Canada's Place in the Global Economy

[Infanteer]

The most powerful Lords cheerfully ignored the wishes of their fellow Lords, and even their Monarch etc, as the situation permitted.

Ah...Hotspur and his Northumberland ilk always throwing a wrench into the system....

 

[Kirkhill]

Ah...Hotspur and his Northumberland ilk always throwing a wrench into the system....

And Norfolk not any better.....

 

[a_majoor]

The Marcher Lords are actually a good wedge to reenter the idea of a Gn. While certain economic or econometric measures can be used to determine who might or might not qualify, the real issue lies in the underlying values of the "qualifying" members. Does the United States really have much in common with the UAE, for example?

If the desire is to get things done, then the members of the putative Gn need to have lots of common interests and values, which explains my constant expressions of support for the idea of an Anglosphere. Alert readers will see elements of Huntington's "Clash of Civilizations" thesis (or perhaps Thomas P.M. Barnett's "Core and Gap" thesis as well).

If powerful sub groups inside the Gn have divergent interests, then they will pursue interests at cross purposes at the Gn. Either the Gn is run by Edward the Longshanks, or the Gn gets taken over by the Marcher Lords who fell they can defy Henry VI with no risk or penalty....

 

[Kirkhill]

The question though, is what is this group convening for?

Is it a group of like minded individuals (nations) meeting to determine a strategy that benefits them?  Or is it a group of inimical individuals (nations) sitting down to resolve differences?

If the former then the size of the group matters less than their common philosophy.  If the latter then the group MUST include ALL interested parties.  There is no way that one nation can guarantee the conduct of another sovereign nation (individual).  Beyond that you are merely discussing spheres of influence, or hegemony ...... Unless you can convince the sovereign nations to elect a small steering committee with well defined terms of reference.

The proliferation of "Clubs" and the lack of utility of the United Nations doesn't give me much hope of a single, universally accepted steering committee being possible any time soon.

The Lords, like Parliament itself still is, was a forum for inimical entities to come together to hash out their differences.  In the bad old days the King was their final arbiter.....unless they didn't like the ruling. 

 

[a_majoor]

We may be going from Marcher Lords to warlords far faster than anyone could have imagined. A massive pension fund collapse in the United States is not only quite possible, but even probable, and the size and scope of this makes the sub prime mortgage bubble look like the warm-up act.

The full article is at the link, but the short summary is many pension funds (particularly Union funds and civil service funds in particular) became vehicles for political malinvestment and ended up backing investment losers. Since pensions are supposed to remain fully funded, corporations may have to sell assets or divert a large portion of their cash flow to maintain their pensions (with inevitable effects on their profitability and viability), while State and local pension funds shortfalls may lead to huge tax increases. The obvious answer of scaling down pension payouts does not seem to be on the radar:

http://reason.com/news/show/130843.html

The Next Catastrophe
Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.
Jon Entine | February 2009 Print Edition

Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protected wake up to a sinking feeling of uncertainty and gloom.

Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.

If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.

During melting markets, all pension funds come under siege. If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.

The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.

The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.

Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits.

Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted. Yet the investment performances of their corporate pension funds, while dismal, are holding up better than the returns of many public and union defined benefit plans. Those funds are facing their own reckoning, but in this case a lot of the pain is self-created and exacerbated by politics.

remainder at link

 

[Rifleman62]

For thoes who were not aware:

http://www.cppib.ca/About_Us/


The CPP Investment Board is a professional investment management organization based in Toronto. Our purpose is to invest the assets of the Canada Pension Plan in a way that maximizes returns without undue risk of loss. The CPP Fund is $117.4 billion. Canada's Chief Actuary estimates that CPP contributions will exceed annual benefits paid through 2019. Thereafter a portion of the CPP Fund's investment income would be needed to help pay CPP benefits.

The CPP Investment Board was incorporated as a federal Crown corporation by an Act of Parliament in December 1997 and made its first investment in March 1999.

November 12, 2008

Investment returns were negative 7.5 per cent on a year-to-date basis and negative 8.5 per cent for second quarter

TORONTO, ON (November 12, 2008): The CPP Fund ended the second quarter of fiscal 2009 on September 30, 2008 with assets of $117.4 billion, reflecting investment returns of negative 7.5 per cent for the first six months of the fiscal year and negative 8.5 per cent for the second quarter. The Fund declined $5.3 billion in value for the fiscal year to date and $10.3 billion since the previous quarter.

The Fund’s four-year annualized investment rate of return through September 30 was 6.6 per cent, which has resulted in $22.0 billion of investment income for the Fund over the four-year period. The CPP Investment Board reflects its long investment horizon by regularly reporting rolling four-year performance.

We report the performance and the market value of the CPP Fund on a quarterly basis.

Investments held by the CPP Fund include equities, fixed income (primarily government bonds), and inflation-sensitive assets (real estate, inflation-linked bonds and infrastructure).

Our fiscal quarters are:

The fiscal year is from April 1 to March 31

1st quarter: April - June Release date: mid-August
2nd quarter: July - September Release date: mid-November
3rd quarter: October - December Release date: mid-February
4th quarter: January - March Release date: mid-May

 

[a_majoor]

The problem isn't the CPP (although many of their investments will be at risk as we move closer to the vortex; this is a bit like orbiting a black hole, you seem to be quite safe until you get too close to the event horizon.....). The scale of these state and municipal pension losses is staggering, and so long as there is a demand to cover these losses, then vast amounts of taxpayer wealth will be drawn away from the productive economy to cover them.

The potentially nasty backlash is when taxpayers realize they are having their current standard of living reduced and their own future retirements placed in jeopardy to fund very generous government pensions (which provide coverage they could never achieve even in a growing economy). Taxpayers might try to take on "city hall" with political campaigns, referendums and lawsuits, while the public service will respond with strikes, work to rule and obstructing their opponents with red tape wherever they can. (If there is any positive aspect it is many alternative private services will grow and prosper to take care of business during disruptions; these will be the targets of the fiercest opposition and red tape entanglements).

