Canada's Place in the Global Economy

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post, is an interest take:

http://network.nationalpost.com/np/blogs/fullcomment/archive/2009/09/14/terence-corcoran-warm-fuzzy-dictatorship.aspx

Terence Corcoran: Warm, fuzzy dictatorship
Canada would never accept a U.S. government resource takeover

September 14, 2009

When Prime Minister Stephen Harper meets with U.S. President Barack Obama tomorrow in Washington, they will not be discussing the following hypothetical news story:


WASHINGTON — The U.S. National Energy Corp., recently created by the Obama administration to secure America’s long-term energy security, will today announce a takeover bid for all the shares of Suncor Energy of Calgary. The bid price, expected to approach $50 a share, would value Suncor — Canada’s largest energy company — at about $50-billion, or more than $15-billion over current market value. While company and government officials decline to comment, USNEC’s chief executive, Tex Ritter, said last week that “our objective is to make sure the United States doesn’t get caught with its pants down as the world runs out of oil. All that oil up there in Canada, in the oil sands, would sure help us meet our objective.”


There is little doubt that any such U.S. government move on Canadian energy resources would be greeted with firm opposition, howls of indignation and national protest, even hysteria. Anti-American nationalism runs deep in Canada. The presence of private-enterprise oil giants such as Exxon and Chevron already arouses resentments and suspicion, even though their purpose is to make a profit (for themselves and Canadian owners) rather than serve U.S. government policy. Imagine the reaction, then, to U.S. government direct investment in parts of Canada’s energy sector. Stop the foreign takeover of our vital national resources! Alert David Crane and Maude Barlow! Save our energy supply from nationalization by the U.S. government!

But now along comes China, whose national corporations are scooping up Canadian energy and mining companies with hardly a whiff of opposition. When China’s national oil company, PetroChina, paid $1.9-billion for a share in control of two Alberta oil sands projects controlled by Athabasca Oil Sands, the reaction was generally enthusiastic. A few years ago, when China Minmetals looked at taking over Noranda, Canadians balked and China withdrew. But now China is being welcomed with open arms, even though its explicit objective is to buy up resources to secure a long-term supply for its national economic interests.

Not only is China being welcomed with open arms. Canadian political and corporate interests see China as a strategic economic alternative to the United States. This raises the question: Why would Canada, which would forcefully block any U.S. government moves to take over Canadian assets, find it acceptable to encourage the same moves by China?

One reason is that China is the hot new brand name on the global scene, a cash-rich machine that has every corporate dog salivating and every columnist abandoning principle to get in on the bandwagon. Thomas Friedman, writing in The New York Times, recently approved of China as a “one-party autocracy” that is “ led by a reasonably enlightened group of people.” If only America could be run along the same lines, with politicians taking firmer control of prices and other trivialities of a market economy.

Also trumpeting China as a fresh paradigm of economic success is Martin Wolf. Writing in the  yesterday, Mr. Wolf glowingly described China as a near-miracle economy that has recovered astonishingly from the 2008 financial crisis and is now set on a sustainable path to prosperity with little risk of inflation or failure. China is one of “the new champions” of economic development, while the bumbling United States has stumbled.

China is therefore now emerging as the replacement model for the old worn-out market-based economies. From the ideals of freedom and democracy the world policy establishment, including Canada has moved on and is now trumpeting the benefits of warm and fuzzy dictatorship.

Dictatorships are not inherently warm and fuzzy in practice, however, as Carlton University’s Fen Osler Hampson reviews in his commentary elsewhere on this page. The ancient mercantilist objectives of Chinese economic policy are wrong-headed and dangerous in themselves. The Chinese version is an even more problematic form of national corporatism, in which government controls the private sector to achieve ends established by the government.

Canada’s enthusiasm for Chinese partnership stops short of endorsing the Chinese economic model. But it is unlikely to be possible to get into bed with the model without eventually have to play by the model’s rules, which are not market-based and are not grounded in principles of freedom and property rights.

Why would Canada choose to welcome China’s direct government investment, even though China’s political and economic system is grounded in a totalitarianism? One reason is that being pro-China fits perfectly with the entrenched anti-Americanism that still thrives across Canada and that has long animated Canadian economic policy. To be so keenly pro-China makes one, almost by definition, anti-American. Perfect.

Absolutely spot on; Canadians are blinkered by their own, juvenile, knee-jerk anti-Americanism.

 

[Edward Campbell]

This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail website, is a prediction of the situation for Canada, too:

http://www.theglobeandmail.com/news/world/from-stimulus-to-austerity-britains-political-whiplash/article1289102/

From stimulus to austerity: Britain's political whiplash
After months of promoting stimulus as the economic way forward, even Gordon Brown has joined the tightwads

Doug Saunders

London
Tuesday, Sep. 15, 2009

Helmut Kohl, the former German chancellor, once marvelled at the sight of a politician who campaigned on promises of funding cuts: “You don't win elections,” he told an ambassador, “by putting the instruments of torture on display.”

This week, that quote has become something of an ironic joke in Westminster backrooms as Britain's two leading political parties have effectively launched election campaigns with competing pledges to cut, hack and dismantle their way out of the economic crisis.

The era of stimulus has ended in Britain, replaced with the self-flagellating politics of austerity.

For Conservative Party leader David Cameron, this bitter-medicine strategy has been central to his long-term bid to put his party back in 10 Downing St. after a dozen years in the woods.

For months, as Prime Minister Gordon Brown led the world in drawing up stimulus plans, bailouts and government spending to restart the global economy, Mr. Cameron was almost alone in Europe with his talk of austerity and cutbacks.

Indeed, the only other politician taking the no-stimulus approach was German Chancellor Angela Merkel, the subject of Mr. Kohl's remark – and even she relented and joined the heavy-spending camp, throwing hundreds of billions of euros into the rescue of industries, banks and credit markets and building her current election campaign on spending promises.

Things are different in Britain. Mr. Cameron's tightwad rhetoric was disastrous at first, sinking his party in the polls and earning him ridicule from economists.

Now, as the economy recovers as a result of all that spending and the scope of public debt becomes a source of public anxiety, Mr. Cameron's repentance tactic seems to be working: Polls this week show the Tories ahead of Mr. Brown's Labour Party by 41 per cent to 27.

So Tuesday Mr. Brown, who will have to face an election by June, launched his own feel-bad campaign with a speech at the Trades Union Congress in Liverpool that was widely seen as the launch of a winter-long campaign.

It was not an optimistic vision. Mr. Brown told an audience consisting mainly of public-sector workers and their representatives that, in effect, many of them would soon be losing their jobs.

He boasted, to the anger of some union officials and the delight of those who feared the party was collapsing beneath the Tories, that he would “cut costs, cut inefficiencies, cut unnecessary programs and cut lower-priority budgets.”

Yes, he added, he would not cut “vital front-line services,” but without saying where he would draw the line, except that MPs and senior civil servants would lose pay and early-retirement privileges.

It marks a sea change in British politics: No longer is it a contest of the “investment” pledges of Labour versus the cost-saving vows of the Conservatives. From now on, British politics will be a race to see who can slash the most, the fastest, and thus avoid the unmentionable spectre of tax increases – which most economists feel will be required in any case.

Tory finance critic George Osborne last night triumphantly declared Mr. Brown's turn “the biggest capitulation in recent British political history.”

There remain distinctions between their policies. Mr. Brown insists that the priority is to return to robust economic growth, which he sees as the only feasible way to avoid fiscal ruin. “Growth,” he said in Liverpool Tuesday, “is the best antidote to debt.”

Mr. Cameron, in a major speech last week, declared his intention to “cut the cost of government” as a means in itself, though even he acknowledged that taxes may have to rise.

There is more than a scent of desperation in Mr. Brown's change of tack. A year ago, he had record-high poll standings and even talk of a majority victory after his stimulus-based rescue plan galvanized the world and launched a recovery. But it all collapsed early this year when a lurid MP expense-account scandal and a series of blunders led him to topple in the polls.

He may have hit a nadir on Monday, when a national poll found that 48 per cent of Britons agree that “literally anyone” from his party's ranks would do a better job than Mr. Brown.

Mr. Cameron is not assured a majority victory, either. Detailed polls show that he has a low level of public trust, and his party is not doing as well as the Tories did in 1978, before Margaret Thatcher's victory, or as Labour did in 1996, before Tony Blair's.

