Canada's Place in the Global Economy

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Financial Post, is another survey of what went wrong (“the worst betrayal of capitalist principles by people with economic power in the history of capitalism”) and what should we do (“[the Canadian] government will need to correlate their efforts with the U.S. government”):
--------------------
http://www.financialpost.com/news/story.html?id=1133059

Donald Coxe: 'I Have Seen Economy Worse'

David Pett, Financial Post Published: Friday, January 02, 2009

Donald Coxe is a 35-year veteran of the Canadian investment community with experience as an advisor, strategist and money manager.

Mr. Coxe announced this month that he will step down as global portfolio strategist of BMO Financial Group to establish his own independent firm, Coxe Advisors LLC. He maintains his role as portfolio consultant to BMO's Coxe Commodity Strategy Fund and will continue to publish his portfolio strategy journal, Basic Points.

A true "renaissance man," Mr. Coxe is also an historian and lawyer, who has served as an associate editor of National Review magazine in New York, and general counsel for the Canadian Federation of Agriculture.
He has been chief executive of a Canadian investment-counselling firm, a strategist on Wall Street and CEO of Harris Investment Management Inc.

Earlier this year, he received the National Post/StarMine lifetime achievement award for excellence in investment research. He spoke with Financial Post reporter David Pett.

Q Have you ever seen the global economy in worse shape?
A Yes, I have seen the economy in worse shape. I got into this business in 1972 and I can tell you that the economy was in worse shape in 1974 and 1975. The early '80s, when [former U.S. Federal Reserve governor] Paul Volcker had to end the inflation spiral and interest rates got to 20%, was also a very bad time. Those were two scary times, and I am a survivor of both. These days I find myself spending a great deal of time dealing with people who, coming into the business much later than I did, think the only comparison now is with the Great Depression.

Q How is this crisis different from other economic crises in the past?
A One of the reasons it is different is demographics. Back in '74-'75, we had millions of young people coming out of high schools, colleges and universities in the OECD countries looking for jobs and there simply were none. The crisis today is partly because we don't have young people coming out now. Starting in 1971, the birth rate collapsed across the OECD countries and so now we are faced with our first downturn that resembles a Japanese-style situation. Japan had that idiot run-up of real-estate prices in the '80s, and it was bound to be a big collapse because by the mid-'80s they were producing more morticians than obstetricians. That is the state that the OECD finds itself in. Each new generation is 60% the size of the previous generation, so we are not going to get enough new young workers and enough family formations. The idea that real-estate prices will continue to go up is unmitigated idiocy.

Q And the crisis in the early 1980s?
A During the 1981-'82 cycle, interest rates were 20% compared to now where they are zero. Obviously that's a dramatic difference.

Q How did we get here?
A We got here through the worst betrayal of capitalist principles by people with economic power in the history of capitalism. It was a very few people, all men on Wall Street and in London, who stopped being bankers to become promoters of structured products, which were based on bad mathematics. They thought they could sell them to greater fools without an impact to the greater economy. In doing so, they created a financial crisis that was entirely unnecessary. I'm not saying they committed crimes, but as far as I'm concerned, people like Stanley O'Neal, [former CEO of Mer-rill Lynch] and Jimmy Cayne, [former CEO] of Bear Stearns, should not be allowed to have memberships in good clubs hereafter and society should indicate to them that they are pariahs.

Q Is there any silver lining to the current crisis?
A One positive is that it might get rid of the shadow banking system, which worked with these Wall Street malefactors to come up with unrealistic prices for these "Jurassic Park" products that have attacked the whole global financial system.

Q Is the policy response to date the right one to get us back on track?
A This has achieved the impossible. The governments and central banks of the OECD countries are implementing the strategies recommended by the two greatest economists of the 20th century, both of whom didn't agree on anything. What you have are the monetary policies of Milton Friedman blended with budget deficits and pump-priming strategies of John Maynard Keynes. Everything being offered by the great economists is being tried at the same time, therefore, you have to assume we are going to get out of this mess. However, the fact that these two economists disagreed with each other, largely because of the implication of their theories on inflation, leads me to believe that when we get out of this current mess, we are going to be faced with another severe inflation challenge two or three years from now. Of course, we have to get out of this mess first. If you are running away from a bear but potentially running into the path of tigers, you must keep running away from the bear. That said, we are probably going to see some tigers.

Q If you were running the country what would you do?
A I commend the Canadian government on holding back on doing anything drastic because Canada was for a time avoiding the worst of this. But now it appears the real-estate cycle has moved into Canada, bringing with it a meaningful risk to the market. Central Canada is also faced with the possible bankruptcy of the Big Three auto-makers, so government will need to correlate their efforts with the U.S. government. One thing I would not do is assume the commodity industries in Canada are going to be in a recessionary condition forever. They are still the national treasures and if bids are made to take out the oil sands companies while they are depressed on US$40 oil, the government should not let them go because of the knock-down price. There are only a limited number of large world-class assets left in Canada.

Q What's been your leadership role as a well-respected member of the investment community?
A I think it's important for me to help investors keep their perspective. At some point, we switched from saying this is a downturn to the belief that things are worse now than at anytime since the Great Depression. That's a great leap, and I reject the analogy. For example, we had 40% unemployment in the Great Depression. Now it's 7%. So it is neither reasonable, nor sensible to tell people during a downturn like this that it could be the worst thing since the Great Depression. I do believe that it is important to use history, not abuse it.

Q Once the dust settles on the economic crisis, what other challenges lie ahead for us?
A I believe the next big challenge we have to face is the global food crisis. I'm working with the University of Guelph right now and in the spring we are organizing a colloquium, where we bring together scientists and investors to talk about solutions to the food shortage.
-------------------


Mr. Coxe’s comments about the 20% inflation during the disastrous Trudeau/Chrétien turn at the economic wheel are well taken. I remember those days – when people with good credit and good jobs were walking away from their mortgages because inflation – fuelled in part by irresponsible government spending – was out of control.

It is interesting to note that he thinks Harper/Flaherty were, on balance, justified to be cautious and to move slowly in Oct/Nov 08.

It is equally interesting to note that he thinks our resource based economy may see us ‘out early’ from this recession.

 

[Edward Campbell]

Jeffery Simpson has long been a fan of, inter alia, a weak dollar, closer and closer economic, but not political, integration with the USA so, here, in a column reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, he gives us his views on what went wrong in the USA – a shallow analysis with which I, broadly, agree – and what it means for Canada:
--------------------
http://www.theglobeandmail.com/servlet/story/RTGAM.20090105.wcosimp06/BNStory/specialComment/home

Forecast: Our economic fate remains entwined with that of U.S.

