Canada's Place in the Global Economy

[Kirkhill]

...The first modern financial bubble started in Paris in around 1719 and spread to London before bursting in 1721....

And this maybe a contributing factor to the antipathy of the French Elite towards Anglo-Saxon banking.

Louis XIV had just died and his Great-Grandson Louis XV was on the throne as a child.  He had a regent, Phillip of Orleans - his uncle, ruling in his place.  The Brits had just quashed the latest Bourbon-Stewart attempt to reclaim the British Crowns at Sheriffmuir. The Masons had openly united as the United Grand Lodge of England and declared themselves to be not at odds with the crown or the state.  Gold, which had been a monopoly of the Crown was being freely traded in the London markets.  Lloyds and the London Stock Exchange were finding their feet.  Britain was wealthy.  And at the back of it all was the Bank of England, founded by Huguenots and other Calvinists and sold to the English by a Scotsman, William Paterson, who died in that year of 1719.


France, as a combined result of Louis XIV's wars and Colbert's dirigisme was broke and with no prospects of recouping their losses except the old fashioned way.  Go forth and conquer.  Except that the French weren't up for it.  They were ill, dead-tired or just plain dead after Louis' wars.

Into this fray marches another Scot peddling his wares.  This time promising to do for France what Paterson had done for England and Britain.  John Law of Lauriston promised to create a Bank of France on Dirigiste lines.  And on to Wikipedia,

....He had the idea of abolishing minor monopolies and private farming of taxes and creating a bank for national finance and a state company for commerce and ultimately exclude all private revenue. This would create a huge monopoly of finance and trade run by the state, and its profits would pay off the national debt. The French Conseil des Finances, merchants, and financiers objected to this plan.

The wars waged by Louis XIV left the country completely wasted, both economically and financially. And the resultant shortage of precious metals led to a shortage of coins in circulation, which in turn limited the production of new coins. It was in this context that the regent, Philippe d'Orléans, appointed John Law, as Controller General of Finances.

Contemporary political cartoon of Law from Het Groote Tafereel der Dwaasheid (1720); text reads "Law loquitur. The wind is my treasure, cushion, and foundation. Master of the wind, I am master of life, and my wind monopoly becomes straightway the object of idolatry. Less rapidly turn the sails of the windmill on my head than the price of shares in my foolish enterprises."In May 1716 the Banque Générale Privée ("General Private Bank"), which developed the use of paper money was set up by Law. It was a private bank, but three quarters of the capital consisted of government bills and government accepted notes. In August 1717, he bought the Mississippi Company, to help the French colony in Louisiana. In 1717 he also brokered the sale of Thomas Pitt's diamond to the regent, Philippe d'Orléans. In the same year Law floated the Mississippi Company as a joint stock trading company called the Compagnie d'Occident which was granted a trade monopoly of the West Indies and North America. The bank became the Banque Royale (Royal Bank) in 1718, meaning the notes were guaranteed by the king. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine, and other rival trading companies and became the Compagnie Perpetuelle des Indes on 23 May 1719 with a monopoly of commerce on all the seas. The system however encouraged speculation in shares in 'The Company of the Indies' (the shares becoming a sort of paper currency) and inflation. The system was based on Law trading shares in the Mississippi Company in return for government debt. The Banque Royale was created by default as a result of Law attaining the majority of the government issued notes (debt). It effectively became the Central bank of France. In 1720 the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was extremely successful until it collapsed and caused an economic crisis in France and across Europe. The collapse was staved off by a constant trading off between national debt and shares of the Misissippi company. New shares were issued to dilute the value of each share, and the new capital was used to purchase more government notes. The speculation continued to build, and the companies two brances, the trading arm, and the bank arm, collapsed simultaneously.

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. In February 1720 it was valued for a very high future cash flow at 10,000 livres. Shares rose from 500 livres in 1719 to as much as 15,000 livres in the first half of 1720, but by the summer of 1720, there was a sudden decline in confidence, leading to a 97 per cent decline in market capitalization by 1721. Predictably, the 'bubble' burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into specie. By the end of 1720 Orleans dismissed Law, who then fled from France.

Law's Bank turned on its head everything that the Bank of England was.  It was different in every detail except that it was a Central Bank promoted by a Scot.  But I am inclined to think that Law had the same impact on the French consideration of banking that Stalin had on the American consideration of communism or Yeltsin had on the Russian consideration of democracy.  A cautionary tale never to be repeated despite the fact that execution failed to match theory.


And Edward, I disagree that Bretton Woods works.  Between 1694 and 1944 there was a solid golden wire running through the world's economy that instilled market discipline.  The Bank of England and the Gold Standard backed by HMG and the RN.  Recessions and depressions happened and wars were financed but the market always seemed to right itself. 

With Bretton Woods that discipline was shredded until it finally broke in 1971 under Nixon.  At that point the Western Governments took themselves off of the Gold Standard and started issuing Scrip - worth whatever the market deems it to be worth.  But the market never went off the Gold Standard, nor did most third world dictatorships.  All that happened was that Governments believed themselves to be beyond the discipline of the Market.

The Market is now reminding Governments that they are not beyond the Market. 

And that is the most frightening thought of all to the Dirigistes. 

Britain succeeded for so long  because it figured out how to work within the constraints of the rules imposed by the market while at the same time allowing some room for movement within the system. 

Degrees of freedom:

Bear on a chain;
Bear in a cage;
Bear in a zoo compound;
Bear in a park;
Bear in a preserve.

In all cases, no matter how much freedom the Bear perceives, the consequences of breaking the containment are the same - death.

Likewise, even in the most destitute, socialist, command economy people survive through capitalism - through individuals trading toilet paper for shoes. 

Capitalism and the Market set the rules.  Governments have to learn to abide by the rules.

They can no more control the Market than Louis XIV could make Europe an extension of his well manicured gardens at Versailles.

Bretton Woods was an American swing of the pendulum to the opposite extreme.

Bretton Woods was an attempt to free the market of constraints, with the Americans thinking that Britain had been setting the rules to its advantage for 250 years.  If only the market were allowed to work freely then everything would level out over time.  I don't believe that the current "crisis" (behind us in 24 months) is the result of laisser faire economics but neither do I believe that the Market is a self regulating and thus benevolent environment. 

I don't think the Market is any different to the Weather, the Sea or one of the McGarrigle Sisters "white waters where the log drivers learn to step lightly".  They are environment and can't be controlled.   They have to be accomodated.  It doesn't do any good to look for root causes in the hope that you can control the environment.  You are best put to husband your resources to deal with the symptoms, the effects.

I believe the Brits didn't set the rules.  They just accepted and exploited the rules.

Perhaps Canada with its pragmatism is the true inheritor of that philosophy.

In today's National Post George Jonas finished with this quote from Ecclesiastes: "The race is not to the swift, nor the battle to the strong, neither yet bread to the wise. Time and chance happens to them all.”  Or as Burns would hae "the best laid schemes o' mice and men gang aft agley".

 

[tomahawk6]

Read this at one of my fav blogs this AM.
http://www.redstate.com/diaries/blackhedd/2008/oct/21/unraveling-the-threads-of-a-currency-hedging/

Unraveling the Threads of a Currency-Hedging Failure in Hong Kong

This story caught my eye because, ever since the acute financial crisis began around Labor Day, news about how China is handling it has been very sparse.

And that matters a great deal, because China’s reactions to the crisis are key to understanding whether the global financial system has fundamentally changed in recent years. The question, of course, being this: has the economic dynamism of the world shifted away from the United States? Or does distress here still cause major problems elsewhere?

Citic Pacific Ltd. makes steel and does some real estate development. Its shares are listed on the Hong Kong stock market, and its billionaire board chairman is one of China’s richest people.