“At the moment,” said Anthony Wells, an analyst with the London polling firm YouGov, “it doesn't look like any British politicians are trusted. The British public, in general, are in a pretty ungrateful mood.”

And they're unlikely to become more grateful. Mr. Wells's polls show that Britons are adamant that health and education services be protected from cuts and that taxes not be increased – an impossible combination. In Britain, and likely soon in other countries, it is not the voters but the politicians who will be tortured, by the fiery points of their own logic.

A handful of Canadian politicians have campaigned, with considerable success, on spending cuts and belt tightening: Ralph Klein and Mike Harris come to mind. But it’s been foreign territory for federal politicians since around 1960.

We are, however, likely to be there sooner rather than later, I hope. And I have no doubt we will be like the Brits, ”adamant that health and education services be protected from cuts and that taxes not be increased – an impossible combination.” Don’t expect to hear too many cries of “save the defence budget!”

 

[Larkvall]

A handful of Canadian politicians have campaigned, with considerable success, on spending cuts and belt tightening: Ralph Klein and Mike Harris come to mind. But it’s been foreign territory for federal politicians since around 1960.

We are, however, likely to be there sooner rather than later, I hope. And I have no doubt we will be like the Brits, ”adamant that health and education services be protected from cuts and that taxes not be increased – an impossible combination.” Don’t expect to hear too many cries of “save the defence budget!”

Didn't Manitoba and Newfoundland and Labrador operate with balanced budgets for years? Didn't the feds have surpluses for over a decade? We can get back there. We can start by not giving the auto companies any more money!

Edit I could be wrong about NL. I thought they had balanced budgets in the late 90s.

 

[Edward Campbell]

Several provinces and Ottawa balanced their budget before and after the scares of the early '90s.

What's different and what  we are seeing in the UK - and what we saw in, especially, AB and ON - is politicians campaigning for spending cuts. Generally, voters - including, maybe especially Canadian voters - want governments to spend! Spend! SPEND!

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post, is an interesting column:

http://www.nationalpost.com/news/story.html?id=2030302

Canada tries to take the lead in energy power play

Don Martin, National Post

Friday, September 25, 2009

As the battle over Canadian and U. S. energy rules heats up, the Post's Don Martin talks to people on both sides of this bold power play. In this, the first of two parts, we examine how Canada is trying to take the lead.

---

At last count, besieged Environment Minister Jim Prentice was confronted by 28 American states or U. S. cities that have drawn a line in the oil-soaked sands of northern Alberta, vowing to reduce or eliminate Canada's "dirty oil" from their fuel supply.

That's not even his biggest American headache. That is reserved for two dozen states that have declared Canadian hydro unacceptable as a "renewable" energy source to help meet new, cleaner standards as they rush to encourage home-grown alternatives to coal-fired power.

On the horizon, if a massive energy bill in the U. S. Senate passes as written, is a White House that has the power to impose unilateral carbon tariffs on Canadian imports that fail to meet its green litmus test.

The federal government's solution is to pretend away the border, aiming to match every move by the United States on greenhouse gas emission cuts, fuel standards and carbon-trading markets.

While Liberal leader Michael Ignatieff will campaign on Canada designing its own energy policy independent of its southern neighbour, Mr. Prentice insists it is not possible to act in isolation when the two countries share environmental and economic living space.

"If you have even modest differences in environment policies between Canada and the U. S., it influences where people make investment decisions. You could lose a hydrocarbon upgrader in Canada overnight just because you lay on an environmental cost they don't face in Louisiana."

His reference point on the climate-change challenge ahead is contained in a simple graph.

One branch measures the Human Development Index; the other lists the power consumption per capita of various countries. Right at the peak of the chart, claiming best place to live honours as the most power-hungry pairing on the planet, sit Canada and the United States.

There you have it, shrugs Mr. Prentice. "If you want to reduce carbon emissions, there's a very easy way of doing it. You move yourself down the standard of living index."

Cleaning up the act between Canada's major oil export market and America's top energy supplier, without sacrificing quality of life or hurting the economy, has opened a Pandora's box of political friction along the border.

The federal government wants Canada's road map rolled out before heading to the Copenhagen climate-change summit in December, even though officials in the department are telegraphing it may not be possible if they are confronting a ghost for American policy.

"The biggest single challenge we face is that the Americans don't have clarity on where they are going," Mr. Prentice said in an interview.

"We have a good working relationship with the President, but you don't know what the Senate will do so we don't know where we're going to land."

The best guess of what's coming is a 1,400-page doorstopper called the American Clean Energy and Security Act, now languishing on the congressional agenda awaiting approval, amendment or, given how it barely squeaked through the House of Representatives last June, possible rejection.

It enshrines low carbon fuel standards for transportation, forces power producers to use a percentage of renewable energy in their generation process, proposes carbon trading and sequestration systems and introduces "border adjustments" to tariff-protect some American industry from goods imported from countries without adequate environmental safeguards.

Sponsor Henry Waxman's office refused to speak about the bill, but his officials insist it doesn't specifically target the Alberta oil sands, even though it does put up walls to importing hydro from Quebec.

What worries the industry are inadvertent threats to the oil sands, a legitimate fret given the legislative hiccup that almost banned oil sands crude for America's largest single buyer of fuel, the U. S. Air Force.

A section inserted into a 2007 clean-energy bill prohibited the use of dirtier non-conventional fuels for government agencies.

While aimed at "slowing the use of coal being liquefied into fuel for jets which kicks up clouds of greenhouse gases, the oil sands were legislative collateral damage," admits a congressional official.

That provision has since been watered down to exclude the oil sands.

But the lingering uncertainty in Washington clearly frustrates Jim Prentice to the point where the Minister muses about going it alone without having an American policy to photocopy. "The essential question for us is whether we should be proposing the North American standard that has some currency in industry and get ahead of it with something that's equal for everybody."

That seems problematic given apparent resistance from the Prime Minister's office.

Stephen Harper has embraced invisibility on the file, staying out of sight this week at a United Nations discussion on climate change while going high profile at a Tim Hortons headquarters the next day.

Behind the scenes, the government has assembled a special team of internal and external officials to help guide talks with the U. S., both at the bureaucratic level but also using outside input from former U. S. ambassador Derek Burney, former Harper advisor Bruce Carson and communications advisor Deirdre McMurdy.

So far, it is the rejection of Canada's clean, green hydro-electric power that has become the greater U. S. energy relations preoccupation inside the federal government.

Obama-backed legislation requires coal-fired power producers to derive 6% of their generation from renewable sources in the next six years, rising to 25% by 2020. One caveat is that Canadian hydro does not qualify as a source of environmentally friendly energy.

The way officials in the Senate argue it, merely plugging into foreign hydro would undermine the U. S. push to diversify into its own green industries.

"It's another illustration of an area where our interests as Canadians is to bring hydro on, but if you're looking narrowly in your state, you may want to build a solar industry instead," says Mr. Prentice. "They want to foster homegrown renewable energy instead of the most economical large-scale resource, which is Canadian hydro."

The battle over the oil sands, meanwhile, is growing in intensity, with various governors and mayors proposing low carbon fuel standards or blanket prohibitions on oil sands-derived crude.

Several states have proposed banning it for all public transportation or government vehicles.

And Dan Woynillowicz of the Pembina Institute in Calgary believes the attention is going to intensify.

"The global environmental movement looks at the oil sands as the thin edge of the wedge for dirtier fossil fuel. It's the poster child for the less desirable route we can head down."

American and Canadian oil producers are fighting back with a fleet of lobbyists and expert studies showing the oil sands bitumen kicks out only 5% to 10% more greenhouse gases than conventional U. S. oil and is even cleaner than some of the heavier crude coming out of California.

When Mr. Prentice talks about the challenge ahead in trying to squelch these various American rebellions against the oil sands, he equates it to a familiar carnival game: "It's like whack-a-mole," he says, "because you knock one down and it keeps surfacing somewhere else."

What we are facing is nothing more nor less than destructive, beggar-thy-neighbour protectionism – something at which American and Canadian politicians, businessmen and labour leaders all excel.

The oil, of course, will go to market, at market price – no one needs to give a tinker’s dam about what Americans do or don’t do.

The hydro issue is more dangerous because US states want to act exactly contrary to international trade law; they are trying to become outlaws all in the name of “protecting” their taxpayers against something “better.”

