Canada's Place in the Global Economy

[Edward Campbell]

Following from an item posted just a few days ago: here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe And Mail, is a report on China’s reaction to Timothy Geithner’s recent hectoring re: echange rates:

http://www.theglobeandmail.com/report-on-business/china-hits-back-at-us-over-yuan/article1603071/

China hits back at U.S. over yuan
Foreign ministry says Washington ‘politicizing’ the exchange issue as an excuse to engage in trade protectionism

Beijing — Reuters
Published on Monday, Jun. 14, 2010

China’s Foreign Ministry on Monday hit back at fresh calls by the United States for Beijing to let the yuan currency rise in value, saying the exchange rate was not to blame for the U.S. trade deficit with China .
Foreign Ministry spokesman Qin Gang was responding to a question about recent comments by U.S. Treasury Secretary Timothy Geithner as well as calls from U.S. lawmakers to pass a bill threatening to press China over its yuan exchange rate  controls.

“A huge amount of facts has demonstrated the renminbi exchange rate is not the main cause of the imbalance in Sino-U.S. trade,” Mr. Qin said in a statement on the Ministry’s website.

“Do not politicize the renminbi exchange rate issue,” he said. The renminbi is another name for the yuan currency.

Mr. Qin said the Chinese government would keep the yuan exchange rate stable at a “reasonable and balanced” level and proceed with reform in a “gradual and controllable” way, in a tone that largely reiterated Beijing’s long-standing official line.

He added that Beijing would take both international and domestic economic conditions into consideration when it came to deciding when and how to reform the way it set exchange rates.

China has repeatedly insisted that it will not respond to foreign criticism and will itself decide currency issues.

Beijing is facing international calls to let the yuan return to the path of appreciation after effectively repegging the currency at about 6.83 to the dollar to help its exporters ride out the global credit crunch.

Complaints eased over the last two months as the euro zone debt crisis took centre stage. But U.S. Treasury Secretary Timothy Geithner said last week that the yuan was an impediment to global rebalancing, suggesting that U.S. patience with China’s currency policy was wearing thin.

U.S. Senator Charles Schumer said last week that he and other colleagues would push for a vote within two weeks on legislation to allow the U.S. Commerce Department to use anti-dumping and countervailing duty laws against China or any other country with a fundamentally misaligned exchange rate.

Qin Gang said that imbalances in Sino-U.S. trade had mainly been caused by globalization and the international division of labour, citing that a 21 per cent appreciation of the yuan against the dollar since 2005 had not helped to reduce the U.S. deficit.

He said U.S. exports to China has risen about 50 per cent in the first quarter, but Washington’s restrictions on high-tech exports were holding back trade.

He urged U.S. politicians to stop pointing figures at other countries and instead rethink their own structural economic faults.

“It is completely unreasonable to politicize the renminbi exchange issue and use the exchange rate issue to engage in trade protectionism against China. The only outcome will be hurting oneself as well as others.”

I especially liked this bit: ” U.S. Treasury Secretary Timothy Geithner said last week that the yuan was an impediment to global rebalancing, suggesting that U.S. patience with China’s currency policy was wearing thin.”

:rofl:

Who on earth, at least in the ‘middle kingdom,’ cares what the US thinks about China’s economy?

This is a fairly sharp, public rebuke, suggesting that Beijing’s patience with Washington’s hectoring has worn away.

 

[observor 69]

I have been waiting for an update on Paul Krugman's thinking on the international economy and here it is  from the New York Times:
LINK

June 17, 2010
That ’30s Feeling
By PAUL KRUGMAN
BERLIN

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.

But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.

What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.

Here’s roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):

German hawk: “We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.”

Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”

German hawk: “I won’t try to argue the arithmetic. You have to take into account the market reaction.”

Ugly American: “But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?”

German hawk: “You just don’t understand our situation.”

The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.

So the real motivations for their obsession with austerity lie somewhere else.

In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it’s about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. “The last few hours were a singular show of strength,” declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength — or what is perceived as strength — is what it’s all about.

There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe’s troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.

But German politicians seem determined to prove their strength by imposing suffering — and politicians around the world are following their lead.

How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.

 

[a_majoor]

What Paul Krugman refuses to see is there is no easy out now. Either deficits and debts are dealt with in a controlled fashion, or the market will rebalance itself in a drastic and probably unexpected way.

The Great Depression was a reaction to the huge inflation central governments allowed and encouraged in order to prosecute the "Great War" of 1914-1918. All the fiddling of the British Empire trying to maintain the Sterling and the US Federal Reserve playing with interest rates in the 1920's may have been the actual trigger, but the huge bubbles were deflated away, one way or another. The huge bubbles of credit and debt that central banks have encouraged (and reckless spending by Federal State and municipal governments) will be deflated.

The Credit Strike of 1937 was more of a reaction by business to the chaos caused by the New Dealer's micromanagement of the economy (and the crossed signals caused by such micromanagement; see the local knowledge problem), Krugman's efforts to prod government into greater economic control will simply lead to the same end state or worse; Soviet style controlled economies have horrible records, and the DPRK is probably the only example of the ultimate end state of this line of thought we will see in our lifetimes.

 

[observor 69]

More Paul Krugman with a fuller explanation of why we should "Spend now, while the economy remains depressed; save later, once it has recovered."

The New York Times

June 20, 2010
Now and Later
By PAUL KRUGMAN
Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?

Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.

But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. I’ll focus on the U.S. position, but a similar story can be told for other nations.

At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.

Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, however, as unemployment falls — probably when it goes below 7 percent or less — the Fed will want to raise rates to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.

