Canada's Place in the Global Economy

[a_majoor]

Despite our best efforts, we might not be able to escape the effects of hyperinflation or deflation, it will be imported as the events change the values of the purchaser's currencies and their own economic conditions determine how much of our commodities and manufactured goods and services they buy:

Interview With Marc Faber: It Is Not A Matter Of If With Hyperinflation, But When
Ron Hera, Hera Research, LLC | Sep. 23, 2010, 1:28 PM | 5,330 |  29



The Hera Research Newsletter (HRN) is delighted to present the following powerful interview with noted speaker and best selling author Dr. Marc Faber, whose newsletter, The Gloom Boom & Doom Report, highlights unusual investment opportunities. Dr. Faber is a popular speaker at investment seminars and conferences around the world and is best known for his contrarian investment approach.
Born in Zurich, Switzerland, Dr. Faber went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.
Between 1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong and, since 1973, has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd.
Dr. Faber’s best selling book Tomorrow’s Gold – Asia's Age of Discovery has been translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is a regular contributor to several leading financial publications around the world.
Dr. Faber, who is an investment adviser and fund manager associated with a variety of funds, is a member of the Board of Directors of numerous companies around the world.

Hera Research Newsletter (HRN): Thank you for joining us today. You’ve commented that the Federal Reserve’s policies have been linked to past boom and bust cycles in the US economy. Why do you believe that?

Dr. Marc Faber: Booms and busts happen also under the gold standard like we had in the 19th century various railroad and canal booms, and we also had real estate booms, first on the east coast in Chicago, then, at end of the century, in California. What the Federal Reserve has really done is create a lot of economic volatility. If you look back at the various crisis starting with the S&L crisis in 1990, then the Tequila crisis [the Mexican Peso crisis] in 1994, then Long Term Capital Management (LTCM), the NASDAQ bubble and at the current crisis, each crisis actually became worse and worse and the bubbles became bigger and bigger. The Federal Reserve did not pay any attention to excessive credit growth. The reason I am so negative about the Federal Reserve’s policies is that they only target core inflation and argue that they can’t identify bubbles, but when each bubble bursts they flood the system with liquidity that bring about unintended consequences.

HRN: What would be an example of that?

Dr. Marc Faber: Commodity prices peaked in May 2006 and after May 2006, especially in 2007, where there was actually a slowdown in the global economy and so there was no reason for commodity prices to go ballistic, but the Federal Reserve slashed interest rates after September 2007. In a global economy that was going into recession, the price of oil went from $78 to $147 and that burdened the US consumer with additional “tax” of five hundred billion dollars. I am not saying that is the only reason but it helped push the US consumer into recession. The fact is that without the Federal Reserve’s expansionary monetary policy after 2001, we wouldn't have had a housing bubble to the same extent. The Federal Reserve’s policies basically encouraged sub prime lending; it’s not the case that they discouraged it.

HRN: Is there a relationship between monetary expansion and the fact that the US economy depends so heavily on consumption?

Dr. Marc Faber: Basically, if you look at consumption as a percent of the economy and at housing activity, the excessive debt growth began essentially after LTCM and, I have to say, it was a huge mistake of the Treasury and Fed to bailout LTCM because it gave Market participants in the financial sector a signal that there is a Greenspan put, and later on a Bernanke put, with an even higher strike price and this resulted in excess leverage. So, if you have problems, the Federal Reserve will bail you out or the system will bail you out. That’s where I think the Federal Reserve acted irresponsibly—irresponsibly—that has to be said very clearly. They didn't pay attention to credit growth. Every central banker in the world pays attention to credit growth, but not in the US.

HRN: What would you recommend that the Federal Reserve do differently?

Dr. Marc Faber: The first action Mr. Bernanke should take is to resign. If I had messed up the system so badly, as he has done, I would have to resign. He has talked constantly about the Great Depression and what caused the depression but the problem is that he really doesn't understand what caused the depression, which was also excessive leverage at that time. I have to stress that in 1929 the debt to GDP ratio was of course minuscule in comparison what it is today. It was 186% of GDP but you didn't have Social security, Medicare and Medicaid and unfunded liabilities for Social Security and so forth. So, debt today, as a percent of GDP, is 379% and if you add the unfunded liabilities we are at over 800%. The Federal Reserve should pay attention to that.

HRN: With debt levels and liabilities so high, what solution is there for the United States?

Dr. Marc Faber: The solution is, basically, for the government to move out and not intervene in the economy. There are economists who will dispute that the Federal Reserve is partially responsible for the crisis and there are economists that will still tell you that debt doesn’t matter, that deficits don't matter and they want to continue to intervene in the free market constantly. To these economists I respond: What about Fanny Mae and Freddy Mac? It was an intervention by the government into the housing market and into the mortgage market and the biggest bankruptcies—bigger than Citigroup and all the banks—are Fanny Mae and Freddy Mac— government-sponsored enterprises. The same economists will tell you that the government has to intervene and to these economists I say: Well, you have made so many mistakes already with interventions do you think that in the future your interventions will improve anything? Einstein defined insanity as doing the same thing over and over and expecting different results, but these economists and the Federal Reserve think that by more interventions with fiscal measures and more money printing they will improve things. No, they won’t. They will make things worse.

HRN: It seems the US is moving towards more government intervention into the free market rather than less.

Dr. Marc Faber: Yes. That’s why I’m very negative about economic growth in the US. It just won’t happen. Can the US economy grow at 2% per annum or, in the best case scenario, at 3% per annum with current policies? Yes, but it will create a lot of distortions. The best case for an economy that goes into a boom phase, in other words over consumption, is to bring it back into the trend line as quickly as possible. So when you have an excursion into a boom, what you need is a cleansing of the system and that may take a few years to happen in the US because the excesses were built up not just in the last 7 years between 2000 and 2007 but, over the last 25 years. So, to really bring the US back into sanity—into a healthy mode where the economy can grow—might take 5 to 10 years, but it won’t happen under the Obama administration.

HRN: Given the poor prospects for US economic growth, do you foresee a flight of capital from the United States?

Dr. Marc Faber: You would be out of your mind, with health care reforms and with the government interventions and the uncertainty about future taxes in the US, to even consider expanding in the US and this is a problem. I mean people say that loan demand is down because banks are not lending, but maybe nobody wants to borrow any money in the US and nobody wants to expand in the US but they are expanding in China, India, Vietnam, Bangladesh, Africa and Brazil. The business world is an international place today, and if you run a corporation, whether you employee 50 people or 10,000, you can choose where you invest your money in terms of capital spending. Where do you want to expand factories? If I employed people in the US, I would rather think of reducing the 50 employees maybe to only 20.

HRN: Where should American investors put their money?

Dr. Marc Faber: Different people have different investment objectives but I made a presentation recently where I showed, that in terms of goods markets, the emerging world is now larger than the developed world and so I think people should have at least 50% of their money in emerging economies. With interest rates at zero and with the prospect that they will stay at zero, or below zero in real terms for a long time, I think cash is not particularly attractive. I think US government bonds are unattractive in the long run, although they may be attractive for the next three months. I would recommend to people to accumulate precious metals and invest in a basket of shares in emerging economies.

