Autonomous Source


November 07, 2007

Down goes the US dollar

Everyone in Canada is talking about the rapid rise of the Loonie (past US$1.10 today!), but the real story is the crashing of the US dollar. Over the past year the Buck has lost over 12% of its value compared to a trade-weighted basket of currencies:

When this change in the dollar value is taken in to account, the S&P 500 has actually lost 3.4% over the past year, and gold has only increased by 16%. Beyond that, the value of all the assets listed on all US balance sheets, both corporate and individual, have been reduced significantly over the last year. If you add in the hit to the foreign holders of US debt, this has probably been the largest destruction of wealth in history. And it's not over yet...

November 06, 2007

More Doom and Gloom -- averted

News of the continuing credit crunch is again hitting front pages. For that reason, the hazy idea of writing another dreary post on my dim understanding of the problem arose in my mind.

I was going to take the position that an open feedback loop between currency-manipulating governments (mostly Asian) and the spineless US Federal Reserve has flooded the world with cash. I was going to display a graph of the US money supply to visually make the case, noting that the Fed had discontinued reporting M3 last year because it made inevitable disaster seem too obvious. Then I was going to argue that since this humongous paper wealth has to be held somewhere, it has surged into the stock markets, the real estate markets, the commodities markets, and the credit markets, creating bubbles in each and causing untold financial destruction. I was going to conclude that the final bubble is yet to burst, and that is the US dollar itself. I was going to put up some graphs generated by this cool US dollar valuation tool at the St Louis Fed to show how it was already happening, and then warn that since the entire world's economy is built on the foundation of the greenback, this is going to be real bad. In the post, I would probably have sprinkled a few links to old posts of mine smugly noting that I had anticipated what was happening a few years ago.

But I'm not going to write that post. I have leaves to rake, a snowblower to try to repair, laundry to do, bills to pay, dishes to wash, and a workshop to clean out. I really shouldn't spend one of the two days a week I have free from my children to write long, dull posts that no one will read. It would be a complete waste of time. And I never waste time. It's just not my way.

If you really do need to read some gloomy economic musings, check out Dollar Daze. I discovered it this morning as I was possessed by a troublesome hazy idea, and I can't say I've ever seen a more interesting economics blog. The archives have terrific primers on the history and the forces involved in the current economic mess.

November 02, 2007

Prepare for more child care hysteria

I don't want to alarm anyone or start a panic, but letters from -- gulp! -- A CORPORATION have been sent to the owners of some private day-care centres:

Form letters, written by Texas businessmen fronting the Canadian expansion, have been arriving in the mailboxes of dozens of private daycare operators asking if they want to be evaluated with a view to selling.

It's all part of a rapid global expansion by Groves' ABC Learning Centres, which last year added about 1,000 U.S. centres to its empire.

"We represent a large financial/child care group purchasing child care centres across Ontario," the letter reads. "Are you ready to see what your business is worth in today's market? The process is simple and all information is confidential ... If the centre meets our criteria we will make you an offer."

Dozens of letters! Imagine!

Oh, what the heck, let's panic:

These developments threaten a sea change from the child care environment we now know in Canada. Multi-national child care uses economies of scale and corporate integration of services to open the floodgates to commercial care across Canada. (link)


"Basing the care and education of our children on the corporate model where the greatest return for shareholders, increasing profit margins and global expansion is the rule of the corporation will hurt children and families," said Bird. "We have a clear message today. Canada's children are not for sale."

"It's a Wal-Martization of daycare in Canada," said Liberal critic Ruby Dhalla. (link)


Salma Malik, from Dalhousie Parents Day Care, was alarmed to hear about the poor quality and the high costs of child care for parents in Australia. "Parent fees have risen by 123 per cent in Australia over the past fifteen years. I can't imagine how full-fee families could afford these kinds of increases and think the province should ensure that parents are not left to the mercy of corporate giants jacking up parent fees to increase their profit margins," asserted Malik. (link)


“Foreign ownership of Canadian child care will kill the dream of a pan-Canadian child care system,” says Jody Dallaire, chairperson of the Child Care Advocacy Association of Canada. “Our children and families deserve quality, accessible, community-based child care not some gigantic off-shore warehouse operation.” (link)

A quick pass through most of the Union sites that are responsible for these dire quotes would leave you with the impression that once ABC has a tiny foothold here, their tentacles will quickly stretch across the country, strangling all competition and leaving no other possible options for parents looking for childcare. Big box daycares will stand next to freeway interchanges, where parents will use an efficient drive-through system to deposit their bar-coded, jump-suit wearing children onto conveyor belts leading to their pens. The media will no doubt report these fearful predictions with little skepticism and will completely overlook the self-interest the unions have in making them. They are greatly invested in creating a vast government run bureaucracy with no place for private operators. Why else -- after years of complaining about the lack of childcare spaces -- did they petition Dalton McGuinty today to (among other things):
- Immediately introduce a moratorium on any further licensing of child care programs;
I complained about Eddy Groves and ABC a couple of years ago:
Eddy Groves is not an 'entrepreneur' in the sense that he developed a useful product or service, he just saw that the government was prepared to firehose money in a certain direction and he positioned himself to get a good soaking. He's a corporate welfare beneficiary.
Still true, but I'd rather his company here, continually having to meet government standards and the expectations and needs of the parents, rather than a monolithic, inefficient, union-run 'early-learning' system.

UPDATE: Now that I think about it, perhaps ABC has some inside information that McGuinty is planning to turn on a childcare firehose in Ontario. Watching the corporations and the unions fighting over the money should be a good show.

Cross-posted (a first!) at the Broom. Darcey is planning a big box domination of the Canadian blogosphere. Resistance is useless!

October 27, 2007

More insight from Jeffrey Simpson

Jeffrey Simpson has once again focused his keen mind on the Canadian political scene and revealed another completely obvious fact:

The GST cut is the triumph of base politics over sensible economics.

When the Harperites sat down to craft their last campaign document, they observed that the Liberals had in fact cut personal income taxes, but the public had not seen or appreciated those cuts. In fact, polls demonstrated that Canadians didn't even know their taxes had been reduced.

So the Harperites decided to give Canadians a tax cut they could see, feel and therefore appreciate at voting time; namely a reduction in the GST, whose creation by the Mulroney government had been attended with much political controversy.

Gosh. Politically motivated policy. Those Conservatives -- sorry, Harperites -- sure are devious.

In his zeal to roast those Harperites, Simpson makes a nice little logical error:

Lower consumption taxes stimulate more - wait for it - consumption, some of which leaks out of the economy in the form of purchasing imports and taking trips abroad.
A lower GST encourages leaving the country to shop?

Simpson argues that if there's a choice, it's better to focus on income and corporate taxes rather than the sales tax -- which may be true, but so what? Any tax cut is better than more taxes. Let's look at what he would have us do:

A sensible government - or sensible opposition parties - would not only scrap the forthcoming reduction but reinstitute the previously cut point, and then add another. The result would be about $15-billion additional dollars for the federal government.

Then, the government should follow the lead of Canada's best finance minister, Carole Taylor of British Columbia, who intends to levy a carbon tax to slow down the increase of greenhouse gas emissions and then reverse them.

I've heard there is a group known in some circles as the Dionistas who are woefully lacking in policy ideas. Perhaps they will be interested in Mr Simpson's wisdom.

October 26, 2007

On the other hand...

I've praised Flaherty's laissez-faire attitude towards the dollar discrepancy issue because it's the right approach. Change happens when people demand better; it's not up to the government.

And things are starting to change. The Collected Works bookstore in Ottawa is allowing their customers to pay the US price on items with both prices marked (hat tip: Kateland). I've never been there, but I'll have to take a look the next time I'm in the area. is now showing prices in line with their American parent. Companies that have been slow to adapt (like Chapters) have been deluged with complaints. Meetings are being held, buyers are being harangued, and slowly, slowly, more progress will happen.

But the government shouldn't be smug about this. Government is the main reason people in Canada pay more than Americans, and why we will continue to pay more, even after the currency fluctuations have been accounted for.

The Conservatives still stand by the policy of 'supply management' for many agricultural products -- controlling supply by allowing only so many 'rights' to produce, while preventing any imports -- which has the effect of driving prices up considerably. The ironic thing is that the supposed 'reason' for this scheme is to maintain a vibrant agricultural sector. But what it does is decrease new investment and innovation, block new entrants to the business, and lower yields and consumer consumption.

Government standards on many products effectively prevent imports or allow them only through licensed middlemen. A couple of days ago I read the story of a man who found all the appliances for his new house in the US at half the price of what they were selling for here. He thought he had a great deal: his warranties would still be honoured and after paying the duty he would still be far ahead. But then he was informed that because these new appliances were not CSA approved, he would not qualify for house insurance -- even though they were exactly the same make as what he could buy in Canada! I was never a fan on the EU merging their currencies, but I did think it was smart that they merged their various standards on all products, painful as it no doubt was. These standards often operate as de facto trade barriers, while offering governments indignant deniability. "Lower our standards? Would you risk the lives of your children to save a few dollars?"

The government also prevents competition in alcoholic products. Living near the border with Ontario, I have the luxury of choosing from two expensive and unresponsive monopolies (neither of which will carry Laphroaig) but other Canadians aren't that lucky. And in many other markets, such as mobile phones and banking, the government restricts the foreign competitors that would force the incumbants to lower prices.

But probably the biggest reason Canadians pay more is just the border. It takes a long time to cross, a long time to cross back, and long waiting periods before you can bring back anything that would make the trip worthwhile. If Flaherty really wants to see Canadian retailers get competitive, work to make the border crossings more streamlined, and eliminate all those restrictions on foreign purchases. Canadian businesses could adapt or die.