JEFFREY SIMPSON

From Tuesday's Globe and Mail
January 6, 2009 at 12:00 AM EST

No one precisely knows how bad the economy will be in Canada in 2009. The forecasters, predictably, do not agree, except that the economy will contract, unemployment will rise and fiscal deficits will again become the order of the day.

Canada's economy is joined at the hip with that of the United States. So consider this, when trying to figure out whether our recession will be short or mild: Since mid-2007, Americans have lost about a quarter of their net worth. That's one-quarter in 18 months!

The best intentions, most uplifting rhetoric, and huge stimulus package presented by Barack Obama after he takes office on Jan. 20 will not easily or quickly fill that loss of net income.

Where did the lost income go? Americans are homeowners. Their government encourages them to buy homes, with such policies as mortgage-interest and property-tax deductibility. And in the years of easy money, low interest rates and a glut of savings coming from offshore, housing ownership grew, as everyone assumed (wrongly) that prices would continue to soar.

So the biggest loss to Americans came in the value of their homes as the housing bubble collapsed - from $13-trillion in early 2007 to $8-trillion today. Retirement income fell. So did savings and investment income of almost all kinds. Pension funds dropped. The total household loss is in the range of $8-trillion.

That's the cost for households. On the government side, the Bush administration fought two wars while cutting taxes, let spending rip and, not surprisingly (the laws of arithmetic being what they are), ran eight consecutive years of deficits, thereby driving up U.S. government debt. And that was before the economic tsunami of 2008, the first stimulus package and the one now being crafted by Mr. Obama.

If that package is as large as reports suggest, it would drive the U.S. federal deficit well above $1-trillion, or into the range of about 7.5 per cent of GNP. And since the U.S. banking system is damaged, and consumers are highly indebted anyway, that deficit, like the previous ones, will have to be financed offshore, largely in Asia and specifically in China, which is already holding $2-trillion of foreign exchange reserves, the largest being U.S. dollars.

The downdraft in household net income is producing a consumer recession. For many years, other countries coasted to greater prosperity on the buoyant spending habits of U.S. consumers, who borrowed heavily, as did the federal government. Now that engine has gone into idle in some areas, and into reverse in others. And that means trouble for Canada, a country highly dependent on the U.S. market in most industries from commodities to manufacturing to services.

Americans, in general, won't be buying or travelling as much. When (if?) they get disposable income, many people with debt loads will try to reduce them. There has already been a pulling in of the horns by consumers, and by state governments that must balance their budgets but cannot with expenditures now running ahead of depressed revenues.

To put this another way, a massive, long-term and unbelievably costly recapitalization of the United States - its financing institutions, taxpayers, businesses and governments - will be required before the country's economic engine can fully restart. The debts are so large, the government's investment (read nationalization in another context) in the financial sector so huge, the deficits so great, and the lost household income so striking and painful, it will take years - how many must remain obviously unknown - for the recapitalization to be over and the country restored to some semblance of balance.

It was Canada's fate to be so closely tied to the U.S. economy that the country's economic space was North American while its political space remained Canada, a happy conjuncture with a buoyant U.S. economy. For much of that time, we covered weak productivity and competitiveness with a low dollar. But its rise, courtesy of oil and other commodities, exposed all the things we had not done.

As the U.S. economy got sicker, with debts rising and an unwillingness to face economic realities blinding consumers and the Bush administration - until the collapse occurred - Canada's fate was to be dragged along and, therefore, down by the American recession.
--------------------


There is some room for dispute within Simpson’s analysis. Some (many?) economists believe that Americans will spend when they get some disposable income, despite the fact that they should try to reduce their debt loads. The urge to spend and a concomitant reluctance to save seems, to some, ingrained in the 21st century American psyche.

Predictably Simpson gets in a bit of Bush bashing – despite the fact that several administrations and congresses and the punditry, going back 20+ years, must share the blame for the current crisis.

Simpson is right about one big thing: we, Canada – citizen, politicians and the chattering classes, ignored our woefully low productivity for too long. That has to change.

 

[Rifleman62]

I agree with you. Canada's reported woefully low productivity has been acknowledged and ignored for far too long. And where is our low productivity centered? Name a type of association that contributes to that low productivity.  I believe, as I have stated before, that the 1965 Canada/US Auto Pact is in trouble with the Democrates controlling the USA. Possible even NATA, which the saving grace for Canada is the POL requirements. I am sure most people have seen yesterdays US auto sales reports. Low productivity, extremely high labour costs, and US (Democrate) protectionism will kill Canadian auto manufacturing. As a taxpayer, I do not want billions loaned/forgivable loan/incentive given to the Detroit Three (formally known as the Big Three) and a deficit racked up. I am not a Financier or a Economist. Just a taxpayer. Hopefully whoever is in charge will do the best for Canada even if it means a whole lot of pain for some, but somehow I doubt it. Waiting for Bombardier to wallow up as the government is passing out financing.
A sovereign nations currency should be close to face value. It really bugs me to hear calls to undervalue the Canadian dollar to support manufacturing and exports to the USA. Our exports to the USA are, I believe, sitting at 82%, down from 86%.

 

[a_majoor]

Contemplate this, and as yourself how Canada can survive the inflationary pressures that trillion dollar deficits will bring. (It also pays to remember how Paul Volcker crushed inflation in the early 1980s at the beginning of the Reagan Administration). Stagflation at the end of the 1970's and 20% interest rates in the early 1980's were no fun; 2012-2014 will be interesting years:

http://internetscofflaw.com/2009/01/07/obama-trillion-dollar-deficits-for-years-to-come/

Obama: trillion-dollar deficits for years to come

Argh:

    Obama said Tuesday the deficit appears on track to hit $1 trillion soon. Speaking to reporters after meeting with top economic aides, Obama said: “Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on.”

    He wants Congress to approve a stimulus plan of about $775 billion.

    The federal deficit was about $455 billion when the last fiscal year ended on Sept. 30, 2008.

(Via Instapundit.)

So Obama plans to double the deficit his first year in office, and leave it there for years to come.  We’ve tried all four combinations in recent years, and it seems the only way to get fiscal sanity is with a Democratic President and a Republican Congress.  Well, let’s get right on that.

