_majoor]

Governments are discovering markets work far faster than they can. If the Eurozone collapses the consequences will derail our economic recovery at best and overwhelm us at worst:

http://www.weeklystandard.com/print/articles/coming-euro-crack_558504.html

The Coming Euro Crack-Up

A currency divided against itself cannot stand.

Irwin M. Stelzer

May 9, 2011, Vol. 16, No. 32
A spectre is haunting Europe​—​the spectre of the disintegration of the eurozone. All the powers of old Europe have entered into a holy alliance to exorcize this spectre: German chancellor and French president, the Brussels eurocracy and the bonus-laden bankers. Let the ruling classes tremble. The debtors have nothing to lose but their burdens.

So Karl Marx might have written were he watching unfolding events in the eurozone. In a sense, it is like watching a slow-motion train wreck.

A quick review: Some 17 of the 27 nations that constitute the European Union have abandoned their own currencies in favor of the euro. This means they have given up control of their exchange rates and their interest rates, the latter set by the European Central Bank on a one-size-fits-all basis. In fact, it is the state of the German economy, the area’s largest, that dictates interest rate policy for the entire 17-country group. When Germany was suffering under the weight of the costs of reunification, its sluggish economy needed, and got, a low-interest rate policy from the European Central Bank. That eventually proved too stimulative for, say, Ireland, which was in the midst of an inflating property bubble.

The creation of the eurozone also led lenders to assume that the credit of every member was just about as good as the credit of Germany and France. So Greece, Portugal, Spain, and Italy could sell sovereign debt at very low interest rates and use the borrowed money to finance an expansion of their welfare states​—​Greeks, for instance, could retire at 50 if they were in a hazardous occupation such as hairdressing (all those chemicals). More important, countries like Portugal, with a poorly educated workforce, and Spain, with politically run regional banks making imprudent loans to local property developers, became noncompetitive with their eurozone colleagues and international rivals. No problem: Fiscal policy was not controlled from the center, and investors hadn’t yet realized that lending to the so-called PIGS (Portugal, Ireland, Greece, and Spain) was a hazardous occupation. So the latter could tap the credit markets to fill the gap between tax receipts and spending, and benefit from German-level interest rates.

Then the rating agencies rose from their torpor and downgraded the sovereign debt of Greece, helping to drive interest rates on its government bonds to unsustainable levels. Enter Brussels with a bailout for Greece. And when Ireland’s deficit soared to 32 percent after the government decided to guarantee the debts of its insolvent banks, enter Brussels with a bailout for Ireland. Now Portugal, burdened with an economy that has not grown for a decade, also is rattling its begging bowl, and another bailout is being negotiated with a conclusion along the lines of earlier bailouts imminent, never mind that the previous two have done more harm than an honest confession of insolvency would. If at first you don’t succeed, repeat the mistake.

The main bailer, of course, is Germany, its economy growing smartly on the back of an export boom​—​it does not make what China makes, but makes what China buys. Chancellor Angela Merkel has two reasons to play Lady Bountiful. The first is her belief, shared by the German elite, that if a euro country declares bankruptcy, the currency will lose credibility and the entire European project will come unhinged. That would leave Germany alone at the top of the European heap, Europe’s most powerful country with its most powerful economy. History makes many Germans less comfortable with a German Europe than with a European Germany.

Second, there is the small matter of the German banking system. The German banks, especially the state-run Landesbanken, are so woefully undercapitalized that some are planning to opt out of the new stress tests because they know they will fail. These banks are sitting on 220 billion euros of sovereign and bank debt of Greece, Portugal, and Spain, and if those IOUs become worthless, the German financial system might come tumbling down or at minimum require a taxpayer bailout. To make matters worse, France sits on another 150 billion euros of this dicey paper.

To the intrinsic flaws in the euro system​—​a one-size-fits-all interest rate and the inability of the eurozone bureaucracy to control the fiscal policies of members​—​add the news from tiny, previously europhile Finland. In last month’s election, the anti-euro, anti-bailout True Finn party’s share of votes jumped from 4 percent to 19 percent, and its parliamentary seats from 5 to 39 in a 200-seat parliament, enough to insist on inclusion in a coalition government. Just as the Tea Party sent a message politicians can’t ignore, so the True Finns sent a message to the incoming government that it should think hard before casting a vote​—​unanimity is required​—​for the impending Portuguese bailout. As Tony Barber put it in the Financial Times, “Finns are angry because, like the Austrians, Dutch, and Germans, they dislike rushing to the aid of countries that in their eyes have cheated, idled, lied, lived beyond their means, and let reckless bankers run amok.” Finland’s “no” vote is all that is needed to leave Portugal drowning in debt.

All of these bailouts, and those to come, are premised on the notion that the troubled countries are having a liquidity problem, and a bit of cash will enable them to get back on their feet and repay their debts in full and on time. It is now clear that these countries are not merely illiquid but are insolvent, and that they will one way or another have to renege on their debts, at least in part. Unless, of course, Germany agrees to convert the eurozone into what is called a transfer union, in which funds from the rich countries are regularly shipped to the poorer ones. That route seems to be blocked by the unwillingness of German taxpayers to agree to such an arrangement and the German constitution which prohibits it.

The cold facts are these:

• Greece, Ireland, and Portugal are now frozen out of credit markets. The yield on Greek two-year bonds is 24 percent and on both Irish and Portuguese bonds of similar maturity around 12 percent. No country can afford to borrow at those rates. Of interest to the White House and Congress might be the speed with which the markets move: Interest rates charged on Greek debt increased by 10 percentage points in the past month.

• The debt burden on these countries is in excess of the 90 percent of GDP that scholars now agree stifles growth. Portugal’s debt is at 90 percent of its GDP and rising, Greece’s is approaching 150 percent, and “Ireland’s debt now appears to be bigger, in relation to its economy, than the reparations imposed on Germany after the First World War,” according to economist Anatole Kaletsky.

• These economies cannot grow their way out of the problem. The Greek economy shrank at an annual rate of 4.5 percent last year and is forecast to decline this year at 3.2 percent. Portugal’s will shrink at an annual rate of 1.5 percent, guesses the International Monetary Fund. And Ireland, despite a robust export industry and a corporate tax rate of 12.5 percent that, at half the EU average, remains attractive to foreign investment, might eke out growth of 1 percent. No way these growth rates produce enough tax revenues to meet debt obligations.

There’s more, but you get the idea: These countries are bankrupt and will have to default on their debts​—​“restructure” them, to use the term spoken in polite European circles. Germany’s finance minister Wolfgang Schaüble was among the first to mention the possibility of default, and more recently Clemens Fuest, chair of the German finance ministry’s advisory committee, said a Greek restructuring is not merely possible, it is inevitable. “Most intelligent people know there has to be a significant restructuring to ease the burden on Greece, and we’re not talking about a painless extension of maturities, but wiping away a large portion of the debt,” said Charles Grant, the highly respected director of the Centre for European Reform in London.

Such a default would be no trivial event for creditors: Estimates are that it would take a “haircut”​—​a write-down​—​of 40 percent to 70 percent to get debt into repayable territory. José Manuel González-Páramo, a member of the executive board of the European Central Bank, warns, “A restructuring would have legal and systemic consequences that are difficult to calculate right now, but would in all probability be bigger than after the collapse of Lehman Brothers.” And a “messy euro debt implosion .  .  . not only would .  .  . hurt the euro, it also has the potential to derail the global recovery,” conclude economists at Fathom Consulting. The more time that passes without a long-term solution, the more likely the consequences of the current mess will go from merely serious to dire.

So much for the least important stuff. The more important question is whether Spain, its economy twice as large as those of Greece, Portugal, and Ireland combined, will be next when the bond vigilantes again saddle up. So far, the contagion has not spread. But Spain has an unemployment rate of over 20 percent (40 percent for young workers) and rising, its regional banks (cajas) have so many IOUs from property developers gone bust that some failed the rather lax first round of stress tests, and Moody’s says the nation’s banks will have to raise as much as 120 billion euros in fresh capital (the government puts the figure at 15 billion euros, despite the fact that Spain’s banks and companies have 70 billion euros invested in Portuguese assets, 7 percent of Spain’s GDP). Throw in forecast growth of “close to zero” according to Citigroup Global Markets and the inability of the central government to persuade the regions to rein in their huge deficits, and it is not inconceivable that Spain will soon need a handout of such size that even the euro-enthusiasts will not be able to come up with the needed cash. “Spain’s room for maneuver is limited,” say the economists at Fathom Consulting.