There's about as much chance of that happening as Elizabeth May becoming Prime Minister. In fact, I'll bet that the next 'mini-budget' to come out will offer compensation to those poor Canadian businesses that are losing money to customers going to the States. And you can expect border hassles to actually increase. That's how this country works; the consumer is the least important part of the economy.

October 24, 2007

Who could possibly think something like this could work?

If Mr. Flaherty is serious about stopping consumer gouging, spurring capital investment and attaining more balance in global markets, then he'll need much more than jawboning. He'll have to regulate retail margins to stop the current exchange-rate rip-off
The answer? Jim Stanford, economist with the Canadian Auto Workers union, who helpfully (though needlessly) points out:
I am a socialist
No kidding. Imagine a government department trying to monitor each transaction between two parties to determine if it is 'fair'. Imagine them trying to determine the 'real cost' of the simplest item while accounting for all the special discounts, extra services, and incentives that accompany many sales. Trying to create a 'carbon budget' would be simpler...

It's a real shame that the Globe and Mail has fallen to such low standards in who they let write for them. It's almost like they have no standards at all, really...

Okay, let me seriously answer Stanford's argument. The rising Canadian dollar has invisibly raised the prices on all goods and services in the country. Stanford believes that it's pointless to ask the evil, bloodsucking corporations to lower their prices, as Jim Flaherty has done, because, well... they're evil, bloodsucking corporations that only care about draining your pockets. That price rise is theirs, and they're going to keep it, and there's nothing any of you can do about it. [insert evil laugh here]

While I don't think they're evil, I do agree that companies would like to extract as much margin as they can in each transaction. That's the nature of business, and I think it's a good thing. But... those companies have competition. Consumers have choice, and they can look at price, and they can send a message to businesses that continue to overcharge. They don't have to shop there, and businesses that don't react to the changing currency situation will start to earn a bad reputation that will be very difficult to erase.

Of course, consumers will only be able to send this message if they're aware of what's happened themselves. There's been some grumbling for a little while, but the story hadn't made it into the mainstream. But Flaherty has now done that. What Stanford doesn't understand (beyond everything about economics) is that Flaherty was speaking to the consumers, not the retailers. He reminded them of their power and their role in the economy. People are talking about this issue. They will now be reevaluating their brand loyalties, and smart businesses will act quickly, as Walmart is already doing:

In a press release, the company said it has been negotiating with suppliers for more than a year to have wholesale prices better reflect the strengthening Canadian dollar.

"Canadians are not satisfied, Wal-Mart Canada is not satisfied, and negotiations continue," Mario Pilozzi, Wal-Mart Canada's president and CEO, said in the release.

"We are the agent for our customers, and will continue to work proactively with suppliers to negotiate lower prices. We are committed to turning our negotiations into many pleasant surprises for our customers between now and the New Year."

Leftists constantly want to take individual responsibilities away from people. I don't think it's really because they want the power for themselves -- though it is a nice bonus-- but because they think individuals are incapable of properly making decisions and are helpless at spurring change. Usually the powers they seek are minor, though they are numerous -- as the term 'creeping socialism' implies. But giving government the power to monitor and control consumer transactions would impose a totalitarian system almost instantly.

October 22, 2007

Canada's retailers are helpless

I'm sure everybody has noticed that the prices Canadians pay for most goods are still significantly higher than what Americans pay. People are getting annoyed, and are starting to complain to the retailers. The federal Finance Minister is encouraging them, apparently because he holds some laughable belief in the power of markets and something called the supply/demand curve. But the retailers aren't buying this nonsense. They've come out to set the record straight.

They can't do anything. It's not their fault:

Diane Brisebois, president of the Retail Council of Canada, which represents 40,000 stores, said Monday her group called for the meeting to explain how prices are set.

"Although we appreciate that the minister wants to get involved, his so-called crusade is misdirected," Brisebois said, noting Flaherty should put pressure on the manufacturers to lower prices in Canada.

Brisebois said manufacturers are continuing to mark up prices in Canada by 20 to 50 per cent, and therefore retailers have little savings to pass on to the customer.

"The minister needs to put pressure on that community as he has done to retail," she said.

"He's not talked about the publishing industry; he's talked about booksellers. Well booksellers don't set the price. The publishing industry, the magazine industry, the car manufacturing industry — those are not retailers. Retailers are given a certain price, they have a markup and they sell the merchandise.

Isn't it crazy that a government minister could think that a group of only 40,000 retailers would have the leverage with their suppliers to get the same prices as the suppliers' other customers? Obviously, only the government could do that. This is Canada, after all.

October 08, 2007

A very, very, very good idea

Glenn Reynolds just tosses this out:

I think that everyone should pay at least some tax, and it should vary each year with how much the government spends, and should be enough to give people an incentive to care.
Possibly this might break the strange mind-block that many people have about government spending. It's not the government's money they're throwing around. It's your money! If something like this was in place, people might not be quite so enthusiastic about all the spending announcements the politicians make -- especially around election time. The would know that they will really be paying for these targeted boondoggles come tax time.

A law that would reduce the incentives for politicians to overspend would be miraculous. But what party would be foolish enough to propose such a thing?

October 02, 2007

Ontario's Health Care System

My exciting new priority didn't get much attention yesterday as my children were home from school sick, and I experienced an unnatural and almost forgotten urge to feed my blog. And now, here I am again: blogging. But at least this does have a little something to do with my new priority. More information later.

This video is almost cruelly manipulative, but it makes an important point about the strange priorities of our political class. It's called 'Two Women'. I won't say any more about it; but watch it -- especially if you will be voting in the upcoming Ontario election. And tell your friends.

I want to make it clear that I have nothing against Susan, the second of the two women. From her point of view, she needed something, lobbied to get it, and was successful. But the politicians -- if they are going to manage all our health care needs -- have to be effective in making in choices in how to use the limited resources available to meet those needs. And this short film makes it clear that they are not effective.

The resources will always be limited for health care. There will always be some form of rationing. But can it ever be done in a fair way?

August 08, 2007

China talks tough to hide a weak hand

China is apparently threatening to dump their massive holding of US dollars if Congress gets too aggressive with trade tariffs:

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

The unfortunate thing is that China and the US have a unhealthy codependent relationship. The US is addicted to the cheap money the Chinese have been providing, which allows interest rates to stay low and keep the economy moving. And China is dependent on the US to soak up all the crap they produce so they can keep their people working and avoid social unrest. It's a situation that can't go on forever, and perhaps the cracks are finally beginning to show.

But economic crises are caused not by changing economic conditions, but by the rate of change of those conditions. Markets generally adapt to change very well, but too much too fast will cause enormous disruptions that unpredictable effects. Both the tariffs proposed by the US and the dumping of dollars by the Chinese will rebound to their own countries and cause a lot of economic devastation.

The fact that the two countries are still making threats to each other in public tells me they're still a long way from cooperating in disentangling themselves from this mess they're in. Personally, I think it's far too late to do anything anyway, especially with the debt crisis growing in the US. It's likely the rhetoric will get more heated as the two nations seek to blame each other for the inevitable pain as they break free of their codependency the hard way.

August 06, 2007

Both sides happy. 'It's deplorable!'

Most sensible people would rather have a root canal than go to a Celine Dion concert. So if a sensible person found themselves in the possession of free tickets, they -- being sensible -- would do well to sell them to some of those strange, non-sensible people that enjoy suffering. But apparently this is some kind of moral faux pas:

Dion performed at the Bell Centre for patients, volunteers and staff of Ste. Justine Hospital. Tickets were free for about 1,000 patients and their families, 4,500 staff and 500 doctors, Ste. Justine spokeswoman Chantal Huot said.

But just days before the show, some tickets were being offered for as much as $200 a pair on popular online classified websites.

"I really think that's just deplorable," Huot said. "Some employees saw the ads and got in touch with management. They thought it was horrible."

What's the problem? Some people seeking to preserve their sanity freely traded the tickets to others who had obviously lost theirs. If the tickets were intended as a 'reward' to the hospital staff, well, what could be more rewarding than a bit of money?

Perhaps the outrage is directed at the ticket sellers for taking cruel advantage of those poor addled souls that actually want to be trapped in a room with Celine Dion. Yes, that must be it; nothing else makes sense.

July 29, 2007

The hissing is getting louder

Steven Pearlstein's column in the Washington Post (bypass registration through Google) has the most succinct description of what's beginning to happen in the world financial markets:

The turmoil we're witnessing in global financial markets is nothing less than the popping of an enormous credit bubble that built up over the past five years, artificially inflating the market prices of stocks, bonds and real estate. It created a bonanza for Wall Street investment houses and private-equity funds and fueled the longest and strongest period of global economic growth in modern history.

The only question now is whether the bubble will deflate slowly enough to allow an orderly repricing of those assets, or whether a broad loss of confidence by investors will create a vicious cycle in which selling begets more selling, markets freeze up for lack of buyers, and a credit crunch ensues.


A credit bubble develops when there's too much money to lend and too few places to lend it. A world capital glut has been created by the impending retirement of the baby-boom generation and the globalization of finance, which has made the savings of billions of people in developing countries available for investment overseas.

It would be comforting to believe that the availability of all this money precipitated a deterioration of lending standards in only a few credit markets, such as subprime mortgages. But in an efficient global financial market in which money flows toward the best return, it is more likely that loosey-goosey lending anywhere is a symptom of loosey-goosey lending everywhere. If so, it's likely that this credit correction has only just begun.