HRN: Are you saying you would consider buying gold even at today’s prices?

Dr. Marc Faber: Yes, I keep accumulating gold although in the next three months it may go down and not up, but maybe it won’t go down. To me, it doesn’t really matter if it goes down by 10% or 20% or whether it stays where it is. I think if in case gold came down 20% it would be because tightening of global liquidity and, in that scenario, equities wouldn’t do particularly well either.

HRN: You mentioned that cash is not attractive. What are the prospects for the US dollar?

Dr. Marc Faber: The dollar has been relatively weak in the last few years. It’s just that the other currencies are not much better. There has been a tendency for the dollar to weaken and certainly it has weakened against the price of oil, against the price of precious metals and raw materials and it's lost its purchasing power. There is no question about the fact that, today, if you have $100,000 you can buy less than 10 years ago or 20 years ago. Just look at the housing market. It has come down somewhat but a house is much more expensive than in 1980.

HRN: Can you comment on inflation versus deflation?

Dr. Marc Faber: In this whole inflation and deflation debate investors have to realize that in a system—say you have a room like this and then the money is dropped from helicopters into this room, it can flow into real estate; it can flow into equities; it can flow into precious metals; it can flow into the art market or it can flow out into other currencies or into commodities that the Federal Reserve doesn’t control. They only control essentially how much money they will drop from the helicopters.

HRN: Is this an example of why central planning of the economy by the Federal Reserve isn’t effective?

Dr. Marc Faber: Yes. Exactly.

HRN: Do you think hyperinflation in the US is possible?

Dr. Marc Faber: The Federal Reserve doesn’t want to create a hyperinflation. I mean Mr. Bernanke may be incompetent, but he’s not an evil person per se. He just doesn’t have sufficient knowledge to be a central banker, in my opinion, and has misguided economic theories, but he’s not evil in the sense that he would not wish to debase the currency entirely. Clearly, if the US economy moves into a double dip recession and you have deflationary pressures reappearing, in the housing market, for example, and if the S&P drops from roughly 1,100 down to say 900, then I think further monetization will happen. I believe that because of the unfunded liabilities and the deficits of the US government, which will stay high for a long time; sooner or later there will be more monetization anyway.
It’s more a question of when it will happen rather than if it will happen. For sure it will happen but will it happen right away, say in September, or maybe only in two years time? Eventually, before everything collapses we’ll have an inflationary bout which may not be so strongly felt in consumer prices, as in stocks or housing or precious metals prices or in commodities like oil; or inflation could occur mostly in foreign currencies, in other words, in Asia where the currencies could appreciate.

HRN: Thank you for being so generous with your time.

Dr. Marc Faber: Thank you.

After Words

Dr. Marc Faber is not only one of the world’s most outspoken critics of the Federal Reserve and of its monetary policy, but is quite possibly the Federal Reserve’s most credible critic. Dr. Faber’s detailed, evidence-based arguments, linking Federal Reserve policy decisions, such as interest rate changes, to economic developments like the US housing bubble and oil price changes are supported by thorough research. Dr. Faber’s research raises serious questions about the results of central economic planning in the form of central bank monetary policy and about the wisdom of intervention into the economy by governments. The evidence suggests that centralized manipulation of money and credit has a destabilizing influence on the economy overall—it increases economic volatility—and has unintended consequences totally outside the control of so-called monetary authorities. History shows that well-intentioned lawmakers and their economic advisers cannot predict the outcomes and unintended consequences of economic interventions. Neither central bankers nor governments have been successful in substituting centrally planned economic agendas for the decentralized decisions of millions of entrepreneurs and owners of private capital, but they persist nonetheless with ever more centralized control and ever larger interventions. Dr. Faber confidently predicts that greater government control over the economy will hamper economic growth rather than stimulate it, and that interventions into the free market, no matter how large or well meaning, will continue to fail as they consistently have in the past.

(This post comes courtesy of Hera Research)
Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions.  Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.

Read more: http://www.businessinsider.com/marc-faber-hyperinflation-2010-9#ixzz10aASWSVa

 

[Edward Campbell]

It appears more and more likely that the USA will try to deflate its way out of debt by debasing its currency, according to this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/economy/currencies/officials-clash-on-currency-policies/article1745532/

Officials clash on currency policies

STEVEN C. JOHNSON

New York— Reuters

Published Wednesday, Oct. 06, 2010

Global policy makers clashed over currency policies on Wednesday as Western leaders warned China  and other emerging markets that widespread efforts to weaken exchange rates threatens to derail economic recovery.

U.S. Treasury Secretary Timothy Geithner said countries with large trade surpluses must let their currencies rise lest they trigger a devastating round of competitive devaluations.

“When large economies with undervalued exchange rates  act to keep the currency from appreciating, that encourages other countries to do the same,” Mr. Geithner said in a speech ahead of this weekend’s semi-annual international Monetary Fund meeting.

Officials around the world fear such a “race to the bottom“ may trigger trade tariffs and other measures that could damage global economic growth.

Using exchange rates “as a policy weapon” to undercut other economies and boost a country’s own exporters “would represent a very serious risk to the global recovery,” IMF Managing Director Dominique Strauss-Kahn was quoted as saying in Wednesday’s edition of the Financial Times.

But China, which the West accuses of keeping the yuan artificially weak to promote exports, has rebuffed such calls. On Wednesday, Premier Wen Jiabao told the European Union to stop piling pressure on Beijing to revalue the yuan, saying a rapid exchange rate shift could unleash disastrous social turmoil in China.

“Many of our exporting companies would have to close down, migrant workers would have to return to their villages,” Mr. Wen said during a visit to Brussels. “If China saw social and economic turbulence, then it would be a disaster for the world.”

Low interest rates in Europe and Japan and expectation that the Federal Reserve will launch another round of money printing that could weaken the dollar have pushed currencies to the top of the agenda at the IMF meeting and at Friday’s gathering of finance leaders from the Group of 20 economies.

Despite disagreement among governments, IMF chief economist Olivier Blanchard said he was “optimistic” about a solution. “We are just at the beginning of the process, so it’s much too early to declare it a failure.”

Others, however, are less sure.

Brendan Brown, economist at Mitsubishi UFJ Securities International, said the IMF, which has the United States as its biggest stakeholder, would not try to prevent further U.S. monetary easing or a weaker dollar.

“That Washington institution has failed in its central mission to prevent currency war,” he wrote in a report.

The U.S. dollar tumbled to another 8-1/2-month low against major currencies in anticipation of more Federal Reserve monetary easing, pushing the yen to a fresh 15-year high.

A strengthening yen prompted Japan to sell yen in currency markets last month, its first intervention since 2004, and several emerging market countries have followed suit or are threatening to.

Brazil fired the latest shot this week in what its finance minister dubbed an “international currency war,” doubling a tax on foreign investors buying local bonds to 4 per cent to curb its strong currency.

Some assigned blame to developed country policies, particularly the Fed’s loose monetary policy, which has brought instability to exchange rates and forced countries such as Japan and Brazil to defend their exporters.

“It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world. It’s a very strange policy that they are pursuing,” Nobel economics laureate Joseph Stiglitz said of U.S. policy.