POSTSCRIPT: I may not have actually written it here, so let me write it now. The stimulus plan will not work.  Why?  Because Keynesianism is just plain wrong today.  Keynesianism applies in the extremely rare circumstance that there should be deflation, but wages fail to fall.  Arguably, this applied during the Great Depression, which is what Keynes was trying to explain.  It does not apply today, nor will it ever apply with a remotely competent central bank.  Obama’s stimulus package will not stimulate anything; it’s just a trillion-dollar boondoggle.  But, the economy will probably recover anyway, and the stimulus will probably be given the credit.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post web site, is an article giving several of Canada’s top economists’ view on the state of the economy in 2009:
----------------------
http://www.financialpost.com/news/story.html?id=1152395

How the top economists view the economy

Jacqueline Thorpe, Financial Post

Published: Wednesday, January 07, 2009

The Economic Club of Toronto held its annual outlook conference Wednesday with top economists of Canada's big five banks. Here are some of the highlights:

Don Drummond, chief economist Toronto-Dominion Bank, on Canada

Forecast: Sees 1.5% real GDP drop for 2009; a $12-billion to $14-billion federal fiscal stimulus package

Looking through the wreckage: "We have longer term infrastructure needs. We couldn't meaningfully dump $10-billion or $20-billion of additional infrastructure into an economy that was operating the way Canada was in 2006 or 2007. We saw Alberta tried to do that and it just created massive capital good price inflation, massive labour market shortages. You can actually do a fair bit of that into this economy in 2009 and 2010. That's an opportunity to advance some of these long term plans."

Warren Jestin, chief economist Bank of Nova Scotia, on the international outlook

Forecast: Sees all major economies declining in 2009 and emerging economies and asset markets weakening in a "remarkable synchronicity."

Looking through the wreckage: "The investments that are going to go into alternative technologies are simply going to be absolutely massive, trillions and trillions of dollars."

Also, "The global economy is ageing very rapidly and that suggests big changes in consumer preferences and big changes in how you offer services -- less high risk vacations and more longer term vacations... When you put those three things together, the new [emerging market] economy, the ageing of the economy and the greening of the economy you really have a set of profound opportunities for businesses to try and inject in those areas."

Avery Shenfeld, senior economist at CIBC World Markets on the markets

Forecast: Sees S&P/TSX at 11,000 by year-end, a tidy gain from Wednesday's level around 9,000 but well off the peak around 15,000.

Looking through the wreckage: Unless the United States is heading for another depression or Japan-like lost decade, history suggests the stock market will start to recover well ahead of the economy. If the U.S. economy is to recovering towards the end of 2009, the equity market should start to recover soon. "That said you don't get all your money back in a hurry." While the government bond market was top dog for investors last year, the "value is now in better [corporate] credits."

Sherry Cooper, chief economist, BMO Capital Markets, on the United States

Forecast: Sees 3% peak-to-trough GDP decline overall for the U.S. and the worst recession in the post-WWII period; four-million jobs lost; first decline in annual CPI since 1955; sub-1% core rate.

Looking through the wreckage: "Ultimately the growth drivers for the economy in the next decade will be the consumers in countries like China and India. That's a very positive thing but it means as well, that not only should the policies that encourage borrowing-led spending in the United States be changed but also that the development of a consumer borrowing market in China and India will be very important, as well as wage increases and improvements in their residential real estate markets."

Craig Wright, chief economist, Royal Bank of Canada, on currencies

Forecast: The loonie will continue be volatile, heading to a softer US80¢ level towards year-end as oil settles around US$50 a barrel before creeping up to US$60 next year. Ontario economy to contract 1.4% in 2009 after a 0.2% decline in 2008

Hard to see through the wreckage for Ontario: "We're looking at two back-to-back annual declines in the Ontario economy and that's something we haven't seen since the early 1990s."
--------------------


I agree with Don Drummond that now is the time to invest in infrastructure project – but only those that are ready to go. Too much long term ‘stimulus’ will come too late to aid a recovery and will, instead, just create an inflationary problem that will force the Bank of Canada to raise rates and, thereby, tighten credit again.

I agree with Sherry Cooper that we have to look to Asia for our financial future and that Americans may be our 'saviors' by driving themselves (dangerously) even further into debt to raise up the Chinese/Indian middle classes.

 

[GAP]

I agree with Sherry Cooper that we have to look to Asia for our financial future and that Americans may be our 'saviors' by driving themselves (dangerously) even further into debt to raise up the Chinese/Indian middle classes.

I don't see how this helps......is it a larger potential consumer market they are trying to create?

 

[Edward Campbell]

There is a huge trade imbalance right now: the USA, especially, and Europe, Australia, Canada, Japan, etc send cash to China and China send stuff to them. The Chinese need to keep sending stuff but not just to Europe and America. The Chinese need their own, growing middle class to save less and buy more, more Chinese made goods.

When, rather than if, China and India buy more it will be, mainly of their own stuff made, in many cases, with Canadian resources.

I'm not sure how this helps the USA and, to the extent that it does not spur US growth, it does not help us, either. But I suspect the gains made by sending Canadian resources to Asia will offset losses (or stagnation) in the American market - which, also, still needs our resources. But it is, broadly, not good news, for Ontario's manufacturing base which must get a lot more productive - and that's NOT a trade union problem - a lot faster. Management and politicians, not workers, hold the keys to productivity; for the last 60+ years both have been to frightened and lazy to use those keys to unlock our productivity.

 

[Edward Campbell]

Further to How top economists view the economy,  here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is more on the “top economists’” prognostications:
--------------------
http://business.theglobeandmail.com/servlet/story/RTGAM.20090107.weconomists0107/BNStory/Business/home

Economists' advice to Flaherty: cut taxes now

DAVID PARKINSON

From Thursday's Globe and Mail
January 7, 2009 at 12:15 PM EST

TORONTO — Canada's top private-sector economists have a message for Jim Flaherty as the federal Finance Minister prepares his critical recession-fighting budget: Cut taxes now, rein in spending later.

At the Economic Club of Canada's annual outlook roundtable, economists from the country's five biggest banks called on Mr. Flaherty to make tax cuts and well-focused infrastructure spending the centerpieces of his Jan. 27 budget, and to resist futile bailouts for dying industries.

They also called on the Bank of Canada to continue cutting its interest rates to lend further stimulus to the struggling economy and credit markets.

And they stressed that any personal tax cut - something Mr. Flaherty has already hinted could be in the budget - needs to be permanent if it's going to be effective, and needs to be offset in future years by reining in government spending.

"I would hope that if we do get a tax cut, it's not just temporary," said Don Drummond, chief economist at Toronto-Dominion Bank.

He argued that temporary tax cuts only serve to move forward consumers' purchases that they would have eventually made anyway, without fuelling any lasting increase in spending habits.