Spain is only one of the important problems facing Europe. Voters are beginning to ask why they should suffer through painful austerity programs to spare imprudent bankers from the consequences of their foolishness. The Greeks have taken to the streets and are refusing to pay tolls on bridges; the Portuguese parliament refused to agree to an austerity program and the government fell, as did Ireland’s after putting an enormous burden on taxpayers to prevent the failure of its banks; and the Spanish prime minister had to agree to fall on his sword after pushing an austerity program through parliament. More important, Angela Merkel has had to postpone putting up more bailout money because the Bundes-tag is dragging its feet. Meanwhile France’s Nicolas Sarkozy, a proponent of bailouts accompanied by a Brussels seizure of control of a nation’s finances as part of a centralized European “economic government,” has a popularity rating in the low 20s.

This seems to be just one part of the increasing pressure on the entire concept of a united Europe. When Germany refused to go along with Britain and France in attempting to stop the slaughter in Libya, it called into question the concept of a European Common Foreign and Security Policy, notwithstanding the enormous resources being poured into the newly established European External Action Service, a euphemism for a full-fledged foreign service. And when France resurrected border controls and check points to prevent a flood of Tunisian immigrants from Italy, and Italy retaliated by issuing travel documents to some of the 25,000 immigrants who were passing through Italy en route to the EU country thought to have the most generous benefits, it put a serious dent in the concept of the free movement of peoples throughout the EU. Finally, a chasm has opened between the prosperous north and the less-hard-working south; between the 17 EU members that comprise the eurozone on one side and the 10 other EU members who have their own currencies and want no part of the bailouts; within the gang of 17, between Germany and Finland; and between the exporting machine that is Germany and protectionist France.

The vision of a united Europe still has a powerful hold on the elites of Europe, who see the transfer of power from nation-states to an unelected bureaucracy as insurance against future wars and, if truth be told, a relief from democratic pressures. In addition, the prospect of a euro that would replace the dollar as the world’s reserve currency, or at least weaken its role in world trade, has a powerful hold on the French, who make no secret of their antipathy to Anglo-Saxon capitalism.

The “European project” won’t go quietly into the night. But it just might go noisily into the ashcan of history if the Germans decide they cannot convert the Greeks into hard-working, tax-paying euro-citizens worthy of continuing handouts. Or, at minimum, we might end up with a euro-nord and euro-sud, as Martin Feldstein once suggested. Such a distinction, rooted in differences between the stronger and weaker economies and banking sectors, would allow Greece and -others to do what the team of Obama and Bernanke seem to be planning: get rid of all those annoying debts by paying them off in a depreciated currency.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

 

[Edward Campbell]

Our news has, recently, been full of the “same old, same old:” America is going broke (true) and must do what Canada did 15 years ago (partially true – but the US federal government cannot recover on the backs of ½ of Americans living in ⅓ of the states, as Chrétien/Martin did here); Europe is going broke (partially true, too); China is living on a giant Ponzi scheme which must, sooner rather than later, collapse (maybe); the global recovery depends upon the BRIC countries (not so – maybe on half a load of bricks: India and China); the G-20 is the saviour of the global economy (well ... not quite).

Here is an interesting take from Timothy Garton Ash, which is reproduced under the fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/opinions/opinion/obama-can-take-us-beyond-the-old-west/article2034932/

Obama can take us beyond the old West

TIMOTHY GARTON ASH

From Thursday's Globe and Mail
Published Thursday, May. 26, 2011

The West is dead, long live the West. Thus we might summarize the message of Barack Obama’s trip to Europe so far – and his keynote speech in Westminster Hall. There was one rhetorical moment that only Mr. Obama could have produced. An eloquent passage about well-integrated diversity being a strength of both American and British society culminated in the observation that this is why “the grandson of a Kenyan who served as a cook in the British army” could now “stand before you as President of the United States.” It earned the first and only spontaneous round of applause from the assembled British parliamentarians.

Yet most of this well-crafted speech could have been delivered by any American president over the last half-century: the references to Magna Carta and D-Day; the mythistory of a shared, centuries-old, English and American struggle for freedom; a hymn to NATO as “the most successful alliance in human history” (but only one passing reference to the EU); the obligatory quotation from Winston Churchill.

In Westminster, the President said that we – meaning America, Britain and the West more generally – “live in a global economy that is largely of our own making.” Historically speaking, that is true. He also said that we “remain the greatest catalyst for global action.” That may still be true, if one understands by that phrase, co-ordinated, co-operative global action. But it’s also true that non-Western powers, acting by their own lights and in their own interests, are increasingly shaping the agenda of world politics. Beyond the important statement that the longing for freedom and human dignity is “not English, or American, or Western, it is universal,” the Westminster speech said disappointingly little about this central development of our time.

Unless all current trends are reversed, the 21st century will see an increasingly post-Western world. China, India and Brazil will sooner or later be both more powerful and more important to the United States than Britain, France and Germany. The task for American and European statecraft is to build a revivified, somewhat enlarged old West – what I have called the post-West – into a larger framework of international order. It’s a task for which Mr. Obama, who has half the United Nations in his own family, is particularly well suited. As I argued some years ago, our object must be to move from the definite to the indefinite article: from “the free world,” meaning the Cold War West, toward the ideal of a free world.

One of the few institutional building blocks we have for this transition is the G20 group, which includes the emerging non-Western great powers and came into its own in the global financial crisis. But instead of going on to a meeting of the G20, Mr. Obama and British Prime Minister David Cameron have travelled to Deauville for a meeting of the G8. Mr. Obama will then have to come back to France again, to Cannes at the beginning of November, for a meeting of the G20, which France is also chairing.

That means lots of lovely limelight for France’s Nicolas Sarkozy as he, too, strives to be re-elected as President, but otherwise is quite pointless. The G8 is an anachronistic survival of the old, Cold War West. It has its origins in meetings of finance ministers and national leaders of seven developed Western economies in the 1970s. Russia was added in the 1990s, at a time when the old man of Eurasia was supposed to be becoming part of an enlarged West. If the G8 did not exist today, no one would dream of inventing it. Its core business, the management of the global economy, cannot properly be discussed without the presence at the top table of countries such as China, India and Brazil.

I have just looked at the agenda for the Deauville meeting and I am more convinced than ever that this is a monumental waste of time and money. The cash spent on the security measures alone, which involve more than 12,000 police, gendarmes and soldiers, could have made a significant contribution to the consolidation of Tunisian democracy. The whole circus, with its preparatory meetings of officials known as “sherpas,” and what the French wonderfully call “sous-sherpas,” will be repeated all over again in the run-up to the November G20 meeting.

Not that the G20 is working well either. But it is a grouping much more appropriate to the economic, political and cultural realities of the 21st century. All the efforts of Western or post-Western leadership should be dedicated to making it work better. The best way to start would be to abolish the G8, and Mr. Obama will soon have an opportunity to do just that. Next year, the United States is supposed to be hosting the G8 while Mexico is to host the G20. Mr. Obama should privately agree with other G8 members, and with Mexico, to roll the G8 into a single G20 meeting. All efforts could then be concentrated on making the G20 more serious and effective than it is now.

Anyone who abolishes a useless committee or institution should be awarded a medal, and this would deserve a large one – a kind of Global Medal of Honour. More broadly, this U.S. President is qualified like none before him to move forward from the outdated Cold War notion of “the leader of the free world” toward being the leader of a movement toward a free world. Cometh the hour, cometh the man. In this case, we have both. They just need to get together.

Timothy Garton Ash is a professor of European studies at Oxford University and a senior fellow at the Hoover Institution.

TGA (as he styles himself) has it partially right. The “old West” - which is only 50 years old, really, is pretty much dead – it just needs to be buried before it starts to stink too badly. It was killed, mainly, by  Anglo-American ineptitude and French greed.  But the “real” West – a smaller thing with, say, ten or 20 members – some of then far Eastern, rather than 30 or 40 (OECD+), is still alive and well and is still 'driving' the underlying streams of innovation and creativity that make the manufacturing, metal bending/weaving economy chug along.

The “new world order” must include everyone and the leadership – which the G-20 might as well become, since it is already here – must represent everyone, which means that some of the existing G-8 and G-20 members need to stand aside.

What is the world:

1. Asia is number 1 in population and economic dynamism;
2. Europe is tied for number 2; with
3. North-America;
4. South America trails, despite Chile and Brazil; and
5. Africa.