Policy makers have highlighted the issue of global imbalances for years, with fundamental problems seen as the dollar’s global dominance, China’s overvalued yuan and Germany’s lack of domestic consumption.

The IMF said Wednesday that emerging economies were set to grow nearly three times as fast than rich nations next year, with China the main engine of growth.

But emerging nations say the massive cash flows associated with this growth have damaged their exports, particularly as major economies try to restrain their own currencies’ levels.

South Korea warned investors it might impose further limits on forward trading and India and Thailand said they were looking at steps to control speculative surges.

“It’s natural in that context for them to say -- we can’t just let our exchange rates appreciate and destroy our exports,” Mr. Stiglitz told reporters at Columbia University on Tuesday.

Markets, however, think Fed easing is more likely than ever. That point of view was boosted by Chicago Fed President Charles Evans, who was quoted as saying the central bank should do much more to spur the economy.

And in a surprise move this week, Japan pulled interest rates on the yen back to zero and pledged to pump more funds into an economy struggling to compete with the currency near a 15-year high against the dollar.

The US policy is nothing more nor less than beggar thy neighbour, and that includes Canada in spades. The Obama administration, like the one before it, is the captive of a stupidly protectionist congress – an institution with a sad history of colossal economic ignorance and irresponsibility. (Smoot Hawley, anyone?)

 

[a_majoor]

PIIGS in spaaaaaace!

Ireland moves up the list of most likely to default, but any one of these nations could set the domino's in motion:

http://www.businessinsider.com/19-countries-most-likely-to-default-2010-10

Ireland Surges Higher
Gregory White | Oct. 9, 2010, 5:59 AM | 152,686 | comment 6

Ireland's bank bailout and the failure of its austerity budget has been the big sovereign debt story since September.

This country's place on CMA Datavision's cumulative probability of default rankings has spiked as from 14th place in July, to 5th place by the end of Q3.

But Ireland isn't the only country in sovereign debt trouble, and it's not the other PIIGS that dominate this list either.

CMA's list is ranked by CPD, or cumulative probability of default. This rating is separate from a company's CDS, but is closely related, and based on the volatility and price of that product.

#19 Croatia
Cumulative Probability of Default: 16.6%

Current 5-year Mid CDS (bps): 254.7

CMA Implied Rating (Sept 30): bb+

CMA Implied Rating (Q2): bb

Source: CMA Datavision

#18 Dominican Republic
Cumulative Probability of Default: 17.6%

Current 5-year Mid CDS (bps): 266.3

CMA Implied Rating (Sept 30): bb

CMA Implied Rating (Q2): bb

Source: CMA Datavision

#17 El Salvador
Cumulative Probability of Default: 17.5%

Current 5-year Mid CDS (bps): 267.7

CMA Implied Rating (Sept 30): bb

CMA Implied Rating (Q2): bbb+

Source: CMA Datavision

#16 Lithuania
Cumulative Probability of Default: 17.5%

Current 5-year Mid CDS (bps): 271.3

CMA Implied Rating (Sept 30): bb

CMA Implied Rating (Q2): bbb+

Source: CMA Datavision
#15 Bulgaria
Cumulative Probability of Default: 27.8%

Current 5-year Mid CDS (bps): 275.4

CMA Implied Rating (Sept 30): bb

CMA Implied Rating (Q2): bb-

Source: CMA Datavision

#14 Lebanon
Cumulative Probability of Default: 18.7%

Current 5-year Mid CDS (bps): 287.8

CMA Implied Rating (Sept 30): bb

CMA Implied Rating (Q2): bb

Source: CMA Datavision

#13 Iceland
Cumulative Probability of Default: 21.7%

Current 5-year Mid CDS (bps): 303.3

CMA Implied Rating (Sept 30): bb-

CMA Implied Rating (Q1): bb-

Source: CMA Datavision

#12 Hungary
Cumulative Probability of Default: 20.4%

Current 5-year Mid CDS (bps): 320.6

CMA Implied Rating (Sept 30): bb-

CMA Implied Rating (Q1): bb

Source: CMA Datavision

#11 Latvia
Cumulative Probability of Default: 20.8%

Current 5-year Mid CDS (bps): 329.7

CMA Implied Rating (Sept 30): bb-

CMA Implied Rating (Q2): bb-

Source: CMA Datavision

#10 Romania
Cumulative Probability of Default: 22.1%

Current 5-year Mid CDS (bps): 350.9

CMA Implied Rating (Sept 30): bb-

CMA Implied Rating (Q2): bb-

Source: CMA Datavision

#9 Iraq
Cumulative Probability of Default: 26.4%

Current 5-year Mid CDS (bps): 427.1

CMA Implied Rating (Sept 30): b+

CMA Implied Rating (Q2): b+

Source: CMA Datavision

#8 Dubai
Cumulative Probability of Default: 26.5%

Current 5-year Mid CDS (bps): 437.4

CMA Implied Rating (Sept 30): b+

CMA Implied Rating (Q2): b+

Source: CMA Datavision

#7 Portugal
Cumulative Probability of Default: 30.2%

Current 5-year Mid CDS (bps): 408.8

CMA Implied Rating (Sept 30): b+

CMA Implied Rating (Q2): bb-

Source: CMA Datavision

#6 Ukraine
Cumulative Probability of Default: 32.3%

Current 5-year Mid CDS (bps): 546.8

CMA Implied Rating (Sept 30): b

CMA Implied Rating (Q2): b

Source: CMA Datavision

#5 Ireland
Cumulative Probability of Default: 33.0%

Current 5-year Mid CDS (bps): 458.3

CMA Implied Rating (Sept 30): b

CMA Implied Rating (Q2): bb

Source: CMA Datavision

#4 Pakistan
Cumulative Probability of Default: 34.6%

Current 5-year Mid CDS (bps): 606.4

CMA Implied Rating (Sept 30): b

CMA Implied Rating (Q2): b

Source: CMA Datavision

#3 Argentina
Cumulative Probability of Default: 40.4%

Current 5-year Mid CDS (bps): 749.3

CMA Implied Rating (Sept 30): b-

CMA Implied Rating (Q2): ccc+

Source: CMA Datavision

#2 Greece
Cumulative Probability of Default: 48.7%

Current 5-year Mid CDS (bps): 775.3

CMA Implied Rating (Sept 30): ccc

CMA Implied Rating (Q2): ccc

Source: CMA Datavision

#1 Venezuela
Cumulative Probability of Default: 54.2%

Current 5-year Mid CDS (bps): 1109.4

CMA Implied Rating (Sept 30): ccc

CMA Implied Rating (Q2): ccc-

Source: CMA Datavision


Read more: http://www.businessinsider.com/19-countries-most-likely-to-default-2010-10#ixzz11vY7vZka

 

[Edward Campbell]

It appears more and more likely that the USA will try to deflate its way out of debt by debasing its currency, according to this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/economy/currencies/officials-clash-on-currency-policies/article1745532/

The US policy is nothing more nor less than beggar thy neighbour, and that includes Canada in spades. The Obama administration, like the one before it, is the captive of a stupidly protectionist congress – an institution with a sad history of colossal economic ignorance and irresponsibility. (Smoot Hawley, anyone?)