"It just shifts around the timing of purchases, and doesn't accomplish anything."

He also noted that in last year's temporary personal tax cut in the United States, consumers only spent about 20 per cent of their tax-cut cheques, and about half of that was spent on imported goods. "So, they got 10 cents on the dollar" from the fiscal stimulus.

Mr. Drummond and others added that tax cuts now would have to be balanced in 2010 and beyond by a tightening of program spending, which throughout this decade has consistently grown faster than inflation and the economy.

"We do have to see these permanent tax cuts - that's really the only thing that will influence behaviour in the economy," agreed Craig Wright, chief economist at Royal Bank of Canada. "But in the out years, when we hope and think the economy will be in a recovery mode, then you can rein in program spending, because that's something that has been running quite rapidly."

The economists also said infrastructure stimulus should be aimed at projects that could be instituted rapidly, rather than large new initiatives that would be unlikely to get off the ground this year. And they said the spending should focus on projects that would serve the long-term interests of the Canadian economy, such as long-overdue upgrades of existing structures and expansion of public transit.

"Obviously, we don't want to have a program of digging holes and filling them in again," said Avery Shenfeld, senior economist at CIBC World Markets Inc. "We want to make sure that the assets that are left behind are ones that Canadians need."

Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., warned the government against throwing good money after bad at specific struggling industries.

"The thing I would least like to see is subsidization of declining industries. We've gone down that road before; it doesn't work."

The economists also believe the Bank of Canada's benchmark policy rate will have to decline further from its current level of 1.50 per cent over the next few months. Mr. Shenfeld predicted the Bank of Canada won't go to essentially zero, as the U.S. Federal Reserve has done, but could cut as low as 0.50 per cent before it is done.

BMO Nesbitt Burns issued a forecast update yesterday in which it, too, lowered its Bank of Canada rate forecast to a floor of 0.50 per cent by March. Bank of Nova Scotia also expects the rate to bottom at 0.50 per cent, while TD and Royal Bank are still calling for the central bank to only cut as low as 1.00 per cent.
--------------------

This is, in my opinion all good advice – lower taxes, permanently; spend on immediate infrastructure projects; don’t prop up failing industries; and reduce programme spending later. But, we must remember, that when Canadians look at programme spending to reign in the defence budget is always in their sights; it’s a big, slow moving, easy target. The government, however, ought not to contain spending on the backs of the military again. We did that in the ‘70s, ‘80s, ‘90s and into this decade; now is the time for the defence budget to grow.

 

[Jed]

So would it not be wise for the government to invest heavily in all sorts of infrastructure and equipment assets for the Canadian Forces and to concentrate on Dom Ops and recriuting Engrs in a very big way for sustainable long term value?

 

[Edward Campbell]

So would it not be wise for the government to invest heavily in all sorts of infrastructure and equipment assets for the Canadian Forces and to concentrate on Dom Ops and recriuting Engrs in a very big way for sustainable long term value?

Only partially; DND's infrastructure (Airfields, Armouries, Bases/Training Areas, Dockyards, etc) all have been neglected - some as badly as bridges and overpasses in some provinces. Upgrading that infrastructure, where projects are approved and just awaiting funding, makes good sense.

The defence capital budget needs to grow and grow and grow some more, year-after-year and, indeed, decade-after-decade. Many military experts contend that 'capital' (new/replacement ships, tanks, guns, aircraft, etc) should account for 20-25% of a nation's defence budget - leaving 75% to 80% to be split between personnel (salaries, personnel support services, payments to wounded soldiers, etc) and operations and maintenance (bullets and beans and spare parts and training and 'routine' (domestic) operations. I'm too lazy to go look right now but I recall that, not too long ago, 50% of the budget went to personnel costs leaving capital and O&M to contend for the other half. Capital was nowhere near 20% just a few months ago.

Domestic operations do not require any focus; they are, always done as well as possible and immediately, whenever necessary. The resources required for a well rounded combat force will, always, produce whatever is needed for any domestic operation.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is a column in which Jeffrey Simpson indulges in some quite unjustified nationalistic back slapping:
--------------------
http://www.theglobeandmail.com/servlet/story/RTGAM.20090108.wcosimp09/BNStory/National/columnists

Their deficit, our perspective

JEFFREY SIMPSON

From Friday's Globe and Mail
January 9, 2009 at 12:00 AM EST

Close your eyes. Assume that, in just over two weeks, Prime Minister Stephen Harper's budget warns that the country faces deficits of around $100-billion "for years to come."

It would be a nightmare scenario for Canada. Deficits at that level would eclipse by far what Canada experienced at its worst deficit years in the late 1980s and early 1990s. It would mean deficits much higher as a share of national income than in those years.

We all should remember or learn what those deficits that stretched from the mid-1970s and ended only in 1995 brought or contributed to Canada: higher taxes, lower government spending, huge interest payments, lower private and public sector investment, stagnating productivity.

Year after year, until the Liberals stopped the deficits in the mid-1990s, governments pledged to dig Canada out of the fiscal hole, only to dig an even deeper hole. Every budget during those years, Liberal and Conservative governments pledged to restrain, reduce and eventually eliminate deficits. They never did.

The $100-billion figure would be the very rough Canadian equivalent to what president-elect Barack Obama is proposing for the United States. Mr. Obama warned Americans this week to get ready for "trillion-dollar deficits for years to come."

What a long way Mr. Obama has come in such a short time. In the dreamy days of summer, and throughout the fall election, he promised much new spending and tax cuts for all but the rich andeventually a balanced budget. Now the dreaminess of his analysis has smashed against an even more dire reality than he could have imagined.

"Change," his favourite word, he now interprets to mean the desire of Americans to curtail deficits at some point - which, of course, is not at all the meaning he gave the word a little while ago.

Think about a trillion-dollar deficit not for a year or two, but for "years to come." At $1-trillion, the deficit would represent about 7 per cent of national income. The deficit could easily be higher, once Mr. Obama's "recovery" package is added to the mix - at which point, the deficit ratio could rise to 7.5 per cent or beyond. And "for years to come."

The world's biggest debtor nation, therefore, is about to become, quite massively, an even bigger debtor nation, with consequences for itself and the whole world.

The dominant country of any era does not remain the dominant country indefinitely on borrowed money. At some point, money talks, in the sense that those with it begin to flex their muscles vis-à-vis those who need it.

We are therefore witnessing, and will continue to witness, a slow relative loss of influence for the United States, the debtor, against those from whom it must borrow. After all, Americans cannot possibly finance these new debts themselves, since they could not even finance the old ones.