 

[a_majoor]

As Edward says, the oil will go to market at market prices, and I doubt the Chinese or Indians will have any qualms about how green, blue or orange the oil is so long as C18 hydrocarbons (the common ones for fuels like gasoline and diesel) can be extracted.

WRT the Human Development Index; there are many potential technologies that can increase efficiency and lower fuel use (see blogs like Next Big Future, or reade the "Scarey Stratigic Problem; No Oil" thread on Army.ca), but even if all were to be adopted tomorrow morming, it would take decades to replace the capital plant of North America to take advantage of these technologies. It takes almost a decade to get a car off the road, imagine how long it takes to replace entire factories and powerplants.

Devaluing the dollar and imposing government controls and ownership on industry and banking like the Obama administration has done will only make such a changeover more, not less, difficult as market incentives get distorted for political incentives instead.

 

[Kirkhill]

Pipeline you say?

Just keep an eye on those local interests.

 

[Edward Campbell]

Some good news, on the Canadian front, in this report,  reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site:

http://www.theglobeandmail.com/report-on-business/jobless-claims-post-surprise-decline/article1303685/

Jobless claims post surprise decline
For the first time in 11 months, the number of Canadians claiming employment insurance falls

Tavia Grant
Globe and Mail

Monday, Sep. 28, 2009

The number of Canadians receiving jobless benefits fell for the first time in nearly a year in July, another sign the labour market may be stabilizing.

The number of people claiming employment insurance fell 3.8 per cent in July from a month earlier, Statistics Canada said Monday. It was the first drop in 11 months, with the biggest declines in Ontario, Quebec and Alberta.

Recent labour reports show the torrid pace of layoffs across the country is easing. In the last five months, the economy has shed 31,000 jobs, a far slower pace than the 357,000 jobs lost in the previous five months.

“We are encouraged by this report, and believe that it is a reflection of the improving fortunes in the Canadian labour market,” said Millan Mulraine, economics strategist at TD Securities in a note. He cautioned that any jobs recovery will be slow.

Fewer renewal claims also indicates that pressure on the system is easing. Renewal and initial claims fell 8.5 per cent in July, a similar pace of decline to the previous month.

The report didn't say why the claims fell, and it may be some people's benefits ran out in the month, rendering them ineligible for further funds.

The number of regular EI recipients remains elevated. Despite July's drop, the number of people getting benefits remains 57.4 per cent higher than it was last October, when the job market peaked. More than a quarter a million Canadians – or 287,400 people – collected EI in July.

Over the past year, the biggest increases in beneficiaries are in Calgary, Edmonton, Greater Sudbury and Vancouver. In Calgary, the number of EI claimants has more than quadrupled; in Edmonton, it has more than tripled amid job losses in factories, construction, retail as well as in the oil and gas sector.

The latest report shows that young people and men continue to be the hardest hit segments of the work force. More than twice as many young men were on EI this summer than last summer.

For July, nowhere did the number of EI beneficiaries fall the fastest than in Ontario, where the monthly drop was 5.9 per cent or about 17,000 fewer people. From October to June, by contrast, the number of beneficiaries had increased, on average, by about 16,000 a month.

The only province to tally a monthly increase in July was Newfoundland and Labrador, where the number of benefits rose 6.5 per cent.

Unfortunately, for us, our “fragile recovery” (Jim Flaherty’s words) needs American unemployment to fall. They, Americans, provide the demand that stimulates our  supply which, in turn, creates jobs for Canadians.

 

[Edward Campbell]

But, see here where the New York Post says, ”The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept.”

That bodes equally ill for our long term welfare unless or until we broaden or trading base.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is some not so good news about the “recovery:”

http://www.theglobeandmail.com/report-on-business/canadas-economic-growth-fizzles/article1306538/

Canada's economic growth fizzles
GDP was unchanged in July, raising concern over the strength of the country's economic recovery

Tavia Grant

Wednesday, Sep. 30, 2009

The Canadian economy was unexpectedly flat in July, a reading that throws into question the strength of the country's recovery.

Gross domestic product didn't budge in the month, Statistics Canada said Wednesday, dashing economists' expectations of a 0.5-per-cent increase. Shutdowns at mines, lower oil-and-gas extraction, a Toronto civic strike and a drop in construction activity held back growth.

Economists – and the Bank of Canada – have said July marked the start of Canada's economic recovery after a year of little or no growth. Wednesday's report, however, suggests the economy was still in the doldrums at the start of the third quarter.

“This is a shocker,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, who called the report “wall-to-wall disappointment on the goods-producing front.”

The goods side of the economy slid 0.4 per cent and the services side was little changed, rising 0.1 per cent.

The mining sector, construction, retail trade, utilities and municipal public administration all posted declines in the month. Auto makers, along with the accommodation and food service sectors strengthened.

“It's a big-time disappointment,” said Sébastien Lavoie, an economist at Laurentian Bank Securities. “There's no spark in our economy.”

He, along with most other economists, is cutting his forecast for third-quarter growth.

Improvements in the labour market, however, suggest the economy is on the mend – albeit slowly, said Millan Mulraine, economics strategist at TD Securities. Employers added to payrolls in August, creating 27,000 jobs, and the number of people signing up for employment insurance is falling, suggesting the labour market is stabilizing.

Mr. Mulraine still believes the country exited a recession in the second quarter of this year. However, “the initial phases of this recovery will likely be tepid, and driven in large part by the substantial monetary and fiscal stimulus that has been added to the economy,” he said.

The Bank of Canada began chopping its benchmark lending rate back in October as the recession took hold. The key overnight rate sits at 0.25 per cent – the lowest since the central bank was founded in 1934. The central bank, which said this week the recovery will be stronger than it anticipated, has said it plans to keep interest rates unchanged until the middle of next year.

Wednesday's report showed many sectors are still struggling. The country's manufacturing sector advanced 0.8 per cent in July as several auto makers resumed production, though that gain was weaker than expected.

The mining and oil and gas sector was a key source of disappointment. It shed 1.5 per cent in July – the ninth straight monthly decrease.

“Iron mines as well as non-metallic minerals mines ... continued to feel the effects of reduced world demand, leading to some temporary shutdowns during the month,” Statistics Canada said.

Electric power generation decreased 2.6 per cent and natural gas distribution fell 2.7 per cent as low temperatures in Central Canada weakened demand.

Construction dropped 0.2 per cent. A decline in residential and non-residential building construction, as well as activity of real estate agents and brokers, outweighed an increase in engineering and repair work.

Our “recovery” depends on a US recovery. The faster our major only significant source of demand (for our goods and services) recovers the faster our supply of those goods and services, and the concomitant jobs, will recover, too.

If the US government and financial sector screw up then we will chug along at a “no growth” rate.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is a report on China’s oil demand and its potential impact on Canada’s oil supply:

http://www.theglobeandmail.com/globe-investor/chinas-oil-thirst-spurs-race/article1322267/

China's oil thirst spurs race
With U.S. demand slumping, Canadian energy producers urged to forge new paths to booming Asian markets

Shawn McCarthy

Ottawa

Wednesday, Oct. 14, 2009

China's energy juggernaut is revving up, boosting global oil demand beyond what was expected and creating an opportunity for Canadian producers now focused on the U.S.

Analysts recently have revised their forecasts for global crude consumption this year and next, based largely on China's resurgent economy and giving even more support for oil prices that have jumped on the back of a weakened U.S. dollar.

But the overall picture masks a tale of diverging trends: Demand is expected to climb sharply in emerging countries with the return of stronger economies and pent-up demand for automobile purchases among rising middle classes. In contrast, demand peaked four years ago in richer countries, including the United States, and many analysts say it is unlikely to recover that ground any time soon.

That disparity creates huge incentives for Canadian-based oil companies to support pipelines to the West Coast to supply the booming Asian markets, said energy economist Peter Tertzakian of Calgary-based ARC Financial Corp.

“Selling into a declining or even stagnant market is a difficult thing to do, especially when it is your only market,” Mr. Tertzakian said. “Which is why it is paramount for Canada to be thinking about opening up other markets, in particularly the growth markets of Asia for our product.”

Canadian oil sands producers are currently counting on winning a larger share of the U.S. oil market as Mexican and Venezuelan imports decline. However, analysts say they will be fighting for a bigger share of a shrunken pie.