There are, really, three Asias:

1. East or Sinic Asia which is number 1, all by itself;
2. South or Indo Asia, which is number 2, but gaining; and
3. Al the rest of Asia, which, despite lots of oil, ranks down with South America.

So, who are the top 20? We have, de facto eight regions and we need at least two from each (that's 16) plus a few to make 20.

Let's start from the bottom:

20. An African country;
19. Another African country;
18. An “other” Asian country;
17. Egypt;
16. Chile;
15. Brazil;
14. Argentina;
13. A Caribbean country;
12. Canada;
11. USA;
10. Australia;
9.  India;
8.  Singapore;
7.  A Pacific or Indian Ocean island country;
6.  Bahrain, Qatar or UAE;
5.  Germany;
4.  Netherlands;
3.  Ukraine;
2.  Japan; and
1.  China.

Now, we can fiddle, with a few members – including Canada – but that is a pretty fair 'sample' of the world with about 10% in leading roles.

Finally: while I like TGA's idea of moving from the free world to a free world, and while I think it can, should and maybe even will happen, I doubt that my grandchildren will be alive to see it. They will not see a free world, they will not even see progress towards it – not as long as illiberalism (Argentina, Belgium, Croatia ... France ... Russia and so on) rules most of the world.

 

[a_majoor]

Interesting observation about the list, Edward, you grouped the "Anglosphere" block together (Canada, USA, Australia, India), and with two "honourary members" based on both their relationships with Anglosphere nations and their proven ability to step up to the plate (Netherlands and Japan) the Anglosphere represents 20% of your grouping and Anglosphere + Honouraries = 30%

The Anglosphere West still has considerable clout, and even outside the Gx, can still bring massive amounts of resources to any task.

 

[a_majoor]

Conrad black on the debt:

http://fullcomment.nationalpost.com/2011/05/28/conrad-black-a-world-of-financial-ruin/

Conrad Black: A world of financial ruin

Fotolia
In a world heading to financial ruin, the UK offers hope for the future.
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Conrad Black  May 28, 2011 – 8:18 AM ET | Last Updated: May 27, 2011 6:21 PM ET

The present U.S. administration, building, certainly on unpromising leavings from its predecessor, has shuffled from one delayed reaction placebo to another to anesthetize financial markets with a sequence of consciousness-lowering deferrals. First we were waiting for the Simpson-Bowles debt commission, which held any actual attention to the problem at bay for nearly two years. It reported quite sensibly and sank like lead weight, but without a ripple. The administration’s budget proposed a dynamic eventual freeze on 15% of federal government expenses, a solution that underwhelmed almost everyone.

The House Budget Committee chairman, Republican Paul Ryan, proposed a plan that only cut the deficit initially by a little over 10%, but cut very appreciably into future outlays and was at least something that could serve as an opening gambit. Barack Obama then pilloried the congressman on national television in strictures usually reserved for judicial or editorial condemnations of skinheads who steal the hearing aids and Zimmer frames of the elderly and the mittens of the new-born. Newt Gingrich — who succeeded the politically late Donald “the Stillbirther” Trump as the most improbable candidate for national office since the 1948 Progressive nominee for vice president, Glen H. (“The Singing Cowboy of Idaho”) Taylor (“Oh Give me a Home by the Capital Dome”), was so shaken by the implications of possibly having to do something about such bone-cracking deficits that he called for a “national conversation” about it, a tocsin that stirred the nation to the depths of its finger tips.

When Barack Obama took office, the official normal money supply of the United States was about $1.1-trillion. The $3-trillion in federal budget deficits that have been run up since then have largely, technically, escaped the money supply, though accretions have almost doubled the official total, an unheard of rate of growth (about 40% annualized) in a hard-currency country. About 70% of this debt has been paid by the issuance of bonds to the central bank of the United States, the Federal Reserve, a subsidiary of the United States government. Whatever the balance sheets say, this has produced the effect of a money-supply increase, which has brought pump-priming to a level of over-achievement not seen since Noah felt the compulsion to build an ark. And the annual trillion-dollar deluge is forecast to continue for a decade.

The world’s reserve currency, the fabled vehicle of the “faith and credit of the United States,” is now virtual money — a symbol for all the other massive problems afflicting the U.S. economy. The imported share of America’s oil consumption, for instance, has gone from 20% to 60%. Large suppliers like Iran and Venezuela have become hostile countries. Yet Americans remain neurotic about paying half the gas price of other oil-importing countries.

The cost per capita of U.S. medical care is $7,000 compared to the average among Australia, Canada, France, Germany, Japan and the United Kingdom, of $3,000; 70% of the people have immensely generous plans that they love with passionate attachment and don’t pay for, either as contributors or as taxable benefits, and the political class won’t touch this. Unfortunately, much of the other 30%, 100 million Americans, get what amounts to emergency health care only, and much of it is uninsured and is billed to the recipient until the patient is out of money, and only then provided gratis. Most of the largest states are bust; Social Security, student loans, Medicare (for the elderly in the U.S.) are all, also, in desperate need of an utterly cacophonous national conversation.

Unless the United States has the most spectacular cognitive awakening since Brunhilda, if not Lazarus, the laws of arithmetic are going to assert themselves in Zeus-like terms.

Meanwhile, the European Union is a water-logged vessel in a tempest, frantically bailing. In the six weeks since French finance minister Christine Lagarde last bravely proclaimed her personal fantasy that Greece would not default, the interest on Greek government notes has risen from 20% to 26%. Germany will not indefinitely remain so encumbered with guilt for the Third Reich that it will go on eating the costs of the false prospectus Goldman Sachs assisted Greece and others to file when they joined the Euro. The Germans have only tolerated it up to now because the strain Greece, Portugal, Ireland, Spain and eventually others put on the European banking system and the Euro,keep the Euro in fairly close downward mode with the U.S. dollar, which assists German exports. What a splendid irony that Germany, reviled as the rampaging hun in olden time, is now being entreated by genuflecting masses of its former ungrateful subjects to occupy and dominate them again, at least economically. (The Bundesbank’s uniforms are less stylish than those of the Wehrmacht.)

The EU is in hot contention with the United States as the Sick Man of the Great World Economic Powers, because less than 40% of Eurozone citizens work and over 60% are on benefits of some sort. But not to be discounted in this gripping Olympic contest for total fiscal immolation is geriatric, debt-ridden, stagnating Japan, a great but terribly beleaguered and demoralized country.

If there are signs of hope, the place we might look is Britain. Unlike the United States, the European Union and Japan, the United Kingdom is making a respectable effort to reduce unsustainable debt rather than simply devaluing the currency in which the debt is denominated. Britain’s fiscal deficit is more than 10% of GDP, approximately twice Canada’s rate and slightly higher than that of the United States, but its government does have a somewhat believable plan for reducing it.

The U.K. has never been a rich country and has not been a great manufacturing country for decades. But it has a better work ethic and political system than almost all of Europe and a better present government than most. It is on a slow and perhaps shallow rebound from New Labour, whose only novelty was that it took them three terms rather than only the one required by Attlee and Wilson to bring the country to the brink of ruin, speaks English, has a good legal system and has been one of the most respected nationalities in the world without interruption since the rise of the nation state approximately 700 years ago.

Strangely and endearingly, Queen Elizabeth’s visit to Ireland last week was the greatest success of royal diplomacy since her parents’ visit to the United States and Canada on the verge of war in 1939, if not her great grandfather Edward VII’s visit to Paris in 1903 to seal the Entente Cordiale. When Britain can’t lead as it often has, as recently as with Thatcher in the ’80s, it still muddles through. The Queen appears to have dispersed a great deal of ancient bitterness, going back to Cromwell and beyond, in just a few days. The adaptability, durability and astuteness of the British should not be underestimated. Canada has inherited, refined and demonstrated some of those qualities, and has a North American work ethic and immense resources to boot.

Both countries, as they shore themselves up and brace themselves for the disarray that the Americans and peripheral Europeans and Japanese seem determined to generate, should keep their nerve, stay in close touch, be prepared to embrace Germany and a few others when they tire of being Europe’s baggage animals, and get ready for great opportunities to lead and renovate.