More, this time with a familiar ‘cold war’ metaphor, on the currency wars and a potential destructive trade war, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/carl-mortished/canada-in-the-forefront-of-a-currency-cold-war/article1752447/

Canada in the forefront of a currency cold war

CARL MORTISHED

From Tuesday's Globe and Mail
Published Tuesday, Oct. 12, 2010 6:00AM EDT

It’s a new Cold War and once again, Canada is on the front line. There are no remote air bases or Arctic radar stations, just flickering screens in offices on Bay Street, Wall Street and the City of London where people watch the precipitous fall of the U.S. dollar and the rise of the Australian, Brazilian and Canadian currencies.

The war is cold because no one has yet fired a gun. As in the nuclear arms race between Russia and the United States , there is a lot of name-calling. Decades ago, the Cold War antagonists in Washington and the Kremlin accused each other of seeking global hegemony. Today, Washington accuses China of being a “currency manipulator,” of artificially depressing the yuan, a strategy that helps China’s exporting manufacturers by making their goods cheaper while at the same time making US imports into China look expensive – a tariff barrier in all but name. In retaliation, Beijing blames the U.S. for its profligate spending and for playing fast and loose with monetary policy, flooding the developing world with cheap dollars.

No one has launched gunboats but America is threatening trade violence: A bill is through the U.S. House of Representatives, that would, if it gained Senate support, allow the U.S. to retaliate using real tariffs against Chinese imports.

It is the nuclear option and, as in the 1960s Cold War, no one wants to pull the trigger because a global trade war would cripple a world economic recovery that is already looking shaky. Last week’s U.S. unemployment statistics were truly worrying, not least the tepid figures from manufacturing that suggest America is deriving little advantage from the weakness of its dollar. Instead, this war is being fought, like the last one, in the Third World. Cash is flying from the West into emerging markets, pumping up the value of assets in Latin American and Asian countries, creating dangerous bubbles. The fighting has already started in countries such as Brazil, which are imposing taxes on hot money imports in a desperate attempt to stop the upward climb of the Brazilian real.

Everyone looks for a powerful peacemaker; there is a global institution dedicated to monetary peace and stability. But like the United Nations, the International Monetary Fund is a toothless old tiger. Over the weekend, the U.S. and China  exchanged insults at an IMF summit meeting and the institution’s bureaucrats wrung their hands. In a hilarious rerun of the UN’s behaviour during the Cold War when its agencies conducted endless critical studies of the behaviour of the capitalist West, the IMF said, in a sop to the emerging-market lobby, it would in future study the economic health of rich countries.

It is not as if we were unaware that Americans borrowed too much money. There is, however, a real ideological divide at the root of this new Cold War. China has embraced a form of capitalism but it has not embraced free markets any more than it has embraced democracy. In the world view of Beijing’s mandarins, the global economy is a finite resource in which every nation seeks to grab as much wealth as it can. For China, the notion of the level playing field is nonsense because resources are not evenly apportioned. The solution is to play your advantage to the hilt and accumulate power in the form of trade surpluses that can be reinvested in acquiring valuable resources overseas: oil, iron ore or potash. In other words, mercantilism; this is a land grab on a massive scale.

Canada, is on the front line of this struggle, exposed to the chronic underperformance of its sickly neighbour to the south. As the Federal Reserve prepares to trash the greenback with another barrage of manufactured money, called quantitative easing, Canadian exporters should brace themselves for a surge in the value of Canada’s currency. Like Australia, Canada is being pumped up by China’s ravenous appetite for stuff: metals and minerals. An investor in the loonie gets a yield premium and exposure to an economy pumped up with oil, gold, base metals, grain and fertilizer. The price for riding the Chinese-driven commodity wave is that Canadians who make things are going to suffer a great sweating – factories will close and only clever businesses will survive.

There is hope that at a meeting of the G20 nations in South Korea next month, a coalition of America, Europe and emerging-market nations will gang up on Beijing and force a yuan revaluation, using the threat of trade sanctions. History suggests that a cold war doesn’t defrost after a single meeting. Canada could be in for a long haul of commodity inflation and dear money.

Carl Mortished is a Canadian financial journalist based in London.

I need to get my opinion out first: if there is a trade war then China will win. Those, mainly Americans with far, far too many supporters in the US congress, who want to provoke a trade war with China are self destructive fools who are hell bent on destroying America.

There is, contrary to what Mortished says, no hope that the G20, or anyone else, can “gang up on Beijing and force a yuan revaluation, using the threat of trade sanctions.” At least there is no hope that China will tolerate any revaluation sufficient to rescue the sadly mismanaged US economy. Nor should it, in my opinion. Yes, it is quite true that “China has embraced a form of capitalism but it has not embraced free markets any more than it has embraced democracy. In the world view of Beijing’s mandarins, the global economy is a finite resource in which every nation seeks to grab as much wealth as it can. For China, the notion of the level playing field is nonsense because resources are not evenly apportioned.” But that is not, as Mortished suggests, a “divide” between China and the West. It is, rather, an exact, near perfect copy of US policy since the 1850s. Why, many Chinese ask, is what America did, does and will continue doing be ‘bad’ when China does it? It’s a fair question because we, in the American led West, are the worst sort of hypocrites when it comes to economic policies.

I think Mortished is right on one key point: “It [American retaliatory tarrifs] is the nuclear option and, as in the 1960s Cold War, no one wants to pull the trigger because a global trade war would cripple a world economic recovery that is already looking shaky.” Cooler heads, including Canada’s I wager, will prevail and the US will be left to debase its own currency and Gresham’s Law will apply because it still does apply to paper money and 21st century finances.

Canada needs to look West – all the way West – to the globe’s other future leaders. America will not, suddenly, decline and fall; history shows us that it (decline and fall) doesn’t work that way but the world will not return to 1940 to 1990 – there will be a new (bipolar or, perhaps, multi-polar) world order and, for the rest of my life and maybe the rest of your lives, America will lead one faction but the American zenith has passed.

 

[Edward Campbell]

This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, illustrates the Canadian dilemma, we need the US economy to turn around and grow again, even if that means helping it to make bad choices:

http://www.theglobeandmail.com/report-on-business/canada-backs-us-push-for-g20-deal-on-economic-rebalancing/article1768285/

Canada backs U.S. push for G20 deal on economic rebalancing

BILL CURRY

Gyeongju, South Korea— Globe and Mail Update
Published Friday, Oct. 22, 2010

Canada is siding with Washington as U.S. Treasury Secretary Tim Geithner pushes a reluctant G20 to strike a deal this weekend to narrow the financial gap between nations with big surpluses and those who are deep in debt.

The large scale current account surpluses – particularly China’s – are at the heart of U.S. concern over exchange rates  and general concern that the world economy may turn to protectionist trade policies.

Following a day of negotiations at the officials level, finance ministers and central bank governors began talks Friday that will be dominated by concern over exchange rates.

“I think we’re all agreed on the direction,” Canada’s Finance Minister Jim Flaherty told reporters Friday in advance of the G20 talks. Earlier in the day, Mr. Flaherty held one-on-one meetings with his counterparts from China , India and South Korea.