Exporting the bitumen to Asia would avoid a glut of Canadian heavy oil in U.S. markets and allow for higher production from the oil sands.

Enbridge Inc. to shelve its Gateway project to B.C. several years ago due to lack of support from producers. Now, even with plans to dramatically expand export capacity into the U.S., Enbridge says there is keen interest among oil companies for a pipeline to the coast to provide access to new markets.

The prospect of rising demand in emerging economies should once again provide support for oil prices – just as rapid growth in China, India and the Middle East contributed to the runup between 2003 and 2008 that resulted in record oil prices of $147 (U.S.) a barrel.

Crude prices rose sharply Tuesday after the Organization of Petroleum Exporting Countries (OPEC) said world oil demand will be stronger than it had expected this summer. OPEC's bullish pronouncement came after upward revisions by the U.S. Energy Information Administration and the Paris-based International Energy Agency, which advises industrialized nations on energy matters.

On the New York Mercantile Exchange, crude was up 88 cents to $74.15 (U.S.) a barrel, after touching a seven-week high of $74.47.

Oil prices have also climbed in response to a lower U.S. dollar, as investors look for safer havens to hedge against inflation and a declining U.S. currency. But the recent demand revisions provide some fundamental underpinning to the market.

“Prices are higher in anticipation of higher demand,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass.. “We have yet to see demand recover, but as long as there are upward revisions of future demand, there will be support for prices.”

After a succession of downgrades to its demand forecast, OPEC turned marginally more optimistic in a report released Tuesday, saying China's faster-than-expected recovery should boost demand in both 2009 and 2010.

OPEC said global crude consumption is now expected to fall by nearly two million barrels a day in 2009, somewhat less than anticipated, while it will grow by 1.1 million b/d next year, an increase from its forecast of 200,000 b/d.

The cartel said virtually all of the higher consumption will occur in emerging markets.

China Tuesday reported that automobile sales have soared 78 per cent in September from a year earlier, widening a lead over the U.S. as the world's top auto market, with sales spurred by tax cuts and government stimulus spending.

In contrast, the industrialized world will experience little growth in oil consumption in the coming years, as slow economic growth, an aging population and government environmental policies combine to keep a lid on fuel use, according to a report by IHS Cambridge Energy Research Associates (CERA).

The Boston-area consulting firm expects global crude demand to increase from 84 million barrels b/d this year to 89 million 2014, with growth occurring primarily in emerging economies. For the leading industrialized economies, CERA forecast growth of just 900,000 b/d in the next five years after demand fell by 3.7 million barrels from 2005 to 2009.

The “declining” US market remains big and rich, for now. But Chinese and Indian demand for oil will continue to rise for a generation.

This is medium to long term stuff, not related to the recovery from the 2008/09 crisis.

 

[a_majoor]

Hyperinflation:

http://moneyrunner.blogspot.com/2009/10/protection-against-hyper-inflation.html

Protection against hyper-inflation

One of my clients called today to ask what he could do to protect himself against hyper-inflation. With the Democrats in congress and Team Obama using trillions as counters and billions as rounding errors, that concern is spreading. And it's a very good question. Let's use the experience of Germany during its experience during the early 1920s. Germany was a first-world country that was dealt hyper-inflation as a deliberate policy. Here’s Art Cashin:


Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money.

But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).

So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.

Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE (there were some hen) gave me a graphic and memorable (at least for me) example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten
that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a…..trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.

Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 2 cents. By 1919 it was 26 cents. Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.

Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier).


How Could This All Happen? – In 1913 Germany had a solid, prosperous, advanced culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war. Each side was convinced the other would not dare go to war. So, in a global game of chicken they stumbled into the Great War.

The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact. The war was long. The flower of their manhood was killed or injured.

They lost and, thus, it was they who had to pay reparations rather than receive them. Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers.

As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset ontemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.” (Can you imagine such a thing happening again?)

When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

Currencies, Culture And Chaos – If it is difficult to grasp the enormity of the numbers in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a nation and, almost, the world.

People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months. People demanded to be paid daily so they would not have their wages devalued by a few days passing. Ultimately, they demanded their pay twice daily just to cover changes in trolley fare. People heated their homes by burning money instead of coal. (It was more plentiful and cheaper to get.) The middle class was destroyed. It was an age of renters, not of home ownership, so thousands became homeless.

But the cultural collapse may have had other more pernicious effects. Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble. All hope and belief in systems, governmental or otherwise, collapsed. With its culture and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting. And then came World War


It is little wonder that the “big fear” of the German government is not of another Great Depression, but of a repeat of hyper-inflation.

So let’s look at those things that are most hurt by hyper-inflation.

The most cautious, conservative people are hurt worst. People who keep their money in cash or in checking accounts can be wiped out as currency becomes worthless. Pensioners are next since most pensions are not tied to inflation. Bond holders are next as bond values evaporate.

Who is the beneficiary of hyper-inflation? People who are in debt have their debts essentially erased by hyper-inflation. Of course the biggest debtor in this country is the US government who can magically erase its debt through hyper-inflation.

But what about the ordinary middle class American who has a home, a 401k, a modest savings or investment account? Well “real” assets like natural resources (including gold) will keep up with inflation. So will real estate.

And in many cases, so will stocks. As inflation takes hold, corporations will raise prices to keep up with inflation which will result in higher nominal profits and higher share prices.

That’s what happened in Germany during the period of hyper-inflation.

That is, of course, unless the government decides to control prices. In which case companies will go bankrupt, go out of business and we will be dealt a depression that will make the Great Depression of the 1930s a pleasant memory.

 

[a_majoor]

Why stumulus packages fail. As the Us economy continues to tank, our biggest market will shrink. This is also a cautionary tale for our own politicians:


http://reason.com/archives/2009/10/19/the-myth-of-the-multiplier/singlepage

The Myth of the Multiplier
Why the stimulus package hasn't reduced unemployment
Veronique de Rugy from the November 2009 issue

Give us money, and we’ll give you jobs. That was the promise President Barack Obama made when he asked Congress for a $789 billion stimulus bill. The cash, he said, would create millions of jobs during the next two years. Without the stimulus, the administration warned in a January report by economic advisers Christina Romer and Jared Bernstein, unemployment by the end of 2010 would reach as high as 9 percent.

Well, Obama got his money. Since then, the economy has shed more than 2 million jobs and the unemployment rate has climbed to 9.4 percent. By May 2009, the Council of Economic Advisers (CEA) had changed its message. Now the stimulus would “save or create” 3.5 million jobs by the end of 2010. 

Measuring total jobs “saved” by a piece of legislation is as difficult as measuring total crimes prevented by police patrols. That’s why no agency—not the Labor Department, not the Treasury, not the Bureau of Labor Statistics— actually calculates “jobs saved.” As the University of Chicago economist Steven J. Davis told the Associated Press, using saved jobs as a yardstick “was a clever political gimmick to make it even harder to determine whether this policy has any effect.”

A look at the CEA’s job creation model undercuts its promises even more. The model’s calculation of saved or created jobs is based on a macroeconomic estimate, not on actual data. According to the authors, the estimate rests on a “rough correspondence over history” that indicates a 1 percent increase in gross domestic product (GDP) represents an increase of 1 million jobs. They might as well have said the estimate was picked at random.

How did they come up with the 1 percent figure? Since government spending is increasing, and since such spending is a component of GDP, they assumed GDP would grow whether or not the spending produced real growth in the economy. This is akin to assuming I will have a baby in nine months whether or not I am pregnant.

The May report concedes that while the CEA will attempt to measure job creation through data collected from stimulus recipients, the results will contain errors and inconsistencies. “Because of these limitations,” it warns, “the reported jobs numbers will need to [be] used with caution and as part of a more complex estimation strategy.”

Since then, Romer has told CNBC she couldn’t say for sure how many jobs would be created, since we can’t know what would have happened without the stimulus. But didn’t her report pro-ject what would happen if the stimulus wasn’t passed? Wasn’t the 3.5 million number supposed to be the difference between employment with the stimulus and employment without it?

The confusion flows from the faulty theory underlying the stimulus bill. In Keynesian thought, a decline in demand causes a decline in spending; since one person’s spending is someone else’s income, a fall in demand makes a nation poorer. As a poorer nation cuts back on spending, it sets off another wave of declining income. So any big shock to consumer spending or business confidence can set off waves of job losses and layoffs, as fewer goods are demanded and more workers become useless.