But the time for such a deal is a long way off — probably two years or more. The responsible thing, then, is to spend now, while planning to save later.

As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can’t afford it. In so doing, they are undermining spending at a time when we really need it, and endangering the recovery. Yet efforts to control health costs were met with cries of “death panels.”

And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.

But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.


http://www.nytimes.com/2010/06/21/opinion/21krugman.html?hp=&pagewanted=print

 

[Brad Sallows]

When Krugman writes of depressed revenues, I wonder what he regards as the normal level?

I speculate that the revenues enjoyed by governments at all levels prior to the recession represent levels well above normal, sustainable levels (a bubble economy).  Governments must now adjust not only to a fall back to the "normal" level, but to a level further below.  The reason is simple: government revenues depend, mostly, on the net volume of economic transactions. Fewer transactions means fewer sales taxes and less gross income to be taxed (corporately or privately).  The past period of prosperity was debt-fueled.  Governments with the authority to increase their own money supply can do that indefinitely; a corporation or private person can not.

Krugman's point is simple enough: fill in the revenue hole in front of us until we reach the other side, by clawing in from a pile on the other side (future revenues).  What if the hole is too large (ie. the period of depressed revenues endures for too long)?  What if the pile on the other side (the ability of lenders to finance so much debt, or future revenues) is too small?  Then we will have to cut spending anyways, and have a much larger net debt - and cost of debt servicing - to boot.

I maintain my position from the fall of 2008: cut spending now, at all levels of government, to match current revenues.  As revenues recover, retire debt and reduce the cost of supporting debt.  Each time we push off the reckoning, we find it is harder to face when it comes due.  It is not going to go away.

A policy of spending tomorrow's money today assumes that tomorrow will be prosperous enough to cover its own requirements as well as today's burden.  The assumption is not reasonable, and on the evidence is invalid.

 

[Kirkhill]

Merkel Tells Obama Spending Cuts to Boost Economy, Not Put Brake on Growth

  Link

Soros tells Germany to step up to its responsibilities, or leave EMU
Legendary investor George Soros has called on Germany to leave the euro unless it willing to embrace a growth strategy, describing Berlin’s austerity doctrine as a threat to democracy and political stability in Europe.

  Link

If he's against it, it must be ther right thing to do.  I'm for it.

 

[a_majoor]

So the G-20 plans to reduce deficit spending by 1/2 by 2013? A bit like trying to bail out the Atlantic with a tea cup.

The problem of deficits and massive overhanging debts (and unfunded liabilities like government pensions) must be addressed or the current structure of the global economy will be destabilized and swept away in a series of chain reaction failures. The PIIGS will probably crack the Eurozone and end the Euro as a currency (if not the EU in its current form), and there are enough apocalyptic predictions about the US economy that I need not go on here.

And yet...

The biggest economic non event ever was the "Great Depression of 1946". Don't remember that one? Keynesian economists widely predicted economic disaster as the US ended wartime contracts and wound down military spending (and demobilized millions of servicemen). The economy rapidly adjusted and the economy prospered (largely due to the "Do Nothing" congress, which refused to impliment President Truman's plans for a highly controlled and regulated economy). Note the economy didn't really take off until President Kennedy implimented a series of deep tax cuts early in his administration, ushering the "go-go 60's".

I have calculated that if Canada were to eliminate Crown Corporations, transfers to other levels of government and economic subsidies (while not touching transfers to individuals; although wrong, they would be political suicide for whoever tried to eliminate them), we would eliminate the National Debt in a bit over six years. (savings such as elimination of government departments would fule small tax cuts during that period). Once the payoff period passed, deep tax cuts would be possible to drive the economy and cover the unfunded liabilities like Government pensions and CPP.

So if bold action were to be taken, we could eliminate the structural causes of the current economic crisis, and position ourselves for a stable economy into the forseeable future.

 

[observor 69]

One more try from Paul Krugman NEW YORK TIMES

--------------------------------------------------------------------------------

June 27, 2010
The Third Depression
By PAUL KRUGMAN
Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

More on the same theme at:

http://www.theglobeandmail.com/news/world/g8-g20/economy/g20s-plan-for-deficit-cutting-draws-fire-from-paul-krugman/article1622050/



 

 

[GAP]

We can complain all we want, but the south is.....er.......going south......

Imagine the ramifications if public sector workers, etc. went from an average of 65,000 a year to 15,000......

Calif. state workers brace for minimum wage
By JUDY LIN Associated Press Writer Jul 3, 8:12 AM EDT
Article Link

  SACRAMENTO, Calif. (AP) -- Some California state workers are preparing to tap into their savings while others already are cutting expenses as Gov. Arnold Schwarzenegger's minimum wage order moved one step closer to reality.

On Friday, the Schwarzenegger administration won an appellate court ruling saying it has the authority to impose the federal minimum wage of $7.25 an hour on more than 200,000 state workers as California wrestles with its latest budget crisis. It was not immediately clear if the state controller, who cuts state paychecks on a decades-old payroll system, will comply. The office says its computers are unable to make the change until an upgrade is completed in two years.

The effect, however, was chilling for state government workers, many of whom say they have to prepare as if the pay cut will happen.

"I feel like we have a target on our backs," said Robert Blanche, a 20-year state worker in the disability division of the Employment Development Department. "My wife stays at home with the kids. This is our sole source of income. And people are going to lose their homes, lose their cars."

The loss of wages - even temporarily - for such a large work force would deal an especially harsh blow to the capital region, where one out of 10 workers is a state government employee. According to the state Employment Development Department, there were 84,600 state workers out of 819,100 people employed in the Sacramento region in May. The number is higher when counting colleges and universities.