“No one wants to be confrontational here,” he said. “No one wants to walk away from here without an agreement on an action plan, so that’s what we’re trying to do.”

Mr. Geithner’s proposal to focus on current accounts – which is the difference between the value of exports and the value of imports as well as the difference between national savings and investment – is far from a done deal. In fact, it is just one of several floating around inside the room. Japan’s finance minister has already questioned the move, describing specific targets as unrealistic.

In a letter to the G20 colleagues dated Oct. 20, Mr. Geithner proposes a way forward that could lead to a final deal Saturday, rather than waiting for the Nov. 11-12 gathering of G20 leaders in Seoul.

“I know that some of you will want to reserve any substantive agreement until the November Leaders' Summit, but I think we should take advantage of the presence of the central bank governors to try to reach agreement on the broad elements this weekend, and put those in a report to our Leaders,” writes Mr. Geithner in the letter.

The three measures proposed by the U.S. in the letter, which was summarized by a senior Canadian finance official and later posted in its entirety by Reuters, include:

• A commitment by G20 countries to reduce external imbalances below a specific share of GDP over the next few years, with exceptions for large exporters of raw materials. That means deficit nations should increase their savings and surplus nations should adopt policies and exchange rates that encourage domestic consumption.
• A pledge to refrain from exchange rate policies designed to achieve competitive advantage by weakening their currency or preventing appreciation of an undervalued currency.
• Allow the International Monetary fund to take on a special role as a monitor of these commitments and to publish semi-annual reports.

“With progress on these fronts, we should reach final agreement on an ambitious package of reforms to strengthen IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies,” writes Mr. Geithner.

The Japanese Finance Minister is correct: specific targets are unrealistic, even dangerous. China will not tolerate anyone, especially not the USA, dictating its monetary policy. That’s a recipe for failure but it is a recipe Geithner may have to follow in order to placate an economically illiterate US Congress and an instinctively protectionist Democratic administration and party base.

 

[Edward Campbell]

This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, is mildly good news:

http://www.theglobeandmail.com/report-on-business/top-business-stories/loonie-surges-greenback-sinks-after-weak-g20-pledge/article1771183/

Loonie surges, greenback sinks after weak G20 pledge

MICHAEL BABAD | 
Globe and Mail Update

Published Monday, Oct. 25, 2010

Currencies volatile after G20 meeting

The U.S. dollar (USD/JPY-I80.54-0.83-1.02%) sank this morning and theCanadian dollar (CAD/USD-I0.980.011.01%) climbed sharply in the wake of a G20 finance meeting that ended with just vague pledges amid heightened currency tensions.

While the meeting of finance ministers and central bankers in South Korea focused heavily onforeign exchange  volatility, “there was nothing really firm in there to halt the decline of the U.S. dollar, so the risk is out of the way,” said Scotia Capital currency strategist Camilla Sutton.

The G20 finance officials pledged in their communiqué to refrain from "competititve devalution" of currencies, the flashpoint in trade tensions, and to pursue policies that would bring down high trade imbalances. That was nowhere near what U.S. Treasury Secretary Timothy Geithner was pushing for, but, economists said, it does lay the groundwork for the broader G20 meeting in November.

"We think the communiqué will take some temporary pressure of the ‘currency war’ refrain; however the significant and persistent economic problems will likely make it easy for a backward slide," Ms. Sutton said.

The greenback hit a 15-year low and the loonie shot well beyond 98 cents U.S. as markets took the G20 pledge as basically leaving the status quo in place. There are somewhat differing views going forward, though:

“Markets took the G20 outcome as a green light to get back to the business of selling [the U.S. dollar] across the board ... We retain our base case view that the [U.S. dollar] selloff is running out of steam. In the longer-run, more [foreign exchange] co-operation should actually ease the pressure on [the U.S. dollar],” said Elsa Lignos, currency strategist at Royal Bank of Canada  Europe.

But CMC Markets analyst Michael Hewson sees the U.S. dollar continuing to struggle: “As suspected this weekend’s G20 communiqué turned out to be another bland statement pledging to work together to avoid ‘competitive devaluation’ of currencies. It also pledged that countries would work together to ‘move towards more market-determined exchange rate systems’ and that the International Monetary Fund would have more of a role in the supervision of exchange rates.

"The meeting also agreed to look at ways of looking at measures at reducing what was termed as excessive trade imbalances, though no specific targets or time-frames for doing this were set. It also served to kick the can down the road, so to speak, to the G20 leaders’ summit next month, also in South Korea but is unlikely to reverse the overall pressure on the U.S. dollar as it continues to remain under pressure.”

The US dollar needs to find its own fair value, reflecting the state and outlook for the US economy. It’s status as the de facto global reserve currency demands a fair, sensible valuation.

Although Canadian manufacturers will scream for help, the appreciating Canadian dollar is, in fact, a good opportunity for them to buy tooling, talent and equipment (and even complete subsidiaries) from/in the USA. New tooling, talent and equipment, not an artificially devalued Canadian dollar, are the keys to productivity.

On balance, chalk up a small victory for the Chinese, and for common sense and an opportunity for Canada's manufacturing sector.

 

[Kirkhill]

I think the hand has been played reasonably well by Flaherty.  Canada can't drift far from America, or at least not quickly.  However the economic situations of Canada and America are widely different.

America is, I believe, widely perceived as a nation sitting on the pot of gold and the rest of the world is trying to separate Americans from as much of the gold as possible.  The trouble is that the pot is a figurative one not an actual one. Their reality is they don't have the proverbial pot to p*ss in.  Ever since they gave up on the gold standard they have been living in fear of the little boy in the crowd pointing out their lack of appropriate attire.

On the other hand Canada is seen less as a treasure house and more as a warehouse.  Its dollar is backed by wheat, coal, oil, strategic metals including rare earths and good, old-fashioned gold and silver.  The more that the world consumes of those resources the greater the value of the loonie.

Of course in the financial world perception and reality are intertwined.  The physical reality is that the US has many of the same physical advantages Canada has so its dollar should be strong as well.  But the perception is different.  Just as the illusion of emperor being fully clothed has been maintained since Nixon severed the last tenuous official link between the dollar and gold.

Untill the US starts exploiting their own resource base fully, and re-establishes that link between fiat and physical that Canada enjoys then I think that the market will continually drive a wedge between Canada and the US.

 

[a_majoor]

Trouble from Greece.

http://www.businessinsider.com/theodoros-pangalos-debt-gaffe-2010-11

Greek Deputy PM Makes A Huge Gaffe, And Accidentally Reveals The Country's Debt Plans
Joe Weisenthal | Nov. 1, 2010, 7:09 PM | 6,760 | comment 12

Theodoros Pangalos

Classic gaffe here by the Greek Deputy PM Theodoros Pangalos.

According to Greek newspaper Kathemirini, Pangalos said in an interview Sunday: “Debts exist to be restructured... We may pursue it ourselves or the option may be offered to us and it could be in our interest to turn it down.”

This is in radical contravention to the official party line out of Greece, which is that restructuring would be a disaster.