All this will keep the productive economy in low gear, and this assumes that the pension funds don't collapse and spark huge asset dumps on the market, or force large sectors of the economy into receivership as the taxes on the business community is ramped up to cover the losses. The effects on our economy, with 82% of our exports going to the United States, is entirely predictable:

http://www.bloomberg.com/apps/news?pid=20601213&sid=ahb6gcv6yWcs&refer=home

State Pensions’ $865 Billion Loss Affects New Workers (Update2)

By Adam L. Cataldo

Jan. 13 (Bloomberg) -- State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires.

Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.

“Not a whole lot of people get too excited about pension funds,” Philadelphia Mayor Michael Nutter said in an interview. “But if you have to pay those costs, they do grab your attention.”

After Philadelphia’s fund lost $650 million in the first nine months of last year, Nutter joined the mayors of Atlanta and Phoenix in writing a letter to Treasury Secretary Henry Paulson seeking financial help for U.S. cities. Their November letter cited investment deficits and rising pension costs.

The $865 billion in losses, which exceed the $700 billion Troubled Asset Relief Program that Congress approved in October, comes as states face budget deficits totaling $42 billion.

The Boston College center analyzed holdings reported on financial statements from 2006, when the 109 funds had about 20.4 million members. It didn’t specify which of the 218 U.S. state funds it studied.

To return to 2007 actuarial funding levels by 2010, the 109 funds would need annual returns of 52 percent on assets, the analysis found. Annual returns of 18 percent would achieve the goal by 2013, the center said. The projections are based on a 5.7 percent annual increase in liabilities and a $50 billion increase in assets from contributions above annual payouts.

‘Accelerating Complications’

State funds have enough money on hand to pay benefits for the foreseeable future, said Alicia Munnell, the center’s director. “Even if markets recover, this will be a one-time loss that will have to be made up in the future by taxpayers,” she said.

“We can’t make enough on investments to drive out of this hole if all you do is depend on investments,” said Mike Burnside, executive director of the Kentucky Retirement Systems in Frankfort.

As of June 30, Kentucky’s largest fund for state workers held about 52 percent of the assets needed to pay current and future benefits to its 117,000 members. The plan had an unfunded liability of $4.8 billion at that time, while the entire system’s liabilities totaled about $16 billion.

‘Negative Cash Flow’

“When we are experiencing a negative cash flow and we are having to eat capital to make payroll, we are accelerating the complications,” Burnside said.

Increasing taxes to fill the pension gap has little support, said Frank Karpinski, executive director of the Employees’ Retirement System of Rhode Island in Providence.

“I don’t think anybody wants to do that, likes to do that or would say it would be an easy sell anywhere, especially given the current economic situation,” he said.

State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.

Attempts to reduce benefits also face opposition.

“I believe that our members will oppose such initiatives in collective bargaining or in state legislatures,” said John Adler, a director with the Capital Stewardship Program in New York for the Service Employees International Union, which represents public workers. The union’s 850,000 members were in retirement plans with more than $1.5 trillion in assets as of Jan. 1, 2008, Adler said.

Two-Tiered Plans

To cut pension costs, some states are creating two-tiered systems offering less to new hires.

Kentucky lawmakers this year set the state’s first minimum retirement age, 57, for employees hired after Sept. 1, and required 30 years of service, up from 27, to receive full benefits. They capped cost-of-living adjustments, which had been tied to the Consumer Price Index, at 1.5 percent. The system had an unfunded liability of about $16 billion as of June 30, executive director Burnside said.

New York Governor David Paterson, trying to close a $15.4 billion budget gap over 15 months, wants to reduce new workers’ benefits and raise the retirement age to 62 from 55. New York’s pension system was over funded, with assets of $153.9 billion, as of March 30.

‘Weakest Cases’

Of the 109 state funds, 43 were funded at 79 percent or less of estimated current and future costs. Those below 80 percent “constitute the weakest cases,” said Ted Hampton, an analyst with Moody’s Investors Service Inc. in New York. The average level is 85 percent, according to an analysis prepared for a Moody’s report published in July 2008, Hampton said.

A survey of state funds found they owed $2.35 trillion to pension payments over 30 years, a December 2007 report by the Pew Center on the States found.

Company pension funds have also lost assets in the stock- market decline. The value of so-called defined benefit plans fell to $1.2 trillion at Dec. 31 from $1.6 trillion a year earlier, according to Mercer LLC, a New York-based pension consulting unit of Marsh & McLennan Cos.

Last month, after Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies said losses could force them to make unexpectedly large contributions, Congress voted to delay provisions of the Pension Protection Act of 2006. The law would have penalized employers that didn’t cover at least 94 percent of their liabilities this year.

Membership Growth

For state plans, which weren’t covered by that mandate, the funding issue is complicated by 12 percent growth in membership since 2002, with 23.1 million now participating, according to census data.

Excluding Social Security, public employers’ pension costs are three times the retirement costs of their private counterparts, according to a June 2008 report by the Washington- based Employee Benefit Research Institute.

Some state retirement systems have seen losses in derivatives as well as stocks. Public pension funds bought more than $500 million in so-called equity tranches of collateralized debt obligations, according to public records compiled by Bloomberg in 2007. CDOs are packages of securities that are backed by bonds, mortgages and other loans. Their equity tranches are considered their riskiest portions.

The Missouri State Employees’ Retirement System invested $25 million in half the equity portion of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. Moody’s last month cut ratings on parts of the debt, saying a drop in value of the underlying collateral may cause “an event of default.”

Finding Funds

Chris Rackers, the manager of investment policy and communication for the Missouri fund, didn’t return calls seeking comment.

In Rhode Island, state and local governments were scheduled to make contributions equaling 25 percent of their payroll expenses to retirement plans in 2010, said Karpinski, the executive director. Barring a recovery, the contributions may increase to as much as 30 percent in 2011, he said.

“That is kind of the elephant in the room,” he said. “Where are the funds going to come from to make these kinds of required contributions?”