The source of the credit bubble is the long-running habit of Asian governments -- particularly China and Japan -- to buy up American dollars on the foreign exchange market in order to keep their currencies low and their exports strong. Those trillions of dollars had to go somewhere, and they went back to America to be loaned to anyone with a pulse and a desire to live in a half-million dollar house.

Because the goal of those governments wasn't to get decent returns but simply to stash their growing pile of cash, lending standards fell, and many companies and individuals that shouldn't have been loaned money got it anyways. And -- surprise, surprise! -- some of them are finding it hard to meet their payments. A certain amount of defaults are to be expected, but they are starting to reach the point where some of the larger financial edifices can no longer hold together because of these weaknesses. What happens next is anyone's guess.

June 27, 2007

Price controls cause shortages

Example #2379:

Zimbabwe's government announced sweeping price cuts in a bid to curb inflation Tuesday and said it set up a unit drawn from all its security agencies to enforce the cuts.

But most businesses -- including gas stations ordered to reduce the price of scarce fuel by more than two-thirds -- ignored the government's directive. There were no reports of security agents arresting business managers on the first day of the ordered cuts.

Far from cutting prices, retailers have been struggling to keep up with the falling value of the Zimbabwean dollar, in some cases curtailing their hours of business to give employees time to put new, higher prices on goods.

Industry Minister Obert Mpofu announced price cuts of up to two-thirds on a range of basic goods and services, from commuter transportation to bread, sugar, meat, milk, corn meal and even newspapers, state radio reported Tuesday.

The result?
On Tuesday, shops in central Harare seemed to be defying the new directive. Instead of cutting prices, some supermarkets simply emptied their shelves of goods such as sugar, salt, flour cooking oil, beef and fuel that would be subject to the order.

"We have been instructed by management to remove some of the products from the shelves for now," an assistant at a leading chain store said as shoppers scrambled to buy bathing soap.

At another store there were long queues as people stocked up, saying they feared basic goods would now be in even shorter supply.

Zimbabwe's government must be among the most incompetent gang of morons ever to rule a country. After years and years of stupid policies that have devastated the economy, still they keep at it -- seemingly thinking that their absolute physical power can change the rules of supply and demand. They seem to have some sort of institutional learning disability.

June 11, 2007

The 'devastating urge to do good'

Recently, Bono and Bob Geldof wagged their fingers at Canada for our government's unwillingness to hand over the money they're demanding. But if you listen to Kenyan economist James Shikwati, more big checks and aid handouts are the last thing Africa needs:

SPIEGEL: Even in a country like Kenya, people are starving to death each year. Someone has got to help them.

Shikwati: But it has to be the Kenyans themselves who help these people. When there's a drought in a region of Kenya, our corrupt politicians reflexively cry out for more help. This call then reaches the United Nations World Food Program -- which is a massive agency of apparatchiks who are in the absurd situation of, on the one hand, being dedicated to the fight against hunger while, on the other hand, being faced with unemployment were hunger actually eliminated. It's only natural that they willingly accept the plea for more help. And it's not uncommon that they demand a little more money than the respective African government originally requested. They then forward that request to their headquarters, and before long, several thousands tons of corn are shipped to Africa ...

SPIEGEL: ... corn that predominantly comes from highly-subsidized European and American farmers ...

Shikwati: ... and at some point, this corn ends up in the harbor of Mombasa. A portion of the corn often goes directly into the hands of unsrupulous politicians who then pass it on to their own tribe to boost their next election campaign. Another portion of the shipment ends up on the black market where the corn is dumped at extremely low prices. Local farmers may as well put down their hoes right away; no one can compete with the UN's World Food Program. And because the farmers go under in the face of this pressure, Kenya would have no reserves to draw on if there actually were a famine next year. It's a simple but fatal cycle.

Obviously, it's a complex issue. No one wants to turn their back on suffering. But clearly it isn't money alone that will get Africa on the path to modernity. Africa needs reliable banks, dependable currencies, and honest government and law enforcement. Without them, people seen no reason to try to better their lives because the fruits of their labours will be stolen/inflated/taxed away. But since we can't stick those foundations of prosperity in a container and put them on a boat, and because any attempt to provide those services would be met by deafening cries of "Colonialism!" from the usual suspects, perhaps a bit of tough love, as Shikwati suggests, is in order.

(via Instapundit)

June 02, 2007

Price controls cause shortages

Example #2378...

Political analyst Rosendo Fraga said Argentina's energy woes date to a 2002 economic crisis, when regulators froze rates for home utility bills just after the peso devalued more than 70 percent against the dollar. Since then, far less revenue has been available for upgrading and building plants and other infrastructure.

"A lack of investment in the energy system, in great part generated by the freeze on utility rates, has created a situation which soon or later could explode," Fraga said.

Many factories went idle this week when distributors shut off or reduced gas supplies to give priority to homes. Government regulators also ordered an 800-megawatt electricity cut nationwide for four hours Wednesday night, which led to sporadic blackouts in the capital.

At a shampoo and detergent factory in suburban Buenos Aires, executive Alberto Rodriguez said workers had to race to meet production goals after one outage.

"The lights went out for several hours," Rodriguez said. "To a greater or smaller extent, we are all suffering from a lack of energy and gas."

It's much worse in the People's Republic of Hugo though...

March 20, 2007

Budget burnout

On the subject of budgets:

I hate, hate, hate Budget Days and Budgets, and conversations about Budget Day and conversations about Budgets, from the depths of my soul. I find the details of tax law deeply depressing and complicated, not least deeply depressing because [it's] so damn complicated. Plus everyone on regular TV drones on about it all for hour after hour, while saying (because knowing) extremely little, like cricket commentators when it is raining only not funny or interesting.
The 'cricket' comment should give you a clue that the writer is not talking about Flaherty's latest cash distribution plan, but a similar document that is going to be released in the UK. But it still applies.

I'm pretty disappointed that the Conservatives have taken a page from Paul Martin and used our own money to buy us gifts and wrap them up in neat little packages, but I'm not surprised. Minority governments have backbones like overcooked spaghetti and must accomodate any special interest group just to remain standing. But it could be worse. Stephane Dion is upset because Flaherty only used one firehose to spray us with cash, not two:

Child care? Nothing, and we have requested a lot for that," said Dion.

Aboriginals? Nothing or almost nothing. This is a shame. And the fight against poverty is not there. The competitiveness of the country, the capacity to invest in research and skills? Nothing. The environment? Only compensation for the cuts they did last year.

It'll only be after the Conservatives get a majority that there'll be any real change in this kind of wasteful spending. Maybe. Hopefully. Well, there's a small chance...

Didn't I say I wasn't going to write about politics any more? I wonder what happened with that...

March 15, 2007

Economic Doom Update

The first tremors in the housing market earthquake have been felt, but as I've mentioned before, this is a big mess and it's going to cause more than just a couple of down days on Wall Street.

The Washington Post had a good article yesterday on the depth of the economic foolishness that led to this state:

Today's pop quiz involves some potentially exciting new products that mortgage bankers have come up with to make homeownership a reality for cash-strapped first-time buyers.

Here goes: Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets."

In fact, these innovative products are now so commonplace, they have been the driving force in the boom in the housing industry at least since 2005. They are a big reason why homeownership has increased from 65 percent of households to a record 69 percent. They help explain why outstanding mortgage debt has increased by $9.5 trillion in the past four years. And they are, unquestionably, a big factor behind the incredible run-up in home prices.

Now they are also a major reason the subprime mortgage market is melting down, why 1.5 million Americans may lose their homes to foreclosure and why hundreds of thousands of homes could be dumped on an already glutted market. They also represent a huge cloud hanging over Wall Street investment houses, which packaged and sold these mortgages to investors around the world.

Read the whole thing. It almost makes the dot-com insanity look respectable in comparison.

January 09, 2007

The Financial Post's War on Environmentalism

Personally, I'm a skeptic when it comes to fight against global warming. I have my reasons, which I have yet to detail on this blog -- because I'm generally very wary of the subject. Everyone I know seems to be a passionate believer in it, and the party I belong to has embraced it and is taking advice from the most vocal crusaders for it. It's the great motherhood issue of our time, and I feel that I would ruffle too many feathers if I said my piece.

The Financial Post Comment page (part of the National Post) does not have a similar fear. Almost every day for the past few weeks, there has been a story kicking holes in the theory or examining the true costs of Kyoto. Obviously, the editors are in the pockets of Big Oil. Still, as a member of the small cohort of heretics still left, I appreciate seeing arguments being made about the issue when many people would just like to declare global warming -- and its solution -- to be beyond debate.

Today's piece, Climate action would be suicidal, pulls no punches and is a fun read:

Even if one were one to agree that the scientific case for potentially catastrophic man-made climate change was closed, which it is not, there would still be three unavoidable facts about the pretensions of climate policy. Each of these facts is assiduously avoided by fans of draconian action. The first is that Canada could not meet its obligations under the Kyoto Accord without decimating the economy. The second is that if it were to achieve this suicidal goal, the impact on global climate would be zero. Finally, even if all the signatories to Kyoto were to meet their targets (which they won't), the impact on global temperatures would be minimal. Kyoto was just one draconian step towards a much more draconian future.
Read the whole thing.

December 03, 2006

Who will get the last word?

A trivial post at Andrew Coyne's blog simply announcing who won the leadership convention has morphed into a rock 'em-sock 'em debate over the validity of the greenhouse effect. There's over a hundred comments so far, and yet there has been no agreement. Imagine that! Some well reasoned arguments have been advanced by both sides, but they've been mixed with lots of nasty ad hominum stuff as well. Which makes it so fun to read.

UPDATE: Now what to do about Afghanistan is being debated. I'm glad these guys are working so hard to clear these issues up.