Citic Pacific is 29% owned by Citic Hong Kong, which is a wholly-owned subsidiary of CITIC Beijing, which in turn is owned by the Chinese government.

You probably remember these guys. CITIC Beijing almost invested $1 billion in Bear Stearns, but Bear collapsed before the deal could close. And they invested $3 billion in Blackstone Group shortly before the latter went public and started falling in value. In short, and greatly to the annoyance of the Chinese authorities, CITIC have earned a reputation as "dumb money."

So what’s the news item? Citic Pacific has lost about $2 billion, trading currency derivatives. (All money figures in this post are US dollars, not HK dollars. 2 billion USD is about 15 billion HKD.)

What are they going to do? That’s easy. They go to their sugar daddy, the Chinese state, and recapitalize around $1.5 billion. In return, some senior managers of Citic Pacific will be dismissed, and some will probably be shot. (For once, I’m not using a metaphor when I speak of death in managers.)

Of course, this being Asia, the company won’t go out of business, although the amount of the trading loss was considerably larger than the current total value of the company’s stock.

What’s interesting about this is that it points out some of the less visible aspects of the global credit crisis.

Citic Pacific isn’t the only relatively small trading company that has created an awful lot of pain in Asia with currency derivatives. In this case, they appear to have speculated on a continued rise in the value of the Australian dollar, which has been one of the world’s star currencies.

Citic Pacific apparently has major iron ore operations in Australia, so they wanted to hedge their exposure to the Australian currency. This makes sense if you want to smooth out your native-currency cash flow, and every major trading company in the world does it.

But Citic Pacific appears to have screwed this up, not managing their risk properly. And they got caught in the downdraft that has caused the Australian dollar to plunge in value over the last several weeks. All of a sudden, their currency hedges appear to have become exposed to nearly unlimited risk.

This isn’t a unique story about bad decision-making in one relatively small firm in Hong Kong. Similar things have been happening in South Korea, Brazil, and elsewhere. Even in Iceland, where the collapse of the entire country’s banking system broke above the media radar and got fifteen minutes of fame.

Why is this typical? Well, there’s a big contrast between what happens to the US dollar in times of financial stress, and what happens to every other currency. The dollar goes up as everyone seeks the safety of the world’s highest-quality money. And money flows out of high-growth emerging economies like air out of a balloon, which drops their currencies like a rock.

Further evidence that this is the dynamic at work: the value of the Japanese yen. Because yen is the lowest-yielding major currency, it’s a favorite source of funds for “carry trades,” in which you get paid for holding a high-yielding currency. Like the Aussie dollar, the New Zealand dollar, the Brazilian real, or the Icelandic krona.

As high-yielding currencies deflate in the global crisis, money flows out of carry trades and back home to Japan. Right on cue, the yen has joined the US dollar as the only major currencies to appreciate sharply during the current phase of the crisis.

One thing that the Chinese try very, very hard to avoid, is for foreign speculators to deposit money into Chinese banks. Since their interest rates have been incredibly high (in order to damp out the powerful inflation they’ve been suffering for two years or so), they’re theoretically vulnerable to inflows of “hot money” (including carry-trade money), which can exit the country on a moment’s notice and crash the banking system.

So unlike South Korea and even Brazil, which now face extreme financial disruptions from adverse currency movements, Citic Pacific and companies like it ought to be fine.

Still, what the whole episode appears to be telling us, is that the global economy still depends on final demand from the United States.

That, in fact, will be the most interesting thing to watch for as the aftermath of the crisis plays out over the next three years or more. The countries that respond to the crisis with increased regulation and control (which axiomatically includes Europe and Asia), will return to growth much more slowly than the countries that quickly shift back to free markets and light regulation.

At this point, however, political risk enters the calculus. We may elect a President who has already promised higher trade barriers, taxes, and regulations. It’s not a forgone conclusion that America will be a country that returns quickly to free markets and light regulation.

If we do, we’ll emerge from this crisis in a very strongly enhanced position vis-à-vis our economic competitors. We’ll have by far the strongest and most commanding economy on earth, a position that will be unchallengeable for years or even decades.

But if we go down the Democrat path of protectionism, high taxes, and regulation, that won’t happen. And who knows? Given the way the Democrats talk about wanting the rest of the world to love us for our charm, rather than respect us for our strength, the weaker outcome might actually be what they want.

-Francis Cianfrocca

 

[a_majoor]

The news gets worse. An "unwinding" of debt will take several years, and taxing away people's income and wealth will prolong the process as they have fewer resources to deal with private debt or recapitalize debt ridden companies through investments or purchases:

Do our rulers know enough to avoid a 1930s replay?
Events are moving with lightning speed as the global credit freeze evolves into something awfully like a classic trade-depression.

By Ambrose Evans-Pritchard
Last Updated: 11:17AM BST 20 Oct 2008

Comments 143 | Comment on this article

The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation.

The freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95pc to $11,600 since May, hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2pc at the US Port of Long Beach last month, but that is a lagging indicator.

From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931. “The crisis is now in full swing across the entire world,” said Giulio Tremonti, Italy’s finance minister. “It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere,” he said.

Italy’s industrial output has fallen 11pc in the last year. Foreign orders have dropped 13pc. But we are all in much the same boat. Europe’s car sales fell 9pc in September (32pc in Spain). US housing starts fell to a 45-year low in September.

Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again).

Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.

The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage - Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk) - are lining up for state bail-outs from a $50bn rescue fund.

Brazil is free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.

China says 53pc of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. “The end is near. They’ve been keeping this house of cards going for a long time with bank support,” he said.

Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. “There is no chance of a 1929-33 depression. We know how to stop it happening again,” he said.

I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites a) understand what happened in the 1930s – on that score I suspect that few, other than the Fed’s Ben Bernanke, have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count);

b) that central banks will now jettison the dogma of inflation-targeting that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?

c) understand that non-US banks – especially Europeans – have used the shadow banking system to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away;

Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks are doing much better? The Europeans fell into the trap of equating this year’s oil and food spike with the events of the early 1970s.

As readers know, I view European Central Bank’s decision to raise rates to 4.25pc in July – when Spain’s property market was already crashing, and Germany and Italy were already in recession – as replay of 1930s ideological madness.

You could say the ECB also acted under the constraints of the age: its rigid inflation mandate. But I suspect that Bundesbank chief Axel Weber and German finance minister Peer Steinbruck were quite simply too arrogant to listen to anybody.

Mr Steinbruck insisted that “German banks are far less vulnerable than US banks” just days before the collapse of Hypo Real with €400bn (£311bn) of liabilities. Had he not read the IMF reports showing that German and European lenders have an even thinner Tier 1 capital base than American banks?

One can only guess what French President Nicolas Sarkozy has been saying to ECB chief Jean-Claude Trichet, but he must have warned in blunt terms that Europe’s leaders would exercise their Maastricht powers to bring the bank to heel unless it slashed rates. Democracies cannot subcontract monetary policy (with all its foreign policy implications) to committees of economists in a fast-moving crisis. Those accountable to their electorates have to take charge.

Whatever occurred behind closed doors, the ECB is now tamed. It has cut rates to 3.75pc, and will cut again soon, perhaps drastically. The risk is that rates have come too late in Europe and Britain to stop a nasty denouement, given the 18-month lag on monetary policy.

We should be thankful that President Sarkozy and Gordon Brown took action in the nick of time to save our banking systems. Their statesmanship should at least spare us mass bankruptcy and unemployment.