To contact the reporter on this story: Adam L. Cataldo in New York at acataldo@bloomberg.net.
Last Updated: January 13, 2009 14:08 EST

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is an interesting and slightly contrarian view on using infrastructure programmes to ‘stimulate’ the economy:
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http://www.theglobeandmail.com/servlet/story/RTGAM.20090114.wrjobcreation14/BNStory/crashandrecovery/home

As jobs tonic, big digs may be a thing of the past

TAVIA GRANT

From Wednesday's Globe and Mail
January 14, 2009 at 3:17 AM EST

The image is persuasive: Thousands of industrious workers wielding shovels to fix Canada's crumbling roads and bridges, netting a windfall of earnings for their families and motoring the economy out of recession. Trouble is, it may be an image from another era.

While infrastructure spending is a great way to prop up economic activity, many economists don't see it doing much for job growth, where money may be better spent on daycare and nursing homes.

The knocks against infrastructure are that it is not as labour-intensive as it used to be, tends to employ many more men than women and, these days, requires skills in engineering, technology and architecture that are already in short supply, critics say.

"A lot of this ethos of infrastructure-equals-jobs comes from the 1930s when you put a lot of guys to work digging ditches and shovelling gravel. And we don't do that any more," said Dr. Jim McNiven, professor emeritus and former dean of management at Dalhousie University.

"You can't just take unemployed people off the street and have them build roads and overpasses," he said.

Much new funding may well wind up being spent on new machinery rather than hiring, he added said.

"You might as well just send a cheque to Caterpillar in Illinois."

He's speaking from experience. Dr. McNiven oversaw job creation programs as Nova Scotia's deputy minister of development during the recession of the early 1980s. He believes now, as then, that employment growth should focus on the services side of the economy, where three-quarters of Canadian jobs already lie. It's where our economy has tilted in recent decades and where hiring could be stepped up quicker.

"If you want to create jobs, as opposed to buy equipment, you do daycare expansions, more help in senior citizens' homes and more community services. And you need to be more imaginative."

He's not alone in his skepticism. As Canadian employment losses mount, questions are emerging over what will best bolster job growth as the employment outlook deteriorates.

Canadian employers shed jobs for the second month in a row last month. Companies' opinions about future employment levels are the gloomiest in at least a decade, a Bank of Canada survey showed this week.

"Job creation will be a major issue and will probably be the No. 1 factor determining policy at this point," said Benjamin Tal, economist at CIBC World Markets Inc.

Just about everyone agrees Canada badly needs an infrastructure overhaul - and Finance Minister Jim Flaherty promised to boost such spending in his Jan. 27 budget. South of the border, president-elect Barack Obama hopes to create three to four million new jobs, partly through infrastructure spending.

Mr. Flaherty said last week that he wants to hear ideas from all parties and levels of government on how to best resuscitate the economy.

At least $61-billion in public and private money will flow into infrastructure projects this year, according to a report released today by ReNew Canada magazine.

The largest slated for this year, at a capital cost of $6.5-billion, is the Romaine Hydroelectric Complex Project in Quebec.

The second largest, Ontario's Bruce A Nuclear Generating Station Restart, plans to hire 250 people this year - mostly in skilled positions such as nuclear operators and control technicians.

Finding those specialized workers "has been and probably will continue to be a challenge," spokesman Steve Cannon said.

Labour experts are proposing a range of other options, from converting traditional factories to green manufacturing as global demand grows, to spending on retraining and education.

A low-skilled, unemployed worker, for example, could get a stipend for retraining at a community college.

In Alberta, where an economic boom caused a spike in school dropouts, many could now be nudged to finish high school, helping to create a better-educated work force for when hiring ramps up again.

"Measures that would encourage people go to school would have a short-term impact and boost productivity in the long term," said John Clinkard, chief economist at Deutsche Bank in Canada. "I'm talking about an investment in human capital."

He frets that lag times in starting infrastructure projects, heightened by the scarcity of skilled workers, mean that by the time many of these projects are up and running, the worst of the recession will have already passed.

Perry Sadorsky, associate professor of economics at York University's Schulich School of Business, suggests Central Canada's traditional factory base should morph into a hub of green manufacturing that would supply growing demand here and abroad.

"You're seeing changes in other countries with respect to renewables - Germany, Spain, and now Obama is talking about it in the U.S. I see massive changes in the energy sector globally and it would be a shame for Canada to lose out on that.

"We could build ourselves into a world-class manufacturing base for renewable energy components. But we need a sense of urgency."

*****

PUBLIC WORKS THROUGH THE AGES

Ambitious infrastructure projects have employed great swaths of the population in years past. Not all labour was voluntary, nor well paid, but here are some snippets from the history books:

2009

At least $61-billion in public and private money will flow into infrastructure this year, according to ReNew Canada magazine. Energy and transport projects dominate the list. Globe and Mail Editorial Research, Canadian Encyclopedia

TORONTO SUBWAY

On Sept. 8, 1949, construction began on Canada's first subway. The project took 7,250 'man years' of skilled labour, and 13,580 man years of unskilled labour, according to the TTC Archives Department.

HOOVER DAM

To control and harness the power of the Colorado River, construction on the dam was begun in 1930 and completed in 1935. About 16,000 people worked on the project, with about 3,500 employed there at any one time.

GREAT PYRAMIDS

Pyramids were erected in Egypt to serve as burial vaults. The Great Pyramid of Giza employed an average work force of 14,567 people, with about 40,000 workers at the peak, according to some theories.

TRANS-CANADA HIGHWAY

The 7,821-kilometre highway was formally opened on July 30, 1962. Work started in the summer of 1950 with an infusion of $150-million of federal funds but revisions increased the federal contribution to $825-million.

TRANS-CANADA RAILWAY

The railway was built by Canadian Pacific Railway Co. between 1881 and 1885 as a condition of British Columbia's entry into Confederation. About 15,000 workers helped build the railway.
-------------------------

In fact, there is, still, a large low skilled component in major construction projects and one can hire labour right off the street because a lot of low skilled/semiskilled construction workers are pounding the pavement.