Canadians will have a particular perspective on this slow relative loss of influence, since no country is more closely tied to the United States. We have put almost all of our economic and foreign policy eggs into the U.S. basket, thinking very little about Asia.

We might also have a perspective - or at least could offer one, if asked - about the challenges the United States will eventually confront now that the country faces deficits for "years to come."

What Canada learned was that the slaying of deficits involved a mix of higher taxes and reduced spending - and almost nothing else. There were lots of alternative ideas, from an industrial strategy to injecting massive amounts of additional public spending into the economy to slashing taxes. The mix that worked was that of higher taxes (at least for a while) and reduced spending.

Canadians also learned that it was much easier to talk about reducing and then eliminating deficits than actually doing something, which is why the deficits endured for so long. It took considerable political courage and an impending sense of genuine crisis to create the political conditions for action.

It also took a turn in public opinion, because after years of higher taxes and stagnant incomes, people found less money in their pockets and fewer government services, and then became receptive to explanations about what had happened and why.

None of these conditions appears even on the horizon in the United States, a country where the issue of deficits was barely raised during the 20 years of Republican rule when the government ran a deficit every year. The recession has turned everyone into big spenders and deficit financers, which is acceptable for a while but not over the longer term.

As Canadians learned, getting into deficits is easy, even alluring; climbing out of them is difficult. The means Canadians eventually used combined tax increases and spending cuts that almost no American is willing to even contemplate today.
--------------------

As Lorne Gunter said, on an unrelated topic, there is an ”infinite malleability of the Liberal conscience,” which allows for anything a Liberal does being forgotten ”by all other Liberals (and the vast majority of the Parliamentary press gallery), if shoving it down the memory hole is in the best interest of the Liberal party.” Thus Jeffrey Simpson, being one of those who truly believes that the Liberals are the natural governing party because they are not the despised Alberta red necks, is able to consign the truth down the memory hole.

The truth is that there are, normally, two components to a rising government deficit: programme spending that exceeds revenue (taxes) and interest on the debt that must increase steadily until programme spending < revenue.

The truth is that Mulroney/Wilson balanced the programme spending in the mid ‘80s – they cut spending on most things, including, especially, defence, until all government spending on everything except the interest on the national debt was less than the revenue collected in the same year from taxes, customs duties, fees, etc.

The truth is that Mulroney understood exactly how to balance the whole budget by making all Canadians share in the pain. But, on a damp spring day in 2004 he met a lady named Solange Denis, who said, roughly, keep your hands off our pensions (and, by implication, other social programmes like Medicare) or, come the next election “it’s goodbye Charlie Brown.” Mulroney was shaken to his boots and the plans to cut the ‘social spending envelope’ were shelved.

The truth is that Chrétien/Martin were equally terrified of the voters in traditional Liberal strongholds like Québec and Atlantic Canada that are deeply attached to federal government social programmes.

The truth is that Chrétien/Martin decided that only a select few Canadians – those living in AB, BC and ON and those involved in national defence – should bear the burden of reducing the residual deficit created by interest payments on the national debt.

But, Simpson is right in saying:

”Canadians also learned that it was much easier to talk about reducing and then eliminating deficits than actually doing something, which is why the deficits endured for so long. It took considerable political courage and an impending sense of genuine crisis to create the political conditions for action.

It also took a turn in public opinion, because after years of higher taxes and stagnant incomes, people found less money in their pockets and fewer government services, and then became receptive to explanations about what had happened and why.”

And I suspect Simpson is close to the mark when he says:

”None of these conditions appears even on the horizon in the United States, a country where the issue of deficits was barely raised during the 20 years of Republican rule when the government ran a deficit every year. The recession has turned everyone into big spenders and deficit financers, which is acceptable for a while but not over the longer term.

As Canadians learned, getting into deficits is easy, even alluring; climbing out of them is difficult. The means Canadians eventually used combined tax increases and spending cuts that almost no American is willing to even contemplate today.”

Simpson is wedded to the idea that high and even higher taxes are an essential component to a sound economy. In my opinion that is unproven, at best. However: Low and still lower government spending – by smaller, less intrusive governments – is, demonstrably, a good way to avoid large debts and deficits.

Many Canadian social programmes could be privatized: funded, through private sector providers, by user/insurance fees and, for the low income cohorts, direct government payments. I suspect that many social programmes could be provided, in a competitive, market based, environment at lower costs, than is the case today, and with better outcomes (we’re what? 30th in quality of health care) than we now enjoy. 

The only sensible way to lower government spending in Canada is to cut the 'social' envelope. Everything else of substantial size/dollar value, including - especially - national defence, is already at an irreducable minimum level thanks to Chrétien/Martin and Trudeau/Chrétien - who got us into the unnecessary deficit downward spiral in the first place.

 

[a_majoor]

Real deflation: when the bank pays your mortgage:

http://www.barrelstrength.com/2009/01/09/a-truly-wacky-world/

A truly wacky world
January 9, 2009 8:42 am Arran Gold Economics and Finance

The continuing decline in interest rates in UK, the lowest since the Bank of England was formed in 1694, could lead to financial events that were never contemplated.

    Lawyers suggested that if rates dropped further, borrowers could end up having their mortgage paid for them by their bank.

    Eddie Goldsmith, of property law firm Goldsmith Williams, said: “This interest rate cut is bringing lenders and borrowers perilously close to a bloody conflict.

    “Many lenders will never have taken into account the prospect of such a drop in rates and will have their lawyers scurrying back to their offices to look at the small print of their mortgage conditions as the prospect of having to pay their borrowers is to awful to contemplate.”

    The majority of borrowers with a tracker deal pay the bank rate, plus a percentage on top. But some deals available just over a year ago allowed borrowers to pay the bank rate minus a percentage.

    If the bank rate falls much further, these borrowers could be paying negative interest on their mortgage.

In a world where the word “unprecedented” is bandied about recklessly, this is truly unprecedented and mind boggling.  Theoretically the rates can go negative in a deflationary environment, but nobody expected it to be that way in practice.

 

[Edward Campbell]

Former Prime Minister Paul Martin is out flogging his new book. I have not yet read it nor will I get to it until, maybe, late winter, unless my "read soon" stack shrinks a lot, even sooner.

He has been making one important (albeit self serving) point: the G20 Heads of Government (HoG) (president and prime ministers)  need to meet to discuss things like the credit crisis.

Martin claims – and I believe him – that the biggest impediment to a G20 HoG meeting has been US disapproval. The US was enthusiastic about the G20 finance ministers/central bankers meetings but feels/felt that 20 is/was too big for a productive HoG level meeting. I say felt/was because soon, of course, President Bush will host a G20 HoG Meeting in Washington.