National Post

 

[a_majoor]

The Virtual water trade is an interesting idea and worth studying in more detail as potential sources of wealth and conflict in the future:

http://www.newscientist.com/article/mg21028144.100-african-land-grab-could-lead-to-future-water-conflicts.html

African land grab could lead to future water conflicts

26 May 2011 by Anil Ananthaswamy
Magazine issue 2814. Subscribe and save

IS THIS the face of future water conflicts? China, India and Saudi Arabia have lately leased vast tracts of land in sub-Saharan Africa at knockdown prices. Their primary aim is to grow food abroad using the water that African countries don't have the infrastructure to exploit. Doing so is cheaper and easier than using water resources back home. But it is a plan that could well backfire.

"There is no doubt that this is not just about land, this is about water," says Philip Woodhouse of the University of Manchester, UK.

Take Saudi Arabia, for instance. Between 2004 and 2009, it leased 376,000 hectares of land in Sudan to grow wheat and rice. At the same time the country cut back on wheat production on home soil, which is irrigated with water from aquifers that are no longer replenished - a finite resource.

Meanwhile, firms from China and India have leased hundreds of thousands of hectares of farmland in Ethiopia. Both China and India have well-developed irrigation systems, but Woodhouse says their further development - moving water from the water-rich south to northern China, for instance - is likely to be more costly than leasing land in Africa, making the land-grab a tempting option.

But why bother leasing land instead of simply importing food? Such imports are equivalent to importing "virtual water", since food production accounts for nearly 80 per cent of annual freshwater usage. A new study into how this virtual water moves around the world offers an explanation for the leasing strategy. Ignacio Rodriguez-Iturbe of Princeton University and Samir Suweis of the Swiss Federal Institute of Technology in Lausanne have built the first mathematical model of the global virtual water trade network, using the UN Food and Agricultural Organization's data on trade in barley, corn, rice, soya beans, wheat, beef, pork, and poultry in 2000. They combined this with a fine-grained hydrological model (Geophysical Research Letters, DOI: 10.1029/2011GL046837).

The model shows that a small number of countries have a large number of connections to other countries, offering them a steady and cheap supply of virtual water even if some connections are compromised by drought or political upheaval. A much larger number of countries have very few connections and so are vulnerable to market forces.

Most importantly, the model shows that about 80 per cent of the water flows over only about 4 per cent of the links, which Rodriguez-Iturbe calls the "rich club phenomenon". In total, the model shows that in 2000, there were 6033 links between 166 nations. Yet 5 per cent of worldwide water flow was channelled through just one link between two "rich club" members - the US and Japan.

The power of the rich club may yet increase. The model allows the team to forecast future scenarios - for example, how the network will change as droughts and spells of violent precipitation intensify due to climate change. Predictably, this will only intensify the monopoly, says Suweis. "The rich get richer."

China and India are not currently major players in the virtual water network on a per capita basis, and as the network evolves they could find themselves increasingly vulnerable to market forces and end up paying more for the food they import. Leasing land elsewhere is an attempt to secure their food and water supply in a changing world. But it could be a short-sighted move.

Last year, Paolo D'Odorico of the University of Virginia at Charlottesville showed that a rise in the virtual water trade makes societies less resilient to severe droughts (Geophysical Research Letters, DOI: 10.1029/2010GL043167). "[It] causes a disconnect between societies and the water they use," says D'Odorico. The net effect is that populations in nations that import water can grow without restraint since they are not limited by water scarcity at home.

Although this could be seen as a good thing, it will lead to greater exploitation of the world's fresh water. The unused supplies in some areas that are crucial in case of major droughts in other areas will dry up. "In case of major droughts we [will] have less resources available to cope with the water crisis," says D'Odorico.

In the end, then, the hunt for water that is driving emerging economies to rent African land to grow their crops could come back to haunt them.

 

[a_majoor]

With most eyes on the ongoing drama of the US debt ceiling, people may have forgotten another huge crisis is brewing across the pond:

http://www.theatlantic.com/business/archive/2011/07/euro-in-crisis-is-the-italian-domino-falling/241760/

Euro in Crisis: Is the Italian Domino Falling?
JUL 11 2011, 11:17 AM ET183

There have been some rumbles about Italy for a while.  Italy's budget deficits are relatively modest compared to, say, Ireland, but their debt is about 120% of GDP.  The government has passed a plan that will balance the budget by 2014, but as with most such plans, most of the cutting comes later, while the current cuts are small.  This may well be sensible fiscal policy, given the current economic climate, but it is not reassuring to the markets.  Mike Shedlock estimates that Italy needs to borrow about €356 billion ($500 billion) in 2011 to cover its deficit, and roll over outstanding debt.  Their 10-years are now trading at something north of 5%.  Most of the estimates I've seen say that a debt death spiral becomes likely when rates hit somewhere between 6-7%, because the debt service costs start blowing up the budget deficits.

If Italy goes, it's not clear that the rest of Europe can save them.  In the FT, Neil Dennis says people are talking about doubling the euro bailout fund to €1.5 trillion--or about three times the size of TARP.  And you may have noticed that the bailout fund has not actually stopped Greece's descent into debt madness.  Italy's public debt is not much smaller than Germany's, even though the latter obviously has a much bigger (and richer) economy.  In the event that things really go south on the Italian peninsula, I don't think there's enough money in the rest of Europe to provide a rescue package.

Meanwhile, conditions in the other PIIGSs are worsening.  European leaders seem to be giving up on the notion of some sort of voluntary debt swap after the ratings agencies noted that they would be forced to call this what it is: a default.  Since the Greek debt load does not seem to be in any way sustainable, they're going to have to do something.  Riots in Athens seem to be making it increasingly clear that over the long term, "something" is not going to be indefinitely decreasing their government consumption in order to make debt service payments.  That leaves making bondholders take some sort of a haircut, aka default.  It sounds as if the continent's financial leaders are starting to decide that if Greece's only option is some kind of default, they might as well bite the bullet and do the thing.

This will not be pretty.  For starters, if they default, but stay in the euro, then unless really considerable aid is forthcoming from the rest of Europe, they're going to lose most of the advantages of the euro (low debt premium) while retaining the disadvantages (excessively tight monetary policy for a country that is going to be experiencing capital flight and even deeper recession).  Countries like Argentina got at least some tourism and export boost from very cheap prices after they defaulted and went off their currency peg; Greece won't even get that if the euro remains at an ouchy 1.4 to the dollar.  (If it doesn't remain there, but instead sinks . . . well, that means the euro zone will be having all sorts of other problems.  More on which in a minute.)

Of course, even defaulting and going off the peg is hardly a gateway to paradise.  It is true that after an initial period of horrifying double-digit contraction, Argentina boomed . . . but Argentina was an agricultural commodity exporter in an era when soaring Chinese demand was causing rapidly rising prices in many commodity markets.    And after playing hardball with their foreign investors, Argentina has had limited access to global capital markets, which means they've had to resort to some desperate measures, like seizing the Argentinian equivalent of 401ks, and running the printing presses, to keep the government's finances in balance.  This weekend, the Wall Street Journal informed me that Argentina has now resorted to filing criminal charges against economic consulting firms whose reports indicate that actual inflation exceeds the officially reported numbers by a factor of two to three.

Either way, what Greece does will have implications for the rest of Europe--and for us.  As NPR's Jacob Goldstein says, interbank lending between various European nations, and the US, "looks like a web made by an insane spider".

Once Greece defaults, the immediate outcome is crisis, not calm. Within Greece, they'll need to find some way to close their primary deficit, and stem capital flight, while the economy craters.  Outside of Greece, Portugal, Ireland, Spain and Italy will face growing pressure on their debt.  The euro may plummet--good for German exports, not so good for attracting the kind of capital needed to keep the banking system solvent. And the rest of us will be scrambling to keep the contagion from taking down our banking systems, or our economies.  No one wants another Credit-Anstalt.  But I'm not sure anyone feels quite confident we can prevent it.  As I tweeted yesterday, if the drama continues on both sides of the Atlantic, we may soon get to witness a paradox: where does a capital "flight to safety" go if America defaults while the euro implodes?

 

[a_majoor]

Now that everyone's eyes are no longer fixated on the US political drama:

http://www.theatlantic.com/business/archive/2011/08/eurocontagion-spreads/242981/

After Congress Comes Together, Eurozone Is Still Falling Apart
By Megan McArdle

Aug 2 2011, 4:45 PM ET 229
Finally, the deal has passed the Senate and the House.  Which means we now return to our regularly scheduled programming: panicking about Europe.  Italian and Spanish bond yields are soaring:

    The flurry of activity came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 per cent and 6.25 per cent, respectively. The premiums Madrid and Rome pay to borrow over Germany also reached new euro-era highs of 404 and 384 basis points. Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs.