October 30, 2006

Crime Story

One of the uglier effects of the insane housing markets of the past few years has been an increase in all kinds of real estate fraud. CNN Money has the detailed story of a con-man by the name of Matthew Cox who roams the US under multiple aliases taking advantage of desperate sellers with his crooked schemes. It's obvious the guy is total scum, but you can be sure there's a movie waiting to be made after they finally catch him.

September 25, 2006

Doom da doom-doom

It's been a while since I last linked to some juicy foretellings of economic doom. I'll correct that now. Bill Fleckenstein quotes economic analyst Robert Campbell:

"I always figured the deflation of the housing bubble would resemble a slow train wreck, but there is new evidence that makes me think the correction may occur more rapidly. This is because there is compelling evidence that a recession is dead ahead. … Now that housing prices are going sideways to down -- and incomes and jobs are still sagging -- this 'debt-fueled' artificial-life-support system for continued consumer spending (and an expanding U.S. economy) is running out of gas.

"In the long run, housing prices cannot continue compounding faster than incomes. We are now facing this economic reality. People cannot continue buying homes with creative, voodoo mortgage-loan financing -- that, in the end -- they can't afford. I don't know who has been more irresponsible, real estate agents, mortgage lenders, borrowers, or banking regulators -- but I do know that the lending standards for mortgage borrowing have dropped to a zero setting for the past five years. If people weren't in prison or earned more than the minimum wage, money essentially was free to all -- whether they could ever hope to pay it back or not."

Continuing on, he says: "The United States has experienced the greatest real estate boom in history, but the boom is now turning into a bust, and the aftermath is not going to be pretty. Present American folklore has it that a real estate decline does not have to affect the economy. That's like saying that it will rain, but you're not going to get wet.

"The coming recession is not only going to dispel that hope, but it's going to speed up the fall. … The sad fact is that we're living in a debt-fueled economy, as opposed to an income-fueled economy. Housing prices cannot continue to compound faster than incomes forever. This incredible rise in prices has been driven by artificial demand (ultra-low interest rates and ultra-loose credit), as opposed to real demand (rising incomes and rents)."

He concludes: "Loose mortgage loans that prolonged the boom will worsen the bust. Homebuyers are now going to pay the price for their 'buy now, worry later' spending spree. … With market manias, self-feeding greed on the way up turns into self-feeding fear on the way down. That time is near."

Repent, borrowers! The end is nigh!

September 02, 2006

Bubble, bubble

Back during the late-90's stock market boom, I read Robert Shiller's book Irrational Exuberance, which showed how share prices had become insane and a crash was around the corner. It didn't take a genius to see this, but Shiller's book was still worth reading because besides just making a strong economic case, he also discussed the psychological factors that made it happen.

His latest book is Irrational Exuberance: Second Edition, in which he uses the same techniques to look at the housing market. I haven't read it, because the graph showing the economic argument is about all I need to know:

Larger version. From Nouriel Roubini's blog, which has much, much more info.

I would qualify Shiller's graph by noting that there is probably a 'quality' factor in the rise in price of homes. People at least 'feel' richer, and have been buying bigger and bigger homes over the years (which are more valuable). But that in no way accounts for the doubling of prices in less than ten years.

Housing prices in the US have hit their zenith and have nowhere to go but down. In fact, even though the last batch of housing numbers in the US showed a miniscule increase in housing prices year-over-year, prices may actually be falling.Many economists and commentators have begun to point out that housing prices are inflated to an unknown degree by seller concessions: rebates on closing costs, swimming pools, new kitchen countertops, luxury trips once a year for life and other goodies detailed in a recent New York Times article. These and other expensive sweeteners are now par for the course as desperate sellers try anything to move their houses.

There are plenty of reasons this occurs. First and foremost is that the homebuilding and home-selling industry depends on the perception that housing is a no-lose investment in order to continue hawking its wares. Agents, of course, get paid based on selling price, so you can be darn sure they'd rather see under-the-table concessions than straight price drops.When it becomes common knowledge that prices are falling, buying will slow down even further as more potential buyers decide to 'wait until things settle'. Then the economy-wide pain starts.

The bursting of the bubble has started to happen in Canada too. Anecdotally, I've seen plenty of properties in my area offering 'reduced prices' on homes. But we're still mostly in the 'denial' phase. The next few years are going to be rough.

July 28, 2006


A story by Jacquelene Thorpe in today's National Post suggests that the US housing bubble may finally be about to pop:

"The slowdown in house price inflation has been extraordinarily rapid," Gabrielle Stein, chief international economist at Lombard Street Research said in a report this week.

"Unlikely though it seems, the latest data ... mean that falling house prices can no longer be ruled out. And if they do fall, then any thought of an orderly slowdown in the housing market must go out of the window. To be joined by hopes of consumer spending holding up in coming quarters."

Jan Hatzius, chief U.S. economist at Goldman Sachs, said in a report prices could decline for the first time on record in 2007 on a nominal basis -- that is, unadjusted for inflation.

With credit starting to tighten, and record inventories everywhere, the crash in the real estate market will be severe. It's going to have huge effects on consumer spending, employment, finance, and the general way people look at the future. And it's not a question of if it's going to happen, but when...

Check out the Housing Bubble Blog for more portents of doom.

June 23, 2006

Net Neutrality: dangerous nonsense

Few things annoy me as much as preachy celebrities working for a cause. Whether it's Paul McCartney looking weepy over a baby seal, Pamela Anderson fretting about chickens, or George Clooney shilling for poor John Kerry, I'm much less likely to support a cause if some overpaid nitwit endorses it than if they stuck to what they're good at. I mean, why should I listen to them for advice?

So when I saw the picture of Moby on the front of this week's Ottawa Citizen 'Tech' section -- photographed from below, looking defiant and staring into the distance -- I knew what he was advocating would be complete horseshit. And it is -- it's 'net neutrality'.

The central premise behind this new cause célèbre is: Boy, isn't the internet getting busy? Seems like everyone is downloading videos and game demos and music. Maybe we could run out of bandwidth! And then what would happen? Maybe the ISPs could start charging the big content providers to give them priority! They have that technology! And that would destroy all the little content providers, leaving the world at the mercy of... (No! Say it's not true!)... Big Business.

Think I'm exaggerating? Check out this terrible vision of the internet to come from an article in the New Republic titled (very neutrally) 'The Bush administration prepares to wreck the Internet':

Imagine you were choosing whether to buy a book from or Barnes and Noble's website, and you knew that Amazon's site would load much faster, allowing you to scan books and sample their content much more easily. Or imagine that's streaming video came up instantly and's balked. Or that loaded quickly while the site of a contentious political magazine was plagued by delays. That is what your Internet experience could be like if Congress doesn't require the big cable and telephone companies that control access to the Web to observe what is called "net neutrality."
Reality check. There is no bandwidth shortage. So much fibre was laid down by the (now bankrupt) telco startups during the dot-com boom that there is still a glut of long distance transport. And new WDM (wave division multiplexing) technologies allow more traffic on a single piece of fibre than was ever imagined before. And on the routing side, routers are cheaper, more powerful, and more reliable than ever. Because of the way internet traffic is distributed, if there are any areas of congestion they can be quickly relieved by added new hardware.

Secondly, no one is doing this now -- or at least no one is doing it in the way the fantasists in the above article are suggesting. They want to legislate against an abuse that is only hypothetical! But in so doing, they will destroy many benefits that tiered internet traffic might bring.

Internet providers are being squeezed by competition. Most markets in the US and Canada are served by many ISPs, so consumers have a choice in where to invest their high-speed dollars. It would be foolish if the ISPs didn't look at both sides of their traffic to try to generate revenue. Who might pay for a guaranteed speed on the delivery of their data? Companies providing subscription financial information would. For example, Bloomberg receives a great deal of money from financial services companies for their data. In delivering this data, milliseconds count. As well, a company that provides video conferencing services needs a guaranteed level of service to keep their customers happy. They don't want to lose connections when the newest Paris Hilton video becomes available. New business oportunities become possible with tiered service. A multinational company might exchange their global telephone network with a Voice over IP (VoIP) system -- but only if they could count on their IP service remaining consistent.

The net neutrality people want all bits to be the same. Seriously, that's the legislative goal of these deluded folks. They want it to be against the law for an ISP to prioritize data. But all bits aren't the same. Some are more important than others and people are willing to pay to ensure that they get there on time. And you know what? The big spenders will wind up subsidizing the regular users. Internet access will be cheaper because of the premiums paid by these 'elite' data streams. Imagine the effect of a law that made first class airline travel illegal -- say, because it's 'not fair' and the airlines might fill the planes with first class seats only. Would it improve prices and service? I doubt it.

The internet has grown to be the absurdly wonderful thing it is because of competition and the minimal intrusion of government. Strangling the companies that provide this service (and very cheaply, I might add) to ration an unlimited and man-made resource to prevent a hypothetical abuse is ridiculous. Even worse though, is that it will prevent IP services we can't even imagine yet from being developed. Equal rights for bits is possibly the dumbest cause the left has come up with yet.

UPDATE: Reason has more on the silliness of this cause.

June 07, 2006

Al Gore: the false messiah

I'm briefly coming out of hibernation to note a strong rebuttal to Al Gore's apocalyptic propaganda movie, An Inconvenient Truth. Today's Financial Post has a piece by Tom Harris that cuts through Gore's one-sided perspective and backs it up with quotes from climate experts. But it appears facts will always lose a battle with ominous music, flashy visuals, and a persuasive voice.

Peter Foster has an accompanying piece that looks at the impact this movie is having and the abandonment of reason Gore's followers have taken:

Mr. Gore claims that climate change is, above all, a moral problem, but any search for scientific truth that starts with a moral conviction is severely hampered, if not fatally flawed.