A cut to a minimum wage would mean state workers would make the equivalent of $15,000 a year. The average state worker makes $65,000 annually, according to the state Department of Personnel Administration.

"We all understand the immense budget pressure facing governments right now," Sacramento Mayor Kevin Johnson said in a statement. "However, paying state workers minimum wage will have a devastating effect on Sacramento's economy and on thousands of families."

Jeff Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton, said it's hard to judge how workers and their families will react to this latest possible financial hardship. He said some may pull back spending while others may charge bills to their credit cards and "hope the money will come back before the bill is due."

State workers already have endured 46 days of furloughs that cut their pay by 14 percent. The furloughs ended in June, with Schwarzenegger trying to persuade unions to take a 5 percent pay cut through contract negotiations.

Sacramento-based Golden 1 Credit Union, which serves more than 56,000 state workers, has announced it will provide a loan to members who receive minimum wage or do not get paid as a result of the budget impasse. State doctors and workers will not get paid until a budget is signed because by law they cannot be paid minimum wage.

Some of the loans will be interest-free.

In what has become an annual spectacle, California began its new fiscal year Thursday without a balanced budget. The budget gridlock usually affects only a few thousand workers, many whom work for lawmakers, while companies that contract with the state have to plan for payment delays.

This year, after several previous rounds of budget cuts, Schwarzenegger and Democratic state lawmakers remain far apart on ways to close the state's $19 billion deficit. Several workers taking their lunch breaks near the Capitol on Friday indicated they already have begun cutting back because Schwarzenegger has been threatening the minimum-wage move for months.

Niki Ortiz Levy, 33, an office technician at the transportation department, said she is hoping Schwarzenegger and lawmakers can reach a compromise on the budget before paychecks are cut at the end of the month. She makes $29,000 a year.

"We're not going to spend any money on anything we don't need," said the mother of a 3-year-old. "We're not eating out, we're going to cancel our DirecTV. We can't not plan for it." Ortiz Levy said she and her husband, who works for Hewlett-Packard Co., expect to tap into savings to pay for day care and other expenses if the minimum wage goes into effect.

Michelle Carlson, a 42-year-old married mother of two, said her family can weather the minimum wage for a short time.

"We can absorb it for a few months, but I've heard a lot of people say they cannot," said Carlson, a recycling specialist at the Department of Resources, Recycling and Recovery. "For some people, it could be pretty tough."

Schwarzenegger's minimum wage order will not affect all of California's government employees. The 37,000 state workers represented by unions that recently negotiated new contracts with the administration will continue to receive their full pay because they agreed to pay cuts and pension reforms.

Salaried managers who are not paid on an hourly basis would see their pay cut to $455 a week.
More on link

 

[Brad Sallows]

Unless the other articles I read are misinformed, it isn't a permanent loss of pay.  It is in effect a withholding of some of some public sector pay until the California legislators properly pass a budget.

 

[a_majoor]

Never thought Lady Ga-Ga would become an object lesson in economics:

http://dailycaller.com/2010/07/09/the-lady-gaga-economy/

July 10, 2010
The Lady Gaga economy
By Wayne Crews | Published: 11:43 AM 07/09/2010

The Lady Gaga phenomenon conquered the Today Show this morning, with what must have been the largest crowd they’ve had in their summer concert series.

In the convoluted way things occur to me, I thought of the contrast between our limping general economy, and her thriving fame-monster micro-economy.

In macroeconomics we’re taught that recessions and depressions occur because of overproduction and a general glut of things that no one can buy.

She reminds us (well, probably only me) that (as “Say’s Law” in economics holds) there are no general gluts; instead there is only relative overproduction in particular sectors of the economy. Yet stimulus proposals like those of today are premised on the existence of general gluts.

Say’s Law in economics is the proposition that supply creates its own demand. A relative overproduction of certain goods may occur, implying that too many scarce inputs have gone into the production of unwanted items relative to inputs for desired goods. But general overproduction — to which demand stimulus would allegedly provide relief — is not the core economic problem.

Right now, there’s lots of demand for Lady Gaga, say; but maybe too many houses, cars for sale, and hokey Internet startups.

Economic recovery requires massive spending cuts, deregulation, privatization, tax-cutting, avoidance of monetary inflation, and elimination of government-granted monopolies and favors.  But, more importantly, economic recovery requires allowing prices and wages to adjust to market clearing levels. Politicians don’t allow that, so downturn is deliberate policy in a sense.  Politicians instead stimulate demand in random, whim-driven ways that create new distortions that harm us later (when they’re out of office, or their earlier misdeeds are forgotten or forgiven).

Such policy prescriptions foster political ends that have little to do with actual economic recovery. Recession is already inevitable if government does not perform its core function of preventing the interest group manipulation that distorts smooth economic enterprise. It’s doubly so when politicians deliberately distort the economy’s workings.

Beyond performing its “classical” functions of maintaining order and thwarting contrived scarcity, government can only serve as a transfer mechanism.  Inherently limited in what it can contribute to the real economy, it can certainly subtract a lot.

One immediate form of stimulus is to cut marginal tax rates to facilitate economic activity via increased supply. With returns to enterprise increasing and workers and investors certain that present efforts will be penalized less, the economy will begin expanding owing to reduced effective tariffs on the creation of supply. Similarly, a sustained program of reducing governmental regulatory interventions in the economy, and invigorating institutions to keep such interventions minimal, point the way toward prosperity and wealth creation, and to an economy that can finally eschew damaging appeals to political stimulus. Rather than spending stimulus, we desperately need a campaign to “Liberate to Stimulate.”