There are minimum skill sets required for almost any jobs: none are suited to or available for the chronically unemployed/unemployable, undereducated young people who are “on the streets” right now and about whom so many social scientists worry so much.. They are going to ‘mature’ into chronically unemployed/unemployable adults – and parents, and grandparents of new generations of people who know nothing but welfare and substance abuse.

 

[GAP]

There are minimum skill sets required for almost any jobs: none are suited to or available for the chronically unemployed/unemployable, undereducated young people who are “on the streets” right now and about whom so many social scientists worry so much.. They are going to ‘mature’ into chronically unemployed/unemployable adults – and parents, and grandparents of new generations of people who know nothing but welfare and substance abuse.

Nothing will change until society decides that it is not on for them to be supporting fiscally and emotionally the continuance of these groups actions. They don't act, so the social scientists plead for more support for them, we give, and the cycle goes on. We make them account for nothing, require little or no work from them to  receive benefits, tell them its not their fault, etc. etc........

 

[Edward Campbell]

Now here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Ottawa Citizen, is a ‘stimulus’ proposal that will warm the heart of Θουκυδίδης:*
------------------------
http://www.ottawacitizen.com/opinion/op-ed/Stimulus+cure/1177498/story.html

‘Stimulus’ is not the cure

BY NIELS VELDHUIS AND CHARLES LAMMAM

JANUARY 14, 2009

Earlier this week, Finance Minister Jim Flaherty wrapped up his cross-country pre-budget consultation trip in search of recommendations for the upcoming federal budget. Most interest groups, economists and activists are calling for massive increases in government spending to “stimulate” the economy — much of it directed at their own pet projects or industrial sectors.

The unfortunate economic reality however is that “stimulus” spending simply does not work. If the federal government is truly interested in doing what is best for the economy (and Canadians), the solution is reduced government spending and permanent tax cuts.

For starters, a fiscal stimulus package will require increased government borrowing, meaning that the government will take money from some Canadians (who will have less to spend) in order to give to others. The end result is more redistribution rather than more economic activity.

In addition, running a deficit today (to fund the stimulus package) implies higher taxes or lower spending some time in the future. As a result, Canadians will likely save most of a stimulus-induced windfall or use it to pay down outstanding debts in order to brace themselves for higher taxes or lower government spending in the future.

This would certainly apply to temporary tax relief measures. Recent evidence from the U.S. showed that temporary increases in income (from tax rebates) did little to stimulate consumption or the economy.

Other “stimulus” options being considered would likely be worse.

Business subsidies, bailouts, or emergency loans to troubled sectors (auto, forestry, etc.) will only delay the day of reckoning for these industries.

These initiatives transfer tax dollars and employment from healthy businesses to unhealthy ones.

While Canada’s infrastructure is in dire need of improvement, increased infrastructure spending will have little stimulus effect on the economy. Infrastructure initiatives are rarely “shovel ready.” It takes time to draw up project plans, get approvals, and co-ordinate among stakeholders. By the time the actual spending takes place, the economy may already be rebounding.

If past evidence is any indication, increased unemployment benefits will ultimately result in higher levels and longer spells of joblessness. The unfortunate reality is that higher benefits reduce the urgency and incentive for workers to look for employment in other industries and regions.

Rather than forging ahead with “stimulus” initiatives, the federal government should reduce government spending and focus on tax relief aimed at improving incentives to work, invest, and engage in entrepreneurial activities.

To that end, the government should first reduce wasteful spending. A recent study led by economists at the European Central Bank found approximately 25-per-cent waste in Canada’s public sector. Government should follow the lead of many Canadian households: it’s time to trim the fat.

With reductions in spending, permanent (not temporary) personal income and business tax reductions are possible. Specifically, this would allow the federal government to:

• Reduce middle and upper personal income tax rates: reducing personal income tax rates would be a good first step to a single-rate personal income tax which would dramatically improve the incentives to engage in productive economic activity. 

• Eliminate the Capital Gains Tax: the capital gains tax is one of the most damaging taxes in Canada in that it encourages the owners of capital to hold on to their investments and has a detrimental impact on entrepreneurship by reducing the return that entrepreneurs, venture capitalists, and other investors receive from risk-taking, innovation, and effort.

• Accelerate and build on the reduction in the corporate income tax: over the next four years, the general corporate income tax rate should be reduced to 11 per cent, the preferential rate levied on small businesses. This will significantly improve the incentives for business investment and will eliminate the barrier, or disincentive, for small businesses to grow beyond $400,000 (the threshold for the preferential rate).

• Work with the provinces to harmonize provincial sales taxes with the GST: Harmonization with the GST would exempt business inputs from provincial sales taxes and improve the incentives for business to invest in productivity-enhancing machinery and equipment.

The federal government could partially offset the revenue losses from tax reductions by eliminating direct corporate welfare (bailouts, subsidies, loans) and tax rebates, reductions, exemptions, and credits that favour certain types of business investments over others. Canadian governments have spent more than $182 billion on corporate welfare alone over the past 12 years.

As Finance Minister Jim Flaherty indicated, “We are in extraordinary times,” and that “calls for some extraordinary thinking.”

Let’s hope that his government makes the tough choices needed.

Niels Veldhuis is director of fiscal studies and Charles Lammam is a policy analyst at the Fraser Institute.

© Copyright (c) The Ottawa Citizen
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This also warms my mean, cold little fiscal conservative heart but, for one big reason, I hope and trust it will not happen.

Such a bold, sensible move would, without a shadow of a doubt result in the government losing the confidence of the HoC and, in this circumstance, I’m sure that Her Excellency the Right Honourable Michaëlle Jean would, rightly and properly, call on Michael Ignatieff to form a government and that would be worse than any stimulus Harper/Flaherty will offer.

----------
* See here or here

 

[Kirkhill]

Last night I saw McGuinty on CTV fronting for the Premiers and declaring that they needed to fast track infrastructure projects as:  "We don't want the recession to be over before we see the funding."