But it will not spare us a decade-long toil of pitiful growth – or none at all – as we purge debt. The world stole prosperity from the future for year after year, with the full collusion of governments, regulators, and central banks. Now the future has arrived.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is the Bank of Canada’s assessment of the impact of the global credit crisis on Canada:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081023.wboc1023/BNStory/Business/home

Economy on edge of recession: Bank of Canada

HEATHER SCOFFIELD

Globe and Mail Update
October 23, 2008 at 10:35 AM EDT

The Bank of Canada says the Canadian economy is on the razor's edge of recession, and a full recovery is dubious and distant.

In a blunt 32-page assessment of the global and Canadian economies that is devoid of good news, the central bank says Canada's economy is contracting right now, and won't show any growth in the first quarter of next year.

The forecast ever-so-narrowly avoids projecting a recession, commonly defined as two consecutive quarters of contraction. Instead, the central bank sees the economy shrinking at a 0.4 per cent annual pace in the fourth quarter of this year, and showing zero growth in the first quarter of next year, before picking up speed.

“Economic growth in Canada has slowed abruptly this year, following a period of exceptionally rapid growth in the second half of 2007,” the bank said in its quarterly outlook that was layered with cautions about how unreliable forecasting has become in the face of crisis.


The bank reiterated its intention to continue cutting interest rates as needed. But the cuts won't be enough to fend off some tough times ahead.

The housing boom, which supported much of the spending by Canadian consumers over the past couple of years, has come to a sudden end, the bank said.

Household net worth is declining as equity prices plunge and home prices slide.

Business investment is under pressure because the cost of credit has risen and the availability of credit is evaporating.

Trade won't be as much of a drag on Canada's growth as previously anticipated, but only because domestic demand is softening and Canadians aren't buying imports like they have in the past.

The country's income – which has been on fire in the past couple of years because of rising commodity prices and a strong currency – is poised to contract steeply in 2009. Indeed, the bank now forecasts that Canada's gross domestic income will decline 1.9 per cent next year. That's more than six percentage points than its last such projection.

And with the world's financial system in crisis, and the U.S. and global economies in recession, the bank admits that its already gloomy prognostication for the Canadian economy could easily change.

“The global financial turmoil that began in the late summer of 2007 has worsened in the past two months to become the deepest, broadest, and most persistent financial crisis in decades,” the bank said.

Even though central banks around the world have undertaken major extraordinary measures to bolster financial institutions and maintain confidence in credit, the measures will only work gradually to bring financial conditions back to a more normal state, the Bank of Canada warned.

“These financial headwinds will take time to dissipate, even with the extraordinary recent policy actions just announced. These headwinds are expected to adversely affect consumer and business confidence, thereby contributing to a sharper and more protracted downturn.”

In Canada, businesses have faced “considerable” tightening of credit conditions recently, but credit available to households has been surprisingly strong, the bank pointed out. That can't last, it added.

The path to recovery will be bumpy. Canada's economy will be operating below full capacity throughout 2009. Then, as financial conditions normalize and substantial interest rate cuts around the world stimulate consumer demand and capital expenditures, the domestic economy will start to recover in 2010.

Global growth should pick up by then too, after the U.S. economy bottoms out and then resumes growing. So Canada's exports should benefit at that point, the bank projected.

The bank sees global growth of 2.8 per cent in 2009 – a pace widely considered to be recessionary – and then 4.6 per cent in 2010. For Canada, the economy is expected to grow 0.6 per cent in 2009, and recover with 3.4 per cent in 2010.

But the bank's projections, based on data available until Tuesday of this week, were already questionable by Thursday's publication of the report. It assumes that the Canadian dollar will average 85 cents (U.S.), that the U.S. dollar will depreciate, that oil will be trading around $82 a barrel for the next six months, and that the measures taken recently by major central banks will actually work to stabilize financial markets and credit conditions.

But the Canadian dollar was hovering around 79 cents on Thursday morning, the U.S. dollar was appreciating, and oil was at about $68 a barrel. And it's far from clear that the central bank measures will be effective, or when.

Even if the Canadian and global economies begin a recovery late next year, Canada can't expect to grow any more than 2.4 per cent on average, without prompting the central bank to crack down on inflation, the report stated.

That's because Canada's productivity has been so abysmal over the past decade that the economy's ability to grow without exacerbating inflation has eroded, the central bank said.

So, two quarters (4th of ‘08 and 1st of ‘09) of essentially zero growth, followed by slow but steady growth through 2009 and recovery in 2010 ... they hope.

 

[GAP]

With our dollar below 80 cents US, this should help manufacturing keep getting orders through this tough period.

The US businesses know as well as we do that a 20% savings by ordering from Canada is going to help their bottom line. Why else would they order their stuff manufactured in the far east?

 

[GAP]

Heed the advice of The Smartest Man
DEREK DeCLOET Globe and Mail Update October 25, 2008 at 6:00 AM EDT
Article Link

Crackpot. Crank. Scaremonger. Alarmist.

The Smartest Man We Know has heard the slurs. When you make your living on Wall Street, yet hold the opinion that Wall Street is populated by incompetent fools, you're not going to win a lot of friends at dinner parties, are you?

And when you bet millions that the American financial system is going to fall apart, that its economy will be seized with fear – and when you were doing this and saying this before there was any hint of real trouble – well, you couldn't really expect other people to welcome the message, could you?

The Smartest Man, when delivering his prophesies, did not sugar-coat them. “This could potentially make Long-Term Capital [the financial crisis of 1998] look like some kind of walk in the park,” he predicted. “The reckoning has started.” No soft landing this time: It could even be “like the Great Depression of this century.” He said these things not last week, not last month, but on July 26, 2007. That day, the Dow Jones industrial average closed at 13,473.

But The Smartest Man was just getting warmed up. Checking in with him again this January, he was every bit as gloomy. By that point, credit fires were burning all over the place; the Dow was at 12,500; the world's biggest banks had been forced to turn, cap in hand, to Singapore, China, the Middle East and elsewhere for billions of dollars. It won't be enough, he said. “There's a whole bunch of companies that just have to hit the wall. They can't survive.”

What kind of companies? U.S. financial institutions, mostly. Wachovia looks bad. The major investment banks are shaky. It's about to get a lot uglier, warned The Smartest Man. “The implications of what's going on for the U.S. economy, credit, for lending over all, are not that pleasant to think of.” Two months and two days later, Bear Stearns was gone.

So you can imagine our surprise when the Smartest Man – his real name is Krishnamurthy Narayanan, and he goes by Nandu – showed up in town this week and was bullish.

“I think we're ending the financial crisis now,” he said. “There will be countries, like the U.S., that will go into recession. But this need not be a global recession. And there are some encouraging signs on that front.”

In a different era, The Smartest Man might have been a rocket scientist, or an engineer, or a medical researcher, or maybe a university professor. The academic résumé says: MBA, PhD in finance and economics from the Massachusetts Institute of Technology, studied under Paul Krugman, who just won the Nobel prize for economics. But this is – or at least was – the age of finance, and The Smartest Man became a hedge-fund manager, placing money on his views rather than just writing them.

Lately, that has worked out rather well. His CI Global Opportunities Fund has returned 57 per cent in the past year, 19 per cent (compounded) over the past five. Nice numbers, but once you've made your money calling the credit crisis and short selling Washington Mutual, what do you do then?

You buy Canada, says Mr. Narayanan, who can't believe the way the loonie has been savaged. “The currency is ridiculously undervalued. I can't think of any country in the world that has no fiscal deficit, no trade deficit and no inflation – except Canada. I think the Canadian dollar should go through parity.

“I like the whole Canadian market. I don't particularly dig the banks because I just don't know what's in there [on the balance sheet]. But I'd say virtually everything else is fine.”

You buy some emerging markets, even though they, too, have collapsed in the meltdown. “You can't play the emerging markets by listening to the market action. If the Indian market's down 50 or 60 per cent from its peak, I can assure you nothing's really changed in India. Nothing's changed. The vast majority of people in India don't believe in the stock market,” said Mr. Narayanan, who was born in Chennai, India.