For more detail on all this, see Still Stimulating Like It’s 1999.  Meantime, here’s a bumper sticker version:  Good Government; Good Government.  Sit.  Stay.

Wayne Crews is Vice President for Policy at the Competitive Enterprise Institute in Washington, D.C., and the author of the 2010 edition of “Ten Thousand Commandments.”

Read more: http://dailycaller.com/2010/07/09/the-lady-gaga-economy/#ixzz0tG0SHmy6

 

[a_majoor]

An interesting series on sovereign debt and historic instances of default:

http://www.calculatedriskblog.com/2010/07/sovereign-debt-series-summary.html

Enjoy

 

[a_majoor]

Unstable equilibrium indeed. Inflation or deflation may be the order of the day; here are some historical examples:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

The Death of Paper Money
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.

By Ambrose Evans-Pritchard
Published: 7:05PM BST 25 Jul 2010


During the inflationary crisis of Weimer Germany, grand pianos became a currency of sorts, according to an account of the period.
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.


Swiss endure safe-haven agony from euro flight People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that would lead to Kristallnacht a decade later.

While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.

Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.

The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. partakists tried to take Berlin. Worker `soviets' proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.

Nostalgics plotted the restoration of Bavaria’s Wittelsbach monarchy and the old currency, the gold-backed thaler. The Bremen Senate issued its own notes tied to gold. Others issued currencies linked to the price of rye.

This is not a picture of America, or Britain, or Europe in 2010. But we should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan’s Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline.

Japan was the world’s biggest external creditor when the Nikkei bubble burst twenty years ago. It had a private savings rate of 15pc of GDP. The Japanese people have gradually cut this rate to 2pc, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion.

There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go to far and risk losing control over their printing experiment as velocity takes off. One problem at a time please.

 

[a_majoor]

US deflation risks:

http://www.investmentweek.co.uk/investment-week/news/1727390/pimco-us-real-risk-outright-deflation

Pimco: US faces real risk of outright deflation
10 Aug 2010 | 19:29

Hysni Kaso
Categories: Bonds
Tags: Deflation | Pimco | Treasury

Pimco, the world’s biggest bond fund manager, has warned the US faces a prolonged period of stagnant growth and a real risk of outright deflation, similar to what Japan experienced in 1990s.

Echoing a warning by M&G's bond team on Monday, Pimco portfolio manager Scott Mather says if a Japan-like deflationary scenario becomes the baseline for the US, it would have "profound implications for asset prices".

Mather says there are uncomfortable similarities between the two countries.

"There are striking similarities between the US and Japan with respect to fundamental causes of the crisis. Both economies experienced rapid growth in debt, which fuelled bubbles in real estate, residential and commercial, and equity markets," he says.

"Income did not grow fast enough to service the increasing debt load, which resulted in growing delinquency and defaults. Falling asset prices exacerbated the problem.

"For both countries, the toxic mix triggered a banking crisis and ushered in an era of economic turmoil."

However, Mather says there are some important differences between the US and Japan.

"Chronologically, the US looks to be following a high-speed version of the Japanese scenario. The immediate economic crisis unfolded more quickly and was deeper in the US than Japan," he says.

"The US experienced much larger loss of employment and developed a larger output gap than Japan did.

"On the optimistic side, the policy response in the US, both fiscal and monetary, has occurred much more quickly and with greater force than it did in Japan."

Mather says preparing for the possibility of deflation is an "important step" at this moment in time.

"As was the case in Japan, if deflation materialises, it will not be kind toward real estate and equity markets that assume positive inflation to support valuations," he adds.

"With respect to nominal bonds, the case of Japan provides an interesting roadmap. A focus on the intermediate maturity of the US treasury market, five- to 10-year maturities, is warranted if the yield curve evolves as the Japanese curve did.

"In this environment it is this part of the yield curve that initially performs the best as deflation risks rise. In addition, capital gains may be harvested from rolling down the steep part of the yield curve even if the rate structure only changes slowly, as was the case in Japan.

"If more experimental monetary policy is conducted at some stage, it is likely to benefit this maturity bucket more than longer maturities."

 

[CougarKing]

From last month:

Reuters link

China overtakes Japan as No.2 economy: FX chief

Fri Jul 30, 9:40 AM


By Aileen Wang and Alan Wheatley


BEIJING (Reuters) - China has overtaken Japan to become the world's second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty.


Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others.


China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China's chief currency regulator, mentioned the milestone in passing in remarks published on Friday.


"China, in fact, is now already the world's second-largest economy," he said in an interview with China Reform magazine posted on the website (www.safe.gov.cn) of his agency, the State Administration of Foreign Exchange.


Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan's or America's.


"China is still a developing country, and we should be wise enough to know ourselves," Yi said, when asked whether the time was ripe for the yuan to become an international currency.


CAN IT BE SUSTAINED?


China's economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi.


China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said.


If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.


In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the United States as the world's largest energy user.


If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history.

The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.


China is a leading member of the Group of 20 rich and emerging nations, which since the 2008 financial crisis has become the world's premier economic policy-setting forum.


In one important respect, however, China is still a shrinking violet: anxious to shield itself from the rough-and-tumble of global markets, it does not permit its currency to be freely exchanged except for purposes of trade and foreign direct investment.


And Yi said Beijing had no timetable to make the yuan fully convertible.


"China is very big and its development is unbalanced, which makes this problem much more complicated. It's difficult to reach a consensus on it," he said.

In the same vein, China was in no rush to turn the yuan into a global currency.

"We must be modest and we still have to keep a low profile. If other people choose the yuan as a reserve currency, we won't stop that as it is the demand of the market. However, we will not push hard to promote it," he added.