I almost wet myself.  You could see him trying to bite that sentence back even as he blurted it out.  He at least had the grace to grin as he realized what he had said.

We need to spend money quickly to cure a problem that may cure itself before we can cure it.  I am reminded of the boy scout helping the old lady across the street whether she wants the help or no.

We are at risk, in the minds of the premiers, of committing Rahm Emmanuel's cardinal sin and letting a crisis go to waste.

It will be interesting to see the government's books in 18 months time if it plans for a deficit but costs aren't as great as they planned and revenues aren't as low as they planned.

 

[a_majoor]

It will be interesting to see the government's books in 18 months time if it plans for a deficit but costs aren't as great as they planned and revenues aren't as low as they planned.

Jerry Pournell deconstructs some numbers and comes to interesting conclusions:

http://www.jerrypournelle.com/view/2009/Q1/view553.html#bailout

On Bailouts and Mortgages

The bailouts continue, or at least the distribution of money. Barrack Obama is now making vague threats against the Democrats if they don't quickly vote to give him $350 billion, the other half of the mysterious bailout package that was supposed to end our problems. I haven't been told where most of the first half went, and there seems to be little information on what Obama will do with the second half, but he assures us it is vitally needed and Right Now.

My original reaction to Paulson's original request for $700 billion to be spent at his discretion and exempting him from any liability was "Why not?" My logic was that the amount was trivial compared to what we were about to lose in the coming crash and depression, and buying up the bad paper that was the source of the collapse probably would not work, but it just might, this being a confidence game anyway. A bold move like that might just might restore some confidence and prevent the coming collapse.

That wasn't what was done, of course. Instead everyone had to line up to wet their beaks, and it became a giant pork barrel. Moreover, they didn't even buy up the toxic paper. I'm not at all sure what they did with the money other than dangle some in front of the auto makers while making them grovel. I am pretty sure that you won't solve the US automobile industry by reducing the executive's salaries and perks, or by putting Congressional Committee Chairs in charge of industry policies.

I am not an economist but I do wonder about something. Apparently the total collapse of the house industry was brought about by some 2 million foreclosures. That is, the mortgage backed security packages had been sliced and diced and sold and resold and resliced and rediced and resold again, but all of that was dependent on people making their payments on time; and when some 2 million people stopped making those payments, the whole thing collapsed.

Now assume that the average payment was $4000 a month. That is $8 billion a month, or $92 billion a year. Now if the US Government had simply taken over the payments -- and thus the ownership -- of the properties, it would cost $100 billion a year counting some administrative costs. We could then have rented those properties for whatever we could get; call that $1000 a month per property or $2000 a month total income, so our total outlay is back to under $80 billion a year. This isn't trivial, but it will take a while for that to add up to $700 billion. Part of the administrative costs I assume in the above would be to set agencies to untangle the witch brews of those mortgage securities so we are dealing with real properties, real renters, real buyers -- real people. We begin to unload those properties which we took over for the payments, with administrators biased toward selling the properties to the people living in them: converting their rent into rent/purchase contracts and letting them build equity (which they lose if they stop making the payments.) There are many devils in the details of this, but it seems to me that if the reason for the collapse of the economy was the utter collapse of the real estate market and the terrible losses investors suffered when the "investment grade AAA rated" mortgage based securities turned out to be CC minus grade at best, then with the US government making the mortgage payments they all become AAA again.

I know there are problems here. Among them, there is no retaliation against the ratings agencies which created this problem in the first place. If any executives deserve to lose all their assets it would be, in my judgment, those who put AAA ratings on bundles of crap thus making chicken salad out of chicken droppings. If they didn't know what they were doing they are incompetent and ought to be turned out; if they did know, they ought to be made to disgorge every nickel they were paid to defraud the investors who bought junk bonds under the delusion that they were high grade investments. Alas, the law names the four ratings agencies and requires investment firms and Fannie Mae and Freddie Mac to go pay high fees for their ratings, and no I am not making this up: Federal law sees to it that the four big ratings agencies can never have any competition other than each other, and that they will get business if anyone invests any money in anything ratable. The fact that these four agencies are either incompetent or crooked -- I mean, how competent can you be if you rate a package of mortgage secured paper as being as safe an investment as US Treasury bonds when you have not a scintilla of evidence that they are safe (and it soon became manifest to anyone with a brain that they weren't safe) -- the fact that these agencies are either incompetent or crooked doesn't matter: the law sends investors to them and requires that they be paid their fees.

I don't think that handing Obama $350 billion will save the country; but if he were to spend it by making the payments on defaulting mortgages, it would cost a lot less than what they are planning, and who knows? Maybe the horse will learn to sing.

 

[a_majoor]

Interesting perspective on what is happening and why Russia and Germany are taking the opposite tack. While neither Russia or Germany are hotbeds of Classical Economics or huge fans of Ludwig von Mises, maybe this is a trend we can jump aboard. as an alternative, Canada can make huge tax cuts and become the North American tax haven; attracting American investors and skilled workers to fuel our recovery:

http://www.riehlworldview.com/carnivorous_conservative/2009/02/russia-germany-shift-right-us-goes-left.html

Russia, Germany Shift Right - US Goes Left

Is it possible that Europe and Russia, seeing a shift to the Left with Obama that will weaken America economically, are shifting to the Right to maximize any advantage coming out of the downturn? Because that is what is happening to some extent folks.

Amazing, even as Michelle points out the latest pig lining up at our trough - US auto parts suplliers want $20.5 billion.

Russia opts for fiscal discipline and a no bailout approach.

    Russia signalled a change in its policies to fight the financial crisis on Wednesday, indicating that it would switch from bailing out individual companies to supporting the economy through the banking sector. Moscow also plans huge budget cuts in an attempt to limit its fiscal deficit – rejecting pressure to follow the US and other western countries to try to stimulate the economy with a big boost in public borrowing.

And Deutsche Bank says no thanks to state aid, even with its worse loss since WW II.