Under this logic, one possible remedy is for public spending to take the place of private spending. As government increases its spending, the money creates new employment. That, in turn, spurs those new workers to consume more and prompts businesses to buy more machines and equipment to meet the government-induced demand. Economists call this increase in aggregate income the “multiplier” effect. One dollar of government spending, the theory goes, ends up creating more than a dollar of new income. It’s a rare free lunch.

As appealing as the Keynesian story sounds, many economists have long doubted it. In 1991, looking across 100 countries, Robert Barro of Harvard presented historical evidence that high government spending actually hurts economies in the long run by crowding out private spending and shifting resources to the uses preferred by politicians rather than consumers. For a dollar of government spending, we end up seeing less than a dollar of growth. Can long-term poison be short-term medicine?

Even in the short run, if there’s a big decline in the demand for workers, why should that alone cause mass unemployment? If all those workers really want to work, why won’t wages just fall until all the workers have jobs? That’s how markets end a glut, whether it’s a glut of employees or a glut of blue jeans: with lower prices. If recessions really are caused by a fall in demand (and nothing else), why don’t wages fall enough to keep people from losing their jobs? 

It’s because wages are sticky, Keynesians argue. Wages and salaries don’t change on a daily basis the way stock prices and gas prices do, so if a company hits a sales slump, salespeople might earn fewer commissions, but the vast majority of workers don’t get a pay cut. There’s something about the market for workers that keeps businesses from cutting wages in a slump. As long as wages are sticky, in the wake of a nationwide collapse in sales, entrepreneurs will start firing people.

If a decline in demand means mass firing, a rise in demand can mean mass hiring. Even if government spending is inefficient, pork-laden, and financed by future tax increases, the theory goes, it can still create some real jobs, some real output, in both the public and private sectors. 

So what do the data say? There aren’t many studies of the issue. But two stand out: Robert Barro’s work and research by Valerie Ramey, an economist at the University of California–San Diego, on how military spending influences GDP. Both studies found that government spending crowds out the private sector, at least a little. And both found multipliers close to one: Barro’s estimate is 0.8, while Ramey’s estimate is 1.2. This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four. What’s more, Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases.

Why this crowding out of private spending? Government spending comes from three sources: debt, new money, or taxes. In other words, the government can’t inject money into the economy without first taking money out of the economy.

Take taxation: Taxes simply transfer resources from consumers to government, displacing private spending and investment. Families whose taxes have increased will have less money to spend on themselves. They are poorer and will consume less. They also save less money, which in turn reduces the resources available for lending.

In addition, higher taxation encourages people to change their behavior to avoid taxes. They might switch their efforts to nontaxed activities, such as household production, or to the untaxed underground economy. Economists call this a deadweight loss, because people give up the taxed activity or good they prefer.

There are high costs to the other options as well. If the government borrows money, that leaves less capital for the private sector to borrow for its own consumption. If the government prints new money, it will create inflation, which reduces the value of the money we own and decreases everyone’s purchasing power.

Overall, government spending doesn’t boost national income or standard of living. It merely redistributes it—minus the share it spends on the bureaucracy that collects and spends our tax dollars. The pie is sliced differently, but it’s not any bigger. In fact, it’s smaller.

Contributing Editor Veronique de Rugy (vderugy@gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University.
[/quote]

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is an interesting commentary:

http://v1.theglobeandmail.com/servlet/story/LAC.20091024.COESSAY24ART2021/TPStory/TPComment/?pageRequested=all

ECONOMIC HERESY
Putting to rest a too vigorous bird
The arguments in favour of a separate Canadian currency have been refuted by experience. The time has come for North American monetary union. It is essential for Canadian prosperity.

KONRAD YAKABUSKI

October 24, 2009

Every institution has its orthodoxies. These are the mostly unwritten rules that no one from within challenges without risking marginalization or outright ostracism. To be a member of the club is to acquiesce.

At the Bank of Canada, arguably the most important player in the Canadian economy, there is only one orthodoxy more inviolate than inflation targeting - though this has been the central bank's only official objective since 1991. No, besides keeping the annual inflation rate between 1 per cent and 3 per cent, those who toil in the glass house that is the bank's Ottawa headquarters accept as holy creed the existence of a separate Canadian currency.

This goes far beyond any desire among bank staff to preserve their own jobs. It is partly the result of a cultural bias, since Canada was the first major country to adopt a floating exchange rate in 1950 and, except for eight years after 1962 when the loonie was pegged to the U.S. dollar, our currency has navigated countless peaks and valleys, to the delight and horror of cross-border shoppers, snowbirds, manufacturers and speculators. Managing monetary policy in a floating-rate regime is what the Bank of Canada knows best.

THE FLOATING HABIT

It is also what the bank's well-regarded research staff believes to be in the best interest of the Canadian economy. By letting its dollar float, the bank reasons, Canada can adjust more quickly and effectively to domestic and global economic shocks than it could if we implemented a fixed exchange rate, embraced a common North American currency or simply adopted the U.S. dollar as this country's legal tender.

The central bank believes that the Canadian and U.S. economies are just too different to warrant a single currency and monetary policy. We're net exporters of natural resources; they're net importers of the Earth's God-given abundances. Hence, when commodity prices crater - as they did during the 1997-1998 Asian financial crisis or at the outset of the most recent recession - so does the Canadian dollar.

The loonie's collapse a decade ago was hailed by then Bank of Canada governor Gordon Thiessen as proof of the benefits of a floating rate. The decline buffered the blow delivered to the economy by low resource prices by helping "Canadian manufacturing and other non-commodity sectors to increase their exports to the United States," he said in a 2000 speech. "In this way, the impact of falling employment and incomes in our primary sector because of lower commodity prices was largely offset by greater expansion in other sectors."

POLITIICAL NO-NO

Mr. Thiessen's speech did not come out of the blue. At the time, economists here were embroiled in a heated debate about the pros and cons of North American monetary union. NAMU, as it was dubbed, was seen as the next logical step in the continuing integration of the Canadian, U.S. and Mexican economies, after the 1994 ratification of the North American free-trade agreement. Talk of a currency union on this continent was also spurred by its realization in Europe in 1999. If countries as disparate as France, Finland, Italy and Ireland could do it, why couldn't two countries as economically and culturally integrated as Canada and the U.S?

It soon became clear, however, that NAMU was a political no-no. Canadian economic nationalists equated common currency with a loss of sovereignty, just as they had fought the Canada-U.S. free-trade agreement, saying it would mark the end of public health care here. Besides, it suited the Chrétien government to have a low loonie, to take the edge off its tight fiscal policy and create manufacturing jobs. Hence, as the Canadian dollar dug a historic trough, hitting 61.75 cents (U.S.) in 2002, Ontario was on its way to surpassing Michigan in auto production.

If the past decade has taught us anything, though, it is that Canada enjoys all the inconveniences of a floating exchange rate and independent monetary policy, with precious few of the benefits. The protracted low-dollar period wrought an unprecedented widening of the gap between Canadian and U.S. productivity levels, and has left our economy (outside the resource sector) painfully uncompetitive as our currency nears parity with the U.S. dollar.

TEMPTED TO BE LAZY

A decade ago, Mr. Thiessen dismissed the idea that a low loonie would encourage Canadian businesses to get lazy. "If the argument here is that a low exchange rate gives exporting firms easier profits and blunts their motivation to innovate and become more efficient and competitive, I am inclined to say that this suggests a rather serious problem of corporate governance," he countered. But blaming Canadian businesses for responding to the incentives created by a low dollar is like expecting an apple picker paid by the bushel to ignore the low hanging fruit for the McIntoshes on top. First things first, after all.

When the dollar hovered around 60 cents, then 70 and later 80, everyone agreed that it was undervalued. Now as it approaches parity with the U.S. dollar and threatens to surpass it, as it did in 2007 and 2008 when the price of oil peaked near $150, almost everyone - including the Bank of Canada - insists it's overvalued.