    The premium France pays to borrow over Germany also hit a euro-era high of 75bp. Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading. "What can be announced to really break that? It is difficult to see," said Laurent Fransolet, head of European fixed income research at Barclays Capital.

    The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy. It has been heightened by worries about the possibility of recessions in the US and Europe, which has led to frenzied buying of perceived safe-haven debt including Germany, the US and the UK.

There's some thought that once the rates hit around 7-8%, they enter a death spiral: debt service costs grow faster than the ability of the economy to service them, and since bond buyers know that this raises the risk of default, they demand higher interest rates, which just makes it all worse.

Where does this end? I wish I knew.  The Euro-Optimist argument seems to be that the euro cannot hold together without massive fiscal integration--transfers, plus a guarantee of these debts.  It seems to me that this is true. But like Tyler Cowen, the conclusion I draw is that the euro will probably not hold together, at least not in its current form.

 

[a_majoor]

The PIIGS are still threatening to sink the Euro and the Eurozone:

http://www.businessinsider.com/senior-imf-economist-expects-hard-default-for-greece-soon-2011-9

Senior IMF Economist Expects Hard Default For Greece. Soon.

According to a senior IMF economist who wasn’t identified, Greece will likely face a “hard default” well before March 2012.
It could happen during 2011, and perhaps after the current round of negotiations. This acknowledgement from someone very close to the matter in a body that is heavily involved in the bailout, is quite worrying.

The current talks are around the first bailout, agreed more than a year ago. Greece definitely missed its targets. The EU /IMF delegation suspended its visit to Greece after discovering that the deficit will be higher. They are expecting fresh steps to be taken by the Greek government.
The Greek government says any more steps will only deepen the recession and make things even worse. The debt trap is quite clear at this stage.
These complications triggered not only the aforementioned expectations for a hard default, according to WSJ:
“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”

A hard default means a messy one. A default that is not controlled could have a serious domino effect: it can push banks to bankruptcy (such as French banks, that are highly leveraged), and it can send bond yields of other countries much higher. A hard default for Greece also seriously endangers .

The ECB has bought Spanish and Italian bonds and managed to stabilize things: 10 year yields stood on around 5% after the intervention. The recent retreat of Italy on some of the suggested measures and the political problems of Berlusconi sent yields up once again.
All in all, the bailout mechanism secures only one thing: a crisis on every inspection. Last time, it ended with a reshuffle of the Greek governments, fresh austerity measures and violent protests on the streets of Athens.

Opposition is also growing in the donating countries. Will the current round be a chance for a change?
This is one of the things that sent EUR/USD down on Friday, despite the zero job gains in the US and the higher chances of dollar printing.

This will add to the weight on EUR/USD at the beginning of the week.
For all the European events and technical analysis, see the euro/dollar forecast.
Read more posts on ForexCrunch »


Read more: http://feedproxy.google.com/~r/ForexCrunch/~3/E7Ae5sXV0eM/#ixzz1X5b3yzst

 

[FoverF]

I am currently living in a PIGS state, and let me tell you, nobody... and I mean...

NOBODY

is even TALKING about balancing their budgets.

It's not even in the long-term plans.

They're talking about maybe someday stabilizing their deficit at 3.5% or so. That's not 3.5% percent of government expenditures mind you, which is what normal people would mean if they were talking about a 3.5% deficit. No, they mean 3.5% of the entire GDP of the country (which is what normal people would call a 17% deficit). That's the long term goal. The current reality (here) is more along the lines of a 10% deficit (which sounds much nicer than saying you're spending twice as much money as you're taking in).

But there is no talk in Europe of balancing budgets. Just talk about how to use the mechanisms of the Euro and ECB to stabilize bond markets and ensure lower interest rates.

Just talk about how to borrow more money.

The Germans are running awfully thin on Nazi-guilt, and that's the only thing keeping the Euro zone afloat.

But one way or another, they are going to crash hard, and man, oh man, do they ever deserve it.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, is some all to rare good sense, from a likely source:

http://www.theglobeandmail.com/report-on-business/careers/careers-leadership/the-lunch/david-dodge-black-coffee-spiked-with-exasperation/article2160163/

David Dodge: Black coffee spiked with exasperation

JACQUIE MCNISH
TORONTO— From Saturday's Globe and Mail

Published Friday, Sep. 09, 2011

David Dodge is not inclined to hold his tongue.

Three years after he retired as Governor of the Bank of Canada to take up the life of a corporate director and law firm adviser, the plain-spoken Mr. Dodge has emerged as a stern voice of economic reason in a time of financial upheaval.

There are no shortage of economic critics in these difficult times, but what makes Mr. Dodge a unique scold is that he is the former head of the Bank of Canada, a sober institution from which leaders are expected to retire into quiet obscurity. He has not only broken tradition with his predecessors, but he is also something of a maverick in his Ottawa home base where public sector voices have gone quiet under the Conservative government.

During a recent early morning breakfast meeting in the Toronto office of his law firm Bennett Jones LLP, he says it is “unfortunate” that most senior civil servants have “hidden a bit,” from the long-standing tradition of speaking their minds about public policies in speeches, public hearings or committee sessions.

“I believe that Canadian citizens are more intelligent and more able to deal with things than the political operators believe. The foundation of a good public policy is really an open dialogue and open debate.”

That discussion has never been more important than today, he says, because trust in public and private sector institutions has been shaken by three years of economic turmoil.

“People are searching for the right answers,” he says.

Anyone who plans to share a meal with Mr. Dodge should probably eat first. He unleashes such a torrent of thought-provoking and passionate arguments that food becomes an afterthought. Which is another way of saying that muffins prepared for our morning meal will remain wrapped on his desk and the fighter pilot black coffee mostly untouched.

Sporting the standard civil service outfit of khaki pants, blue jacket and brown shoes, he serves up an unusual blend of tart critiques wrapped in such folksy exclamations as “Holy Smokes!” or “That’s bananas.” Close your eyes and you could be listening to an episode of A Prairie Home Companion.

What’s bananas in Mr. Dodge’s book is a lack of global co-operation and “stupid” political theatrics, particularly in the United States, which are preventing the world’s leaders and financial authorities from getting on with the business of fixing global economic imbalances. The global co-operation that worked so well during the 2008 meltdown, he says, has “lost momentum.”

At the same time, the list of economic ailments is growing. China’s currency is artificially low. In Europe and North America, households are bogged down by debts, job growth is stalled and governments are burdened with too much debt. Add it all up, he says, and “clear and real economic growth is not in the cards for some time.”

How bad will it get? To this question, Mr. Dodge responds with another: “Are we in North America and Europe facing a Japanese decade?” The question will not be directly answered, but his implication is clear: Most of the industrialized world is a long way from economic recovery.

Canada has been insulated from the worst of the economic carnage, thanks to its strong banking system and robust GDP, but he sees tougher times ahead. Much of the country’s resource-based economy has been stoked by strong commodity prices, which “won’t go on forever” as global economies sputter.

A more intractable problem is the country’s waning manufacturing base in Ontario. The underpinnings of the province’s core industrial sector have been eroding for decades. Plants here can’t compete with the lower wage markets of the Southern U.S. states and emerging countries. Compounding matters, long-term investment in more efficient plants and equipment has been anemic. The deterioration was masked for years by the competitive advantage of a depressed loonie and overheated demand in the United States, particularly in the past decade.

Given the current strength of the Canadian currency and fragility of the U.S. economy, he says, “we in Ontario are in an extremely difficult position.”

The worst of it, he says, is that none of the province’s three political parties appear willing to admit that jobs and corporate tax revenues are at potentially at risk. More disconcerting are the absence of viable economic strategies and incentives to attract manufacturing investment.

His most pointed criticisms are directed at Ontario’s three political leaders who are campaigning for an October election. Each leader, he warns, is promoting “impossible” economic plans that unrealistically promise lower taxes and improved services for a province that he believes is facing a shrinking tax revenue base.

“Whoever wins will be seen to have lied to the public,” he said.

It was this kind of sharp criticism that earned Mr. Dodge his first job in the federal public service in the early 1970s. Back then, he was an economics professor at Queen’s University who had a lot to say about the federal government’s indirect subsidies to workers in the Atlantic provinces. At the time, the system allowed workers to claim unemployment benefits within weeks of losing work, reducing the incentive for people to look for jobs. “I was very upset. … It was nuts.”