You look to the currencies of Asian countries that are growing and still financially healthy. Singapore, Malaysia and Thailand all have trade surpluses and single-digit inflation. “Most of the Asian emerging markets and emerging currencies are ridiculously priced right now.”

You buy uranium stocks: “Ridiculously cheap.” Gold miners: “Ridiculously cheap.” Pipelines, too: “How bad a business is that? It's a fantastic business. You're just shipping gas. Why are people selling those?” Energy: “Unless there's an absolute collapse in oil demand, you really can't see oil plunge all that much [more].”

There are, however, some things The Smartest Man wouldn't touch. They happen to be the assets the investing masses have flocked to in this crisis: U.S. Treasuries and the greenback. “I don't think it can hold for that much longer.” Once the world has to absorb trillions of dollars in new U.S. debt – watch out. In fact, he thinks the odds of the U.S. having its own currency crisis are “at least 30 per cent.”

Would you want to bet against him?
More on link

 

[JackD]

implications in my side of the pond:
http://www.nytimes.com/2008/10/27/business/worldbusiness/27poland.html?th&emc=th
October 27, 2008
Credit Crisis Slows Economy in Once-Hot Poland
By NICHOLAS KULISH
WARSAW — Poles were jolted last week by the sudden discovery that they were not immune to the financial crisis contagion rippling across the globe. The plunging stock market here and the drastic weakening of the Polish currency proved, as in so many corners of the fast-growing developing world, how wrong they were.

The go-go atmosphere in Poland has abruptly stilled to a cautious wait-and-see. Developers across the country have halted building projects for thousands of apartments as banks have grown stingy with lending. The boomtown energy here has been replaced by nervous eyeing of the once powerful zloty, as it retreats in value against the dollar and the euro.

The daily newspaper Dziennik summed up the mood on Friday with a front-page headline, “Welcome to the Tough Times.” In a country that seemed to be on the fast track to full membership in the Western club, the question on everyone’s lips is, “Why us?”

Emerging markets that seemed healthy, even thriving, barely a month ago are beginning to find themselves caught in the worldwide panic. This sharp turn has caught even the local financial guardians and experts by surprise, as they have clung to their indicators of fundamental economic soundness while forgetting that capital stampedes rarely tarry for fine distinctions.

From Europe’s former Communist bloc to South America, fear and disbelief mingled with frustration that a breakdown in the United States mortgage market — one that most investors and institutions in emerging markets had avoided — was beginning to lead once again to their punishment at the indiscriminate hands of the capital markets.

“Everything is going down,” said Lukasz Tync, 28, an information technology consultant in Warsaw, who said he owned shares in 10 companies and several mutual funds and had been hit hard by five consecutive days of falling stocks at the Warsaw Stock Exchange. The country’s leading index was down 12.6 percent for the week and more than 50 percent for the year.

“The thing is that there is no fundamental basis for such moves,” Mr. Tync said. “It’s just panic.”

Adding to the pain, the zloty has fallen around 17 percent against the dollar over the past week, and more than 10 percent against the euro. The currency has fallen roughly 30 percent against the dollar in October. Economic experts are cutting growth forecasts.

Poland is still considered relatively healthy compared with Hungary and Ukraine, which have been among the hardest hit. On Sunday, the two reached tentative agreements with the International Monetary Fund for loans and other assistance aimed at preventing their financial systems from collapsing. Ukraine will get a loan of at least $16.5 billion. The value of Hungary’s rescue package has not been specified. Still, alarm about Hungary and Ukraine has infected Poland.

“A week ago, people would have told you that this is an oasis of calm and stability,” said Marek Matraszek, founding partner and managing director at CEC Government Relations in Warsaw, a political consulting firm for foreign investors. “They didn’t expect that the lack of confidence in Central Europe would bleed over from Hungary and Ukraine.”

The bleeding has extended much farther. In South Africa, the price of platinum, a major earner of foreign exchange, has cratered, from more than $2,000 an ounce in June to less than $800 now, contributing to a sharp depreciation in that country’s currency. Brazil’s currency has fallen by more than 40 percent against the dollar since August. The Turkish lira has fallen by more than 30 percent against the dollar in recent weeks and almost 20 percent against the euro.

Fuat Karatas, 41, a dental technician in Istanbul, buys some imported materials priced in euros but cannot pass on the rising price to customers, who pay in lira, he said. “Now with the euro going crazy, I have no idea how things are going to work out for me,” he said. “I just want to be able to keep my lab open, nothing more.”

During more prosperous times the risks in emerging market countries were strongly underestimated, said Marek Dabrowski, president of the Center for Social and Economic Research in Warsaw. “Naturally, the global credit crunch and economic slowdown caused overshooting in the opposite direction,” he said.

Emerging-market countries are hardly a homogenous group, but they face similar challenges. The outflows of investor capital driving down their stock markets and pressuring their currencies have occurred just as the demand abroad for their products, whether commodities like oil or manufactured goods like automobiles, has begun to weaken.

But the crisis has not hit the streets right away, buttressing the confidence of many in affected countries that the problems are temporary and can be weathered. Some argue that the declining value of local currencies is even a plus, because it will help these countries sell more goods abroad by making them more affordable.

“When the zloty was so strong, my import was profitable. Just now, I hope my exports will be improving,” said Krzysztof Izydorczyk, 52, owner of Comexpol, an importer and exporter of stainless steel products based in Katowice.

In South Africa, Finance Minister Trevor A. Manuel gave a budget speech to Parliament last week, saying he had seen the warning signs of trouble and had taken appropriate action.

But South Africa is not just facing unpredictable economic pressures. It is also at a perilous political moment, with a likely split in the governing African National Congress and a strong possibility that the unemployment rate will worsen. The economy had been weakening before the global crisis, according to Pieter Laubscher, chief economist at the Bureau for Economic Research at South Africa’s Stellenbosch University.

The commodities boom had drawn investment into the country and had helped drive economic growth, Mr. Laubscher said, but that boom has now fallen victim to the worldwide slowdown.

In Brazil, leaders took pains to save wisely during the commodity boom, reform the country’s banking sector after a financial crisis in the late 1990s and diversify its trade partners. “This country has never been so prepared to face up to adversity as it is now, economically, politically and, I’d say, ideologically,” President Luiz Inácio Lula da Silva said early last week.

But on Wednesday the government empowered state-controlled banks to buy stakes in private financial institutions. Although officials denied any private banks were in danger, the announcement fueled jitters that some could fail, helping send Brazil’s stock market down more than 10 percent that day.

Poles had good reason to believe that they had avoided the stigma that causes investors in emerging markets to flee at the first hint of financial panic. Poland had joined the European Union and NATO, it was a close ally of the United States, it was growing robustly and enjoying swiftly rising living standards unimaginable under Communism.

Experts say there was a consensus locally that Poland would not be affected by the crisis, and that membership in the European Union would buffer it from the worst of the shocks. That consensus has begun to break down.

When the Central Bank of Hungary surprised markets last week by raising interest rates three percentage points to defend its currency, the vulnerability of Central and Eastern Europe received harsher scrutiny.

Poland illustrates the illogic but also the relentless pressure this crisis has exerted, because in many ways it was in good shape. Compared with Hungary, Poland has higher growth, lower inflation, lower interest rates, less public debt relative to the size of its economy and a smaller share of foreign loans. Poland has stronger domestic demand than Hungary to prop up the economy as consumers among its Western trading partners cut spending.

But Poland has not adopted the euro, which might have helped insulate it somewhat. Now the prime minister, Donald Tusk, says Poland hopes to by 2012.

Government officials in Warsaw, including the prime minister, the central banker and the finance minister, have been saying that the Polish economy remains strong and that they expect markets to stabilize.