Part of Mr. Gore's rhetoric is to compare his own moral crusade with others, such as the fight against fascism, or the struggles to end slavery or give women the vote. He regards himself as the environment's Ghandi, Mandela or Martin Luther King. In fact, beneath its glib exterior, Mr. Gore's message contains a great threat to personal freedom and prosperity.

In many ways Mr. Gore's crusade is reminiscent of that launched by Marx and Engels in the middle of the 19th century. As they trekked the grim streets of the cotton towns and pored through statistics in the British Museum, they were looking for proof of what they already knew: that capitalism was an evil system based on exploitation and impoverishment, and that the solution was revolution and collectivization. They died before their revolutions came to pass. Students of history can see the results.

Al Gore's crusade is basically against the same enemy. Like Marx, he is driven by a messianic self-image. Like Marx, he is potentially a dangerous man, particularly if he should run again in 2008. Meanwhile, perhaps the most frightening reaction to his film is that it has drawn little but praise.

Okay. Back to sleep... (Comments are still disabled.)

February 01, 2006

The Maestro makes his getaway

So Easy Al has ended his tenure leaving the house of cards still standing. I'm impressed, really, I thought it would collapse during his watch. He's managed to get out in time and leave his successor, Ben Bernanke, to take the blame when the great teetering structure comes crashing down.

I've written about what I believe are the problems in the world economy before, so I'm not going to repeat them again, but it's important to understand Greenspan's role in it. Bill Fleckenstein tells how he sees things:

Alan Greenspan gave a speech last year titled "Economic Flexibility." It should have been called "Damn, I'm Good," because the world's biggest serial bubble blower -- and most incompetent, irresponsible Fed chairman of all time -- tried to rewrite history. This column will endeavor to set the record straight.
Read the whole thing.

And Stefan Karlsson is not a big fan either:

[A]part from inflation and economic imbalances, the defining characteristic of the Greenspan Fed has been its dishonesty. We have already seen how Greenspan claimed to have mimicked gold standard conditions. Moreover, instead of admitting how he was responsible for the tech stock bubble through the creation of moral hazard and suppression of interest rates, he blamed the bubble on "irrational exuberance." And instead of admitting his role in creating the housing bubble, he denied that there was such a bubble. Later, when he admitted that the housing bubble was real, he spoke out against it as if he had nothing to do with having created it in the first place.
This week will see a great wash of articles and retrospectives tripping over each other to lavish the most praise on Greenspan. Hopefully I've given you a reason to be a bit skeptical.

UPDATE: The New York Sun also has a timely editorial on his legacy that's well worth a look.

July 29, 2005


I don't care for them, myself. And they don't like me. Recently we decided to simplify our banking by changing my wife's account at CIBC into a joint account. We went in and I filled out numerous forms and signed and initialed on the appropriate dotted lines. Our new checks arrived and... I was listed as:

Hmmm. I went in to their office a month ago to straighten this out, and wrote my name as clearly as I could in block letters on a piece of paper. It would terrible to make a mistake again, said the pleasant woman from the evil corporation that nickels and dimes us to death. The new checks listed me as:
I was too angry to call them again, so my wife did it. Now the bank knows me as:
Maybe I should just get my name legally changed to match the checks.

June 22, 2005

Fear this

One of the side-effects of the various international trade imbalances has been the huge pots of foreign reserve cash held by various governments. This money has been sent out to look for work, and has found it providing financing for real estate deals. This has resulted in rapid increases in property values all over the world that make the dot-com crash look mild by comparison. The Economist explores where things stand and what might (will) go wrong:

Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.


UPDATE: Bill Fleckenstein blames Greenspan. I don't think he's to blame for the root causes, but he ignored the problem (and even cheered it on!) so if someone is to be blamed, he's the best candidate.

June 17, 2005

Economic speculative fiction

This month's Atlantic has an good article on the financial house of cards the US has become. The trade deficit, lack of savings, federal budget deficit, and the housing bubble all have consequences that so far have been delayed but one day will cause an economic earthquake. (I've written a brief summary of the problem here.) But instead of writing a dreary litany of statistics to make his case, James Fallows writes his piece as a briefing for the likely winner of the 2016 Presidential election and summarizes the events of the past ten years.

One of the problems in discussing this situation is that while it's easy to show that something is wrong, it's hard to imagine how the collapse will come, because no one wants it. It's in no one's best interest to push over the first domino that will start the process rolling. Fallows article is interesting because he creates a plausable scenario and traces the consequences. As a result, he makes the current problems in the US economy seem very immediate.

It all starts in 2008, when Castro dies. In the chaos following the political transition in Cuba, a revolt is started in Venezuela against Chavez, which fails. Chavez blames the US, declares 'economic war', and halts oil sales to America. He also makes a secret deal with China that has the Chinese dismantling its support for the US dollar in exchange for favourable oil deals. After that, everything begins to go pear-shaped. A run on the dollar, oil price spikes, rising interest rates, housing market collapse, foreclosures. Fallows paints a believable picture of another Great Depression.

There's plenty in the article that I would argue against. For example, a US decline in wealth doesn't mean an ascendence of China. In fact, since most economic activity in China is driven by exports to the US, China would suffer enormously by an economic collapse in America. Others have more nitpicks. But it's still a useful read for it's ability to show how high the stakes are on this issue.

February 15, 2005

What car should we get?

My '96 Honda Civic LX is on its deathbed. My thieving insurance company decided after my accident that the car was repairable, and so it was fixed. But all the little things that keep going wrong have convinced us to just let nature take its course. A council has been formed consisting of myself and my wife to determine which vehicle should replace it. Any suggestions? We're looking for value, a bit of cargo space, good gas milage, safety, and reliability. All-wheel drive would be useful, though not essential.

Should we buy used or new? Import or domestic? Green or orange? We need ideas, people. Mama and I are butting heads over this right now and we need calm, sensible voices to take us through this stressful decision. Any clever advice or links to useful pages would be appreciated.

December 09, 2004

Where Kyoto is leading us

Britain is further ahead than Canada when it comes to meeting obligations under the Kyoto treaty. In Canada, all we've done is create a healthy environmental consultancy industry and have bombarded our citizens with earnest public service messages. In Britain they've started making the laws. Here's one poor British citizen on the edge of a breakdown describing one of them:

I tell her about that infamous legal text, and the insane requirements it places on all of us who break our own windows, in our own homes, in the course of a loving affray, and how we are compelled, if we wish to replace that window, to become members of the Society of Window Replacers, called FENSA, provided we can stump up the fee and pass the exam; and if we cannot pass the FENSA exam, how we must go to the council and deposit a plan showing how we propose to replace our own windows, in OUR OWN HOMES, in line with Britain's commitments under the Kyoto protocol on climate change, and having replaced the window how we must then go back to the council and get a COUNCIL APPOINTED WINDOW INSPECTOR to come out and verify that whatever we have done is in line with those international commitments. And is that not mad, ladies and gentlemen, I demand. Is that not the height of insanity?
The height of insanity? Let's not be too quick to judge. We haven't seen what our government will come up with yet.

(via Samizdata)

December 08, 2004

I'm an economic girlie-man

In his speech at the Republican National Convention, Arnold Schwarzenegger said, "To those critics who are so pessimistic about our economy, I say: 'Don't be economic girlie-men!'". But I am, and have been for some time. Optimism is great and is necessary for economic growth, but a willful blindness to reality can make a bad situation much worse. I've been expecting a big shake-up in the global economy, and now think I see the first signs of it's arrival: the steady drift lower of the US dollar.

My reasoning has always been ideological rather than based on some trendy economic theory. I think having governments mucking around in markets is a bad idea. And what's been going on for the last ten years is governments messing around in the foreign exchange and credit markets. Bigtime.

The Asian governments have been soaking up US dollars from the currency markets to keep their currencies low, thus keeping their exporters busy. The policy hasn't really kept Japan out of the doldrums, but it's kept the pedal to the floor in China and boosted places like South Korea and India. All those dollars held by the Asians have gone back to America to be loaned out, creating low interest rates and bottomless credit. This has contributed to a real estate bubble, a negligable savings rate, and a massively indebted population (and government).

Few problems are yet seen in the commonly quoted economic metrics. But because it takes ever increasing amounts of cash to maintain this artificial situation, it will eventually have to end. And when it does, it won't happen gradually. I really don't think a 'soft landing' on this one is possible. The amounts of American bonds held by Asian governments and corporations is a truly staggering, preposterous sum. When the great cash-out starts -- when traders conclude that a significant portion of the Asian governments can no longer keep the game going -- there'll be a rush to the exits. The US dollar will tank hard, and interest rates and inflation will shoot up. And if you don't want to believe the word of an unemployed blogger, take the word of brilliant Morgan Stanley economist Stephen Roach:

Our updated foreign exchange forecast now calls for a sharp depreciation of the dollar over the next six months. Relative to the dollar, we are now forecasting a 1.37 euro and a 95 yen by mid-2005 -- about 15% higher than our previous forecast and levels that could well put significant further downside pressure on externally-dependent European and Japanese economies. Moreover, given Americas record current account deficit, together with the huge dollar overweight in official foreign exchange reserve portfolios -- close to a 70% share of dollar-denominated assets versus Americas 30% share in world GDP -- the possibility of a flight out of dollars can hardly be ruled out.
He goes on to say that the only thing that will avert this financial earthquake would be a concerted effort by the major economies to increase their amount of intervention in these markets -- which will only delay the eventual reckoning and make it worse.

Stephen Roach works for a big financial services company, so he can't run around in circles flapping his arms in panic. But I can.

