Stephen Harper is feeling some of that effect from the millions he put into “infrastructure” projects as part of Canada’s own stimulus plan. You will recall that Ottawa solicited proposals from local governments before handing over the money. Inevitably, a goodly number turned out to be . . . shall we say . . . not entirely crucial, leading to articles like this, pointing out that — oh dear — taxpayers were financing bocce courts via deficit spending. Not to mention sending money to rich people in good neighbourhoods! Even funding for the arts — which Harper was previously criticized for providing too little of — was thrown back in his face as a cheap attempt to correct his earlier gaffe. (If he hadn’t corrected the gaffe, of course, it could have been portrayed as a “continuing snub.” Don’t try to beat the media folks, you can’t win.)
So what’s the lesson here? Politicians should ignore the experts and do what makes people happy, even if it’s unlikely to have much long-term benefit? Politicians should never expect the public to appreciate their efforts unless there’s some kind of individual payoff? Politicians should stay out of the economy, because no one is ever satisfied anyway?
Pick any one of those. Just don’t run for president or prime minister if you want to be popular.
Kelly McParland, “Obama could save America and lose the election”, National Post, 2010-07-29
July 29, 2010
QotD: You can’t beat the media
July 15, 2010
Reasons not to get angsty over China’s growth
The ever-sensible and highly entertaining Monty points out that Americans fretting over the growth of the Chinese economy are bothered over (comparatively) minor issues:
The angst over China’s economic ascent continues to smell rather strongly of the same panic the US felt over Japan in the 1980’s. I respond to this panic in two ways: 1) I am happy for the average Chinese citizen, who is finally seeing some benefit from their labor after 400 years of failure and ineptitude — they deserve any success that comes their way; and 2) America is in the enviable position of being able to worry about unlikely hypotheticals because we are the world’s largest economy and will continue to be so for much of the 21st century and perhaps beyond. We face severe problems — public spending being #1 among them — but our competitors also have problems, in many cases more dire than our own. We as a people have a habit of overestimating our own problems and underestimating those of our adversaries. Don’t begrudge the Chinese people some measure of success; just hope that they can cast off their Communist government and move towards being a freer people. There may come a time when the US and China square off as enemies rather than just competitors, but that outcome is not inevitable.
Fitch agrees with me about taking the whole “China is taking over the world” thing with a grain of salt. The Chinese are hiding an enormous amount of bad debt. If China hopes to succeed beyond their export-driven economy, their finances are going to have to become more transparent. And when/if this happens . . . look out below. That crash is going to make our little economic vacation of the past couple of years look mild in comparison.
I know that it may appear that I’m anti-Chinese based on some of my past economic postings, but that’s not true. I’m actually quite positive about China in the long term — once they manage to get rid of the last trappings of authoritarian government and overcome the huge dead hand of army-controlled crony capitalism. Most Chinese markets are not yet free, but they’re in most cases far more free than they were a decade ago. That’s wonderful, both for ordinary Chinese people and for the rest of the world. China has immense untapped resources of skills, talents, and ideas that can’t be accessed in a controlled economy. If-and-when their economy becomes as free as typical western markets, sit back and watch all that human ingenuity go to work.
On the down side, while China is becoming a bit more free, many western countries are becoming less so: piling on regulations and creating additional barriers to economic growth (Canada, for the most part, has not been doing this . . . it’s a significant factor in Canada’s escape from recession). If these trends continue, perhaps the worriers-about-China will see the Chinese economy vault into first place as the American government tries to control everything.
July 10, 2010
More hidden legal changes in Ontario
Kelly McParland finds yet another sneaky change to Ontario law the government tried to slip in un-noticed:
Here’s a great story about the absurdity that ensues when a government tries to force-feed an impractical policy to the population for the sake of environmental posturing.
If you don’t want to read the original, here’s a capsule version:
Ontario sponsors a program to encourage small users of solar power by giving them subsidies. Except it has proved so popular, especially in rural areas, the province quietly slashed the subsidy late last Friday. (You remember Friday, right — quiet sleepy day between Canada Day and the weekend? If you really really wanted to release something at a time no one would notice, you couldn’t pick a better day. Not that the McGuinty government would deliberately try to hide what it was doing, of course. Oh no). The result is that people who bought into the program won’t get nearly the amount they expected. Now they’re upset — having discovered the ruse despite the government’s effort to hide it — and are bombarding MPPs with complaints.