Indeed, the latest economic news out of Poland has been largely positive. Retail sales rose 11.6 percent in September, compared with the previous year, and the unemployment rate, which exceeded 20 percent just five years ago, fell 0.2 percentage points last month, to 8.9 percent.

At Miedzy Nami, a restaurant in downtown Warsaw, the owner, Ewa Moisan, said she had not seen a slowdown. Yet some customers said they were beginning to feel the pinch. The monthly payment for the apartment mortgage of one customer, Jarek Wiewiorski, has gone up by a fifth, to 1,800 zloty, about $600. “It’s not catastrophic, but it’s painful,” Mr. Wiewiorski, 40, said. “One minute it’s America, the next it’s Hungary, and then suddenly, it’s here.”


Reporting was contributed by Sabrina Tavernise and Sebnem Arsu from Istanbul, Celia W. Dugger from Johannesburg, Alexei Barrionuevo from Rio de Janeiro, Andrew Downie from São Paulo, Brazil, and Michal Piotrowski from Warsaw.


To put things in perspective, my salary (net) per month for my main job is 980 zloties  (after 9 years teaching at college level).... Poland is becoming a two class society - rich and poor....

 

[a_majoor]

The sad fact of the matter is so long as people  are in the grip of irratiional panic, the "good" will be pulled down with the "bad". Canada and Poland are relatively small economies on the global scale (as I recall, the Canadian stock market is all of 2% of the global investment community), so no matter how hard we pull on the oars, we will still be sucked along by the ebb tide. Picture us on a nice sound rowing boat with a picknik basket and well rested crew on the Bay of Fundy and you get the idea.

We will see Poland and other nations with sound economies struggling with the tide in the distance (in this analogy), but the best thing to do is place yourselves in the best position to run out with the tide and be prepared to pull on the oars as the tide slackens. Get your cash ready to invest, as lots of good bargins will be in front of us. On the other hand, many politicians intend to use this crisis (caused by malformed regulatory regimes and regulatory failure) as an excuse to intervene further in the market economy and erode our freedoms further. Can Fascism be far behind?

http://pajamasmedia.com/rogerkimball/2008/10/26/europe-on-the-brink/

Europe on the brink? (And Russia close behind?)

In September, when the financial crisis in the U.S. really started heating up, we were treated to good deal of unattractive crowing from our European and Russian friends. Nicolas Sarkozy, the President of France, announced that the time of “laissez-faire” capitalism, “not . . . constrained by any rules,” was over. Why, I wondered, had he not noticed that capitalism unconstrained by any rules had never been the order of the day and that for the last 150 years or so, capitalism, especially in Europe, had been hemmed in by thousands–actually, tens of thousands–of pages of rules and regulations? Dmitry Medvedev, the puppet president of Russia, told us that the age of U.S. economic dominance was at an end and that the world required a “more just” economic system. But that was before the price of oil had plunged from $145 to $65 a barrel over the course of a few weeks and the tsunami of credit woes that originated in the U.S. had made its way East to Europe and Asia.

How will this financial mess play out? No one knows for sure. Believing as I do in the resilience of capitalism and the resoluteness of the American worker, I suspect that things will sort themselves out in due course. (And how long is a “due”? That’s a good question that I cannot answer.) One thing that is becoming ever more clear, however, is that the economic situation in Europe and Asia is likely to be far worse for a longer period than in the United States. Writing in the London Telegraph today, Ambrose Evans-Pritchard observes that Western European banks hold about three-quarters of the $4.7 trillion in in cross-border bank loans to Eastern Europe, Latin America and emerging markets in Asia. This, Evans-Pritchard notes, is “a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.”

For the last few decades, the West has been pumping money into economic backwaters, taking care first to assure everyone that they were “emerging” markets. But what if it turns out that they only seemed to be emerging when propped up by easy capital, in the absence of which some or all of them reverted to being what they always had been, i.e., submerging markets? What then?

“Europe,” Evans-Pritchard observes, has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.” Demise? Iceland? Well, economically, it pretty much amounts to that: as a professor at the university of Iceland put it earlier this month, “Iceland is bankrupt. . . . . The IMF has to come and rescue us.”

But what happened in Iceland was only the beginning. The crash of so-called “emerging markets” is sending shock waves throughout Europe and parts of Asia. Evans-Pritchard sketches the dismal picture:

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns. . . .

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

In a rational world, these developments would prompt our leaders to reconsider the utopian policies–underwritten, to be sure, by a healthy dose of the profit motive–to issue and guarantee such quantities of risky debt. It should lead to more responsible lending, i.e., lending that proceeds according to the checks and balances of a free market rather than one that is everywhere constrained by the socialistic imperatives of governments that grow ever larger and more controlling. In this world, however, I fear that what we will see are ever more meddlesome initiatives both in the United States and, especially, in Europe. Already we have witnessed tax-and-spend politicians seize upon the credit crisis to propose measures that would take the “private” out of “private property” and would deliver ever more aspects of the economy into the governments’ hands, aiding and abetting their increasingly ambitious efforts to “spread the wealth around.” I shudder to think what embracing such policies would portend for prosperity and freedom.

 

[Kirkhill]

And here Diane Francis declares Warren Buffet to be wrong.  Apparently this is because he has cash to invest and she doesn't.  Ergo he lives in some weird parallel universe. 

My self, I'm inclined to think he might have the rights of the thing.  After all, he has cash to invest and apparently she doesn't.

Regardless of that it was actually this comment that really got my interest (okay poor choice of words these days, my attention):

"The problem with stock markets right now, and for an indefinite time, is that they cannot fulfil their function which is to properly determine price for equities and debt."

I thought that stock markets were merely fora where willing buyers and sellers could engage in commercial transactions at whatever value they deemed mutually acceptable.  The exchanges, I thought, were merely required to ensure that certain rules on information were followed so that buyers and sellers could make informed decisions. 

Apparently Diane Francis is another individual relying on public institutions to give her the "right" answer.

 

[a_majoor]

More from Arthur Laffer:

http://online.wsj.com/article/SB122506830024970697.html?mod=rss_opinion_main

The Age of Prosperity Is Over
This administration and Congress will be remembered like Herbert Hoover.By ARTHUR B. LAFFERArticle

About a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled "The End of Prosperity." Little did we know then how appropriate its release would be earlier this month.

Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."

David GothardWhen markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.

But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.

The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.

These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

I was on the White House staff as George Shultz's economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.

I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

Mr. Laffer is chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let it Happen," just out by Threshold.

Of course the worst case scenario is the "forward looking" expectations of the market is a tax and spend Obama Administration, Democratic supermajority in the Congress or both; causing the market to tank entirely and the economy slide into a depression. The bumper sticker advocating canned goods (Doomed '08) may well become a symbol of good forward planning.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is another report that shows the impact of the credit crisis on Main Street:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081029.wpension29/BNStory/Business/home

'Disaster' unless Ottawa offers pension relief
Companies launch behind-the-scenes lobbying effort for temporary reprieve from pension funding obligations

JANET MCFARLAND AND TARA PERKINS

From Wednesday's Globe and Mail
October 29, 2008 at 12:00 AM EDT

Canadian companies are lobbying the federal government for relief from their pension funding obligations as market turmoil drives down the value of their pension-fund assets.

Pension industry consultants and corporate executives have confirmed that a behind-the-scenes effort is under way to persuade the federal Finance Department to offer a temporary reprieve for a diverse array of companies and not-for-profit organizations. Among the voices lobbying the government is Nav Canada, which operates Canada's air-navigation system.

Some companies say they are facing possible financial devastation if they are required to immediately make enormous contributions to their pension plans to fund shortfalls.