Of course, this is a classic gaffe in that it's the truth.

Opposition politicians have called on PM George Papandreou to sack Pangalos, which Papandreou has declined to do.


Read more: http://www.businessinsider.com/theodoros-pangalos-debt-gaffe-2010-11#ixzz148lmakE7

 

[a_majoor]

Economics for the masses. If you have children of a certain age (i.e. listen to rap music at high volume) let them listen to this.

Sometimes you have to slip the education in when they are not expecting it.....

 

[jhk87]

I think the hand has been played reasonably well by Flaherty.  Canada can't drift far from America, or at least not quickly.  However the economic situations of Canada and America are widely different.

America is, I believe, widely perceived as a nation sitting on the pot of gold and the rest of the world is trying to separate Americans from as much of the gold as possible.  The trouble is that the pot is a figurative one not an actual one. Their reality is they don't have the proverbial pot to p*ss in.  Ever since they gave up on the gold standard they have been living in fear of the little boy in the crowd pointing out their lack of appropriate attire.

On the other hand Canada is seen less as a treasure house and more as a warehouse.  Its dollar is backed by wheat, coal, oil, strategic metals including rare earths and good, old-fashioned gold and silver.  The more that the world consumes of those resources the greater the value of the loonie.

Of course in the financial world perception and reality are intertwined.  The physical reality is that the US has many of the same physical advantages Canada has so its dollar should be strong as well.  But the perception is different.  Just as the illusion of emperor being fully clothed has been maintained since Nixon severed the last tenuous official link between the dollar and gold.

Untill the US starts exploiting their own resource base fully, and re-establishes that link between fiat and physical that Canada enjoys then I think that the market will continually drive a wedge between Canada and the US.

Extractive economies are notoriously vulnerable to economic downturns, as demand can drop rather precipitously.

Given that Bretton Woods asked for the US to be the only economy sitting on gold with other currencies tied to it, it's difficult to be too condescending towards them - they really did what they could to keep currencies stable and played a huge part in European economic recovery throughout the 1940s and 1950s.

 

[Edward Campbell]

Here, reproduced under the fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, is a pretty fair (in my opinion) assessment of what the US is doing:

http://www.theglobeandmail.com/globe-investor/investment-ideas/experts-podium/the-ingenious-us-currency-ploy/

The ingenious U.S. currency ploy
GEORGE ATHANASSAKOS | Columnist profile | E-mail
Special to Globe and Mail Update
Published Tuesday, Nov. 09, 2010

Central bankers around the world have lined up to criticize the recent quantitative easing by the U.S. Federal Reserve. Many economists have done the same. Comments range from “owes us some explanation on the decision” and “international confidence…might be hurt” to “debasing the currency” and “uncontrolled printing of money which will lead to high inflation and another global crisis down the road”.

While these are valid concerns, what is most disconcerting is that the strategy of the U.S. government and the Federal Reserve is now slowly becoming apparent. And this may create problems and uncontrolled currency devaluations that may destabilize world trade and economic growth.

While Federal Reserve Chairman Ben Bernanke is a student of the great depression and knows very well that policy mistakes at the time led to the most severe economic decline of the century, his policies may lead to similar policy mistakes, by raising antagonism among nations and protectionist feelings around the globe. These were two of the key factors, instigated by policy mistakes, which turned a bad recession of the 1930s to a severe depression.

Recent events are part of an implicit U.S. strategy to get at China’s refusal to play ball. China has refused to take steps to strengthen its currency. This has led to large trade surpluses with U.S. and made China a holder of huge amount of US debt in its reserves.

How has the U.S. decided to deal with these problems and encourage China to listen? The U.S. has implicitly decided to pursue a more subtle way of getting to Chinese as opposed to direct trade wars. First, the U.S. has depreciated its own currency by printing lots of money. This not only has had the effect of depreciating the U.S. dollar and making its imports from China more expensive, but has also reduced the value of the U.S. debt that China holds. It is ingenious!

Additionally, since oil and commodities are priced in U.S. dollars, their values rise as the value of the U.S. dollar declines. The U.S. has an incentive to keep the price of oil high; it makes transportation of Chinese goods more expensive and many times prohibitive. There is a double whammy effect to quantitative easing and printing money, which may eventually induce the Chinese to co-operate. Cooperation will create more balanced economic growth and prolong the longevity of the U.S. and global recoveries and put economies around the world on a steadier path.

Risks

But there are risks in both the short run and long run. The G20 summit meeting this week in Seoul may turn ugly. In the short run, as the true intentions of U.S. policy and the second round of quantitative easing may now become more apparent, the meeting may turn to calls for full blown protectionism and currency devaluations of the “beggar thy neighbour” variety of the 1930s that led to the Great Depression with dire effects for the global economy, pushing weak economies, including the US, over the precipice.

The other risk is that of inflation down the road. Money supply and inflation are connected in the long run. And money supply has been rising fast over the last decade. Keeping interest rates artificially low also creates the risk of bubbles and volatility in commodities and financial assets. While this is not obvious as yet in the U.S., it is quite apparent in emerging economies where inflation caused by U.S. actions is running amok. But in the long run, the U.S. will not avoid the inflation problem either, with severe consequences for economic stability and sustainability. The high and rising gold prices are a reflection of this fear.

We live in interesting times. Unlike the old days when countries went to war to settle outstanding issues, globalization has managed to avert such wars, but it has replaced them by economic wars. Whereas before countries went to war to force others to submission and secure needed resources (i.e., after the British-Dutch and U.S. ban on oil and iron ore exports, Japan decided to go to war against the U.S. as the price to achieve “economic security”), nowadays countries use economic might, implicit or explicit, to force other countries to submit to their demands, or obtain the needed resources by buying control of companies that produce the necessary commodities. China has been doing this for more than a decade.

Greece and many Eastern European countries have handed economic control of their countries to IMF and European Union politicians. Foreign countries do not need to go to war anymore to occupy others; economic power does the occupation. This will prompt calls for more nationalistic policies and protectionism around the world. Canada’s response to BHP’s hostile acquisition attempt of Potash Corp. of Saskatchewan may be an early sign of such calls.

And while in the old days undervaluation of currencies supported by governments led to retaliatory trade measures by other governments and further devaluations, it is now covert devaluation, such as the actions taken by the U.S., that involve not the government but rather the central bank. We may soon see the repercussions of this.

George Athanassakos is a finance professor and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.

Interesting times, indeed!

 

[a_majoor]

Since this involves both China and the US, it seems appropriate for this thread. remember, these are ideas that have been floated, and the deficit and debt cutting ideas in the US portion will certainly have a long, uphill battle ahead:

http://nextbigfuture.com/2010/11/china-yuan-will-rise-faster-as-part-of.html#more

China yuan will rise faster as part of a grand bargain and a US Debt plan is floated

1. China is accelerating the yuan’s appreciation as part of the “grand bargain” to win U.S. support for Beijing to gain a bigger say at the International Monetary Fund, says Goldman Sachs Asset Management’s Jim O’Neill. The yuan will rise faster than the 3 percent traders are betting on in the non-deliverable forwards, according to O’Neill.