In my opinion: There are too many Groups. The G20 is too big but the G8 is both to small and poorly structured.

I think we need a Gn in two parts:

1. The Gn (n=13± but no more than 15) proper consisting of something like: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the United Kingdom and the United States – a mix of the responsible rich and developing countries, large and medium countries and so on; and

2. The Gn steering group consisting of: APEC, the European Union, Mercosur (maybe) and NAFTA.

But the key point Martin makes, and it is a good one, is that the EU and the USA cannot ask China and India to come and help solve the crisis and then shut them out of the world’s most exclusive leaders’ forum.

Maybe I should reconsider my Gn ideas.

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Ottawa Citizen, is a plea for more and better international cooperation by Austral;ian Prime Minister Kevin Rudd:
--------------------
http://www.ottawacitizen.com/opinion/op-ed/must+come+together/1160727/story.html

We must come together


BY KEVIN RUDD, THE OTTAWA CITIZEN

JANUARY 9, 2009


The stabilization of financial markets and stimulation of the global economy will require unprecedented policy co-ordination among the world’s political leaders in 2009. Failure to do this will slow recovery and reduce the aggregate impact of the stimulus packages of individual governments. Worse, fragmented actions could yield incrementally to “beggar my neighbour” policies that run the risk of accelerating rather than ameliorating the crisis.

The International Monetary Fund estimates the global economy needs a fiscal stimulus of at least two per cent, or $1,000 billion (Canadian) in 2009 to ward off the worst effects of the crisis.

Economists acknowledge that much more may be required if shattered confidence sets off a spiral of deleveraging, declining asset values, falling income and rising unemployment.

Some action has been taken by individual governments through both monetary policy and significant fiscal stimulus announcements. The truth is much of this will not be delivered in 2009, but in later years.

Also, some of the fiscal stimulus measures that have been announced are re-announcements and, therefore, unlikely to have any additional effect on growth projections. Individual national measures, meanwhile, will not capture the benefits of co-ordinated international action.

Such benefits are significant. First, there are real and psychological gains. Stimulus measures from one country spill over to its trade partners, creating an additional boost.

Co-ordination is also important to mitigate the volatility in currency and bond markets that can be an unintended consequence of unco-ordinated policies.

Second, co-ordination is an important defence against beggar-my-neighbour policies. We are already beginning to see worrying early forays into protectionism.

The number of anti-dumping cases rose by 40 per cent in the first half of 2008 and there has been a gradual creeping up of tariffs. Even within their World Trade Organization (WTO) commitments, there is scope for countries to raise tariffs.

If all nations put up tariffs to their bound rate (the highest rate consistent with their WTO commitments), exporters from middle- and high-income countries could face tariffs twice as high as current levels. Then there is the remaining challenge of concluding the Doha round of negotiations — where lack of progress represents a continuing failure of global political will.

Third, international co-operation is essential because this crisis has important implications for developing countries.

They did not create it but have been badly damaged by it. The global recession in advanced economies has weakened export opportunities for emerging countries. In addition, the financial crisis has restricted credit flows — with spreads on debt to developing countries having widened significantly.

This means many developing countries will struggle to finance their existing deficits, let alone fund the kind of fiscal rescue packages being contemplated by developed economies. Loans from multilateral development banks to developing countries totalled $34 billion in 2007.

This needs to be significantly increased across the board consistent with the World Bank’s recent decision to quadruple its lending. Aid must be increased, currency swaps need to be extended and the IMF must expand the scope of its short-term liquidity facility.

A fourth reason for co-ordinated action is the unprecedented opportunity the crisis presents to combine shorter-term stimulus requirements to boost growth and employment in 2009 with the longer-term requirement to lift global productivity growth and accelerate the transformation to a lower carbon economy.

The development of a global response to this crisis is a complex task.

The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action — bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short- and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation.

All these measures will require unprecedented co-operation among governments. If we fail, the consequences will be grave.

If we rise to the challenge, not only will we reduce the impact of long-term unemployment, but we will also have begun to fashion a new form of economic governance that the underlying forces of globalization have long been calling forth.

Kevin Rudd is prime minister of Australia.

© Copyright (c) The Ottawa Citizen
--------------------

I have suggested in the past that the G20 is too big to be effective but I take Prime Minister Rudd’s point and so I suggest that a Gn that is, broadly, representative of most of the world’s economies ought to exist.

Here, according to the IMF, are the world’s “Top 49” individual, ‘national’ economies (with Hong Kong thrown in but not counted):
(Read in three columns: Rank, Economy and GDP in $US in 2007)

1   United States 13,807,550
2   Japan 4,381,576
3   Germany 3,320,913
4   China (PRC) 3,280,224
5   United Kingdom 2,804,437
6   France 2,593,779
7   Italy 2,104,666
8   Spain 1,439,983
9   Canada 1,436,086
10 Brazil 1,313,590
11 Russia 1,289,535
12 India 1,100,695
13 Mexico 1,022,816
14 South Korea 969,871
15 Australia 908,990
16 Netherlands 777,241
17 Turkey 659,276
18 Sweden 454,839
19 Belgium 453,283
20 Indonesia 432,944
21 Switzerland 427,074
22 Poland 422,090
23 Norway 389,457
24 Republic of China 383,347
25 Saudi Arabia 381,938
26 Austria 371,219
27 Greece 313,806
28 Denmark 312,046
29 Iran 285,304
30 South Africa 283,071
31 Ireland 261,247
32 Argentina 260,122
33 Finland 246,350
34 Thailand 245,351
35 Venezuela 227,753
36 Portugal 223,447
— Hong Kong 207,171
37 Colombia 202,630
38 United Arab Emirates 190,744
39 Malaysia 186,718
40 Czech Republic 174,999

A G40 is worse than a G20 so I have highlighted, in green the ones I think need to be in a revised Gn – that’s 24 countries, too many for effective ‘management’ of the world’s economy, so I have, further, underlined my choices for members of the (reasonably sized) management team – a new G9.

 

[Infanteer]

UAE, Malaysia and Norway but not China, Germany and Japan?

 

[Edward Campbell]

China is on both lists: in the Gn and the G9. (You may have looked at (24) Republic of China which is in the Gn but not the G9 for fear of annoying the PRC.)

I picked UAE and Malaysia rather than Germany and Japan becaiuse I want my G9 to have regional and size balance.

More important, perhaps, I left Canada OUT of the G9 - Australia and Norway represent the 'middle powers.'