NO BIG RISE IN YUAN

China has been encouraging the use of the yuan beyond its borders, allowing more trade to be settled in renminbi and taking a series of measures to establish Hong Kong as an offshore center where the currency can circulate freely.

But Yi said: "Don't think that since people are talking about it, the yuan is close to becoming a reserve currency. Actually, it's still far from that."

He said expectations of a stronger yuan, also known as the renminbi, had diminished. There was no basis for a sharp rise in the exchange rate, partly because the price level in China had risen steadily over the past decade.

"This suggests that the value of the renminbi has moved much closer to equilibrium compared with 10 years ago," he said.

Yi's comments are unlikely to go down well in Washington, where lawmakers have scheduled a hearing for September 16 to consider whether U.S. government action is needed to address China's exchange rate policy.
(...)

 

 

[a_majoor]

Interesting look at inflation (minus all the pictures in the article; follow link). Much of the comparison is difficult due to "apples and oranges" problems; cars and houses are quite different from the ones we could get in 1979, and things like home computers, the internet and cheap air travel simply did not exist then. The comants section is also interesting:

http://chicagoboyz.net/archives/14754.html

Changing Prices

Posted by James R. Rummel on August 11th, 2010 (All posts by James R. Rummel)


I was doing some work in my basement when I came across the following, tucked away out of sight behind a girder.



It is an old grocery flyer from a nearby store. How old is it?



Okay, so it lists the prices from 1979. But how do those prices stack up against the cost of similar items that can be found on the shelves today?

This handy inflation calculator is pretty nifty. Prices are based on the Consumer Price Index, which is a comparison of a basket of common household items from place to place, and from year to year.

But though I have found it to be extremely useful for figuring out the buying power of wages in different decades, the CPI has some critics. They claim that it isn’t accurate because technology causes the relative cost of various items to rise and fall. And it seems that food prices have been falling relative to buying power.

How can we check this? Well, the first step is to see how inflation has effected prices in the last 31 years. According to the inflation calculator, $1 USD in 1979 would buy the same amount as $2.92 USD today.



Okay, so according to the CPI prices today are about three times what they were back in 1979. But has the price for food risen that high?

It just so happens that a flyer for the very same store appeared on my front porch yesterday, although one that had been recently printed. Let us compare the price of chopped ham. The first image will always be from the 1979 flyer, and the second will be taken from the 2010 handbill.





Pretty close in price! If the CPI was accurate, then the price per pound for chopped ham should have risen to about $4.65 USD.

Okay, what about hot dogs?





Still way off. If a one pound package of tube steak cost $1.29 back then, it would have to cost $3.77 today in order to conform to the CPI reported increase. Instead it goes for $2.

Milk is a household staple that seems to be popular in every decade.





Again, according to the CPI a $1.39 gallon of milk back then should cost about $4.06 today. Instead it sells for $2.50 a gallon. But a straight comparison doesn’t tell the whole story.

The words “LIMIT: 2 CTNS” above the 1979 price listing would seem to indicate that this was an exceptional deal. The grocery store manager didn’t want a run on the item as people stocked up on milk, leaving bare shelves and angry customers who didn’t get a chance to take part in such a value. The present day price might be worth noting in the flyer to get people to visit the store, but there doesn’t seem to be any danger of milk selling out any time soon.

So we have compared items from the dairy and meat aisles. What about vegetables?



Hmmm. The size of the packages by weight don’t exactly match up, except for corn. But, even so, it is obvious that the price of food has not been increasing along with inflation. In fact, it would seem that the percentage of an average American budget devoted to food has fallen by about one half in the last 31 years. If someone had to use 20% of their pay to buy food back in 1979, then they should have to shell out 10% of their hard earned nowadays to get the same number of items, and of the same quality.

Unless, of course, chopped ham makes up a large portion of some persons diet. If so, then the percentage of their income devoted to food should have fallen from 20% to about 7%. Chopped ham seems to be the hot tip for meaty value.

There is more to the story than simply more effecient farming methods. Big box stores like Walmart provide everything the consumer might need for the home, and high volume sales means that there is a reduction in price. The IGA store mentioned above is family owned, and it is much, much smaller than anything Walmart puts up. The prices in the IGA are not only higher, but they also have lower quality goods in the form of off-brand merchandise. The only reason they survive is due to the fact that the store is situated in a rather crappy neighborhood, one which is off the well traveled bus routes. There are enough people living nearby who do not have access to a car so taking a trip to stock up on less costly groceries is not a viable option.

While mildly interesting, this direct comparison in food prices has caused another question to spring to mind. If food has not kept pace with the average price increase due to inflation, then some other items in the CPI basket must have jumped far ahead in comparative cost to offset the lag.

What do I have to spend a greater percentage of my paycheck on today, compared to 1979? Housing? Clothing? Automobiles?

 

[Edward Campbell]

I have, in the past,* expressed considerable scepticism about the BRIC, ay least in so fa as it contains Brazil and Russia. I always expect that Brazil and Russia will find ways to fail despite their manifest and manifold advantages.

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail is one reason for my scepticism:

http://www.theglobeandmail.com/news/opinions/brazils-developing-dilemma/article1683938/

Brazil’s developing dilemma
Presidential protagonists should abandon Third World politics in favour of Third Estate leadership

Alvaro Vargas Llosa
From Wednesday's Globe and Mail

A French economist invented the term “Third World” in the 1950s, paraphrasing the “Third Estate,” which, under the Old Regime, comprised the bourgeoisie – that is, not the nobles or the clergy. But the meaning changed, and Third World was used to designate non-aligned countries (dutifully aligned against the West) and poor nations. Brazil’s great dilemma, as its current presidential campaign demonstrates, is whether to lead the international Third Estate or the Third World.