    Chairman Josef Ackermann said the bank did not require government assistance and would pull out of the financial crisis on its own.

Hello?

 

[Kirkhill]

With the approach of the Deutsche Bank they are setting up the Euro as a safe haven from the dollar.....which is becoming more and more devalued as more and more are printed to cover an ever shrinking economy.  The Deutsche Bank remembers Weimar.

The Russians.....well their just plumb broke.  The spend what they take in and have no ready reserves.  Their reserves are in the ground.

It will be interesting to see what tack Canada takes.... if the opposition can stop playing silly bugger and Harper can find a pair.

 

[a_majoor]

If the non partisan CBO is correct; then the "stimulus package" is like throwing a large rock to a swimmer coming up for air. Not only does this invalidate the need for a US stimulus package, but all the "me too" packages that western governments have signed on for.

Two short answers: If the US stimulus package is passed, our economy will be swamped by the detrimental effects of a dramatic slowdown in the US economy (our prime markets). If we continue with the Canadian stimulus package, we will only be moving closer to the vortex.

Counter solution: Let the Canadian stimulus package expire (canceling various provisions during this fiscal year as they are demonstrated to be counterproductive or ineffective) and make next year's budget the Opportunity Budget. Converting Canada to a North American tax haven will do wonders as well.

http://gatewaypundit.blogspot.com/2009/02/cbo-predicts-recession-will-end-in-2009.html

CBO Predicts Recession Will End in 2009 Without Stimulus

The Congressional Budget Office predicted that the current economic recession will end in the second half of 2009 without the trillion dollar stimulus.
From The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (pdf):

    CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II. (The longest such recessions otherwise, the 1973–1974 and 1981–1982 recessions, both lasted 16 months. If the current recession were to continue beyond midyear, it would last at least 19 months.) It could also be the deepest recession during the postwar period: By CBO’s estimates, economic output over the next two years will average 6.8 percent below its potential—that is, the level of output that would be produced if the economy’s resources were fully employed (see Figure 1). This recession, however, may not result in the highest unemployment rate. That rate, in CBO’s forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 1981–1982 recession.

The Congressional Budget Office even says the Obama Stimulus will actually hurt, not help, the economy.

The CBO (Table 2, page 12) also predicts that the GDP will drop to 14,224 Billion in 2009. This is 1.9% or $63 billion drop from 2008:

Click to Enlarge
And, Democrats want to pass a trillion dollar Spendulus bill to fix this?
Hat Tip Nano DayTrader

edit for spelling

 

[Kirkhill]

But.......It's a catastrophe

Love that Hope thing.

Saul Alinsky would be proud.  As would Harold Laski.  A nice fusion.

 

[a_majoor]

Perhaps the greatest concern will be the drawdown of US military power as the Pentagon's budget gets slashed (but the "rent seekers" will still get their cut). The crippling of the productive base of the economy also means the drawdown will be very difficult to reverse.

http://online.wsj.com/article/SB123629969453946717.html

Obama's Radicalism Is Killing the Dow

A financial crisis is the worst time to change the foundations of American capitalism.Article
   
By MICHAEL J. BOSKIN

It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.

Martin KozlowskiThe illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.

The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).

Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.

As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.

Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.

The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.

The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.

A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.

Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

 

[a_majoor]

Pretty close to the worst case scenario. Even if Canada is the best positioned to recover from the current economic difficulties. our trading partners are not, and our internal market is much too small to make Autarky a viable proposition. Since the US Administration seems determined to sow uncertainty into the markets and prop up the values of unviable institutions and asset classes for the political rent seeker (looter) class, the markets will remain depressed until the administration gives up or a drastic event (like municipal and State bankrupcies due to pension default would be my guess) unblocks the market and clears the dead assets:

http://www.forbes.com/2009/03/11/recession-depression-bear-market-equities-opinions-columnists-nouriel-roubini.html

How Low Can The Stock Markets Go?
Nouriel Roubini, 03.12.09, 12:00 AM EDT
The answer: Lower ... much lower.
 
For the last six months, I have been arguing that, in spite of the sharp fall in U.S. and global equities, there were significant downside risks to stock markets. Thus, repeated bear market rallies would fizzle out under the onslaught of worse than expected macro news, earnings news and financial markets/firms shocks.

Put simply: If you take a macro approach, earnings per share of S&P 500 firms will be--quite realistically in 2009--in the $50 to $60 range. (Some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e., the price-to-earnings ratio, will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession.

Then, even in the best scenario (earnings at $60 and P/E at 12), the S&P index would be at 720. If either earnings are closer to $50 or the P/E ratio is lower, at 10, then the S&P could fall to 600 (12 times 50 or 10 times 60) or even to 500 (10 times 50). Equivalently, the Dow Jones industrial average (DJIA) would be at least as low as 7,000 and possibly as low as 6,000 or 5,000. And using a similar logic, I have argued that global equities--following the U.S.-- had another 20%-plus downside risk.

These predictions were made when the S&P 500 was close to 900 and the DIJA at 9,000. This basic macro approach was the reason why I've argued that the latest bear market sucker's rally--the one going from late November 2008 to early January 2009--would fizzle out, and new lows would be reached. Indeed, like previous bear market rallies of the last year, this one went bust--falling over 20%--and the DJIA and the S&P fell below the 7,000 and 700 upper limit of our range for U.S. equities. With the DJIA and the S&P now well below the "7" range, the next test for the markets may well be 6,000 and 600 for the two indexes.

I have also argued that another bear market rally may occur some time in the second or third quarter of this year and may end up like the previous six. Indeed in the last 12 to 18 months, every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action, optimists come out and say that this is the dramatic and cathartic event that suggests a bottom has been reached.

They said that after Bear Stearns, after the collapse and rescue of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), after Lehman Brothers , after AIG (nyse: AIG - news - people ), after the TARP was announced, after the G-7 communiqué and after the $800 billion fiscal stimulus package was announced last November (the onset of the latest sucker's rally).