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from yesterday’s Globe and Mail is an optimistic appraisal of our situation:
--------------------
http://www.theglobeandmail.com/servlet/story/RTGAM.20090109.wjobs_cycle10/BNStory/crashandrecovery/home

Cheer up: Canada's in good shape

KONRAD YAKABUSKI

Globe and Mail Update
January 9, 2009 at 8:13 PM EST

MONTREAL — The worst economic crisis of a lifetime? Maybe if you were born in 1992.

Job numbers out Friday – showing a jump in the national unemployment rate to 6.6 per cent – confirm that Canada has followed the United States into a recession. But the odds are that workers here will come through the downturn of 2009 with far fewer scrapes and bruises than they did during the two previous recessions. They'll also – for a change – fare markedly better than their American counterparts.

The Canadian unemployment rate rocketed to 13 per cent in the 1981-82 recession and almost as high in the 1990-91 contraction. In both of those periods, Canada was an economic basket case compared with the United States, where unemployment rates peaked at 10.8 per cent in 1982 and 7.8 per cent in 1992.

So far, almost no economist expects Canada's jobless rate will surpass 8 per cent during this downturn. Most, by far, predict it will peak below that figure. The U.S. unemployment rate, however, could enter double digits.

Even an 8-per-cent jobless rate would have been embraced as practically full employment in the Canada of the '70s or '80s. Yet, Friday's news of 34,000 job losses in December, and a 0.3-percentage-point increase in the unemployment rate, had politicians in conniptions. It's easy to feel pessimistic when president-elect Barack Obama speaks of “a crisis unlike any we have seen in our lifetime,” and the U.S. economist Nouriel (Dr. Doom) Roubini warns that the bubbles “have only begun to burst.” But they're not talking about Canada. This country remains an island of relative tranquillity in a raging global economic sea. Our job market, in particular, faces this tempest with storm shutters firmly affixed.

One of the reasons has to do with demographics. The millions of Canadian baby boomers who reached adulthood in the '70s and '80s overwhelmed the labour market's ability to absorb them. Employers didn't have much of an incentive to hold on to workers during tough times, since they could draw on an overabundant supply of labour to replenish their work force when the economic tide turned.

Not now. The prospect of a looming post-recession labour shortage promises to factor into employers' staffing calculations this time around.

“The whole phenomenon of an aging population will act as a brake on layoffs,” predicts Desjardins Group senior economist Benoit Durocher. “Businesses will think twice before laying people off because it could be more difficult to find employees when the recovery comes.”

Claude Morin, an economic development officer in Quebec's export-dependent Beauce region, agrees, adding that more than a decade of solid growth has left firms with strong balance sheets. Though many of the region's clothing and furniture makers have closed in recent years, most of their workers have found jobs elsewhere in the Beauce.

“Our businesses are well capitalized, which allows them to play for time,” says Mr. Morin of the Conseil économique de Beauce. “Morale is good and no one tells me on my visits that things are bad or catastrophic.”

The relative strength of Canada's job market also stems from having an older work force than the Americans. While youth has certain advantages, they're not apparent during a recession. Layoffs will figure more prominently south of the border.

At the same time, Canada has largely succeeded in eliminating much of the structural unemployment that plagued the economy in the past. Though pockets of chronic joblessness still exist, they're modest compared with the unemployment rates in excess of 20 per cent that used to be common in some regions.

This shows up in Canada's employment rate – the percentage of those over 15 with jobs. It remains historically high, at 63.1 per cent in December, down 0.2 percentage points from November. In 1982, it was 57 per cent.

“There has been two decades of continued out-migration from places that were pools of structural unemployment,” observes Dalhousie University economics professor Lars Osberg. “And Internet job searches didn't exist in [past recessions], so there's a whole new way of matching vacancies with unemployed workers.”

Another measure of Canada's relative economic health lies in the so-called misery index, the combined total of the unemployment and inflation rates. It hovered around an excruciating 25 per cent during the '80s recession and about 20 per cent a decade later. Today, it is well below 10 per cent and likely won't surpass that threshold in this recession.

Monetary and fiscal stimulus are two reasons Royal Bank of Canada is predicting this recession will be shorter than the two previous ones. The bank expects Canada's economy to start growing again in the second quarter of this year, following only two quarters of contraction. As a result, the bank predicts the unemployment rate will peak at 7.4 per cent.

Some economists have been warning of deflation, a phenomenon where expectations of falling prices cause consumers to put off purchases. But with unprecedented liquidity being pumped into the financial system by the Bank of Canada, and the federal government promising a spending package that will make it look like Christmas in January, the longer-term threat is that of upward pressure on prices.

“There are risks in terms of the timing of the [stimulus] initiatives,” warns Paul Ferley, assistant chief economist at Royal Bank of Canada. “If they leave them in place too long, it could very well sow the seeds for an inflation problem.”

U.S. economist James Grant, author of the influential Grant's Interest Rate Observer, has also expressed this concern. Though with doomageddon in vogue, not many people are listening.

As Mr. Grant observed recently: “Frostbite victims tend not to dwell on the summertime perils of heatstroke.”
--------------------

If he’s right we should see “bottom” soon – we may already have seen it in late 2008 – and the long, slow upward climb of recovery should be underway by summer. It will be slow because, being primarily a resource exporter, we must wait for our customers to demand our goods and services but it will be faster than most because our resource exports will benefit from others’ stimulus projects.

 

[Infanteer]

China is on both lists: in the Gn and the G9. (You may have looked at (24) Republic of China which is in the Gn but not the G9 for fear of annoying the PRC.)

Shit - my bad.  I should have looked harder.

I picked UAE and Malaysia rather than Germany and Japan becaiuse I want my G9 to have regional and size balance.

Do Malaya and the UAE have the economic power to make things happen?  Germany and Japan could resent such organizational philosophy, seeing there larger contribution to the Global Economy as being discounted as "represented by PRC and Great Britain".  Is there a potential for failure right there?

 

[Edward Campbell]

...
Do Malaya and the UAE have the economic power to make things happen?  Germany and Japan could resent such organizational philosophy, seeing there larger contribution to the Global Economy as being discounted as "represented by PRC and Great Britain".  Is there a potential for failure right there?

That (excluding Japan and Germany) certainly the big weakness of my list.

It is hard, maybe impossible to kick anyone off any list - Russia ought not to be on anyone's list of much of anything, but ... that means, in practical terms, that any Gn is very likely to be a G20++ if one wants, as I do, to improve the 'balance' of the group (as I do because I think Paul Martin's original list was (is) unbalanced).