2. A presidential commission’s leaders proposed a $3.8 trillion deficit-cutting plan that would cut Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction.

    The co-chairmen of the panel appointed by President Barack Obama suggested reducing Social Security spending by raising the retirement age to 68 in about 2050 and 69 in about 2075. The plan also would slow the rate at which benefits grow. The savings would come between 2012 and 2020.

    Income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent.

    Wiping out all tax breaks, including the home mortgage deduction, while lowering rates would save $100 billion a year, Bowles said. Members of the panel could decide to keep some tax breaks by offering offsetting cuts, he said.

    Bowles said about three-fourths of the savings would come from spending cuts with the remainder from tax increases.

    Discretionary spending cuts in the plan include reducing congressional and White House budgets by 15 percent, freezing federal salaries and cutting the federal workforce by 10 percent. The discretionary reductions of $1.4 trillion would be split equally between defense and domestic programs, Bowles said.

    “The cuts really will happen on both sides of that firewall,” he said.

    The plan would cut the deficit to 2.2 percent of gross domestic product by 2015, from the current 9 percent, exceeding Obama’s goal. It would also reduce debt to 60 percent of GDP by 2024. (Interpolation. The deficit needs to be reduced to zero, or if possible, a true surplus should be generated to start paying down the debt)

This plan is considered a starting point for deficit reduction. The full panel, which includes presidential appointees and members of Congress from both sides of the aisle, is expected to release its official findings by Dec. 1. But it’s just that–a panel. Whatever the commission reports to Congress, it will be up to lawmakers to take action. And that may be later rather than sooner, given the political gridlock that’s expected to characterize the next two years.

 

[Edward Campbell]

This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, resonates with me because, while I accept the articles assertion that the depth of the problem in the UK and USA is worse than in Canada, I believe that we too have ”a large population of uneducated, perpetually unemployed” people who need to be nudged off their comfortable perch:

http://www.theglobeandmail.com/news/world/europe/tearing-apart-the-british-welfare-state/article1795942/

Tearing apart the British welfare state

DOUG SAUNDERS
LONDON— From Friday's Globe and Mail
Published Thursday, Nov. 11, 2010

Almost a century after the modern welfare state was created by Liberal prime minister David Lloyd George, his successors in Britain’s Conservative-Liberal coalition government are hoping to tear it apart completely in a radical act of cost slashing.

In a huge and risky experiment sure to be watched closely by other countries wrestling with public debt, government budget deficits and shrinking work forces, Prime Minister David Cameron’s government Thursday announced sweeping plans to change the lives of 5 million people dependent on government payments in an effort to push hundreds of thousands of people into the work force.

In a week when Britain’s deficit-slashing efforts led to the country’s first acts of rioting (after university tuition fee increases were announced), and after France was paralyzed for weeks for a raise in its retirement age, Mr. Cameron risked even more discord with plans to force all welfare and unemployment recipients to seek work, even unpaid volunteer work, or to risk losing their payments.

The proposals will also unify more than 30 social safety net programs into a single “universal credit,” a move that was welcomed by many observers on the left. And through a “work program,” whose name evokes Britain’s Victorian efforts at reform, the perpetually dependent would be trained to do jobs, however minimal, or risk losing their cheques.

At its core is a far more controversial effort by the Conservative-led government to push a large population of uneducated, perpetually unemployed Britons – who Conservative Work and Pensions Minister Iain Duncan Smith yesterday called “the workshy” – into the labour force.

An estimated 2 million children – mostly descendents of the old industrial working class – grow up in households in which nobody has ever worked. Britain, more so than almost any other country in the Western world except the United States, suffers from very high levels of poverty and intergenerational welfare dependency, to an extent not seen in other European countries or in Canada.

It is a perpetual source of frustration to conservatives here that even in the midst of a serious recession there remain 450,000 job vacancies, requiring high levels of immigration to be filled, while there are 1.4 million British working-age people on long-term welfare and unemployment insurance.

“We have to solve the wider social problems associated with worklessness,” Mr. Duncan Smith told the House of Commons yesterday. “We have a group of people who have been left behind even in periods of high growth – millions of people in Britain remain detached from the labour market … work is always the best route out of poverty.”

To perform such an act of extreme social engineering during an economic boom would be difficult. In fact Mr. Duncan Smith’s proposals are essentially elaborations of programs introduced by the earlier Labour Party government, but never fully implemented because of the political difficulty of removing, for instance, hundreds of thousands of officially disabled people from social assistance.

There are 5 million people in Britain claiming unemployment benefits – which have a maximum payout of £65.45, or $106, per week – which, together with housing and disability benefits, cost Britain £87-billion plus £3.5-billion in administration costs each year. This has long been a tempting target for cost savings, but governments have tried and failed to make reforms for 30 years.

As a result, Britain spends almost a quarter of its gross domestic product on social assistance, compared with only 16 per cent in Canada. But it nevertheless has one of the lowest rates of social mobility in the Western world, so the payments are not moving people out of poverty.

It is one of those rare issues where all the parties agree changes must be made. But during a steep economic downturn, clawing back billions in benefits could risk jeopardizing the recovery. Every other country that has managed to reform its welfare program – notably the United States under Bill Clinton’s presidency – has done it during boom times.

Critics said this week that Mr. Duncan Smith faces two fundamental problems: First, he is launching a vast welfare-to-work scheme during a period of layoffs, when there are unlikely to be jobs in the deprived regions where people will be losing their benefits.

Second, the root of Britain’s unique welfare-dependency problem is the large number of people classified as “NEETs” – Not in Education, Employment or Training – most of whom dropped out of secondary school at 16. Very few jobs exist for such people, and fixing this would require big expenditures in the education system, at a moment when the government is cutting it back.

Officials at the British Treasury said in briefings that aggressive welfare reforms are being pursued now because they are the one form of cost cutting whose effects are felt quickly. The welfare cuts will start lowering the deficit within five years, or before the next election; Mr. Cameron’s other cuts won’t have an effect for eight to 10 years.

But the change will not be immediate, or cheap. In fact, the changes will cost Britain an extra £2-billion over the next two years, and that does not factor in the cost of an elaborate new computer system that will be needed to unify the programs. Given that most economists do not expect the labour force to grow significantly as a result, and some fear the cuts could trigger a downturn, there is a chance that the whole exercise could end up costing the country more money.

Despite our real and growing wealth in natural resources, our greatest, best resource is an active educated workforce. Every person who can be, fairly, classified as ”uneducated [and] perpetually unemployed” is a real problem, not just an unhappy statistic.

I also believe that the people, themselves, do not want to be ”uneducated [and] perpetually unemployed” although many, thanks to parental and community pressures, may have had little choice in the matter.

 

[gun runner]

They are products of their environments if that is the case. Sad, but true. Ubique.

 

[jhk87]

Despite our real and growing wealth in natural resources, our greatest, best resource is an active educated workforce. Every person who can be, fairly, classified as ”uneducated [and] perpetually unemployed” is a real problem, not just an unhappy statistic.

I also believe that the people, themselves, do not want to be ”uneducated [and] perpetually unemployed” although many, thanks to parental and community pressures, may have had little choice in the matter.