“There are companies that would absolutely fold if they had to make contributions based on the provisions of the legislation as they stand now,” said pension consultant Jeff Kissack of Watson Wyatt in Toronto.

One company executive, who spoke on condition of anonymity, said his firm cannot afford to fund the huge gulf in its pension plan, which was already a problem even before stock markets tumbled this fall. Since the beginning of 2008, Canada's benchmark S&P/TSX composite index has fallen about 37 per cent and Tuesday's surge will do little to offer much relief.

The executive said it cannot be the government's policy intent to act in defence of employee pension plans if it means fatally weakening companies that would otherwise have no other financial problems.

“If you actually force some of those companies out of business, it would be a disaster for the poor pensioners who only get 70 cents on the dollar or 80 cents or whatever it was at that point,” the executive said.

“It's not asking for a tax break or a bailout or a handout. … You're really saying let us use the money earned within the company and being spent to do the best things for people's jobs and for the company in the long run.”

The Office of the Superintendent of Financial Institutions, which oversees about 1,400 federally regulated pension plans, confirmed this week it has met with companies concerned about the impact of the current market turmoil on their defined benefit pension plans.

Judy Cameron, managing director of OSFI's private pension plans division, said OSFI is “monitoring the industry very closely” and is talking to some plans about their funding issues. But she said it is not within OSFI's powers to change funding regulations for plans whose investment holdings have dropped in value.

Such decisions would come from the federal Finance Department, which has not yet offered any commitments of support.

However, a Finance official said Tuesday the department has had a history of providing help to pension funds in difficult circumstances, offering temporary relief in 2006, for example, to help plans cope with funding shortfalls built up earlier in the decade. That relief has since expired.

“The government is closely monitoring developments related to pension funding,” the official confirmed.

One solution proposed by companies would be a temporary extension of the time limit for funding pension shortfalls, increasing it to 10 or 15 years. Companies currently have five years to make up shortfalls.

Another proposal being weighed by Ottawa would give companies a reprieve from doing a pension solvency valuation at year-end, which would help them avoid recording and “locking in” their lower asset valuations for required funding purposes.

Pension funds normally have to do a valuation of their obligations and assets every three years, then plan sponsors have five years to fund shortfalls. However, once federally regulated funds are in a shortfall position, OSFI requires valuations to be done annually.

Ms. Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two.

Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a “solvency” basis, which assumes a company is going to shut its doors immediately and must fund its pension now.

He said the calculation is artificial for most companies that are in good health, but they must nonetheless make large contributions to allow for this worst-case scenario.

“Before the market turmoil, this was a big issue, but now it's much worse,” he said.

Ron Singer, a spokesman for Nav Canada, said yesterday his company is one of the voices urging Ottawa for pension relief, especially regarding the unpopular solvency level funding.

“We are very concerned about the kind of regulations as they apply to solvency – as are most federally regulated companies that have defined benefit plans,” he said.

While I have no doubt that some companies are, indeed, “facing possible financial devastation if they are required to immediately make enormous contributions to their pension plans to fund shortfalls,” I also have no doubt that some other companies just see a ‘pool’ of free money being created and they want a bit of it, too.

The current regulations regarding pension fund solvency have served Canadians – workers and investors alike – well. We have avoided most of the nightmares that plagued America and Europe in the ‘80s and ‘90s. Some companies may need some temporary (repayable) help; some very temporary relaxation of rules may be part of that relief but, essentially, despite the corporate whinging, the system is not in need of a major overhaul because the “worst case scenario” can and does occur every now and again.

 

[Kirkhill]

In 1917, with the Income War Tax Act, the Government of Canada introduced a temporary general tax on income. The tax applied to both personal and corporate income.

    Government of Canada

 

[Edward Campbell]

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

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

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

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

I think we need a Gn in two parts:

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

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

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

 

[GAP]

first question....why Italy....represents the Mediterranean area, but it's economy does not dominate it

second question: what is Mercosur (maybe)

Nothing from Africa.....

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

I think what annoyed me most about Martin, while stating this was that the world should have listened to him and him alone....this Christ on a Cross approach sucks for credibility...but at least he's not lacking in modesty....

 

[Edward Campbell]

first question....why Italy....represents the Mediterranean area, but it's economy does not dominate it

second question: what is Mercosur (maybe)

Nothing from Africa.....
I think what annoyed me most about Martin, while stating this was that the world should have listened to him and him alone....this Christ on a Cross approach sucks for credibility...but at least he's not lacking in modesty....

Italy, like Australia and Canada, is a responsible medium economy - but it could be Spain.  )
                                                                                                                          ) I'm not hung up on who, exactly, just 12 to 15 responsible members, large and small, from various regions.
Maybe South Africa and/or Morocco could be added - replacing someone?                        )

Mercosur is the South American free trade group.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post, is a report on a potentially useful outcome of the credit crisis:

http://www.financialpost.com/news/story.html?id=917627

Crisis used to push for single regulator
Breakthrough in Ottawa's bid for watchdog: advisor

Eoin Callan and Barbara Shecter, National Post; with files from Paul Vieira in Ottawa

Published: Thursday, October 30, 2008


The severity of the global financial crisis has created a sudden opening for Ottawa to ram through a plan to create a single Canadian watchdog to oversee financial markets and replace a jealously guarded system of provincial supervision.

Prime Minister Stephen Harper will force the issue at a meeting of premiers in Ottawa and expects to head to Washington days later armed with a credible pledge to create a national securities regulator, as world leaders gather for the most ambitious economic summit since the end of the Second World War.

The creation of a central authority has been three decades in the making and is seen as vital to bringing Canada into line with other industrialized nations and improving Ottawa's ability to react when the stability of the financial system is threatened.

"It seems ludicrous that others around the world are looking to merge regulation of securities, banking and insurance and we don't even have a single securities regulator," said one person advising the government.

The political opening was created in the past two weeks following urgent appeals for federal relief from provincial ministers and financial institutions, including Desjardins, the biggest lender in Quebec.

A breakthrough came this week after face-to-face negotiations between Finance Minister Jim Flaherty and Monique Jerome-Forget, the Finance Minister of Quebec, the biggest stumbling block to a single regulator.

The federal Finance Minister agreed to belatedly include Desjardins in a national plan to backstop banks, but attached conditions, according to people familiar with the dialogue.

As part of the deal to guarantee new borrowing in international markets by Desjardins, Quebec softened its opposition to moves toward a federal regulator that would include a seat for each province on its governing board, people close to the process said.

Both Ms. Jerome-Forget and Mr. Flaherty declined to comment on the dialogue.

Desjardins fiercely resisted the link between its plea for a federal backstop and government supervision, but was excluded from the talks after officials in Ottawa indicated discomfort at underwriting billions of potential borrowings without closer oversight of the institution's books.

Mr. Flaherty told a Bay Street audience Wednesday that "given the unprecedented turmoil in international financial markets," it was "time to move toward a single securities regulator."

The Minister said Canada faced a "new reality" after the "sudden and dramatic" collapses on Wall Street, with each "raising the risk of Canada's system being side-swiped."

He stressed it was important the new Canadian Securities Regulator "reflects regional interests, yet can quickly respond with a single voice to market developments."

Mr. Flaherty's staff are thought to have a working draft of the legislation ready, following consultations with Washington and London and recent cross-country hearings held by a special panel appointed by the Minister to revive the long-dormant issue.

His comments on Bay Street on Wednesday set the stage for preliminary negotiations between the federal Minister and his provincial counterparts on Monday at Pearson International Airport, before he flies to Brazil for crunch talks with finance chiefs from the Group of 20 most-industrialized nations, itself a warm-up to the leaders' meeting Washington.

Mr. Flaherty will be conspicuous in the company of G20 finance ministers in that he will be the sole finance chief who does not have some direct authority over securities regulation.