But though the loonie has been extremely volatile in recent years, big and unjustified currency swings are nothing new. When they argued for Canada-U.S. monetary union in a 1999 C.D. Howe Institute paper, policy experts Thomas Courchene and Richard Harris noted that our floating dollar has been prone to "major and prolonged misalignments." This leaves the Bank of Canada constantly, and usually unconvincingly, trying to influence our supposedly free-floating exchange rate. This week, Mark Carney, the current Bank of Canada Governor, channelled Pierre Trudeau and dared speculators to question his resolve. "Markets should take seriously our determination to set policy to achieve the inflation target. Markets sometimes lose their focus. We don't lose our focus." Such uncharacteristically blunt language from a central banker is a sign of panic. A soaring Canadian dollar can create deflation, depressing the prices of imports and creating a Japan-like spiral into perennial recession.

Instead of easing economic shocks, then, leaving our chronically overshooting loonie to float ends up making adjustments more brutal and counterproductive than they need to be. What's more, the Bank of Canada's apparent indifference to where the country's economic growth comes from - whether from resources or value-added manufacturing and knowledge industries - ignores the fact that not all industries produce the same set of public goods. Some encourage a more innovative and educated work force than others. Some position us more for the future than others.

ALREADY FED-FOLLOWING

So, just why do we keep our loonie anyway? Is it to protect the illusion that Canada has a monetary policy truly independent from that of the U.S. Federal Reserve Board? Martin Coiteux, an economist and professor of international business at HEC Montreal, tracked monetary policy in both countries for a prolonged period up to 2004. He found that, though the Fed has a much broader mandate than the Bank of Canada, it had a better record of keeping inflation within the 1 per cent to 3 per cent band than our central bank. The Fed leads, the Bank of Canada follows. "Even if [the bank] says we have a made-in-Canada monetary policy, it mostly tracks that of the Fed," he says.

Nothing proves his point more than the present. One of the reasons markets had, until this week, been expecting the Bank of Canada to follow Australia's recent lead and start raising interest rates soon is that the Canadian housing market is looking dangerously bubbly. House prices have risen 14 per cent in the past year. But the bank is standing pat, Mr. Coiteux reckons, because any increase in the spread between Canadian and U.S. interest rates would send the loonie even farther into the stratosphere.

The past 10 years have reinforced Mr. Courchene's belief that some kind of currency union is essential to this country's long-term prosperity. If the U.S. dollar is now in secular decline against other global currencies, as many argue, then Canada needs to get with it and start negotiating with Washington. "It's in decline that we're really going to get clobbered," Mr. Courchene warns. "Suppose the U.S. dollar goes so far down that the Canadian dollar goes to $1.30 instead of 95 cents. Is that what we want?" Canada could just adopt the U.S. dollar and be done with it. But we would be better off with a formal currency union that allowed for some Canadian representation, and influence, in the Federal Reserve System.

Naysayers have always said the Americans would never go for it. Mr. Courchene thinks Canada, with the world's second-largest oil reserves, has a strong argument going for it. "The Americans would like the idea [of Canadian representation] more than they did a decade ago because the entire Canadian commodity world would come entirely within their currency area, so they wouldn't get anywhere near the oil shocks they're getting now."

AGING CHINA

China may have just overtaken Canada as the biggest exporter to the United States. But the title is possibly temporary and any suggestion that this country would do better by reducing its reliance on the U.S. market is based on wishful thinking. No other major country faces better long-term economic or demographic prospects than the U.S. By 2050, the U.S. work force will have grown by 30 per cent; China's will have contracted by 3 per cent. The median age in China will be 44, up from 33 now. The U.S. will age only marginally. Its median age will rise to 39 from 36. China, the saying goes, will get old before it gets rich.

Canada needs to take heed. Clinging to the loonie's woeful song is no way to keep our economy humming. Those paper George Washingtons may be an anachronism in our coin-loving culture, but the U.S. dollar is not destined to become one any time soon.

I am one who drinks the orthodox kool-aid because I do not feel that a petrodollar, which is what the Canadian dollar really is, can be united with a well balanced (service-industrial-resource-agricultural) currency like the US dollar. I think governors, from Louis Rasminsky through to Mark Carney have been right about floating our dollar because it is so closely tied to resource demand – but Yakabuski makes an interesting and persuasive case.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is an interesting opinion piece:

http://www.theglobeandmail.com/report-on-business/managing/a-new-world-order-forged-in-crisis/article1337516/

A new world order forged in crisis
The East will rule while the West pays for its carelessness

Gwyn Morgan

Sunday, Oct. 25, 2009

It's payback time for debt-laden Americans who shopped the world to prosperity on borrowed money.

Recessions are high-profile times for economists and financial analysts. One popular focus is the shape of the recovery. Optimists think it will be V-shaped; the more cautious predict it will be U-shaped. Those who believe that house prices and the stock market are ahead of the real economy foresee a W shape. Then there's the dreaded L shape. But such speculation misses the bigger question: What will our “after the recovery” world actually look like?

Start by thinking back only 15 months: World oil prices  hit $147 (U.S.) a barrel, transferring enormous wealth to oil-exporting states. Demand for raw materials (such as cement, copper, zinc, nickel and steel), combined with labour shortages, played havoc with construction projects. Global food shortages and price hikes fuelled riots in developing nations. China's embrace of market principles had transformed it into the world's workshop, displacing much of the West's labour-intensive manufacturing. India emerged as the leading global services economy.

The “after the recovery” picture will no doubt reflect some of these trends, but what will have changed? The first place to look for an answer is the country that dominated world affairs before its domestic mortgage meltdown ignited a global meltdown. Optimists remind us that the U.S. economy has always been the most resilient example of what the late Austrian economist Joseph Schumpeter labelled capitalism's “creative destruction.” But current realities tell us our neighbour is unlikely to lift up the world again this time.

There is no credible scenario for turning around growth of the country's $8-trillion national debt. Huge stimulus spending and corporate bailouts are adding even more trillions, yet the Obama administration doesn't seem to have heard the adage, “When you are in a hole, stop digging.” Interest payments and new spending on health care and other initiatives ensure a continuation of out-of-control, trillion-dollar-plus deficits. Some 39 American states are technically bankrupt. Meanwhile, President Barack Obama  and his leftist colleagues throw sand in the gears of Corporate America, the only engine that has ever powered the U.S. economy out of peril. One of his first initiatives was a bill to remove the right of workers to a secret ballot before union certification, further reducing productivity and competitiveness. The administration's plan to double-tax foreign subsidiaries of the country's enviable stable of global companies risks the loss of important head offices. Lastly, it's payback time for debt-laden Americans who shopped the world to prosperity on borrowed money.

The United States isn't the only developed nation in dire economic straits. The U.K.'s debt- and deficit-to-GDP ratios are climbing at an alarming rate, and the populace has one of the world's highest average negative net worth per citizen. Low birth rates throughout the European Union, combined with an aging population in which 20 per cent are over the age of 60, means stifled economic growth along with the financial impossibility of maintaining social programs. Japan's chronic economic problems, meanwhile, show no prospect of improvement.

In sharp contrast, China and India are achieving growth even in the depths of a global recession, and they aren't the only rising Asian stars. In recent years, the potential of Vietnam's nearly 90 million people has been unleashed, and there is increasing realization that Indonesia, the world's most populous Muslim nation at 230 million, is on track to becoming the next Asian economic force.

The sun is also rising for resource-rich countries. Higher oil prices are reinvigorating exporters, most notably in the Mideast. Prices for base metals and other raw materials have increased, with Canada and Australia among the winners.

Think of a global economic triangle: Western consumer countries form one side, Asian workshop countries form another, and resource-producing nations the third. Before the recession, this model saw consumer goods bought by the West, manufactured in the East, using raw materials and fuel from resource countries.

But how has the West paid for these imports? By going deeper and deeper in debt. In 2008, the United States, together with Spain, Britain, France, Italy, Australia, Greece and Portugal, registered a total current account deficit of $1.3-trillion. Meanwhile, China and the oil-exporting countries registered a combined current account surplus of $1.2-trillion. (Canada's resource exports, primarily oil and gas, left us as one of the few Western countries with a current account surplus.)

Such imbalances can continue only so long as resource-exporting countries recycle their largesse back into U.S. dollars, and workshop countries continue to send their export revenues to buy the growing debt of consuming countries. (Hence, China holds mainly U.S. Treasury bills in its $1-trillion U.S.-dollar foreign reserves.)

These enormous global economic imbalances were unsustainable before the meltdown and they are even less sustainable now. So what will “after the recovery” world look like? History will record the arrival of a new world order, with global economic growth dominated by the East, while the overextended West faces the consequences of living beyond its means for far too long.