But our real wealth in natural resources must neccesarily decline. The second we take a non-renewable resource out of the ground, it is lost.

 

[a_majoor]

But our real wealth in natural resources must neccesarily decline. The second we take a non-renewable resource out of the ground, it is lost.

What constitutes a valuable resource changes with time (both renewable and non renewable). Up until the mid 1800's, oil was viewed as something of a waste. When whale oil became too rare and expensive, oil suddenly came in great demand. Even in renewables, the sort of wood that is in demand today for pulp and construction is much different than the sorts of wood considered valuable in the past. (In Elizabethan England, the prime use of wood was to create charcoal for heating and industry, once "peak wood" was reached it became more economical to switch to coal). Today copper is being displaced by sand (the raw material for silicon and glass).

The bigger issue for Canada should be how do we get value added out of the raw resources we extract; rather than sell the low value raw materials and pay for value added finished products.

 

[Kirkhill]

The differences between Canada and the typical Third World extractive economy are:

They are usually based on single commodities while Canada has multiple commodities on offer.
They have a poorly educated labour force, often increasing in number while Canada has a highly educated labour force declining in number.

We are Wal Mart.  You don't want shoes.  We have Tshirts.  You don't want Tshirts.  We have mouthwash.
You don't want oil.  We have lumber.  You don't want lumber.  We have wheat.

Canada is the very definition of a diversified economy with the built in advantage that there is very little we MUST buy from outside our borders.  There is a lot of stuff we like that is produced outside the country but not a lot that we MUST have.

We are not subject to the same market pressures as a third world country dependent  on the revenue from a single product like cotton, coffe or oil.

 

[a_majoor]

The Irish bailout is a huge mistake, not only from a moral hazard point of view but also since all the resources have been expended while Portugal, Italy and Spain's problems continue to fester...

http://www.nationalreview.com/exchequer/253982/irish-bailout-world-record

The Irish Bailout a “World Record”
November 28, 2010 7:28 P.M.
By Kevin D. Williamson
Tags: Bailouts, Debt, Deficits, Despair, Europeans, General Shenanigans

That’s gonna sting!

The additional €35bn (£29.8bn) being ploughed into Ireland‘s banks has shocked experts, who have expressed concern that tonight’s bailout would not contain contagion in the eurozone.

Brian Lucey, associate professor of finance at Trinity College Dublin said he was “stunned”, adding: “We’ve already put at least €32bn into them, so that’s going to be €67bn, which is 50% of GNP, that’s a world record”.

He also warned that a new government next year could rip up the deal. “Sovereign governments have a right to effectively do whatever they want,” he said.

The EU authorities had hoped that the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain that this would be achieved.

Ashok Shah, chief investment officer at investment firm London & Capital, said Ireland might now enjoy some “temporary relief”, but that bond investors’ concerns could now switch to Portugal and Spain.

“Portugal is already in the borderline, it will have to be rescued soon, maybe within a matter of weeks. The market will also focus on Spain. It will remain very volatile.”

A bigger-than-expected bailout for Ireland — does anybody expect Portugal or Spain (or Italy) to do any better? And what if it’s not just the PIIGS?

Years ago, a fellow calling himself Gekko wrote a column for National Review, called “Random Walk.” He predicted that the euro would be inherently unstable, because the economies it covers are so different from one another. I suspect Gekko is starting to feel vindicated, and I hope he has invested accordingly.

Prediction: The fiscal imbalances about to be worked out, probably violently, in the markets and budget committees will change our lives more than Islamic terrorism has or will.

The European disease is headed to these shores. As Michael Barone points out today, California, Illinois, New Jersey, and possibly New York are headed toward insolvency. Once you look at the crisis in public-employee pensions, twenty or thirty U.S. states may be headed for insolvency. We may end up in a situation in which 35 states are looking to the other 15 to bail them out. And when the house of cards starts to tumble, it will happen faster than anybody expects. Texas isn’t going to be able to carry the Union by itself.

I am surprised to find myself writing so many agreeable words about Erskine Bowles lately, but the former Clinton man hit it right upside the head with this one:

“The markets will come. They will be swift and they will be severe and this country will never be the same.”

On the other hand, once politicians are cut off from the endless stream of free money that has made being in government so much fun for the past couple of generations, maybe they will make less trouble. I find that possibility inspiring.

Less inspiring is this from Mark Zandy of Moody’s:

It may seem odd given all this, but I’m optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn’t good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult – for context we spend more than $100 billion a year in Iraq and Afghanistan – but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

What part of “unacceptable” is eluding Mr. Zandy, I wonder? That’s how Nancy Pelosi described the bipartisan proposal around which he believes a consensus may be forming. The Democrats are standing by her, the unions are howling, and President Obama is showing no signs of getting behind the chairmen of the deficit commission he appointed.

There will be reform. It may come from Republicans, over the protests of Pelosi, Reid, et al. I think more likely it will come from the bond-market vigilantes, and that it will be “swift and severe, and this country will never be the same.”

But, hey, everybody ran up their credit cards last Friday, and it some alternate universe that apparently is good news. Don’t worry: You’ll get to pay that Visa bill off in devalued dollars. Merry Christmas, suckers.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

 

[jhk87]

Two points:

1 - The British welfare state is one of the weakest in Europe, and has been since the 1950s. The Thatcherite reforms began with an economy that was far more privatised than say, France. The UK is beset above all by cultural problems -  a paternalisitc civil service and militant labour unions that find it difficult to focus on the ends over the means.

2 - Economies based on resource extraction inevitably run out of them. The UK, for example, had to build much of its first empire at great expense in order to secure resources, and then abandon it because it was fighting the very same people who held the resources. It simply became too expensive.

What constitutes a valuable resource changes with time (both renewable and non renewable). Up until the mid 1800's, oil was viewed as something of a waste. When whale oil became too rare and expensive, oil suddenly came in great demand. Even in renewables, the sort of wood that is in demand today for pulp and construction is much different than the sorts of wood considered valuable in the past. (In Elizabethan England, the prime use of wood was to create charcoal for heating and industry, once "peak wood" was reached it became more economical to switch to coal). Today copper is being displaced by sand (the raw material for silicon and glass).

The bigger issue for Canada should be how do we get value added out of the raw resources we extract; rather than sell the low value raw materials and pay for value added finished products.



Commodity economies never do well over the long term, and we're quickly running out of cheap access to many key commodities that are fuelling global economic growth - with the world population set to peak at about 9 billion with a rising standard of living, we're going to have to work a lot smarter. Our future is with knowledge-based industries, not the same wood-hewing that we have been doing.

 

[Edward Campbell]

...
The bigger issue for Canada should be how do we get value added out of the raw resources we extract; rather than sell the low value raw materials and pay for value added finished products.
...

This is always problematical because, now especially, the resource importers also want to provide the "value added:" components. They are willing (maybe not the best word) to pay top dollar for the resource itself (iron ore, say) but they, just like us, want all the good, steady, well paid, low skill jobs that go with making iron ore into machine tools and auto parts.

This is certainly the case in China where unemployment is already an issue and where jobs are a major part of the ever present 'drive' for the all important social harmony.