Great eh? That’s good old Dalton McGuinty — absolutely, totally dedicated to energy conservation and environmental improvement, as long as it’s costing someone else money and not him.
This is yet another example of how the McGuinty government loves to sneak in unpopular changes and hope nobody notices for a while. Stealth nanny state tactics? Ladies and gentlemen, I present your Ontario government.
Update, 12 February 2011: The poor folks who took up the McGuinty government’s solar power subsidy are being shafted again:
Added to McGuinty’s problems with wind are similar signs of trouble on the solar front. After strongly encouraging individual solar projects, and offering outrageously generous pricing on solar-generated power, the province unexpectedly announced last summer it was slashing the rate it would pay on some projects. On Friday, hundreds more Ontarians were told that installations they’d erected at the behest of the government can’t be connected to the provincial grid because of technical problems. Rural residents, some of whom have invested large amounts in solar generating operations, will be left high and dry.
[. . .]
Angering rural voters, and battering your credibility with the environmental crowd, aren’t great ideas if you run a government that faces an election in eight months. So it’s no wonder that Ontario’s Liberals sought to hide the bad news by releasing it when (they hoped) no one was watching. But the excitement in Egypt won’t last forever, and eventually people will notice that Ontario’s government, once again, has been forced into a humiliating retreat at considerable trouble and cost to individual Ontarians.
June 28, 2010
Tackle the debt, reduce regulatory uncertainty to tackle economic woes
In a difficult business environment, companies take precautions to avoid getting deeper into debt or engaging in risky new projects. Companies and individuals do this because the penalty for getting too deeply into debt is bankruptcy: at best, you survive financially but in much reduced circumstances. Governments, despite evidence to the contrary, seem to think they’re immune to this problem and pile on additional debt even when there’s no reasonable short-term hope of getting out of debt. They should learn from Margaret Thatcher’s approach:
A group of 346 noted economists had just written a scathing open letter to Prime Minister Margaret Thatcher, predicting that her tough fiscal policies would “deepen the depression, erode the industrial base, and threaten social stability.” Thatcher wanted to make absolutely certain her unpopular attack on huge deficits and rampant spending, in the face of high unemployment and a weak economy, was the right one.
So Thatcher summoned Meltzer, along with a group of trusted advisors, to explain why the experts were wrong. Even leaders of her own party advised Thatcher to make what they called a ‘U-Turn,’ and enact a big spending program to pull Britain out of recession. “Our job was to explain why lower deficits and spending discipline were the key to recovery,” recalls Meltzer.
Thatcher was regally unamused by arcane jargon. “Being right on the economics wasn’t enough,” intones Meltzer. “She made it clear that our job was to explain it so she could understand it. If we didn’t, she made it clear we were wasting her time. She’d say, ‘You’re not telling me what I need to know.'”
Thatcher stuck with draconian policies, invoking the battle chant “The Lady’s Not for Turning.” She launched Britain on years of balanced budgets, modest spending increases, falling joblessness, and extraordinary economic growth.
The classic Keynesian theory called for governments to run deficits during tough economic times in order to “prime the pump”: using government money to make up for the lack of private spending in the economy for a short period of time, until the private sector recovered. Governments worldwide grabbed on to this theory, but dispensed with the balancing notion that as soon as the economy recovered, the government had to pay off that debt to return to a balanced budget (or even go into surplus).
Politicians, as a class, love spending money. The more money, the better. They also have remarkably short timelines: the life of this parliament, the next election, pension eligibility date1. Anything that happens beyond that short window of time isn’t important. Spending money the government doesn’t have now is a good thing, to a sitting politician. Paying off the debt later can be left to some mythical future politician.
The other problem that individuals and companies have, but governments don’t, is uncertainty due to regulatory change. Governments don’t have that worry because they’re the ones making the rules (and ignoring them when it’s politically convenient). If you want to depress investment in a given area of your economy, a swift way of doing so is to start faffing with the rules governing that sector. Until you stop changing rules, no company in that sector is going to spend any more than they absolutely have to spend, because you’re creating regulatory uncertainty beyond normal operating levels.
Multiply this by the number of separate government branches involved in making (overlapping, and sometimes conflicting) rules and you can get most major companies to stop expansion, reduce sales, slow or even cease hiring staff until the regulatory environment settles out and the “real” new operating conditions become clear.