"The fact that one of them has no national presence makes us look like a banana republic," said Michael Code, a lawyer who presented to the Expert Panel on Securities Regulation that was established by Mr. Flaherty in February.

The advisor said the current financial and economic crisis is "Exhibit A" in the case for a national regulator because of the global nature, and the co-ordinated response of governments.

Currently, the heads of the central bank and the government's finance department have to meet with the leaders of 13 provincial and territorial securities regulators when acting on the world stage.

This was blamed for slowing Canada's reaction to the crisis at critical moments, including when regulators temporarily suspended the practice of short selling, when financial speculators bet a stock will fall.

This is dull but vitally important stuff. Québec has been a major stumbling block and, in the process, Québec’s ‘leaders’ have done real harm to Canada. The government of Canada ought to have Québec over a barrel right now: a national (less Québec) agency is, probably, all but a reality – if created it would cause all investors everywhere to abandon Québec's banks and major companies; the Montreal Stock exchange would become a bad joke and would soon shrivel and die. Québec has no choice but to hold its nose and join – but the separatists will have a field day making Charest out to be a weak-kneed sell out and making Harper into an anti-Québec bully.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Ottawa Citizen, is a gloom and doom report from TD Canada rust:

http://www.canada.com/ottawacitizen/news/bustech/story.html?id=efac367f-1b2f-4988-afe4-454e54d40ff1

Major recession threatens G7: TD Bank
It 'could be the worst since the Great Depression': forecast

Eric Beauchesne, Canwest News Service

Published: Saturday, November 01, 2008

There is a significant risk that the Group of Seven major industrial countries, which include Canada, will sink into the worst recession since the 1930s Depression, a major Canadian bank warned yesterday.

The Canadian economy will "formally slip into a recession at the end of this year," TD Bank forecast, adding its name to a growing list of financial institutions projecting a downturn.

There is a 30- to 40-per-cent chance that the recession in the G7 industrial countries could be worse than now expected and the worst since the Great Depression, it added.

The dire forecast was issued following news that the Canadian economy shrank by 0.3 per cent in August, which was less than feared, and which economists agreed was small enough to have allowed the economy to skirt a recession in the third quarter of the year.

However, they warned that the economy was on thin ice and that it was going to get thinner.

Scotiabank recently forecast the economy was going into recession, a view shared by analysts at BMOCapital Markets, but not by all forecasters and not by the Bank of Canada.

TD Bank cut its forecast for the Canadian economy to 0.5 per cent this year from its earlier projection of 0.7 and slashed its forecast for next year to 0.5 per cent from 1.2, adding that the downturn could be even worse than it is now projecting.

Under that "pessimistic" scenario, Canada's economy would actually contract by a sizable 0.6 per cent next year.

TD cut its forecasts for the U.S. economy as well, projecting zero growth next year.

"We are also forecasting a deeper global recession," it said, predicting the world economy would expand by only 2.1 per cent.

Here, the contraction in Canada's economy in August reported by Statistics Canada only partly reversed the strong 0.7-per-cent growth spurt posted in July.

"Given the marked deterioration in the economic outlook since that time, it unfortunately will look like a loud early warning shot," said Douglas Porter, economist at BMO Capital Markets, noting the report "is a bit of ancient history, since it precedes the intense financial turmoil which erupted in mid-September."

Adding to the darkening economic outlook here and globally was news that consumers in Canada's largest export market have cut back sharply on their spending. U.S. consumer spending fell a greater-than-expected 0.3 per cent in September, the first monthly decline in two years despite a better-than-anticipated 0.2-per-cent rise in personal incomes.

"Indeed, the sharp decline in consumer spending currently observed in the U.S. will most certainly continue to crimp exports and yield much softer growth," said Marco Lettieri, economist at National Bank of Canada, which projects the Canadian economy will contract during the final quarter of the year, which if matched by a contraction in the first quarter would mean that a technical recession -- defined as back-to-back quarterly contractions -- is in fact under way.

"The tone of the report was very weak, as it suggests that U.S. consumers, a key component of economic activity, may have thrown in the towel," said TD Securities analyst Millan Mulraine.

An indicator of U.S. business activity in October also fell further than expected, and to below what is viewed as the recession level threshold. The Chicago Purchasing Managers Index slumped to 37.8 from 56.7, the first time this year that it has fallen below the 50 point mark, suggesting a contraction in overall activity and with declines the prices, production and employment indicters.

"On balance, this was a very weak report," said Ian Pollick, another TD Securities analyst. "We continue to look for further weakness in the months to come.

The two reports, however, didn't undermine a continuing modest rally on Wall Street, where the blue-chip Dow posted another triple-digit gain of 144.32 points to 9,325.01

However, a powerful three-day rally on Bay Street was cut short, leaving the benchmark TSX down 93.45 points at 9,762.76. Still, the dollar made further gains, rising nearly a full cent to 83.02 cents U.S.

© The Ottawa Citizen 2008​

The US and much of Europe is already in recession so demand for our goods and services is declining, sharply. It is prudent to forecast that we will follow.

But, Prime Minister Harper was being honest during the election campaign: Canada is in much, much better shape than the US or Europe and our recession should be a wee bit shorter but considerably shallower than those in the USA and Europe.

 

[Kirkhill]

.....
But, Prime Minister Harper was being honest during the election campaign: Canada is in much, much better shape than the US or Europe and our recession should be a wee bit shorter but considerably shallower than those in the USA and Europe.

I think that this can be simply explained by Canada having a massive chest of resources, a very diversified industrial sector and an well educated population.  Even if the rest of the world stopped buying and selling Canada could continue to function as a self-contained economy.  It can supply homes. It can supply cars, trucks, roads and planes.  It can build electronic equipment.  It can feed its population.  Most importantly it has the Energy Supplies to be able to do all of those things. 

It does not HAVE to trade to meet its needs. 

It trades to meet its wants.

And given that there are other national economies the MUST trade to meet their needs it is both morally desirable that Canada trade to allow other countries to meet their needs from our surplus capacity and it is materially beneficial to us.

In the paradigm of MacKenzie-King "Trade if necessary, but not necessarily trade."

As long as Canadians don't succumb to believing that American news is Canadian news and instead accept the evidence of their own day to day existence (food in the stores, cars being bought, credit being available.......) and don't succumb to the irrational then there is little reason that Canada shiouldn't broadly continue with "Business as usual".

(Self-serving note here:  It is in my interest for people not to panic - I am currently trying to sell my house.  ;D )

 

[muskrat89]

I'm not sure if this has anything to do with anything, but thought I would add it....

http://www.azcentral.com/news/articles/2008/11/01/20081101hardcredit1101.html

In Mexico, credit is available - at a 70% interest rate

Nov. 1, 2008 12:00 AM
Republic Mexico City Bureau

MEXICO CITY - Plastic skulls and skeleton cutouts lined the aisles of Wal-Mart on Mexico City's University Avenue, ready for last-minute buyers ahead of festivities for Day of the Dead.

But the really scary stuff was in front of the store, where workers passed out fliers offering Wal-Mart credit cards - at a 69.6 percent annual percentage rate.

In Mexico, already-high interest rates are rising even further as banks worldwide tighten lending limits amid a worsening economic crisis. Some economists are worried it could send millions of Mexicans spinning into a cycle of debt, a situation that could hurt the United States, Mexico's largest trading partner.

"There is definitely a risk because you're combining high interest rates with lower income," said Liliana Rojas-Suarez, an economist at the Center for Global Development in Washington.

Up to now, Mexico's financial system has suffered less damage than that seen at U.S. banks because of tougher lending terms imposed after Mexico's own crash in the 1990s.