And after a while, markets are again "shocked, shocked" to discover that the macro news is much worse than expected in the U.S. and abroad; that earnings news is much worse than expected, not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms; and that financial markets/firms shocks are worse than expected.

This is what I see and argue: More financial institutions are effectively insolvent and will have to be taken over by the government; highly leveraged institutions--such as hedge funds--will be forced to de-leverage further and thus sell illiquid assets into illiquid markets; even non-levered investors (retail, mutual funds, etc.) that lost 50% plus into equities are burned out and want to reduce their exposure to equities; and a number of emerging-market economies are on the verge of a contagious financial crisis.

Why do even small, open economies such as emerging-market ones matter for global risk asset prices? Take the case of Iceland, a small island of 300,000 souls in the middle of the Atlantic: The local banks borrowed abroad 12 times the gross domestic product (GDP) of the country and invested it in toxic assets. Now the banks are bust, and the Icelandic government is bust as the banks are too big to be saved. Thus, local banks now selling distressed and illiquid assets into illiquid global markets are having ripple effects on those global markets.

So if tiny Iceland can have contagious effects, how much greater would the contagion be if a larger and more important emerging market were to enter a fully fledged financial crisis (Latvia or Hungary or Ukraine or Pakistan or Venezuela)? Even a mere rating downgrade of Ukraine a few days ago had a shocking effect on financial markets in Emerging Europe--and even in the E.U.

What are the downside, and upside, risks to the bearish predictions for U.S. and global equities? On the downside, I have argued here that there is at least a probability of an L-shaped global near-depression rather than the mere current severe U-shaped recession. If a near-depression were to take hold globally, a 40% to 50% further fall from current levels in U.S. and global equities could not be ruled out. But in this L-shaped near-depression, the last thing one would have to worry about would be stock markets, as more severe issues would have to be addressed, such as unemployment rates in the mid-double digits--15% or above--and multi-year stagnation and deflation.

On the upside, one could argue that the aggressive policy stimulus in the U.S. and other countries will lead to a faster sustained economic and financial markets recovery than expected here. We have discussed why this "sustained" as opposed to "temporary in second- to third-quarter" recovery is highly unlikely to take place. But the bullish argument for a non-bear market and early persistent recovery of global equities is based on a better than expected recovery of the U.S. and global economy.

Earlier this year--at the peak of the latest bear market rally--I met Abby Cohen--the ever-bullish equity markets expert at Goldman Sachs (nyse: GS - news - people ) who predicted a 25% equity rally for 2008 and is making again a similarly bullish call for 2009. I asked her if we disagreed on earnings or on the multiple (P/E). It turns out that our forecasts for earning per share for S&P 500 firms are similar: in the 50 to 60 range for me and the 55 to 60 range for her. But she argued that a P/E in the 1,012 range was too low, as investors would ignore the bad earnings numbers for 2009. If a rapid recovery of earnings was to occur in 2010 and beyond, investors would discount the 2009 bad number and assign to them a much higher multiple of 17, or even more.

The trouble with that argument is that, with the U.S. and global economy in a massive slump, and with deflationary forces at work, it is hard to believe that a massive economic recovery will occur in 2010, thus lifting earnings sharply. Even in a U-shaped scenario, U.S. growth in 2010 would be 1% or lower, and Eurozone and Japanese growth would be close to 0%. With weak growth, deflationary pressure would still be lingering, putting pressure on profits, the pricing power of firms and, thus, profit margins. So even in a U-shaped scenario, a rapid rally of equities is highly unlikely.

It is true that equity prices are forward-looking; they usually tend to bottom out six to nine months before the end of a recession, as they see--ahead of the curve--the light at the end of the tunnel. So the optimists seeing a recovery of growth in the second half of 2009 argue that equities should start to rally on a sustained basis now. But this severe U-shaped recession in the U.S. may not be over at the 24th month date (December 2009). Most likely, the unemployment rate will rise throughout 2010 well above 10%, and the growth rate will be so weak (1% or closer to 0%) that we will remain in a technical recession for most of 2010 (36 months if the recession is over only in December 2010). Thus, the bottom of the stock market may occur in late 2009, at the earliest, or possibly some time in 2010.

Also the "six to nine months ahead forward-looking stock market view" is not always borne out in the data. During the last recession, the economy bottomed out in November 2001 and GDP growth was robust in 2002 but the U.S. stock markets kept on falling all the way through the first quarter of 2003. So not only were the stock markets not "forward looking," they actually lagged the economic recovery by 18 months--rather than lead it by six to nine months.

A similar scenario could occur this time around. The real economy sort of exits the recession some time in 2010, but deflationary forces keep a lid on the pricing power of corporations and their profit margins, and growth is so weak and anemic, that U.S. equities may--as in 2002--move sideways for most of 2010. A number of false bull starts would occur as economic recovery signals remain mixed.

Thus, most likely, we can brace ourselves for new lows on U.S. and global equities in the next 12 to 18 months. Eventually, a more sustained recovery will occur once we are closer to clear signals that this ugly global U-shaped recession is not turning into an L-shaped near-depression, and that the global economic recovery is clear and sustained. Until then, expect very volatile and choppy U.S. and global equity markets--with new lows reached in the next months and the year ahead.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.

 

[a_majoor]

While witless people proclaim that the US is the cause of the global economic meltdown, real answers appear:

http://www.nypost.com/seven/04092009/postopinion/opedcolumnists/it_didnt_start_here_163630.htm?page=0

IT DIDN'T START HERE
THE GLOBAL DOWNTURN BEGAN LONG BEFORE US FINANCIAL MESS

By ALAN REYNOLDS

Last updated: 2:46 pm
April 9, 2009
Posted: 2:38 am
April 9, 2009

AT the recent meeting of G-20 nations in London, officials from many nations agreed on one thing -- that the United States is to blame for the world recession. President Obama agreed, speaking in Strasbourg of "the reckless speculation of bankers that has now fueled a global economic downturn."