A G20++ is too big, even 20 is too large. Thus we need a G9 or G10 that doesn't include Russia but does have room for a few smaller economies from 'regions' beyond North America, North Asia and Western Europe. If we are to make room for Brazil, China and India (as we should) then someone has to come off, but ...

 

[Kirkhill]

So, are we back to the age old problem of determining the size of the oligarchy?  Its life expectancy and its powers?

Monarchy, duarchy (made that one up), triumvirate, tetrarchy, pentarchy, .....heptarchy, eicosarchy?  How about anarchy? 

We are obviously not yet at the point where we are willing to trust our fates to global democracy - due to well established cultural difference.  Therefore there is no basis for an International House of Commons.

There is a basis for an International House of Lords (or Senate if your more classically inclined). There is even a forum for such an institution.

But the problems of the House of Lords are visited on the United Nations.

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

Anything that splits out a representative group from the general population will eventually build an antipathy towards the representative group and everyone will want to have the "privileges" they have.

Isn't it better to adopt the guiding principle of liberal politics (OK Whig if you prefer): "That government is best which governs least" (Thomas Paine)?  And especially given that we are talking about economics here (the realm of the invisible hand)?

Why are we trying to organize a central organizing committee for something that can not and should not be organized?  Let the world's 200 odd sovereign nations make their own experiments as to what will work.  Isn't that what we preach in internal politics?  That while it is possible that one plan may work to the benefit of all it is more likely that one plan will fail to the detriment of all.  Therefore it is better to diversify and let each follow their own path so that failure is not generalized and success generates models for others to follow.

I think picking model states can be at least as hazardous an undertaking as picking model companies.  May be this is one of the times just to let loose the reins internationally while preparing to defend our own nationally preferred model at home.

It is the argument that says that Alberta and Quebec should be allowed to experiment with health care as they see fit.  Failure will cure itself and the whole country won't be affected.  Success will be copied.

 

[Kirkhill]

Just re-reading that I realized it can be interpreted as a call for isolationism.  It isn't meant that way.  I have no problem with establishing bilateral or multilateral co-operatives.  I just don't see any hope of, or need for, getting everybody on the same page.

But on to the reason for this post.

I saw this on realclearpolitics yesterday:

The realclearpolitics tagline was: We Need the Fiscal Equivalent of World War II

The New Republic

Not Doing Enough
by John B. Judis
Why I worry that Obama doesn't realize just how bad things are.
Post Date Friday, January 09, 2009 
 
Does Barack Obama understand the seriousness of the economic crisis? Yesterday, he laid out his economic agenda, and it was filled with all sorts of important exhortations and proscriptions. He appropriately condemned the "anything goes" policies of the last administration. He declared that government is now the solution to our woes, not the problem. Still, I worry that the president elect is underestimating the problem he and the country faces.

We may not simply be facing a steep recession like that of the early 1980s, from which we can extricate ourselves in a year or two, but something resembling the Great Depression of the 1930s. For starters, the current crisis is global, which means that one part of the world can't lift the other out of its misery; everyone will go down together, which is what happened in the 1930s. ....

This prompted two lines of thought.  One was related to hockey sticks and the other related to the New Deal.

First of all the hockey stick.  One of the major challenges the IPCC faced was the Mediaeval Warm period.  With the MW in the record it was very hard to create a convincing case for a crisis.  Without a crisis there was no case for Change.  The same problem that FDR apparently faced in 1936 - things were improving too fast for his liking.  There was less impetus for Change.  The IPCC solution was to glom onto a model that completely ignored the Mediaeval Warm in order to create the impression of crisis.

In the absence of Palm Trees in Alberta (I understand we have snow in Houston) there seems to a bit of difficulty convincing folks that Global Warming is all that it was cracked up to be.  That crisis is fading, especially as people realize there is an economic cost involved.

However, in the problem we find the solution.  We have an economic problem.  All that has to be done is talk up the problem until it becomes a crisis and we can continue with the Change meme.  Like the man with the hammer, it doesn't matter that a nail is a screw. If everything looks like a nail it can be hit with the universal hammer.  All crises can be met with the same Change.

Hence it is not good enough to refer to 1992, or 1980,  or 1973  or even 1873.  We have to make everyone convinced that this is 1932 all over again so that we can retry the corporatist nostrums of Schickelgruber, Mussolini, Stalin and FDR.  We know that  the first three didn't do so well but FDR won the war so he must have been right.  Despite the fact that he did much the same as the others - just under a different flag.

Which brings me to the second line of thought.

World War 2 saved America and the rest of the world.  Fair statement.  Just not in the way the New Dealers usually phrase it.

The solution was not found in Americans selling goods to Americans.  The solution was found in Americans selling goods to the rest of the world.

Initially they sold to all comers, regardless of political affiliation.  Then they sold to Britain in exchange for real estate and gold cash on the barrel head.  Then they sold to Britain on credit. 

Meanwhile Europe and Britain were destroying their industrial capacity and European money was used to build US industrial capacity, ensuring that, after the war the US would be in a position to sell goods to Europe for a very long time (about two decades).  During that time Europe learned to meet their own needs from new factories while the US continued to rely on 1930s (heck 1890s) vintage, manpower intensive plants to meet their market requirements.

Once Europe, and Japan, got back on their feet in the 60s then America failed to respond.  Instead of investing in new plants it simply moved its manpower intensive operations off-shore to continue doing the same thing with cheaper labour. It continued with the same model.  Meanwhile American kids (and Canadians) all decided that the big money was to be made as lawyers, accountants and salesmen and eschewed careers in engineering.  (There is an aphorism in the food industry that the way to make money is to sell air, then water, then sugar, in that order in order to maximize profits.  In the recently departed world of Michael Millkan, Junk Bonds, Derivatives, Hedge Funds and Initial Public Offerings I have grafted "Hot Air" on to the top of that pyramid).

Where am I going with this.  I do hope that the New Dealers realise that the key to their emergence from the depression was not found in them building new bridges for each other.  It was found in them having a very large market into which they could sell things for a period of about 25 years and that the investment necessary to meet the market needs were met from offshore resources - in no small part to British Empire resources.

So when they are calling for a World War 2 prescription, does that include wrecking the economies of their competitors?  Otherwise their solution is no better than me getting my kid to move rocks in the back garden to create a rockery in return for his room and board.  He gets to live under my roof.  I have a nicer looking yard.  But it doesn't do anything to help me put food on the table for him, me or the rest of the family.  We still have to go out and trade services with the rest of the world for that to happen.   And when needs must you take the best deal on offer.