[1] Interestingly enough, today happens to be the day that 75 members of parliament qualify for their lifetime gold-plated pensions. I didn’t realize that when I posted this item. Thanks for the heads-up, Kevin Gaudet.
June 24, 2010
It’s a “Failure of its systems for monitoring”
Austin Bay thinks he’s identified the elephant in the European parlour:
Greece teeters on the edge. The Wall Street Journal‘s Paul Hannon wrote this week that “the failure of its (EU) systems for monitoring and controlling build-ups in government debt” are why the bailout loans given to Greece by the International Monetary Fund (IMF) and fiscally disciplined EU members like Germany became necessary.
He’s right. “Failure of its systems for monitoring,” however, is a euphemism — economic diplo-speak for a very difficult word: corruption. Greek governments cooked the books (its actual deficit is twice as high as officially reported), violated fiscal agreements and borrowed money they could not repay.
Corruption lies at the dirty core of the Euro-zone’s trouble. Governmental corruption and its cohort, illicit business practices, are a pervasive, multicultural, global affliction.
Corruption coupled with systemic lack of accountability — to include personal accountability, where managers and workers let lackadaisical and lazy work practices slide — eventually produces more than anger, cynicism and financial turmoil. Even among economies in the developed world, it stunts economic productivity, robs the future and sows the seeds of armed conflict. In the developing world it undermines aid efforts, manacles fragile economies and as a result condemns millions to poverty.
The big remaining question is no longer “Will the Euro fail?” but rather “Who’ll bail out first?”
June 21, 2010
China’s latest currency move
The always entertaining Monty has a few thoughts that are worth considering:
BNP Paribas forecasts parity (and below!) for the poor, unloved Euro. The Euro is like the easy girl in every town: popular enough when she was young and cute, but now that she’s looking like nine miles of bad road, no one wants to be seen with her or has a kind word to say about her.
After insisting for months that they weren’t keeping the Yuan artificially devalued via the dollar-peg, the Chinese lift the peg, shout Squirrel!, and run away.
Meanwhile, a floating Yuan may not work out quite the way the US thinks it will. This happens to be my view — I think the export-driven Chinese economy is a lot weaker than they’re letting on (or may even realize themselves), and they have severe internal economic problems that the authoritarian government has been papering over for years. There will be a huge banking crisis in China at some point when the huge numbers of bad loans come to light — they can’t hide them forever. Further, the recent labor troubles in China may be only the leading edge of a big wave.
Of course, if you’ve been following Quotulatiousness for any time, you’ll know that I’m fully in agreement with Monty about the Chinese economy. In the long term, I’m quite hopeful about China and their ongoing liberalization and modernization, but in the short- to medium-term I think there are many problems that need to be resolved and that will cause a great deal of upheaval and disturbance.
Remember that even with the best good will in the world, China’s economy is still moving painfully from state-run to private enterprise, and the most common stop on that road is crony capitalism (that’s like capitalism without the rule of law but with private armies). The good news is that a greater proportion of the economy is adjusting to free(r) markets, but there’s still lots of zombie corporate entities set up and run by various branches of the government . . . and the army.
In the latest move, the exchange rate change may not be the panacea that too many American politicians are hoping for:
China’s decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said Saturday.
China said Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.
It won’t fix the underlying trade issues, even if the yuan moves in the “desired” direction, as the problem is much more rooted in American policy than in Chinese currency rates. As long as the American government insists on increasing the debt load, piling on additional regulatory regimes, and directly interfering in corporate decisions, the longer the economy will be unsettled. Stability is a key condition for economic recovery, yet the American government demonstrates a knee-jerk reaction against stability for every opportunity that arises.
Oh, and if you think the US banking system has bad loan issues, wait for the other shoe to drop:
China’s banking regulator warned Tuesday that the nation’s banking system faces risks from bad loans, particularly among those made to local governments and to the real-estate sector.
In its 2009 annual report, the China Banking Regulatory Commission urged banks to use cause and scientific risk analysis in their lending, and warned of dangers to the sector, both from lending in the past year and from development in the future.
June 18, 2010
June 17, 2010
Spain finds its “green” energy unsustainable
Spain can’t afford to subsidize all those “green” jobs anymore:
Dead broke Spain can’t afford to prop up renewables anymore. The Spanish government is cutting the numbers of hours in a day it’s prepared to pay for “clean” energy.