Listening to his barbed analysis was deputy finance minister Simon Reisman, who hired him as the first employee in the department’s new social policy division. One of his mandates was to rethink the federal unemployment insurance system.

It was the beginning of a three-decade career in public service that would see Mr. Dodge tackle some of the country’s thorniest economic issues, including inflation, tax reform, free trade, and Canada’s 1976 entry to Group of Seven leading industrialized countries. By the time he was appointed Governor of the Bank of Canada, he had served as a deputy minister in the Finance and Health departments for 11 years.

For most Dodge watchers, his biggest accomplishment was his work with in the 1990s with then-Finance Minister Paul Martin to balance Canada’s bloated federal deficit. He says the politically fraught assignment of cutting federal costs would not have been possible had then-Prime Minister Jean Chrétien not had “the trust of Canadians that he was doing the right thing by pursuing fiscal restraint.”

That trust is even more important today if provinces such as Ontario have a hope of imposing the government service cuts and rolling out economic incentives that he believes are necessary to rebuild its aging manufacturing sector.

“I’m the last person to sound all gloom and doom, but I think governments can only do difficult things in public policy if they have the trust of the people.”

CURRICULUM VITAE

Family

Born in June, 1943. The son of a Toronto shoe polish manufacturer, he got his first job working in the factory’s payroll office.

He and his wife Christiane, a retired civil servant, have two daughters and three grandchildren. They have a home in Ottawa, an apartment in Toronto and farm in Perth, Ont.

Public Sector

With a PhD in economics from Princeton, he began his career as an economics professor at Queen’s University in 1968. His sharp criticisms of federal unemployment policies earned him a job in 1972 as a researcher with the Department of Finance. He spent most of the next 36 years in Ottawa rising to senior posts in a variety of departments including Deputy Minister of Finance. In 2001, he was named Governor of the Bank of Canada.

Private Sector

Eight months after leaving the Bank of Canada in 2008 he accepted a job as an adviser to the national law firm Bennett Jones LLP. Shortly after that, he was named Chancellor of Queen’s University. His boardroom posts include Bank of Nova Scotia and Canadian Utilities Ltd. He is a co-chair of the International Institute of Finance and a member of the Central Bank of United Arab Emirates’ advisory council.

Personal

His favourite place to unwind is his sprawling farm in Perth where he and his wife spend most weekends. Although he no longer breeds cattle, he keeps busy repairing fences and cutting hay. His hobby is carpentry and cabinet making. His most recent creation was a maple and cherry coffee table.

IN HIS OWN WORDS

On leaving the Bank of Canada during a time of global financial stress

“You sleep better at night because you're not carrying the burden of it.”

On what he misses about the Bank of Canada

“There is a huge difference. At the bank, I had 1,200 staff who were incredibly competent and diverse. Now I have one person, an economist, working with me.”

On the need to be vocal about economic policies

“During my time in the public service, I spent a lot of time talking in public to committees of the house and other forums. It was expected. At the time, it was part of the job. It is unfortunate that today that seems to be less the case federally.”

On the U.S. economy

“There is incredible political stupidity in the United States with this debt-reduction panel. It should take six to 10 years to fix the fiscal problems, but they are doing it too rapidly.”

Dodge is, in my opinion, pretty much spot on, point by point.

The big problems: "a lack of global co-operation and “stupid” political theatrics, particularly in the United States."

Other factors bearing on the current problems: "China’s currency is artificially low. In Europe and North America, households are bogged down by debts, job growth is stalled and governments are burdened with too much debt."

For Canada "Much of [Canada's] resource-based economy has been stoked by strong commodity prices, which “won’t go on forever” as global economies sputter."

And "A more intractable problem is the country’s waning manufacturing base in Ontario. The underpinnings of the province’s core industrial sector have been eroding for decades. Plants here can’t compete with the lower wage markets of the Southern U.S. states and emerging countries. Compounding matters, long-term investment in more efficient plants and equipment has been anemic. The deterioration was masked for years by the competitive advantage of a depressed loonie and overheated demand in the United States, particularly in the past decade."

 

[Brad Sallows]

All true, but I estimate the real root cause is that too many governments have overpromised what is deliverable and written too many cheques on behalf of people who are adamantly opposed to paying.  As the wheels fall off in a handful of countries, prudent people try to reduce debt and shore up for the coming storm.  The response of irresponsible governments is to acquire more debt on behalf of people who are trying to shed it, and to despoil the value of assets (inflation).  All that does is encourage deeper entrenchment in anticipation of a more powerful upheaval.  I'm aware of the limitations of intelligent and well-educated people and firmly and reasonably doubt their ability to successfully manage such a decentralized and chaotic entity as "the economy" by dirigiste measures.

Some think the small number of countries in crisis shouldn't be a problem.  Since they literally don't know how sensitive the "system" is to small perturbations (if they could, their predictions might be sane, accurate, and verified by outcomes), their conclusion is unfounded.

 

[Edward Campbell]

"...  too many governments have overpromised what is deliverable and written too many cheques on behalf of people who are adamantly opposed to paying."

I think you are right. I think the number of "people who are adamantly opposed to paying," including Canada's share, is huge.

 

[a_majoor]

Greece is finally taking steps to cut spending, but only under increasing pressure from the lenders:

http://www.nytimes.com/2011/09/19/business/global/19iht-euro19.html?_r=2&hp=&pagewanted=print

Greeks Discuss Drastic Moves to Receive Aid
By JACK EWING and NIKI KITSANTONIS

FRANKFURT — Greek leaders struggled through the weekend to agree to a set of radical budget reductions that would satisfy foreign lenders’ demands even as they tried to stave off mounting resistance to those cuts at home.

Reflecting the urgency of the situation, the prime minister of Greece, George A. Papandreou, canceled a planned trip to Washington this week and held talks with his cabinet on Sunday.

The Greeks face an October deadline to qualify for 8 billion euros, or $11 billion, in aid, without which Greece will certainly default on its growing debt. Over the weekend, European finance ministers issued stern warnings at a meeting in Poland that failure to meet financial targets would imperil the release of the payment.

The payment is just one installment in a larger package of 110 billion euros, or $152.6 billion, in aid agreed to by euro zone members in spring 2010; a second bailout fund, for 109 billion euros, or $150.2 billion, was agreed to in July, though that has yet to be ratified.

To reach the financial targets, Greek leaders discussed a range of draconian layoffs and pay reductions among public sector workers. While these measures have long been planned, but never carried out, to the frustration of foreign lenders, the discussion of these cuts represented a marked change in approach for the Greek government, with the emphasis on reductions over revenue increases.

“Everyone wants a smaller state,” the finance minister, Evangelos Venizelos, said on Sunday.

After the meeting, the Greek government reaffirmed its commitment to hit budget targets for 2011 and 2012, to avoid generating new debt and to revamp the dysfunctional economy. The measures are “in order to avoid bankruptcy and remain in the euro zone but also to stop the country being blackmailed and humiliated,” Mr. Venizelos said.

Mr. Venizelos also appealed to Greeks to take responsibility for the challenges they face.

“What is being disputed on a global level is not the ability of the government but the ability of the country to do what is necessary,” he said, in an apparent reference to strong labor union resistance to reforms and persistent tax evasion.

More specifically, Greece officials are being pressed to put thousands of civil servants deemed to be “surplus” on a standby status at a reduced wage. The government has not yet pushed ahead with this measure, which is very unpopular in a country where nearly one million people out of a population of 11 million work for the government.

Several Greek news media outlets, including the influential center-left newspaper To Vima, on Sunday cited an internal government e-mail that set out priorities by Greece’s foreign creditors aimed at raising much-needed revenue quickly. These include cuts in the pensions of Greek sailors and employees of the state telecommunication company OTE, the immediate merger or abolition of 65 state agencies and the freezing of state workers’ pensions through 2015.

Adding to the Greeks’ dilemma is that the proposed cuts come as the Greek economy is contracting faster than expected. Last week, Mr. Venizelos warned that the economy would shrink much more sharply this year than anticipated — by 5.3 percent instead of the 3.8 percent originally forecast in May. The budget deficit is on track to reach 8.2 percent of gross domestic product this year, well ahead of the original estimate of 7.4 percent.

The original aid package requires Greece to reduce its deficit to 7.5 percent of gross domestic product this year, and below 3 percent by 2014, according to the International Monetary Fund.

The reduced number of workers employed in the public sector would only add to the difficulty of meeting these targets as payroll tax collections shrink.