Mexico also has a much smaller market in derivatives, investment instruments that amplified the credit crisis in the United States.

However, the financial burden on Mexican families is getting steadily heavier.

Since December, average bank credit-card rates have risen 10 percentage points, from 31.61 percent to 41.78 percent in September.

Pamphlets advertising Wal-Mart's variable-interest credit cards warn applicants that interest rates could be 65 percentage points higher than Mexico's prime rate, currently at 8.73 percent.

Costco charge cards carry a 52 percent interest rate. Visa cards from Banamex, Citibank's Mexican branch, charge 46.49 percent.

Woolworth charges 61 percent on a store credit card financed by General Electric. And Suburbia, a chain of clothing stores owned by Wal-Mart, is charging 70.6 percent on its variable-rate card.

Mexicans tend to use non-bank loans, including store cards, far more than bank credit, according to the Financial Services Consumer Protection Commission.In the United States, Wal-Mart's variable-rate charge cards range from 9.87 to 19.87 percent. Nationwide, the average rate for variable-rate credit cards last week was 11.68, according to Bankrate.com.

In recent years, the number of mortgages and car loans also has soared in Mexico, at rates much higher than in the United States.

Ford, for example, was offering five-year, 17 percent loans on a Focus sedan in Mexico City last week, and that was with a 25 percent down payment.

Mexicans are already having trouble meeting their payments, according to the consumer-protection commission.

Credit-card accounts in default rose 28 percent from January to July, from about $1.6 billion to $2 billion.

The number of debtors coming for help at the commission's office on Mexico City's main Insurgentes Avenue has risen from 40 to 75 a day in recent months, counselor Merari Murillo said. She said the increase began around June.

Mexicans are already more than twice as likely to default on their debts as Americans. About 2.7 percent of Mexican loans go into default, compared with 1.1 percent in the United States.

Credit has always been more expensive in Mexico than the United States, said Rafael Amiel, Latin America director at Global Insight, a consulting firm.

Capital is scarcer in Mexico, and thus, banks can charge more for it, Amiel said.

There are fewer banks, meaning less competition. And the banks charge high service fees, allowing them to make profits even though they loan less money.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is a report on the impact of decades of neglect of the productivity issue:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081103.wflaherty1103/BNStory/Business/home

Ontario to receive equalization payments

KEVIN CARMICHAEL

Globe and Mail Update
November 3, 2008 at 8:49 AM EST

Finance Minister Jim Flaherty said Ontario will receive equalization payments for the first time in its history next year, and that the amount will be “more” than Premier Dalton McGuinty's government is anticipating.

“Ontario will be very happy with the figure I give them,” Mr. Flaherty told reporters on his way into a meeting with his provincial and territorial counterparts Monday. “It will be more than they expect.”

The 51-year-old equalization program will be the focal point of the gathering, which is scheduled to end around noon at a hotel near Toronto's Pearson airport. Mr. Flaherty revealed last week that he will take steps to rein in payments, which the minister says are growing at an unsustainable pace of about 15 per cent a year.

Mr. Flaherty, who is facing the first federal budget deficit in more than a decade, declined to provide details of how he will restrain the growth of the equalization program, which seeks to redistribute Canada's wealth to poorer regions from the richer ones.

The program paid $13.6-billion in the current fiscal year to all provinces except Ontario, British Columbia, Saskatchewan and Alberta.

One of the reasons Mr. Flaherty is seeking to rework the program is to account for Ontario's tumble into the group of provinces that will receive payments. The economy of Canada's largest province is being battered by the global financial crisis and a recession in the United States, events that have destroyed demand for Ontario's factory exports.

Ontario Finance Minister Dwight Duncan kept up his government's feud with the federal government, suggesting he thinks Mr. Flaherty's goal is keep the province from receiving equalization payments – despite the federal minister's repeated assertions to the contrary.

“I don't have the sense they get it in terms of Ontario,” Mr. Duncan told reporters.

Mr. Duncan said Mr. Flaherty still hadn't told him any details about the changes in store for the equalization program.

“If you want to have a serious dialogue, you might put a piece of paper in our hands beforehand,” Mr. Duncan said. “We'll receive the proposal. We won't be able to respond today.”

Mr. Duncan risks becoming isolated at the meeting, as many of his colleagues were taking a more collegial tone ahead of their latest meeting. Like Mr. Duncan, finance ministers from Nova Scotia, Prince Edward Island, New Brunswick and Manitoba said in interviews Friday that they were waiting to hear what Mr. Flaherty has in mind for the equalization program.

But while apprehensive about the possibility of lower equalization payments, all four ministers expressed sympathy for Mr. Flaherty's predicament and said they would enter today's meeting with an open mind.

“I can sympathize with what the minister is going through; everyone is going to have to do a little bit of belt tightening,” New Brunswick Finance Minister Victor Boudreau said. “So long as everyone is treated fairly, I'll be okay with that.”

Mr. Flaherty told reporters last week that he wasn't planning to “review” the equalization program, which was overhauled in 2007 after an extensive study by a panel led by Al O'Brien, a former Alberta deputy finance minister.

“We want to make sure that's not a program that gets bent out shape because that's a program that just got put back in shape,” Manitoba Finance Minister Greg Selinger said. “But there's been nothing put on the table, so we have to keep an open mind and find a way to co-operate together.”

PEI Finance Minister Wesley Sheridan acknowledged that Mr. Flaherty's concern over equalization is rooted in the possibility that Ontario might end up drawing from the program. “Once that happens, the cost of equalization grows dramatically,” Mr. Sheridan said.

Nova Scotia Finance Minister Michael Baker said he was unsure about Mr. Flaherty's assertion that the equalization program is growing at an unsustainable rate, since his province is due to receive decreased payments.

“This is a constitutionally mandated program,” Mr. Baker said. “I certainly appreciate the difficult times his budget is in, but it is important to remember that the equalization is just that, a constitutionally mandated program.”

Ontario is the victim of decades of political irresponsibility at the national and provincial levels. The Conservatives, Liberals, Progressive Conservatives, NDP and, indeed BQ must all share the blame.

The federal government has, since at least the 1940s, played favourites – usually often, but not always, to Québec’s advantage – and trying to “pick winners.” (I once heard a very senior civil servant opine that the government’s record at picking winners was worse than random chance; we would have done better he, suggested, had cabinet (or the PM or the Clerk or whoever) simply picked the first (or second, or last) item on any list (a list, by definition, must have two or more items).)

Provincial governments have done much the same – consistently favouring or, at least, forgiving weak, even dying, ill managed companies and sectors in an effort to buy votes.

R&D spending has been grossly misapplied since the 1940s: government should directly fund Research – on a large scale - and only indirectly, through the tax system, support Development (except in a few ’in house’ cases like DND that do both R and D. But effective R&D is one of the real keys to competitiveness and productivity.

Similarly, both national and provincial governments have applied ill-considered corporate/business taxes and regulations especially those related to improving productivity by buying capital equipment. Canadians, people like you and I, have, consistently, demanded that governments ‘tax the rich’ – especially the impersonal rich corporations. We can excuse Canadians for their ignorance but politicians leaders ought to have been just a wee tiny bit more responsible than those they led – that was not, and still is not the case.

Don’t even get me started on the ‘compensation’ for celebrity CEOs or the undue attention paid to unelected, unaccountable celebrity ‘busybodies’ like Maude Barlow and Buzz Hargrove.

Anyway Diefenbaker and Pearson, Trudeau, Mulroney, Chrétien, Martin and Harper, Frost, Davis and Petersen, Rae, Harris and McGuinty and Lesage, Levesque, Bourassa, Bouchard and Charest, too, can all share the blame – but so can we, ordinary Canadians, for ignoring important issues like competitiveness and productivity and whinging for more, more and MORE.