Estimates put the investment in solar energy in Spain at €18bn — but the investment was predicated, as it is with all flakey renewables, on taxpayer subsidies. With the country’s finances in ruins, making sacrifices for the Earth Goddess Gaia is an option Spain can no longer afford. Incredibly, Spain pays more in subsidies for renewables than the total cost of energy production for the country. It leaves industry with bills 17 per cent higher than the EU average.
[. . .]
“Sustainability” has been the magic word that extracted large sums of public subsidy that couldn’t otherwise have been rationally justified using traditional cost/benefit measures. Spain paid 11 times more for “green” energy than it did for fossil fuels. The public makes up the difference. The renewables bandwagon is like a hopeless football team that finishes bottom of the league each year — but claims it’s too special ever to be relegated.
Of course, the lesson won’t be learned by other countries or regions . . . Ontario recently signed on to a similar kind of deal with Samsung. But Ontario taxpayers are getting a bargain: the jobs being created under this scheme will only cost $303,472, compared with the eye-watering $774,000 the Spanish jobs cost.
June 16, 2010
Monty explains it all for you
Financial worries? Fiscal imbalance? Debt woes? No problem! Monty has the answers (well, answers to some questions, even if they’re not the ones you’re interested in):
And the good news just keeps coming! Slumping cattle and lean-hogs futures may have bottomed out. Screw gold, man; I’m buying swine! (Monty, The Wasteland Bacon Baron. It has a nice ring to it. The potentate of pork! The sultan of swine! The High Lord of ham! The chitlin Chieftain!)
I’m not sure whether this is good news or not: Cramer calls yesterday’s big gain a sucker’s rally and advises people to get out. My rule of thumb is to treat anything Cramer says as the ravings of a lunatic. I consider him a shill and a buffoon. And yet . . . is this a Strange New Respect I’m feeling? Or just the dying embers of that burrito I ate for lunch yesterday?
French financial group AXA experiences a blinding glimpse of the obvious and exclaims, “Ze Euro eez doomed!”. Zut alors! (And no, I don’t know why French guys would be speaking English with a French accent instead of French.)
Spain and Portugal submit their austerity plans to the ECB and IMF. Plans include selling shoelaces at the airport, dancing for nickels, graft, corruption, and murder-for-hire. The ECB and IMF remain skeptical, and suggest that Portugal and Spain might want to look into selling the family silver or something.
And if all of that isn’t enough to get you assembling your Financial Apocalypse Survival kit, how about this?
More bond issues are being denominated in Canadian Loonies and Swiss Francs as investor skittishness regarding the Euro spreads. When investors choose something called the “Loonie” over your currency because it just sounds more stable somehow, dude, you got problems.
June 10, 2010
June 9, 2010
Confused by international finance? Monty can help
If you’re finding the up-then-down-then-under-the-table performance of your investments unfathomable, you’re probably wondering who can explain it all in a way that makes perfect sense and allows you to figure out the best way to handle your personal finances. If you find such a savant, let me know.
For the “real” story about why the markets are doing an imitation of an unstable personality on conflicting medication, here’s Monty’s “Wednesday Financial Briefing”:
Nicholas Sarkozy and Angela Merkel are still waging war against “the speculators” who had the temerity to point out that Euorpean finances were a God Damn mess. A spokesmen for the holders of European sovereign bonds warned the leaders that they were “teasing the gorilla in the monkey-house”. Sarkozy was heard to say that he farted in their general direction and that their fathers smelt of elderberries. Chancellor Merkel only muttered darkly, “I will break you!”
Interbank loans at Spanish banks are drying up. This tightens credit and leads to busted bond auctions. “Fitch can kiss my ass!”, said an unnamed source at Banco Santander who blames the problems on Fitch’s recent downgrade of Spanish debt. Just to show how not-broke they are, Santander bought back their stake in their Mexican unit from Bank of America for $2.5 billion. When asked if this was a wise move given their weak balance-sheet, a Santander representative lowered his trousers and mooned the press-pool.
US debt will climb to 19.6 trillion by 2015, according to a Treasury report to Congress. Tim Geithner assured everyone that, in true Keynesian fashion, every dollar of debt translates directly into GDP growth. Somehow. When pressed on the issue, Mr. Geithner began to cry and had to be excused to the lavatory to pull himself together.