The Third Estate represented the emerging productive majority of old France. The other two estates were the elites that taxed the people. In Brazil, producers and consumers are increasingly behaving like the original meaning of Third World, becoming a vast middle class that, along with millions of Chinese and Indians, constitutes the best hope for the planet. But the Brazilian political establishment seems stuck in the Third World of hypocritical non-alignment, state capitalism, social engineering and patronage.

Dilma Rousseff, the former guerrilla fighter who previously served as chief of staff to President Luiz Inacio Lula da Silva, has overtaken former Sao Paulo state governor Jose Serra in the run-up to October’s presidential election. The problem is not that Ms. Rousseff participated in acts of violence – so did Uruguayan President Jose Mujica, now a grandfatherly head of state. Nor is it a problem that she owes her lead entirely to Mr. da Silva; history is strewn with political heirs who turned on their patrons. The problem is that Ms. Rousseff, like Mr. da Silva, is a Third World leader in a country with a First World economy but a second-rate democracy. The three cannot be out of sync for long.

With the wrong leaders, voters in developing nations can easily embrace Third World politics even when acting like First World producers and consumers. Brazilian voters, who are responsible for an economy that is growing at an annualized rate of 9 per cent and has pulled 30 million people out of poverty since 2003, are also clinging to a Workers’ Party that is ideologically bankrupt, ethically tainted and internationally reckless.

Cajoling Iran’s Mahmoud Ahmadinejad and Venezuela’s Hugo Chavez, seeking a permanent seat on the United Nations Security Council, using its national development bank to buy Latin American influence, capturing federal bureaucratic entities and designing grand power schemes attached to oil have taken precedence, in the political agenda, over the much-needed transformation of the bloated state.

Ms. Rousseff was at the helm of the governing board of Petrobras, the state’s oil company, when the law that will give it a monopoly of the Santos Basin oil reserves – potentially 14 billion barrels – was drafted. The company, which receives money from the government and supplemental funding through the development bank, still doesn’t have the $300-billion needed to exploit the reserves. It’s contemplating new debt that, one way or another, will hit taxpayers. Not to mention the technology and expertise that Petrobras, a generally well-run company, lacks for an undertaking that involves oil stuck beneath thick layers of salt deep in the sea, hundreds of miles off the coast.

There are other illusions of state grandeur, some connected to playing host to the 2014 World Cup and the 2016 Olympic Games – such as the $20-billion bullet train that will connect Sao Paulo and Rio de Janeiro.

A common trait of Third World politicians is they believe there are political shortcuts to the First World. A couple of eras in Latin America were marked by such a superstition. It was called “positivism” at the turn of the 20th century. It became “desarrollismo” (literally, developmentalism) in mid-century. The result was sobering.

Brazilian leaders have long had an “anti-American” complex. The obsession makes them do things simply because they seem in opposition to capitalism. Some experts – as an event organized by the Brazil Institute at the Woodrow Wilson Center in Washington suggested – trace this back to when Brazil, which joined the allied effort in the Second World War, felt rejected by the United States at war’s end.

Perhaps. But the period in which Brazil was most respected – the beginning of the 20th century – was when it was so confident that it saw no humiliation in embracing the leading West under the vision of the Baron of Rio Branco, Jose Maria da Silva Paranhos. Remembering this might help the protagonists of Brazil’s presidential campaign abandon Third World politics in favour of Third Estate leadership.

Alvaro Vargas Llosa is a senior fellow at the Independent Institute in Washington.

Now it is only fair to note that China, just for example, has advanced while staging some grandiose projects/events and being pretty anti-American. But Chinese anti-Americanism is of a different order than that found in Brazil and in Canada; Chinese anti-Americanism is based on a sound assessment of China's best interests, not in sophomoric, populist 'opinion.' Further, China has maintained a coherent economic policy that gets “better” year after year.

My point?

The BRIC doesn't matter; China matters; India matters but the two are not joined in any meaningful way - they are competitors not compatriots. We need to focus on what (who) matters not on a phony Goldman Sachs construct.

__________
*See: http://forums.army.ca/forums/threads/92304/post-913131.html#msg913131 and http://forums.army.ca/forums/threads/70156/post-874249.html#msg874249

 

[a_majoor]

Germany did this once before; a lesson for all of us today?

http://online.wsj.com/article_email/SB10001424052748703369704575461873411742404-lMyQjAxMTAwMDAwNzEwNDcyWj.html

The German Miracle: Another Look

Germany has cut government spending and its economy is growing smartly. It's not the first time that market-friendly policies have led the nation out of crisis.

By LAWRENCE H. WHITE

Earlier this summer George Soros and some leading Keynesian economists criticized what they regarded as Germany's overly strict fiscal discipline. Yet Germany's real output expanded at a robust 9% annual rate in the second quarter, while the U.S. economy grew at an anemic 1.6% rate. So is Germany now a role model for how to recover?

In a June op-ed, German Finance Minister Wolfgang Schäuble justified his government's decision to cut spending, citing "aversion to deficits and inflationary fears, which have their roots in German history in the past century." He was presumably making a reference to the destructive hyperinflation of the 1920s.

Yet Mr. Schäuble might have cited another relevant episode from his nation's history. Sixty-two years ago Germany became a role model for recovery from a very different crisis. In the aftermath of World War II, Germany's cities, factories and railroads lay in ruins. Severe shortages of food, fuel, water and housing posed challenges to sheer survival.