Despite the dire circumstances, Mr. Venizelos denied rampant speculation that the country was on the brink of default.

Acknowledging that the mood in both Greece and the euro zone is “fluid and nervous,” he said the country was committed to taming its widening budget deficit and carrying out reforms, one of which is a new levy intended to ensure that property owners pay taxes.

Mr. Venizelos also lashed out at “those intent on speculating against the euro and carrying out organized attacks on the heart of the euro zone.”

Greece, he said, risks “becoming a scapegoat and an easy alibi for institutions that are unable to curb the crisis and to respond to attacks on the euro.”

On Monday, Mr. Venizelos will have a chance to make his country’s case in a conference call with representatives of the foreign lenders known as the troika: the European Commission, the European Central Bank and the International Monetary Fund.

Public sector workers in Greece have shown little appetite for the cuts that have already been made, let alone those being proposed. Over the summer, protests have turned violent as workers have bristled at the new austerity measures.

In Germany, the mood seemed to be turning increasingly in favor of letting Greece fail rather than to bear the growing cost.

Wolfgang Schäuble, the German finance minister, repeated warnings that Greece would not receive any more aid unless it kept promises it had made to the I.M.F., the European Commission and the European Central Bank to cut government spending and improve the economy.

“The payments on Greece are contingent on clear conditions,” Mr. Schäuble told the newspaper Bild am Sonntag.

As the largest country in the euro area, which has 17 European Union members, Germany is the biggest contributor to a bailout fund meant to help Greece as well as Portugal and Ireland continue to pay their debts while their economies recover.

Voters in Berlin, at least, did not punish Chancellor Angela Merkel for her handling of the debt crisis. Her Christian Democratic Union gained two percentage points in regional elections on Sunday compared with the last election five years ago, winning 23.4 percent of the vote. The Social Democrats, who have generally been supportive of aid to Greece, remained in power with 28.3 percent.

Support for the Free Democrats, whose leaders have been among the most vocal critics of Greek aid, plunged to 1.8 percent from 7.6 percent in 2006. That is below the 5 percent needed to seat representatives in the state Parliament.

In the end, when political leaders do the math, they may find it cheaper to save Greece than engineer a bank rescue, analysts said.

“There is no political advocacy for such a prospect in Greece or in Europe as it would signal the beginning of the unraveling of the euro zone,” said George Pagoulatos, a professor at the Athens University of Economics and Business. “The markets would start attacking Portugal and Ireland, and the domino would stop somewhere around France.”

Jack Ewing reported from Frankfurt, and Niki Kitsantonis from Athens. Stephen Castle contributed from Wroclaw, Poland.

 

[a_majoor]

David Frum lays out a scarey set of circumstances:

http://fullcomment.nationalpost.com/2011/09/24/david-frum-how-canadas-economy-came-down/

David Frum: How Canada’s economy came down

Brendan McDermid/Reuters
The Canadian economy has had a good run so far, but the party might be coming to an end.
   
David Frum  Sep 24, 2011 – 10:00 AM ET | Last Updated: Sep 23, 2011 5:26 PM ET

Is Canada’s luck finally running out?

Through three bad economic years, Canada has emerged as an island of relative stability amid the global storm. More Canadians are working today than were working in the summer of 2008. No other major Western economy has done so well.

Canada has the lowest debt burden of any G7 country. The turmoil in the Eurozone and the gloom in the United States feel very far away from the stability and prosperity of Canada.

Yet Canadians should be warned:

I was talking the other day to a diplomat from a small northern European country. I congratulated him on his nation’s relative economic success. He shrugged. “It’s only a matter of time. You cannot long remain a winner country in a loser region.”

The same principle applies with nearly equal forces on a loser planet.

This week, global markets were jolted by bad news from China: a third consecutive month of decline in its manufacturing industries. International economists have begun to question whether China is not following the U.S. back into recession.

A Chinese recession would cut world demand for oil, nickel, wheat, potash and other Canadian commodities.

Prices for those commodities have already taken a tumble: Oil has bumped back down to $80 a barrel. As commodity prices go, so go Canadian exports — and so goes the Canadian dollar.

Yet the decline in commodity prices is actually the lesser threat to Canada. The greater threat comes from the risk of a Chinese financial crisis.

Here’s how the threat uncoils:

As America slips back into recession, American families buy less — especially including manufactured goods from China.
As Chinese manufacturers earn less in the U.S., they deposit fewer dollars in Chinese banks.
With less dollar liquidity, Chinese banks can finance less asset speculation.
With less Chinese asset speculation, all those condominium towers rising in Toronto and Vancouver will find fewer overseas buyers.
With fewer overseas buyers, prices fall for Canadian housing.
Then arrives the final step, the most lethal. Canadian households are as heavily indebted, relative to income, as their American counterparts were in 2007. Thus:

Declining home prices mean that Canadians may find themselves owing more on their homes than their homes are worth — setting in motion the kind of housing-market collapse we’ve seen not only in the U.S., but also in Western Europe.
And oh by the way,

If Canadians cannot pay their mortgages, that’s very bad news for the banks that hold those mortgages.
Meanwhile of course Canada is also exposed to the direct risks of renewed recession in the United States: Reduced exports not only of commodities, but of all products and services.

Canada has done most things right. Canada had better banking policies and better banking practices than other major economies.

Canada’s finances were in sounder shape than almost anyone else’s before the crisis began. Under the strong leadership of Stephen Harper’s Conservative government — Canada’s finances have been better managed during the crisis, too. Canada borrowed less in 2009, and spent more intelligently, than its peers. Canada then started earlier than anyone else on the post-recession rebalancing of its books.

Yet Canada has also greatly benefited from good luck. Normally, commodity-producing countries suffer more in recessions — as Canadians found in the 1930s. To date, the Great Recession of 2008-2011 was an exception to the rule: a global recession marked by high commodity prices.

If China slumps, commodity prices fall. The unique post-2008 exception to the rule, recession = lower commodity prices, will meet its limits.

In which case, Canada’s long run of comparative good luck may also meet some limits of its own.

©David Frum

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, is an inside look at what is coming next:

http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/financial-times/jpmorgan-boss-rips-mark-carney-over-financial-regulation/article2179981/

JPMorgan boss rips Mark Carney over financial regulation

TOM BRAITHWAITE
WASHINGTON— Financial Times

Posted on Monday, September 26, 2011

Jamie Dimon of JPMorgan Chase launched a tirade at Bank of Canada Governmor Mark Carney in a closed-door meeting in front of more than two dozen bankers and finance officials, underscoring mounting tensions between bankers and officials over financial regulation.

The JPMorgan chief executive’s remarks to Mr. Carney, who is touted as a potential next head of the Financial Stability Forum, the international group of regulators, were focused on a capital surcharge for the largest banks, according to several people who attended the meeting of about 30 bank chiefs.

The atmosphere was so bad after the meeting that Lloyd Blankfein, chief executive of Goldman Sachs and head of the Financial Services Forum bankers’ group which arranged the session, e-mailed the central banker to try to smooth relations, people familiar with the matter said.

On Sunday, 48 hours after the contretemps, Mr. Carney delivered a speech to global bankers at the Institute of International Finance, warning them “it is hard to see how backsliding [on implementing new capital rules] would help” the global economy.

“If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon,” he said.

Mr. Dimon told Mr Carney that many of the rules discriminated against U.S. banks and he was going to continue to use the phrase “anti-American”, first used in a Financial Times interview this month, because it seemed to resonate with people who might be able to modify the reforms.

In his speech, Mr. Carney said: “Authorities are increasingly hearing concerns about the pitch of the playing field for Basel III implementation. Everyone is claiming to be a boy scout while accusing others of juvenile delinquency.”

He added: “However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight.”

The rules agreed by the Basel group of international regulators force all banks to hold 7 per cent core capital against risk-weighted assets. The biggest face an additional surcharge of up to 2.5 per cent.

In his FT interview, Mr. Dimon said the surcharge was unnecessary and the way capital and liquidity were calculated for the new standards -- for example discounting mortgage servicing rights that are a common feature in the U.S. -- discriminated against American groups.

Regulators have more sympathy with banks’ concerns that activity will migrate to the unregulated “shadow” banking sector.

Mr. Carney said shadow banking was “at least as large as the regulated sector…[but] often unregulated and/or overseen by authorities without a systemic focus. This should change.”