The end is nigh! Buy gold! Stock up on canned goods!

(Okay, I'm stretching it a little. But be warned...)

October 28, 2004

Krugman: nuts

Long time readers know I have little patience for Paul Krugman. But I've stopped reading him because all the head-shaking he inspired was making me seasick and my doctor warned me that if I kept rolling my eyes back so forcefully they might stay there.

This psychiatrist thinks Krugman has a few serious issues to deal with.

August 04, 2004

Supply and demand

That's the reason oil has been hitting all time high prices:

According to an analytical estimation by Ministry of Commerce, China's crude oil import will for the first time break through 100 million tons this year to hit a record of 110 million tons, a year-on-year increase of 21 percent. The import of refined oil is to reach 40 million tons, a rise of some 40 percent.
This kind of growth can't last though, sales of cars are slowing down:
Car sales in China are expected to grow by just 20 percent this year after nearly doubling in 2003 to two million units.

May 18, 2004

The Lesson Not Learned, Part IV

Back when I was writing at Moving Target, I would occasionally write about The Lesson, which goes like this:

Economics consists of looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequence of that policy not merely for one group but for all groups.
It's from a fine book by Henry Hazlitt called Economics in One Lesson. Though written in the 50's, the bad government policies he describes and shows the folly of will be familiar to observers today. In the Lesson Not Learned series I write about some examples of government-inspired economic folly.

Today's example comes from France, where the government has finally announced (registration required) that the 35-hour work-week is a failure:

In an interview in yesterday's Le Figaro, the finance minister, Nicolas Sarkozy, said that the 35-hour week had lumbered the state with 10 billion a year in additional social charges and that it had demoralised millions of workers.

"The Socialists made a decision which is not compatible with our responsibilities to Europe," he said. He suggested a system whereby those who wanted to stay on the 35-hour week could do so, but those who wanted to work and earn more had greater latitude.

The idea that preventing people from working more that 35 hours in a week would lower unemployment is based on the lump of work fallacy -- that there is only so much work to do, and so by limiting the amount people work, you better 'share' that fixed amount of work. But the quantity of work isn't fixed; the work available in an economy is more analagous to the amount of work available in your home. There's always something more to be done, but it's a matter of balance between the priority of the job and the cost in time and money that determines what gets completed.

Hobbling the labour force does not increase employment. Most tasks are not of the industrial-age variety where a worker is a cog in the machine and can be replaced by any other worker. Most tasks are done by people with the opportunity, skills, and availability to do them. Limit availability and you decrease productivity.

So has France learned The Lesson? Not a chance; governments never learn.

In addition to easing France's restrictive labour laws, M Sarkozy is also pursuing an economic nationalism, pressing for changes to European Union rules so that governments can support big companies at times of distress and help to give them a competitive advantage against global rivals.
It took them seven years to figure out the damage caused by restricting people's right to work. How long will it take them to realize the folly of propping up inefficient companies with taxpayers money?

April 29, 2004

Corcoran for the defence

I generally like Terence Corcoran. He can take on issues of government waste or boneheaded intervention in the economy like a pitbull with razor sharp teeth. But he's also what I call a 'business fundamentalist'. Whenever some business leader is getting grief in the news, Terry will rush to their defence. To him, business people are all pure of heart and honourable, and only government is corrupt and greedy.

But his column in the Post today (unavailable online) goes beyond his typical defence of capitalism towards outright paranoia. He says that the firing of the head of a private company by the representatives of the company's shareholders is because of, get this ... the government. Here's how he summarizes the case against Dunn:

There's a constant buzz around that Nortel's earnings were made to look good in 2003 to enable Mr. Dunn and all Nortel executives and employees to collect fat bonuses earlier this year on the basis of the company's 2003 profit report. This theory, based on what we know, makes little sense. Even after restatements, he company still appears to have been profitable in 2003. More importantly, it implies that Mr. Dunn et al deliberately orchestrated bigger losses in 2000, 2001 and 2002 so that they could report higher profits in 2003. Mr. Dunn would have had to be monumentally ignorant of the corporate world to have attempted earnings manipulation through that period.

Given the massive size of Nortel's financial numbers in recent years, the restatements border on the trivial. This is especially true given the accounting issues. The company is talking about changes to accruals and provisions -- notoriously hoary issues -- worth a few hundred million dollars in a company whose assets and revenue figures ran up and down by tens of billions of dollars every year.

So Corcoran's defense -- if I understand it correctly -- is: there's no motive because Dunn could have used his time machine to go to the future and see that the company would be profitable without having to manipulate the figures, Dunn would have had to be stupid to do it because he would probably be caught, and it's not such a big deal anyways -- only few hundred million dollars shuffled around. Somehow I'm not convinced, but Corcoran declares case closed anyway:
OK, so if there's no fraud and no scam and no malfeasance, what exactly is the "cause" for firing Mr. Dunn?
Cue the Twilight Zone music. Just as for Michael Moore and Paul Krugman there's nothing wrong in the world that's not the fault of George Bush, for Terry the source of all darkness is the government. (Whereas in truth it's only the source of most darkness.)
Could Nortel be trapped in a post-Sarbanes world in which the company's board, facing regulatory an legal nightmares created by laws and regulators, is forced to sacrifice its CEO so as to protect the company and the board?
Well, you can guess what his answer is. Corcoran probably imagines he's defending capitalism by sticking up for Dunn and other white-collar criminals, but I think he's doing it a disservice. Humans are always looking for ways to enrich themselves, and sometimes they they try to do it through deceit and corruption. When someone is responsible for other people's assets -- whether they are a government program administrator or the CEO of a large company -- that temptation may be very large. For capitalism to shake its bad rap we have to show that it has an effective way of dealing with corruption. To me, that way is to have those who have taken advantage of the trust given to them be punished for what they have done. As we've seen with Adscam and UNSCAM, government bureaucracies are terrible at doing this. Those that believe in free enterprise can set an example by not making excuses for immoral practices like Dunn's.

March 08, 2004

A question from a reader

As a world-famous blogger and renowned expert in the field of currency markets, I get numerous emails asking me for investment advice. I normally can't begin to answer this veritable tide of requests, but I will make the exception for this one:

Assuming the U.S. dollar is set to weaken considerably what will be the effect on the Canadian dollar. A weaker U.S. dollar will make U.S. exports more competitive and Canadian imorts less attractive to purcahse by our No.1 trading partner. Since 90 percent or so of our goods end up in gringolandia, reduced appetite for our products (and the Canadian dollars needed to buy them) will hurt the C buck. At the same time, Mr. Martin has got the country on a stable balanced budget to surplus tack that's been holding for more than 5 years now. Will that lead investors to seel U.S.dollar denominated instruments and seek the relative safety of Canadian debt, in so doing prop up the loony. Anyway, interested in what your thoughts are....Or do I pour all my money in Argentine peso and provincial quasi-currencies and scrip?
As you can see, this poor man has suffered tremendous damage due to his years working for an international news service and no longer knows how to write coherently, use punctuation, or spell the simplest words. He is also under some sort of delusion that Paul Martin is some kind of financial wizard, and that the temporary Canadian federal surplus is due to something more than drastically raised taxes and the pushing off of expenses onto other levels of government. Nonetheless, I will attempt to answer it. I like a challenge.

I first enlisted the help of an expert in deciphering garbled and unintelligible text (an 8th grade history teacher) to translate the question into something I could work with. She came up with this:

If the US dollar continues to weaken as predicted, what will be the effect on the Canadian dollar? On one hand, I think a weaker US dollar will close the trade surplus Canada has with the US, hurt the Canadian economy and drive down the Canadian dollar. But on the other hand, Canada has its federal budget under better control than the Americans, which should make Canada a better place for international investors to place their money, thus propping up the currency. So, should I put my meagre savings into Canadian or American investments? Or should I just spend it as I earn it in riotous living?
Here's my response, for what it's worth. The first force you cite as having an effect on the value of the Canadian dollar is somewhat important, the second less so. Still, I'd place my money with Canada rather than the US, but would avoid bonds.

The decline of the US buck will probably happen pretty rapidly. A couple of major players will start reducing their support (as might be happening with Buffet and the Reserve Bank of India), and then there will be a rush for the door by the rest of them. It'll be ugly, and that's because international currency markets have been rigged for such a long time. It's almost like a Ponzi scheme, the coupons only having their face value so long as they're not cashed in.

In the US, this decline will cause inflation as the prices for imported goods will rise. In Canada, sales to the US will drop, hurting our economy -- especially the services and manufacturing sectors. The resource and energy fields (with products difficult to replace domestically in the US) will do better. Our government will no doubt try to counter this trend by debasing our currency -- lowering interest rates and buying US dollars. The European and Asian central banks will be doing the same thing. It'll be as effective as shovelling back the tide.

As to the second force on the Canadian dollar you mentioned, I don't think government budgetary management has too much effect on currency prices -- though in the long run it should. Unchecked spending by a government suggests that they will be more likely in the future to inflate their way out of a deep debt pit. But right now I actually believe that the reckless lurch into deficit budget territory in the US is preventing the US buck from a crash. (Temporarily, at least.)

What it all comes down to is that the currencies of the world are on a race to the bottom. A worldwide fiat currency regime depends on the governments to actually work to preserve the value of their currencies. Unfortunately, there are too many short-term political gains to be made by letting things slide. I believe any type of bonds right now are a terrible investment, you must invest in things.

Things that people need, and which cannot be created from thin air through financial trickery are the only investments that will make it through this global convulsion. Jim Puplova has a good column on this idea. Real estate would normally be something that would fall into this catagory, but I think prices are a little excessive right now. That may not matter though if inflation really cranks up. Resource industries and physical holdings of precious metals are what I would recommend. Commodity futures are no good because it's difficult to predict when this meltdown will occur.