Unfortunately, occupation policy makers actually perpetuated the shortages by retaining the price controls the Nazi government had imposed before and during the war. Consumers and businessmen battled against the bureaucratic regime of controls and rationing in what the German economist Ludwig Erhard described as Der Papierkrieg—the paper war. Black markets were pervasive.

Germany's new Social Democratic Party wanted to continue the controls and rationing, and some American advisers agreed, particularly John Kenneth Galbraith. Galbraith, an official of the U.S. State Department overseeing economic policy for occupied Germany and Japan, had been the U.S. price-control czar from 1941-1943; he completely dismissed the idea of reviving the German economy through decontrol.

Fortunately for ordinary Germans, Erhard—who became director of the economic administration for the U.K.-U.S. occupation Bizone in April 1948—thought otherwise. A currency reform that he helped to design was slated to replace the feeble old Reichsmark with the new Deutsche mark in all three Western zones on June 20. Without approval from the Allied military command, Erhard used the occasion to issue a sweeping decree abolishing most of the price controls and rationing directives. He later told friends that the American commander, Gen. Lucius Clay, phoned him when he heard about the decree and said: "Professor Erhard, my advisers tell me that you are making a big mistake." Erhard replied, "So my advisers also tell me."

It was not a big mistake. In the following weeks Erhard removed most of the Bizone's remaining price controls, wage controls, allocation edicts and rationing directives. The effects of decontrol were dramatic.

The shortages ended, black markets disappeared, and Germany's recovery began. Buying and selling with Deutsche marks replaced barter. Observers remarked that almost overnight the factories began to belch smoke, delivery trucks crowded the streets, and the noise of construction crews clattered throughout the cities.

The remarkable success of the reforms made them irreversible. A few months later the French zone followed suit. The Allied authorities went on to lower tax rates substantially.

Between June and December of 1948, industrial production in the three Western zones increased by an astounding 50%. In May 1949 the three zones were merged to form the Federal Republic of Germany, commonly called West Germany, while East Germany remained under Soviet domination as the German Democratic Republic.

Growth continued under the market-friendly policies of the new West German government. Erhard became the Minister of Economic Affairs, serving under Chancellor Konrad Adenauer from 1949 to 1963. The West German economy not only left East Germany's in the dust, it outgrew France's and the United Kingdom's despite receiving much less Marshall Plan aid. This was the era of the Wirtschaftswunder or "economic miracle."

Between 1950 and 1960 the West German economy's real output more than doubled, growing for a decade at a compound annual rate of nearly 8% per year. Econometricians who have tried to parse the various factors contributing to this remarkable record found that not all of it can be attributed to a growing labor force and investment flows, or to "catching up" from a low initial level of output. A large chunk of the period's growth is explained by superior economic policy.

Erhard succeeded Adenauer in 1963 and served as chancellor for three years. His electoral success was an endorsement of the policies that had unleashed the Wirtschaftswunder.

Erhard drew his ideas from free-market economists centered at the University of Freiburg, particularly Walter Eucken, who developed a classical liberal philosophy known as Ordoliberalism (named after ORDO, the academic journal where the economists published their ideas). Interest in Ordoliberal ideas waned in Germany after 1963, eclipsed by interest in Keynesian economics. The welfare state grew. The economy became clogged with interest-group policies. Not coincidentally, economic growth also waned. From 1960 to 1973 growth was about half as great as it had been in the 1950s, and during the period from 1973 to 1989 it was halved again to only 2% per year.

Interest in Ordoliberalism began to revive among academics in the 1970s and 1980s, and it continues to have an institutional presence in Freiburg at the university and at the Walter Eucken Institute. Greater interest among politicians might be the best thing for reviving German economic growth over the long term.

If Mr. Schäuble is sincere when he says that, by comparison with U.S. policy makers, "we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation," he can find a useful model in the policies of his predecessor 60 years ago.

Mr. White is professor of economics at George Mason University. This op-ed draws on his forthcoming book, "The Clash of Economic Ideas."

 

[Edward Campbell]

There is much excitement in the media, today over Nancy Pelozi’s distaste for fossil fuels and, more broadly, for the Obama administration’s distaste for foreign oil but it is all smoke and mirrors.

First, only Saskatchewan Premier Brad Wall is is making economic sense. Oil is a fungible commodity, no one cares who buys it. The simple fact (and it is a fact) is that every drop of oil produced, economically, anywhere will be sold at market prices – so long as a profit can be made. The demand for oil will not decline – even if the rate of growth of demand might grow less rapidly as (if) suitable alternative fuels become available. If America prefers Saudi or Venezuelan oil to Canadian oil you may be 100% sure that China will not.

It is better best necessary for us, Canadians, to protect, even enhance, our natural environment while we extract oil and it is right, proper and fair that those (e.g. me, a shareholder in several energy companies, included) pay to cleanup the messes ‘our’ companies make. (You are probably a shareholder/owner too – through a mutual fund or your Canada Pension Plan contributions.)  But that doesn’t alter the fact that we need to extract and produce oil, now, for our own use and for the export market.

We, Canada, as a matter of national policy, can decide to not allow our oil to go to the open market, if we are willing to forgo the jobs and tax revenue and so on. We should not do that – there is a global market for oil, of all sorts, and we are a major producer/exporter and there are few, if any, consumers/importers about whom we should worry.