A JPMorgan executive declined to comment on Mr. Dimon’s tirade at Mr Carney. The Bank of Canada confirmed that Mr Carney met chief executives but declined to comment on the episode with Mr. Dimon. “We continue to engage in constructive dialogue with a range of stakeholders both domestic and international,” he said.

Let me put this in public health terms. Jamie Dimon is like a brilliant brain surgeon and Mark Carney is like an equally brilliant engineer. On the surface we might think that the neorosurgeon has more to do with public health than an engineer but Mr. Carney is a public servant, in the best sense of that word, he is like the city engineer. While Mr. Dimon, the brilliant neorosurgeon, saves several hundred lives each year by doing complex, costly and difficult operations, Mr. Carney saves millions of lives by providing clean water and collecting the garbage.

In this case, both Carney and Dimon are tooth and claw, read meat capitalists but Dimon has a fiduciary responsibility, a legal duty to his shareholders while Carney has a more general responsibility, a civic duty to a much, much larger group. Each is trying to do his duty as best he can but Dimon is showing us the big US bank's next line of attack: anything that might interfere withtheir ability to make profits, regardless of civic duty, is Anti-American.

It is a sad, shoddy tactic but it is about the only arrow the failing US financial sector has in its quiver.

Pay no mind to Mr. Dimon; Mark Carney doesn't give a sh!t and neither should we.

The US financial giants?

 

[Edward Campbell]

Michael Bliss is a pretty good historian, I'm not saying he is right but his views, expressed in this column which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail deserves a respectful read:

http://www.theglobeandmail.com/news/opinions/opinion/we-took-the-gain-now-weve-got-to-take-the-pain/article2178461/

We took the gain, now we’ve got to take the pain

MICHAEL BLISS
From Monday's Globe and Mail

Published Monday, Sep. 26, 2011

It always seemed simplistic. Economists and central bank managers who claimed to be deep students of the Great Depression of the 1930s confidently told us what should have been done then to avoid the crisis. They made clear that they would know what to do to avoid another one.

According to economists ranging from John Maynard Keynes and Milton Friedman through Ben Bernanke, it was just a question of central banks and governments using appropriate monetary and fiscal policies. If they had managed to get these right back in 1929, we were told – if the Federal Reserve banks had acted faster to stimulate liquidity, if governments had goosed economies earlier with bigger wallops of stimulus spending – there would not have been a problem. The Great Depression was really caused by economic mismanagement.

The corollary was that good economic management would protect us from another depression. And so we have seen the grand social engineers at work – the central bankers driving interest rates to near zero while trying to expand the money supply, governments around the world spending and spending to stimulate activity. When their big schemes seem to fail, we are told that the schemes weren’t big enough, that they must try harder. Surely the economists and the politicians will find a way to save us from our economic woes.

What if it had all been a con game, based on a naive, self-serving misreading of history and the capacity to manage economies? Before the age of Friedman, Bernanke and apologists for the American New Deal, there had been a view of the Great Depression as a global economic correction caused by vast imbalances of supply and demand on world markets that had their origins in the dislocations caused by the Great War of 1914-18, and excessive lending in the 1920s. On this view, held by Herbert Hoover and some of his supporters, not a lot could be done to ease the crisis until markets cleared or righted themselves. The patient would recover when nature took its course.

The danger of excessively active fiscal and monetary policy was that it could delay market corrections, destroy confidence, and make things worse. One of the major reasons why the United States remained depressed throughout the 1930s was the intensity of the clash of economic opinion. The U.S. was polarized then, much as it is now. FDR and the New Deal could not restore confidence and enthusiasm in the private sector, because, as with Republicans today, there was widespread distrust in their panaceas. The real economic sickness was more deeply rooted, less treatable, and would only ease with time.

Very broadly (and very sadly) speaking, history does seem to be repeating itself in our time. Years and years of undue expansion, both in housing and in credit, have flooded markets throughout the Western world. Canute-like in their hubris, really no different from other self-deluded (and self-important) social engineers, the central bankers and politicians have tried to reshape the course of history. Hindered by the consequences of their own series of bad policy mistakes – Europe’s premature experiment with a single currency being the most obvious – the managers have created a lack of confidence in their efforts analogous to that of the 1930s. Policy debates have become deeply polarized between spenders and savers, with paralysis the most likely consequence.

Eventually, markets, such as the U.S. glut of housing, will clear and people will go back to work. Debt will be paid down. Obese and addicted societies, like obese and addicted people, eventually have to face up to the need to live with fewer pleasures of the moment, hard though that may be. One of the problems bedevilling all addicts who are trying to reform is the advice they get from well-meaning or self-serving “experts” who say their withdrawal can happen without sacrifice or discomfort, or does not need to happen at all.

The danger of listening to the people who oversimplify the past and then oversimplify the present (I won’t begin to talk about the current Ontario election), is that they really can make things worse, especially when they propose to dope us up on more of the same. The longer we avoid accepting complex, unmanageable realities, and the real discomforts involved in convalescence and recovery, the more we risk the long-term future for our children and grandchildren.

Michael Bliss is a historian and author. His most recent book is Writing History: A Professor’s Life.

Perhaps almost all the stimulus was just political pandering to special interests - big business, big banks and big labour - which just got in the way of allowing the global economy to work its own way through its troubles.

 

[Journeyman]

How appropriate if the "NSF" in the corner stands for "Non-Sufficient Funds" 

 

[Edward Campbell]

More on the Carney-Dimon dustup, reproduced under the Fair Dealing provisions of the Copyright Act, from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/top-business-stories/jamie-dimons-clash-with-mark-carney-highlights-growing-tension/article2180023/

Jamie Dimon’s clash with Mark Carney highlights growing tension

MICHAEL BABAD
Globe and Mail Update

Published Monday, Sep. 26, 2011

Dimon v. Carney

If you want to get a sense of the escalating rift between the world's banks and their regulators, read today's reports of the dust-up between the chief executive officer of JPMorgan Chase and Bank of Canada Governor Mark Carney.

Actually, according to The Globe and Mail's Kevin Carmichael, it appears to have been more a full-on assault by Jamie Dimon against Mr. Carney at weekend meetings in Washington.

Mr. Dimon's tirade came in a room filled with bankers and finance officials. Bank of Canada spokesman Jeremy Harrison confirmed today that the meeting took place, but would not disclose what happened.

"We have been involved in constructive dialogue with a range of stakeholders, both domestic and international, as we move the financial sector reform process forward," Mr. Harrison said.

Mr. Dimon lit into Mr. Carney over regulatory reforms he believes discriminate against American banks. He has said this before, and his comments preceded a speech by the Bank of Canada chief in which he criticized the world's banks.

“If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon," Mr. Carney said, The Globe and Mail's Kevin Carmichael reports.

According to The Financial Times, the meeting went so poorly that Lloyd Bankfein, the chief of Goldman Sachs, who also heads up a bank lobby group, e-mailed Mr. Carney to try to patch things up.

Mr. Carney is in line to head up the Financial Stability Forum. If he does become chief of the group, he'll be stepping into the lion's den, and I'd put my money on the Bank of Canada governor. Not only is he a forceful central banker, the world is demanding reform after the financial crisis.

Like Michael Babad, in a contest between Carney and Dimon I would bet on Careny. Carney  is a seasoned Wall Street veteran, he spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively more senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking.  Dimon is no amateur, he was a member of the board of directors of the New York Federal Reserve Bank and in that capacity and while being, concurrently, CEO of J.P. Morgan he made decisions in connection with the $55 billion loan to J.P. Morgan to bail out Bear Stearns. He is a favourite of Barak Obama and was rumoured to be in competition (with Timothy Geithner) for the office of Secretary of the Treasury. But, at bottom, Dimon is riding a weak horse and Carney has a strong one.

 

[Edward Campbell]

Further: we ought to have some sympathy for Jamie Dimon. He led JP Morgan Chase soundly and now he, his bank, his shareholders really, are being asked to forgo legitimate profits in order to capitalize themselves to a level which might be too conservative for such a well managed institution. But there are too few banks that are managed as well as JP Morgan and the revised capitalization levels set forth in Basel III are, really, a sop to socialist European governments who had, still have too lax banking regulations ~ it's a variation of make the rich pay and punish the bankers and brokers for the sins of social engineers, especially those in the USA who decided that the route to eternal prosperity was by having the poor jump into the middle class through the magic of cheap mortgages. There was a Jewish fellow, some time back, who opined that "ye have the poor always with you," something the US Congress and the Clinton administration seemed to have forgotten.