June 8, 2010
Are we ready for “a serious debate about returning to the gold standard”?
The more I read of Maxime Bernier’s thoughts, the more I wonder how long it’ll be before he’s drummed out of Stephen Harper’s party: he’s far too sensible. Here, for example, he outlines what it is that central banks do to your money, and why it’s a bad deal for ordinary Canadians:
All this guessing about setting rates has nothing to do with capitalism and free markets; it has more to do with central planning and government control of the money supply. In a monetary free market, the interest rate would be determined by the demand for credit and the supply of savings, just like any other price in the economy.
Government control over money has serious consequences that few people seem to be aware of.
One of them is that central banks are continually increasing the quantity of money that is circulating in the economy. In Canada for example, if we use the strictest definition of money supply, it has increased by 6 to 14% annually during the past dozen years. The situation is about the same everywhere.
The effects of constantly creating new money out of thin air have been a debasement of our money and a dramatic increase in prices. The reason why overall prices go up is not because businesses are greedy, or because wages go up, or because the price of oil goes up. Ultimately, only the central bank is responsible for creating the conditions for prices to rise by printing more and more money.
With all this, it’s surprising that he has (so far) managed to stay in the Conservative party, which doesn’t appear to actually believe in anything much anymore . . . other than the need to stay in power.
Update, 9 June: His speech (from which the article linked above was drawn) gets positive reviews.
Consumer debt doesn’t follow the script
Or, in a demonstration of individual rationality, doesn’t follow the script where consumers sacrifice themselves and go even deeper in debt to spark further economic recovery:
While some pundits out there might have you believe that the US economic recovery remains solidly on track, Friday’s May jobs report threw a spanner into those notions, and the latest reading on consumer credit offers little evidence that the crucial consumer intends to share with Uncle Sam the burden of bolstering the economy.
The Federal Reserve’s report on April consumer credit today shows total credit outstanding rose a little less than $1 billion, following a revised $5.4 billion drop in March; March credit was originally reported up $2 billion.
Within the details, the item that jumps out most is the decrease in revolving credit, which fell at a 12% annual rate and declined for the 19th straight month. Revolving credit outstanding has fallen 14%, or roughly $138 billion, since autumn of 2008. Non-revolving is roughly flat since late ‘08.
It would help if the pundits would settle on one of the two diametrically opposed roles that consumers are “supposed to” assume. At an individual level, consumers are being lashed for their profligate spending and borrowing habits, and excoriated for their unprecedented levels of personal debt. This is bad, the pundits say (and I don’t disagree): individuals and families should not be taking on so much debt and efforts to reduce outstanding debt are praised. However, consumers as a group are expected to spend, spend, spend in order to help pull the retail sector back into healthy growth.
So if they do the right thing as individuals, they’re doing the wrong thing for the economy as a whole? Perhaps the emphasis on consumer-led recovery is mistaken, especially given the levels of debt that consumers have already taken on.
June 1, 2010
QotD: The Pascal’s Wager of Economics
[S]timulus spending is the Pascal’s Wager of economics. Seventeenth century philosopher Blaise Pascal couldn’t prove God existed, but figured he might as well be devout since, if there is a God, he’s saved from damnation. If there wasn’t, well, no harm in trying. Politicians see stimulus spending the same way. They can’t prove it works, but if they sit on their hands during a downturn, they know they’ll be blamed for inaction should things turn worse. If and when the economy recovers, as it has here, the government’s happy to take credit. And if more misery comes? They can at least claim to have staved off larger calamity — which is how it’s gone in the U.S., where they’re now spending their third stimulus package in two years.
Politicians are only acting rationally. Last year, they were convinced they faced another Great Depression. [. . .]
Get used to this. Since the narrative that stimulus spending pulled us back from the abyss works for Ottawa, it virtually guarantees that, when dark economic clouds are again sighted from Parliament Hill, we’ll see this routine recur: Dire recession warnings from politicians, followed by stimulus as insurance to cover political hides from any economic blame. As long as future taxpayers get the bill, via future debt payments, it’s as risk-free a gambit as Pascal’s: The latest stimulus added tens of billions in national red ink with little political distress for the Tories.
Kevin Libin, “The Stimulus Bluff: There’s Mounting Evidence That Government Spending Has Had No Impact On The Economic Recovery. Too Bad Politicians Aren’t Listening”, National Post, 2010-06-01