The implications –for Canada, if Morgan is correct - are pretty obvious. Our manufacturing sector (Ontario and Québec) looks like toast, but, as Jeff Rubin predicts, higher and higher oil prices will make some manufacturing financially attractive again – when transportation costs outweigh labour cost benefits. Our resource sectors will prosper, allowing us (and Australians) to prosper and buy manufactured goods but we - 60± million Aussies and Canucks – are not enough of a market to justify much of a home grown manufacturing base.

We should see stiff competition in the resource trade from Africa, South America and Russia but, again to paraphrase Abba Eban, the governments in those places have, historically, never missed an opportunity to miss an opportunity and I’m guessing they will continue in that mode.

The prospect, for my grandchildren, (again, assuming Morgan’s predictions are soundly based) is that China and India, not America, will be our most important trading partners. That doesn’t mean America will be gone or even unimportant – just less important. Some will argue that a more balanced trade relationship (multiple important trading partners) can only be to Canada's advantage.

 

[Edward Campbell]

Australia and Canada are at almost extreme opposites in recovery: Australia has, pretty much, returned to ‘normal’ and is hiking the bank rate to fight inflation, again, while the Bank of Canada holds us at record low rate because the recovery is slow and halting.

What’s the difference? Are we not similarly sized, similarly resource based, similarly advanced economies? Yes, but:

• Australia’s most important trading partner is China; and

• Canada’s major and only important trading partner is the USA! 

China never went into recession; growth slowed to around a mere 6%! The USA? Well, time will tell for them and us.

 

[a_majoor]

Once again the US Administration gives us a potential opportunity to exploit. Lower our taxes and regulatory barriers and American business people and investors will come to Canada in droves ansd energize our economy:

http://tigerhawk.blogspot.com/2009/12/continuing-war-on-business.html

The continuing war on business
By TigerHawk at 12/08/2009 03:11:00 PM

In today's Wall Street Journal, we learn that the Obama administration is, again, proposing to discourage employers from hiring:

Labor Secretary Hilda Solis said her agency will seek to enact an array of 90 rules and regulations next year aimed at giving more power to workers and unions.

Signaling priorities, Ms. Solis said: "We are committed to ensuring that workers are paid a fair wage, have a voice in the workplace, are provided a safe workplace and have a secure retirement."

Ms. Solis's agenda will promote rules requiring employers to increase disclosure to workers on how their pay is computed, strengthening affirmative action requirements for federal contractors, and compelling greater disclosure from employers about their dealings with consultants who advise the companies on how to deal with workplace unions or unionization attempts.

It ought to be no surprise that this announcement came just after the Obama administration's "jobs summit." Regulatory risk from the federal government is now -- by a longshot -- the biggest barrier to increasing private sector employment. Neither looser money nor string-pushing "stimulus" can overcome that in the long run.

Already our economy is struggling against health care "reform," massive new regulation and/or taxation on any business that emits carbon, the proposed "Employee Free Choice Act," new regulation in financial services, new corporate "governance" requirements, fiscal catastrophes in all the large states controlled by the Democrats, and huge new tax increases for the people who actually decide to hire people (whether they are corporate tools or individual entrepreneurs). Do we really need "an array of 90 rules and regulations" from the Labor Department on top of all that?

Just when you think "they can't keep making it harder," they do.

 

[a_majoor]

The forcast is inflation, but hyperinflation (in the classical economic sense) is not in the picture just yet. Some economists actually suggest the collapse of overvalued markets (i.e. housing) and the writing off of trillions of dollars in paper "wealth" (like GM) might actually counteract inflationary trends, but we will see. This cautionary tale applies to Canada as well:

http://www.american.com/archive/2009/december-2009/how-likely-is-hyperinflation

How Likely Is Hyperinflation?
By Peter Bernholz
Tuesday, December 15, 2009

Filed under: Economic Policy, Boardroom, Government & Politics, Numbers, Public Square

Have central bank and government reactions to the crisis created a large danger for the future?

During the past several months, concerns have risen that the expansionary policies of the U.S. government and the Federal Reserve System to counter the present crisis are creating the danger of a substantial future inflation. Some speak even of a hyperinflation, that is, of a rate of inflation  exceeding 50 percent per month. People believing in the latter scenario base their concerns on results I presented in Monetary Regimes and Inflation: History, Economic and Political Relationships, which shows that all hyperinflations were caused by huge government deficits. By analyzing many historical examples, I illustrated how hyperinflations resulted whenever 40 percent or more of government expenditures were financed by money creation. Since it is expected that about 42 percent of U.S. expenditures will be financed by credits this year, some fear the emergence of hyperinflation in the United States. Consequently we face the interesting question of whether a very high U.S. inflation with a corresponding fall of exchange rates has to be expected.

In discussing this question, let me state two facts which in my view cannot be denied: First, that the present crisis has been initiated by the Federal Reserve's too expansionary monetary policies after the bursting of the New Economy Bubble. Second, that the Fed and the U.S. government embarked on even more expansionary policies to fight the present crisis; indeed, their policies constitute an experiment on a scale which has never been seen before in the history of fighting crises.

Though the Fed initiated the crisis, we should not forget that it would never have taken such a dramatic course, which hurt the real economy, were there not other well-known defects in the financial system.Let me turn to the first point. In a mistaken fear of deflation, the Fed lowered its interest rate to 1 percent and increased the monetary base by about 39 percent from 2000 to 2006 after the bursting of the New Economy Bubble. In doing so it encouraged an incredible credit expansion by the financial sector and thus allowed the subsequent asset bubble. Later, it helped to pierce the bubble by raising its interest rate step by step above 5 percent and by strongly reducing the growth of the monetary base. Though the Fed thus initiated the crisis, we should not forget that it would never have taken such a dramatic course, which hurt the real economy, were there not other well-known defects in the financial system such as:

Banks neglected to maintain a sufficiently diversified portfolio.

The compensation systems for leading managers were based far too much on short-term performances.

The control system within banks failed.

Rating agencies financed by their customers grossly misjudged the values of firms and assets.

The measures by the U.S. government to ease the buying of houses by relatively poor people proved mistaken.

American liability rules in case owners could not pay the interest on their mortgages  encouraged levels of indebtedness that were too high.

The liability rules for gross mistakes by leading managers of business firms were too restricted.

The percentages of own capital required for banks by internationally agreed rules (Basel II) and the valuation at market prices adhered to during the crisis exacerbated it.

The permission by Basel II for banks to employ their own models to evaluate risks was a mistake.
The control of financial institutions by government agencies failed.

The lack of knowledge of economic history by leading managers encouraged them to take overly risky decisions.

Before taking up the second point, namely the possible consequences of measures taken by Fed and U.S. government to counter the crisis, let me stress that crises cannot be prevented in a decentralized and innovative market economy. It may be possible to mitigate them by adequate reforms or even to prevent one or the other. But that is the best result one can hope for.

Crises cannot be prevented in a decentralized and innovative market economy.This can be demonstrated by looking at crises from two different perspectives. By analyzing historical events, Charles Kindleberger has shown in Manias, Panics and Crashes that 29 financial crises occurred from 1720 to 1975. This means that, on average, each decade experiences an unpredictable crisis, though very strong crises are rather rare. For instance, besides the 1929 crisis, another in 1873 was severe, lasting about six to seven years and hitting the real economy from Europe to the United States, Argentina, and Australia. Apart from the historical evidence for the inevitability of crises, mathematical chaos theory has demonstrated that systems characterized by non-linear feedbacks can be hit by unpredictable fluctuations. And a decentralized market economy has quite a number of such feedbacks—for instance, changing expectations of consumers and producers, fluctuations in the volume of net investments, governmental interventions, central bank policies, and the reaction of prices to unpredictable innovations.

A Danger of Hyperinflation?

Let us turn now to the second point, whether grave dangers loom because of the measures taken by central banks and governments to fight the present crisis. Is there even a danger of  hyperinflation in the United States? Let us first consider the facts. Central banks led by the Fed have indeed lowered their interest rates to nearly zero percent. The monetary base of the Fed has grown by about 99 percent within one year from the end of July 2008; and this following a substantial increase already since the end of 2008. Even the Swiss National Bank increased its monetary base by 112.5 percent from the end of 2008 to the end of May of 2009. The growth of the monetary base in the euro zone looks more modest, with 68 percent since the end of 2007. But even this smaller increase has never been experienced in monetary history except in countries suffering from high inflation.