Now just let me step out the somewhat smug tone I've adopted in this post. I have no monopoly claim on the truth. I may not know what I'm talking about. These are just my thoughts on the subject. I have a fair amount of money invested in gold and I've done well with it, but everything isn't in that one basket. The best investment I feel is in the quality of your life in the present. A nice house you're comfortable in, good meals with friends, and a bit of travel are things you'll always have. If you also have a small stake in assets that create real and needed goods, you'll never be poor.

March 06, 2004

Martha's guilty. Good.

My views on Martha Stewart seem to differ from most of what I've seen on the blogosphere. Back in September I got hammered by a bunch of libertarians for suggesting Martha deserves what she's getting. Now she's been found guilty and is probably going to jail. I feel pretty good about it.

Functioning markets depend on symmetrical information. Fair trade cannot happen when either the buyer or seller is partially blindfolded. The state has a legitimate role in ensuring this equality, it can be seen in such things as the regulation of scales and food inspection. Perfectly symmetrical information is an impossible ideal, of course, but obvious and arrogant infractions must be punished.

March 03, 2004

Fish to teach mice to fly

It seems that the United Nations has noticed that individual entrepreneurship does more to eradicate poverty than large 'concerned' bureaucracies.

(Paul) Martin co-chairs the Commission on the Private Sector and Development with former Mexican president Ernesto Zedillo and senior United Nations official Mark Malloch Brown. And tomorrow they will produce a landmark document for eradicating Third World poverty by bringing people on the margins of society into the economic mainstream.

The report, titled "Unleashing Entrepreneurship: Making Business Work for the Poor," will be introduced by Secretary-General Kofi Annan, with a keynote speech by Martin.

"If we succeed, it will mean millions of jobs for people who would otherwise be caught in a hopeless cycle of poverty," says Malloch Brown, head of the U.N. Development Program, and the architect of the world body's most ambitious anti-poverty plan to raise the poorest people from destitution by 2015.

A little late, but better late than never. Welcome to the party, guys. I assume you'll be acting to tie future foreign aid for impoverished countries to their progress in improving property rights, reducing taxes, and removing tariffs. Great. But wait a second, what's this?
Martin and Malloch Brown set their sights on disenfranchised people who scrape out a living in the "grey economy" of Third World countries as unregistered, and often illegal, workers.

War widows who take in washing to make ends meet, teenagers selling soft drinks on street corners, mechanics fixing cars in their back yards, jobless professionals working as gypsy cab drivers, are but a few of the "invisible" workers common in countries where many earn survival wages while the official employment rate soars.

Dropping through the cracks of the economy, they pay no taxes, duties or registration fees. But they also have no access to benefits, or aid programs that are funnelled through government channels.

Nor can these invisible workers hope for financing to help them stay in business or improve their prospects for the future.

The goals of the commission are to convince governments in poor countries to make bureaucratic rules less threatening for unregistered workers, while at the same time pressing them to reduce punitive taxes and crack down on corrupt officials who frighten illegals away from the legitimate economy by forcing them to pay unaffordable bribes.

The commission is also seeking ways to connect larger, legally operating businesses with marginal workers, so they can become partners rather than competitors.

And it must convince the disenfranchised poor that they have more to gain than lose from joining the mainstream economy.

So the goal is to really to get the people that have learned to be suspicious of the state to trust it again. And if I read between the lines correctly, this is so the statistics will be more accurate and more people will be able to plug into UN handout programs. I'm disappointed but not surprised. The UN is not the type of organization to lead the fight to reduce corruption or bureaucracy.

This program is doomed to failure. Here's Martin displaying his ignorance (or is it his cynical political posturing?):

From China to Chile ... there's little debate about whether or not private investment is essential for prosperity and growth," Martin said last August when Annan announced the commission.
Funny. Seems I've heard lots of discussion about this subject.
"But private investment too rarely benefits the poorest of the poor, who need it most."
Groan. Got it? Business is bad. Private enterprise is bad. The only way 'entrepreneurship' is of any benefit to people is when it's done through the various UN bureaucracies as part of a sanctioned, carefully-tracked program.
International development expert Nissim Ezekiel, a consultant to the project, admits that the word "commission" usually means nothing practical will be done.

"But this one is different," he says.


March 02, 2004

The mess we're in

I know, I know -- not again. I try not to write too much about doom 'n' gloom economics but the latest issue of the Economist has an interesting piece that discusses the dangers of a fiat currency that meshes nicely with what I was saying earlier. Libertarians take note: the value of your money is based on the premise that the government bureaucracy that manages the money supply will think of long term stability rather than short term gratification. If that doesn't make you question the value of the buck, I don't know what will.

The article has a concise history of how the US dollar got into such a perilous state and what might happen. There's too much good stuff to quote, just read the whole thing. I'll just quote the conclusion:

Perhaps investors have been lulled into a false sense of security by the performance of central banks in recent years, and the independence that has been granted to many of them by governments. But this very aura of inviolability may be storing up problems, since it means that governments can borrow still more at cheap rates. And if governments then find themselves crushed by debt, you can rest assured that this independence will be taken away. And then, once again, the paper in your pocket will only be as good as a politician's promise.

A Heretic of the Church of Greenspan

One issue we can be sure will not come up during the presidential elections is whether Alan Greenspan should retain his position as the head of the Fed. Of course he should! This seems to be the only thing that Democrats and Republicans can agree on. I think it was John McCain that said during the last election that if Greenspan were to die he would find some way to do a Weekend at Bernie's to keep him in office.

Why? I dunno. This is the man who sat atop the greatest asset bubble in history as it inflated, had it burst on him creating the greatest paper loss of wealth in history, and now is riding the equally massive real estate bubble. Bill Fleckenstein is not a Greenspan fan (to put it mildly) and takes the hatchet to him in his latest column. He first gives a history of Easy Al's previous mistakes and then concludes:

So the most irresponsible central banker in the history of the world created the biggest bubble in the history of the world, which had disastrous consequences for the stock market and the economy. In order to ameliorate that, he has created bubble-like conditions and absurd financing schemes in real estate. Meanwhile, we've seen an enormous concentration of risk develop inside the financial system: We are down to just a handful of big banks and government-sponsored entities that are using his other favorite toy, derivatives, to theoretically manage away all their risks.

The summation of these variables has only increased the risk of something bad happening. And, of course, that risk has been heightened by the tanking of the dollar. The dollars decline has been promoted by Greenspan's irresponsible policies and attempts to continually bail out his most recent mistake. He has been doing this serially since junk bonds and bad lending nearly took down the financial system at the end of the 1980s and wiped out the savings and loan industry in 1990-1991.

I believe we are at the end of the string, and things are in the process of slowly deteriorating once again. The pace of that deterioration may pick up speed over the course of the year.

Greenspan's policies have been to simply remove all barriers that would normally prevent excessive borrowing. If prosperity was so easy to create, possibly someone else would have figured out how to do it before today. And sure enough, there was such a man, John Law, who in the 18th century created a state-chartered bank in France that issued unbacked bank notes. It created much 'prosperity' in France as due to all the new 'money', everyone started to get 'rich'. Eventually, however, the whole scheme fell apart and created a world-wide economic catastrophe. When and how will Greenspan's creation collapse?

February 24, 2004

So why isn't there inflation in the US?

The US dollar has lost value dramatically in the past year compared to most non-Asian currencies. Normally this would cause inflation, since imported goods have become relatively more expensive. And you'd think the classic definition of inflation as too much money chasing too few goods would begin to have an effect. The money supply in the US has been growing rapidly for some time now due to extremely low interest rates. But despite these conditions, US inflation rates as reported by the governent have remained quite low.

Bill Fleckenstein, one of my favourite financial mavericks, looks at this question and lays the blame on shifty government statisticians. One of the ways they do it is through the black art of hedonics:

For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. To wit, you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)

The idea behind the first case at least makes some sense, though the government carries it too far by acting as though improvements can be precisely measured. The problem with the second case is that those quality improvements are not voluntary. Since you have to pay the new price, it's sheer silliness to say that the price really didn't go up.

Another way inflation is kept down is through what's called a chain-weighted price index. This depends on the assumption that consumers will change their buying habits when prices increase, and thus will not be greatly affected by it. Richard Benson gives an example:
If you like steak, but the cost of beef goes up so you end up buying less expensive chicken, prices for you didnt really go up that much. However, if you really like steak, your standard of living has just gone down, because you can no longer afford it.
When an organization has a vested interest in making misleading statements they should be carefully scrutinized. It is very important for the government that inflation stays low. Most government obligations such as pensions and salaries are tied to the inflation rate. Higher inflation would increase interest rates and make it more expensive for them (and consumers) to borrow. Budget makers would have to take out the axe.

Defining away the problem doesn't really get rid of the problem, it just hides it. Commodity prices are increasing rapidly when measured in US dollars. The carpet these problems have been swept under is starting to look pretty lumpy.

February 11, 2004

The Economist reads my blog.

The Economist has a good piece on the same problems with the US current account deficit that I've been writing about. They put the problem quite succinctly:

In essence, Asian governments are buying American Treasury bonds in order to ensure that Americans can afford to keep spending money on Asian goods. This cannot go on forever. Despite their mercantilist instincts, sooner or later Asia's central banks will have to face the fact that they are holding far too many risky, low-yielding dollars. If they stop buying, it could trigger a sharp fall in the dollar and a jump in bond yields. Delaying the natural adjustment in the dollar and bond yields is likely to mean that, when the inevitable correction comes, it will be much more painful.
Asia seems to be willing to take promises for future payment in return for their goods. Remember, anything that can't go on forever, eventually ends.