 

[Rifleman62]

We, Canada, as a matter of national policy, can decide to not allow our oil to go to the open market, if we are willing to forgo the jobs and tax revenue and so on. We should not do that – there is a global market for oil, of all sorts, and we are a major producer/exporter and there are few, if any, consumers/importers about whom we should worry.

   
http://www2.parl.gc.ca/content/LOP/ResearchPublications/prb0633-e.htm
 
PRB 06-33E

Canadian Oil Exports to the United States Under NAFTA
Michael Holden
Economics Division

16 November 2006

Contents:

Introduction
What Does NAFTA Say About Energy Exports?
Interpreting the Energy Provisions in NAFTA
What if There Were Oil Shortages in Parts of Canada?
Conclusion

--------------------------------------------------------------------------------

Introduction
There is a widespread belief that the North American Free Trade Agreement (NAFTA) requires Canada to sell a fixed percentage of its total oil production to the United States.  It has been suggested that, under NAFTA, Canada can do nothing to curtail oil exports to the United States, even in the event of energy shortages at home.  This paper examines that claim.

What Does NAFTA Say About Energy Exports?
Canada’s trade in energy products with the United States and Mexico is governed by the rules found in Chapter 6 of NAFTA, “Energy and Basic Petrochemicals.”  The scope of NAFTA Chapter 6 is such that it includes virtually all forms of energy, ranging from uranium to fossil fuels to electricity.  Only a handful of energy products, none of them significant, are exempt.

There are four specific clauses within NAFTA Chapter 6 that directly or indirectly affect Canada’s ability to restrict exports:

■Article 603(2) prohibits the use of minimum or maximum export-price requirements in cases where restrictions on the volume of exports are prohibited.
■Article 604 explicitly prohibits NAFTA members from imposing any export tax or duty on the sale of energy or petrochemical products, unless the same tax is placed on all NAFTA members, including the exporting party.
■Article 605 outlines the conditions under which Canada can restrict energy exports.  It can do so only if all of the following conditions apply:
■exports as a percentage of total Canadian supply do not fall;
■Canada cannot charge a higher price to the United States or Mexico by means of taxes, licence fees, minimum prices or any other regulation; and
■any restriction cannot result from a disruption of normal supply channels.
■Article 607 outlines four specific national security-related scenarios under which energy exports could be restricted:
■to fulfil a defence contract or supply a military establishment;
■to respond to a situation of armed conflict;
■to implement policies related to the non-proliferation of nuclear weapons; and
■to respond to threats of disruption in the supply of nuclear materials for defence purposes.
These four clauses apply only to Canada and the United States.  Mexico reserves the right to control its own energy industries in most cases and is explicitly exempt from the provisions of Articles 605 and 607.

Interpreting the Energy Provisions in NAFTA
From the Canadian perspective, NAFTA Chapter 6 prohibits government intervention in the normal operation of North American energy markets, whether in the form of price discrimination (e.g., the imposition of export taxes), or the direct disruption of supply channels.

Article 605 of NAFTA has been interpreted by some to mean that Canada is required to sell a certain percentage of its energy output to the United States, even in the face of a severe domestic shortage.  Moreover, they argue that NAFTA prevents this percentage from falling over time.

Neither of these statements is true.  Canadian producers are free to sell as much oil as they wish to whomever they wish, including, for example, overseas customers.  As a result, the share of total output exported to the United States can rise or fall according to the normal forces of supply and demand.

The only condition that NAFTA imposes on Canadian energy products is that all buyers in North America must have equal rights to buy those products.

Article 605 does stipulate that energy exports to the United States as a percentage of total output cannot fall.  However, this does not refer to the day-to-day operation of the Canadian energy sector.  It is valid only as a limitation on the extent to which the Canadian government can interfere in energy markets.

NAFTA prohibits the Canadian government from imposing (under normal conditions) any restriction that causes U.S. imports of Canadian energy to fall.  In essence, therefore, NAFTA does prevent the Canadian government from imposing a policy like the National Energy Program in the 1980s.

What if There Were Oil Shortages in Parts of Canada?
It is occasionally suggested that the energy provisions in NAFTA could result in Canada exporting a significant share of its oil production to the United States, even as some parts of Canada suffer shortages.  For a number of reasons, this is not a legitimate concern.

As mentioned above, NAFTA requires that all oil produced in Canada be available to all consumers in North America.  Since it would not be economically logical for oil producers to charge higher prices to Canadian consumers, this fact alone ensures that NAFTA could not create shortages in Canada because Canada was obliged to export to the United States.

Moreover, oil is bought and sold in global markets.  In this way, oil is no different from any other commodity.  Nickel producers, for example, sell at prices determined by global supply and demand. Minor differences aside, consumers buy at comparable prices, regardless of whether they live across the street or around the world.

Alberta energy consumers, therefore, have little to no advantage over other Canadian consumers in terms of access to oil supplies.  Indeed, under current market conditions, it is advantageous for Eastern Canadian refineries and other users to import oil from countries such as Venezuela and Norway.  If, for whatever reason, those supplies were not available, those consumers would simply buy from other sources at prevailing (global) prices.

The important point to ensuring oil supply to all parts of Canada is sufficient infrastructure.  If shipping terminals and pipelines (with sufficient capacity) exist, then consumers across Canada will have access to world oil supplies (including those in Western Canada) at world oil prices.  The only way a local shortage could exist, then, would be because there was a global shortage.

NAFTA ensures that Canadian and U.S. consumers have equal access to oil produced in either country.  In no way does it give U.S. consumers preferential access. 

Conclusion
Contrary to some claims, NAFTA does not commit Canada to exporting a certain share of its energy supply to the United States regardless of Canadian needs.  Canadian producers sell without restriction on the open market.

The only significant limitation NAFTA places on Canada is that it prevents the Canadian government from implementing policies that interfere with the normal functioning of energy markets in North America.  Provided they have the demand and can pay the price, Canadian consumers could conceivably buy 100% of all energy produced in the country without violating NAFTA.