Government finances, too, have worsened dramatically because of the measures taken to fight the crisis. The U.S. deficit rose from 2.9 percent of Gross Domestic Product (GDP) in 2007 to 8 percent in the fourth quarter of 2008; for 2009 a deficit of 10.2 percent is expected. This implies that the indebtedness of the United States will reach 73.2 percent of GDP in this year. In Great Britain the deficit grew from 2.7 percent to 5.4 percent in 2008, whereas one of 9.3 percent is foreseen for 2009. In the euro zone, the deficit of member states increased from 3.5 percent in the fourth quarter of 2007 to 9.3 percent of GDP by the end of 2008.

Even if all the measures may help to mitigate and to shorten the crisis, which is probable, it has to be asked whether lowering interest rates and expanding the monetary base will not bring about even worse developments in the future.But were these measures not justified because of the dramatic situation and the dangers threatening in the crisis? It is difficult to form a judgement because of the extraordinary extent of the measures and because we do not know the further course of the crisis. Certainly some steps like those taken to save General Motors were not warranted. But even if all the measures may help mitigate and shorten the crisis, which is probable, it has to be asked whether lowering interest rates and expanding the monetary base—measures similar to those which have already initiated the present crisis—will not bring about even worse developments in the future.

Speaking to members of the board of central banks, one is assured that they are technically able to reduce the enlarged monetary base and to increase their interest rates to normal levels any time. This is probably true. Asking, however, whether they will be able to do so given the political and psychological pressures to be expected when timely measures to prevent inflation by rising interest rates have to be taken, the answer is again "yes." But this seems to be rather doubtful since such adjustments would have to be made at a time when tender growth has just set in and when unemployment may still be rising. A stiffening of monetary policies to fight inflation needs about two years before results can be observed. It is thus not surprising that former board members of central banks and well-informed economists are much more skeptical concerning the chances of increasing interest rates and reducing the monetary base in time.

It is thus probable that in the future we will have to face a mistaken policy’s bad consequences. But what are the fundamental mistakes of this policy? To understand the underlying problems we have to remember a mostly forgotten important function of financial institutions in a decentralized market economy. In such a system it is one of their tasks to coordinate the savings of consumers (including obligatory ones for health and unemployment insurance) with the net investment of non-financial business firms and governments. In real terms this corresponds to a reallocation of factors of production from producing consumer goods to the production of means of production with the consequence that more and new goods can be produced in the future. Savings by consumers transferred as additional means to producers lead to a reduction in the demand for consumption goods and allow productive firms to increase their investments.

In a mistaken fear of deflation, the Fed lowered its interest rate to 1 percent and increased the monetary base by about 39 percent from 2000 to 2006 after the bursting of the New Economy Bubble.In this process the real interest rate is determined by the impatience to consume and the greater productivity of more roundabout production processes (or expressed otherwise, the marginal productivity of real capital). The resulting "natural“ real rate of interest can change to a minor degree, but should, judging from the non-inflationary environment of the gold standard in developed countries before 1914, be around 3 to 4 percent. This means that if central banks lower the nominal rate of interest below the natural rate, they send the wrong signal to producers, including builders and purchasers of houses. They are motivated to indebt themselves to initiate additional investments and to enter production processes which would be unprofitable at interest rates from 3 to 4 percent. Consequently, not all of these investment decisions can be executed since not enough real factors of production are put at their disposal by the real savings of households.

In real terms, net investment must always equal savings. As a consequence, there remain only two ways to bring this equality about if nominal interest rates are too low and are disturbing this relationship. Either the central bank increases interest rates again—in this case, the net investments initiated are no longer profitable and have to be interrupted, as happened with the housing crisis in the United States—or the central bank leaves interest rates at their too low level, resulting in inflationary developments that cannot be avoided. The use of means of production for goods consumed by households is forcibly reduced since the purchasing power of their incomes and the value of their nominal assets are reduced. In both ways, or by some intermediate combination of them, the equality of savings and net investments is restored.

Measures taken by monetary and fiscal policies neglecting these real relationships are bound to fail, as already stressed by the Swedish economist Knut Wicksell in his Geldzins und Gueterpreise (Interest and Prices) in 1898. This means that central banks and especially the Fed are now confronted by a huge dilemma—huge because of the very dimension of financial support unknown in history, as illustrated by the figures presented above. And this dilemma is increased by the fact that high budget deficits of governments have to be financed. If expectations of households and firms become positive, another sizable asset bubble has to be expected because of the vast liquidity created. And inflation will follow the bubble if the Fed does not act speedily and strongly to reduce the monetary base and to increase the interest rate to normal levels. But such a policy may lead to another crisis and recession. On the other hand, if the Fed does act too late and not strongly enough, inflation cannot be prevented.

A stiffening of monetary policies to fight inflation needs about two years before results can be observed.An escape from this dilemma seems only to be possible if the change to positive expectations and the rise of production follows a slow and continuous development, so that enough time is available to slowly increase interest rates and slowly reduce the monetary base and government budget deficits. But this path is not available in case of a rapid recovery. For then the danger of a sizable inflation is a real one.

But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not. Though it is true that budget deficits with government expenditures covered by 40 percent or more through credits have historically led to hyperinflation, it has been stressed in Monetary Regimes and Inflation that it is not only the size of these credits but also their composition that is important. This is noted in the book thus: “It will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge budget deficits through money creation“ (p. 70 ). This expresses the fact that only credit extended directly or indirectly by the monetary authorities to the government leads to the creation of money, that is, an increase of the monetary base. This is not true for borrowings taken up in the capital markets if they are not resold to the Fed. Looking from this perspective at the U.S. deficit, by far not all of the credits borrowed by the government were financed by the Fed. According to preliminary and rough estimates, not 40 percent but "only“ about 13 percent of U.S. expenditures are presently financed this way. Moreover, in discussing this problem it has to be taken into account that about two-thirds of dollar bills are estimated to circulate abroad. This—together with the fact that incredibly huge holdings of dollar assets are owned especially by the central banks of China, India, and the Gulf States—may pose other and later dangers. But these dangers will be, except for a return of the dollar bills and a purchase of foreign-owned dollar assets by the Fed, of a different nature. Inflation may rise more or less strongly during the next years, but there is presently no danger of a hyperinflation in the United States.

Peter Bernholz is professor emeritus at Basel University, Switzerland. His work focuses on monetary economics, real capital theory, and public choice. He is a member of the Academic Advisory Board of the German Minister of Economics.

Image by Darren Wamboldt/Bergman Group.

 

[a_majoor]

given teh massive linkage between global economies, what happens "out there" can have deevastating effects "over here". While the growing US debt and deficits have the effect of a snake hypnotizing us economic mice, other forces are afoot which could blind side us and send the economy crashing like a house of cards:

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002951/a-global-fiasco-is-brewing-in-japan/

A global fiasco is brewing in Japan

By Ambrose Evans-Pritchard Economics Last updated: January 12th, 2010

81 Comments Comment on this article

I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

My intended point — overly condensed  — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again.

His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.

The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

“This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said.

Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

 

[a_majoor]

More on global debt:

http://www.barrelstrength.com/2010/01/27/fate-of-nations/

Fate of Nations

January 27, 2010 10:21 am Arran Gold American Politics, Canadian Politics, Economics and Finance

Bill Gross of PIMCO is well known for talking up things that would most benefit his bond funds but this chart is too interesting to pass up.

The most interesting data point in this graph is Japan.  A country with declining demographics and a significant outstanding debt.  With no way to get out of mountain of debt it is safe to say that Japan as nation is in deep peril.  The problems of Greece are well known, along with their inability to do anything about it, which brings us to Canada.

If that graph had been done in the ’90s, Canada would have been a proud member of the “Rings of Fire” club.  What changed?  Starting in the early 90s the size of the Canadian government diminished and that was made possible by majority government under Liberals, which did not have to engage in negotiations with the opposition parties to implement their agenda.  This is instructive because of the problems US will face, when trying to tackle their debt.    California gives us insight into how problem will unfold at the federal level in US.  Specifically the inability to reach an agreement on budget, which Canada was able to avoid due to its parliamentary structure.  Can anybody in US say Second Republic?

Bill Gross goes on to paint a grim picture of UK, which your correspondent cannot disagree with.