Extra for conspiracy fans! Can the sudden recklessness of recent US federal spending have something to do with keeping this game going? If there was no new flood of nice, safe US treasury notes for the Asian central banks to buy, would some of them start selling, resulting in a crash in the US dollar? Is it possible that the crazed frenzy of spending in Washington is actually keeping the dollar afloat -- at least until the election?

I really don't know enough to say, but it seems like an interesting line of thought to this amateur economist.

February 04, 2004

Soros isn't always an idiot.

He is an idiot regarding his paranoid fantasies about the suppression of civil liberties in the US. But in the field of currency markets, his words still have some value. He's warning about the growing pile of US denominated assets being accumulated in Asia and the corresponding hole of debt being dug in the US. He says it's bad news.

I said the same thing a few months ago, but now that Soros is backing me up maybe people will pay more heed.

The finance-based economy.

A few weeks ago I wrote a metaphor for the present state of the world economy that I'm pretty proud of. Let me reprint it here:

The richest guy in town is on a buying spree. Every day, he wanders through the market and chooses what he likes. The merchants want to sell to him, and are willing to accept his credit notes. After all, he's the richest guy in town! Everyone knows his credit is good. Eventually, the merchants exchange these credit notes with each other, and use them to purchase assets like real estate or shares of other businesses. This makes prices for these assets go up and makes the richest man in town (who owns many of these types of assets) even richer. He goes on a shopping spree to celebrate.
I like this metaphor because it captures the absurdity of the present world economy, but also displays the dilemma we're all in. These credit notes can't be cashed because the rich man can't pay them; if we try anyway, their value will decrease rapidly -- disastrous to the village.

Another thing the metaphor shows is that the Americans (or the rich man) are borrowing without paying interest. This is essentially true; interest rates have never been lower. But because of this dependence on free credit, the village economy is dependent not only on more credit being created, but also the maintenance of the present credit terms. An increase would cause a serious drain on the rich man's finances that would end his spending spree.

Bill Gross is a powerful bond trader at PIMCO. He discusses these issues in his latest Investment Outlook essay (he's using a 'Western' metaphor):

But folks, all blame aside, I must tell you in advance that this story or movie does not have a happy ending. In terms of timing it may not be high noon, but High Noon it will be in terms of an ultimate outcome. Because in a finance-based economy that depends on more and more low cost money in order to thrive, the game ends when either the more and more or the low cost modifiers are replaced with less or higher cost.
(Emphasis in original.) He offers this chart (among others) to show how the economy has become reliant on debt:

He goes on to talk about the forces that defend this situation, and the inevitability of the whole game collapsing. Read the whole thing (and buy gold!).

The power of self-organizing systems

Before I went to university to get my engineering degree, I taught myself to program in C on my old 386 computer. One program I especially enjoyed working on was based on a Martin Gardner column from an old issue of Scientific American. The program was based on a large, two-dimensional array of numbers (between 0 and 15, say), and displayed visually as a field of pixels each number being represented by a different colour. The program would begin with the numbers (and thus the colours) assigned randomly, but would step through the array and apply a rule to each member. This rule would determine whether the pixel would change colour in the next refresh of the grid. The rule was generally simple, such as if a member directly adjacent to you is larger than you by one, increment yourself by one. (The numbers wrap around, so that for the sake of this program 15 + 1 = 0.)

It was fascinating to run the program and watch the initial digital Jackson Pollack painting evolve into something different. For example, using the sample rule above, order formed with a twinkle of change starting here and there, growing more frequent until small loops were created where the colour was changing each cycle. These loops grew wider and wider, drawing more pixels into their vortex until the loops collided with each other and every pixel in the grid had fallen into some sort of step with its neighbor. Order had grown out of chaos. Different initial rules resulted in different forms of order.

I didn't know it at the time, but I had created a self-organizing system (SOS). This is a (relatively) new area of mathematically based scientific investigation with applications in all fields of study. The basic premise is that small elements or components in a system, working with each other on a local level, create a higher-level order that is not easily predicted. There can be larger, global forces working on elements in an SOS, but the complexity and unpredictability of the comes from the local interactions. In the physical world there are plenty of examples of SOSs: the formation of a snowflake, the patterns made by the wind on a sand dune, the shapes of the galaxies, or the beads of condensation on a bottle of beer.

But you can also see SOSs comprised of elements with more complex behavior than molecules, stars or grains of sand. An ecosystem is an SOS. Each living thing reacts to and is affected by others in its immediate surroundings. The brain is composed of cells which selectively receive and transmit signals to other cells through the synapses. An economy is comprised of individuals and corporations making innumerable exchanges with each other, each believing to have gained value in the trade. Each of these SOSs have larger macro effects that can be seen and quantified, but the power and dynamism of these systems is in the low-level exchanges and interactions.

Humans have a hard time understanding self-organizing systems. They're chaotic and unpredictable, and for governments, uncontrollable. Most of the 20th century's great man-made catastrophes were the result of various vicious leaders attempting to impose 'order' on the 'inefficiencies' of a unregulated society. Though the brutality of the methods used to impose this order have (mostly) changed in the 21st century, the essential goal has not. Modern governments don't trust people to create their own order. The natural feedback loops that encourage some behaviors and discourage others are warped by interventions that regularly harm far more than they help. On the other hand of course, the most natural form of social organization is the gang, tribe, or clan. It's a form of order, and it's quite resistant to change. We clearly need some form of regulation -- where the right balance is is the issue.

My mind has been wandering around these ideas for the past few weeks. They're certainly not original, but have given me a different perspective on the libertarian issues I'm interested in right now. I'll be coming back to them regularly.

January 26, 2004

Denial in Davos.

Stephen Roach is an economist for Morgan Stanley that I've been reading for a few years. He's had a very good record in the past at predicting problems in the world economy, but lately seems to have missed the boat. He sees great problems on the horizon due to trade imbalances between the US and the rest of the world (as I do), but everyone else has concluded that they don't matter. In 2003 the economy roared ahead, fearing nothing. But Roach thinks he's heard this song before:

The Davos consensus was quick to agree. With the entire world perceived to be on a de facto dollar standard, Americas rapid build-up of external dollar-denominated debt was not perceived to be a problem. After all, Asia is funding the bulk of the new increments to that debt, and most were utterly convinced that nothing could break the daisy chain. As long as America continued to buy Asian-made products, Asian investors would continue to buy American-made bonds thereby avoiding the lethal back-up in real interest rates that such imbalances would normally spawn. One participant characterized this arrangement as a massive Asian export subsidy program. Another cited the artificially depressed US interest rates that fall out of this arrangement as a foreign subsidy to the spendthrift American consumer. Either way, no one could conceive of any circumstances that would cause Asian investors private or official to change their mind on the funding of Americas massive external imbalance. And so the Davos crowd believes the music will continue to play on.

Quite honestly, none of this really surprised me these are precisely the assumptions that ever-frothy financial markets must be making in order to sustain asset values at current levels. If imbalances were perceived to be the problem I suspect they are, markets would be in a very different place. As predictable as this response was, I was totally unprepared for what hit me immediately after the conclusion of this opening session. Two of Americas leading academics rushed the stage one a renowned economics professor and the other the president of a top university and loudly proclaimed that the traditional macro of saving shortages and current-account deficits is a scam. America was not in any danger whatsoever, they argued vociferously. The imbalances that I worried about are simply the logical and entirely rational manifestations of a New Economy.

Seems to me I had heard that one before. But I held my tongue and pressed for more. The New Paradigm in this case is that America has now become an asset-based, wealth driven economy. As such, it need not worry about scaling its imbalances by national income instead they need to be judged against economy-wide net worth. On that basis, debt loads either internal or external can hardly be characterized as worrisome when measured against the elevated wealth of the US economy. Sure, that wealth took a bit of a hit when the equity bubble popped in 2000. But the baton of the US wealth creation machine was quickly passed on to property markets, and the US economy never even skipped a beat.

This argument bears serious consideration, but I am convinced it is wrong. For starters, it makes the critical presumption that asset appreciation is permanent. When I pressed this point with my adversary, he bristled in response, claiming that permanently rapid rates of financial asset appreciation were entirely justified by the productivity breakthroughs of recent years. He went on to add that property cycles had all but been abolished that the American home was a lasting store of ever-rising value. Needless to say, if thats the case, then Im the one whos dead wrong. Ever-rising asset values would then qualify as permanent sources of saving obviating the need for consumers to rely on traditional income-based saving strategies. Quite frankly, I couldnt believe what I was hearing. Here we are, just a few years after Americas most devastating post-bubble carnage, and the apostles of the New Economy were back with a vengeance.

Here's a metaphor for how I see the world economy today. The richest guy in town is on a buying spree. Every day, he wanders through the market and chooses what he likes. The merchants want to sell to him, and are willing to accept his credit notes. After all, he's the richest guy in town! Everyone knows his credit is good. Eventually, the merchants exchange these credit notes with each other, and use them to purchase assets like real estate or shares of other businesses. This makes prices for these assets go up and makes the richest man in town (who owns many of these types of assets) even richer. He goes on a shopping spree to celebrate. Can this really go on forever?

One of the gimmicky rules at the Davos World Economic Forum this year was the banning of neckties. Roach refused and kept his on.

January 22, 2004

Deficits -- good, bad, or who cares?

I had a run-in with a (presumed) acolyte of the man I love to hate, Paul Krugman, in the comments section to this post at Jay Currie's site. It's strange how things happen in the blogosphere.