One problem with this blame-game is that last year's recession was much deeper in many European and Asian countries than it was in the United States.

By the fourth quarter of 2008, as the nearby table shows, real US gross domestic product was just 0.8 percent smaller than it had been a year earlier. The contraction was twice as deep in Germany and Britain and much worse in Japan and Sweden.

In February, US industrial production was 11.8 percent lower than a year before -- while Singapore was down by 22.4 percent, Sweden by 22.9 percent and Japan by 38.4 percent.

What was the mechanism by which US problems were supposedly spread to other countries? It wasn't international trade. The dollar value of US imports didn't start to fall until August 2008, and imports of consumer goods didn't fall until September -- many months after Japan and Europe fell into recession.

Indeed, most of the economies that fell first and fastest were not heavily dependent on exports to the United States. Even Japan accounted for just 6.6 percent of US merchandise imports last year, compared with 15.9 percent for both Canada and China -- whose economies fared relatively well.

Even if all of the weakest European and Asian economies could plausibly blame all their troubles on the relatively stronger US economy, how could anyone possibly blame banks? There were no bank failures last year in Japan, Sweden, Canada or any other country on this list except Britain. And US and British banks didn't fail until September-October -- at least nine months after the Japanese and European recessions began.

Yet it's clearly US/UK banks being fingered as the villains. German Finance Minister Peer Steinbrueck, for example, criticized an "Anglo-Saxon" attitude in America and Britain that encouraged risky lending and investment practices because of "an exaggerated fixation on returns."

But Germany's GDP and industrial production was down 19.2 percent for the year ending in January -- versus an 11.4 percent decline in Britain and a similar US drop. Are we supposed to believe that German (and Japanese) firms are more dependent on US and UK banks than American and British firms?

Another problem with blaming the United States is that the timing is all wrong. If the US recession had simply spread to other countries like a mysterious infection, shouldn't the US economy have been the first to start contracting?

Yet US industrial production only started to decline from its peak after January 2008 -- long after production began to slow in Canada (July 2007), Italy (August 2007), France (October 2007) and the Euro area as a whole (November 2007). Aside from a one-month uptick in February 2008, Japan's industrial production peaked in October 2007.

By January 2008, when both the US and European recessions are said to have begun, the OECD leading indicators were lower by nearly 0.8 points from a year before in the US -- but down 2.3 points in Sweden, 2.8 points in Japan, 2.6 points in Korea and 4.1 points in Ireland.

Those leading indicators correctly anticipated much deeper recessions in the latter four countries. And the most famous leading indicator -- monthly stock prices -- peaked in October 2007 in the US and UK, four months after stocks had peaked in Japan and the Euro area.

What did all the contracting economies have in common? Not all had housing booms -- certainly not Canada, Japan, Sweden or the other countries at the bottom of the economic-growth list.

What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960).

In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession.

In The Financial Times on Jan. 3, 2008, I therefore suggested, "The US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does."

In a new paper at cato.org, "Financial Crisis and Public Policy," Jagadeesh Gokhale notes that the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad.

The recession began in late 2007 or early 2008 in many countries, with the United States one of the least affected. Countries with the deepest recessions have no believable connection to US housing or banking problems.

The truth is much simpler: There is no way the oil-importing economies could have kept humming along with oil prices of $100 a barrel, much less $145. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil.

Alan Reynolds is a Cato Institute senior fellow and the author of "In come and Wealth."

 

[a_majoor]

Anyone surprised by this?

http://www.openmarket.org/2009/05/15/stimulus-ignites-job-killing-trade-war-with-canada/

Stimulus Ignites Job-Killing Trade War With Canada
by Hans Bader
May 15, 2009 @ 12:57 pm

The $800 billion stimulus package pushed through by Obama has ignited a trade war with Canada, reports the Washington Post. In response to vague “buy American” provisions in the stimulus, “A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.”

A trade war is also underway with Mexico, thanks to a provision in the stimulus package that blocked a measley 97 Mexican truckers from U.S. roads. That minor NAFTA violation “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs.

Obama’s protectionism echoes Herbert Hoover’s protectionism, which helped spawn the Great Depression. President Hoover signed the Smoot-Hawley tariff, which helped turn a recession into the Great Depression by triggering a trade war with other countries.

Unemployment is now even higher than what Obama predicted it would be without the stimulus. The White House now admits that there will be no job growth until 2010. The Congressional Budget Office repeatedly predicted that the stimulus would shrink the economy “in the long run,” but increase it in the short run, i.e., by the next election.

But so little of the stimulus money has gone into sectors of the economy where unemployment is high (like construction and transportation) that it seems to be doing nothing for the economy even in the short run. The $100 billion it pours into education — a sector where unemployment is very low, and where the U.S. also spends more per capita than almost every other country — appears likely to be wasted. Only 5.9 percent of the stimulus will go to transportation, a small amount compared to the amount of money it showers on state governments, which are using it to continue to provide lucrative pension and health benefits for state employees, whose wages continue to rise much faster than private sector workers.

Obama is following in Herbert Hoover’s footsteps on taxes and spending. In the Great Depression, Hoover raised marginal tax rates to 63%, and went on a deficit spending binge. Similarly, Obama has proposed higher marginal tax rates, which will produce another $1.9 trillion in tax increases. One of Obama’s own advisers now says that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” He compares Obama’s tax increases to those that deepened the Great Depression.

Hoover imposed regressive taxes that burdened consumers, like the Revenue Act of 1932. Obama is now doing the same thing through his proposed $2 trillion cap-and-trade carbon tax. Obama privately admitted to the San Francisco Chronicle (which didn’t report it) that under his “plan of a cap and trade system, electricity rates would necessarily skyrocket.” As Obama admitted, that cost would be directly passed “on to consumers” — just the way Herbert Hoover’s 1932 excise tax increase was. Although the tax’s supporters claim it will cut greenhouse gas emissions, it may perversely increase them and also result in dirtier air. It is also chock full of corporate welfare, regional favoritism, political pay-offs, and give-aways to special interests.