Canada's Place in the Global Economy

[kevincanada]

A several posts back a few days ago you may have noticed, when I looked at the numbers since the recession began, the vast majority of money printed, spent, created etc. had went into stabilizing bank accounts, corporation holdings and reducing debt, very little has went into circulation for the purposes of purchases goods and job creation.

I do believe Ben Bernanke is on the right track with more QE.  They need to devalue the dollar and keep printing until jobs come back.  If they are buying up the US dollar, yeah it does mean they are scared of it triggering inflation on the Hong Kong end.  China and Hong Kong have been getting a free ride for many decades, we keep buying their cheap goods.  The American dollar is a major player in powering their economy.  If the dollar devalues, It will bring jobs back, we'll see higher level of debt repayment and improved markets as a whole.  As for Hong Kong? Decreased exports and slowed growth, and the outlook not so good.

Obama tried to do the same thing with the made in America clauses on goods, I believe the Republicans shot it down a couple years back.  Obama and Bernanke could be thinking retaining jobs failed using legislation and politics, fine we'll get it done using credit then.

I'm not sure what this report, reproduced under the Fair Dealing provisions of the Copyright Act from the Sunday Straits Times, means, exactly:

http://www.straitstimes.com/breaking-news/money/story/hk-defends-currency-peg-first-time-2009-20121021
My guess: QE (quantitative easing) really means that Ben Bernanke is printing more and more and more money with nothing new happening in the US economy to give it any real value. Thus the US dollar is 'devaluating' itself against e.g. the HK (and Canadian) dollar and this poses a threat to price stability in HK as the US money leaves America in search of real value elsewhere - e.g. HK real estate. In other words "bad" money flows in and drives out "good" money, if you like Gresham.

 

[Edward Campbell]

I'm not sure Bernanke is on the right track but I don't see what other courses are open to him.

From the point of view of HK, Singapore and a few other strong currency countries, however, the US policy is dangerous, so I expect them and maybe a few others may take similar, defensive measures.

 

[kevincanada]

There is no other course open, for anyone really.  We are all to far into debt. the more I learn about this recession, the more I'm blaming Keynesian policy and debt levels gone out of control.  While it stinks for the little countries, They can take all the defensive measures they want.  They are to small to have a choice changing impact.  Hong Kong, is $250 billion GDP est.

According to the Wikipedia, hong kong economy is 90% service, 9% industry.  Perhaps it is their stock market they are worried about. 

Either way, I'm willing to bet we see the American dollar gradually being devalued over a number of years, like how our dollar raised in value over the last few decades.  I think they don't have a choice, Either devalue the money, or invoke trade clauses to stop the jobs from going over seas.  The latter Obama has already tried.

 

[Edward Campbell]

There is no other course open, for anyone really.  We are all to far into debt. the more I learn about this recession, the more I'm blaming Keynesian policy and debt levels gone out of control.  While it stinks for the little countries, They can take all the defensive measures they want.  They are to small to have a choice changing impact.  Hong Kong, is $250 billion GDP est.

According to the Wikipedia, hong kong economy is 90% service, 9% industry.  Perhaps it is their stock market they are worried about. 

Either way, I'm willing to bet we see the American dollar gradually being devalued over a number of years, like how our dollar raised in value over the last few decades.  I think they don't have a choice, Either devalue the money, or invoke trade clauses to stop the jobs from going over seas.  The latter Obama has already tried.

It's the Hong Kong dollar - they, like Singapore - are HUGE traders: in goods, in services and in currencies, but most transactions pass, in part, at least, through HK banks. You need to see the HK (and Singapore) container ports: they, too, are HUGE. You're right, they don't manufacture much, but they are major, global  entrepôts and they buy and sell vast amounts of goods. If their dollars are valued too high they will lose business to other centres. The trading business in HK and Singapore employs many tens of thousands of local people: good, well paying jobs; the governments will do whatever it takes to protect their positions.

While the Singapore and HK economies are, indeed, small ($260 and $245 Billion vs $1,700 Billion for Canada) they are, still, in the top quarter in the world and, on a per capita basis, both are in the top 10 in the world, far ahead of Canada (at about 15th place). They matter in the global economic system and their reaction to US actions matter, too.

But, I suspect that, in general, we are in violent agreement about what can be done.

 

[a_majoor]

Printing money and devaluing currency really only has one end point, as the people living at the end of the Weimar Republic could tell you. Argentinians have also been on the receiving end of hyperinflation, and the Iranian people are learning about this as well.

Devaluing the currency is not the only option for the Americans, nor is it the best. Really the only reason that the Administration allows or encourages this behaviour from the Treasury is:

1. It avoids making tough choices and kicks the can down the road a little farther

2. Real changes like cutting entitlement spending, reforming the tax code or eliminating crony capitalism would inflict huge amounts of pain on the population or political client groups, which politicians would avoid to maintain their power and perques.

Jobs do not "come back" because the government devalues the currency; jobs are created through investment, which needs savings and accumulated wealth to kick start. Creating piles of monopoly money just won't do.

 

[Edward Campbell]

The US Treasury/Administration neither "allows" nor, officially, "encourages" the Federal Reserve. Chairman Bernanke's options are limited to monetary policy, President Obama's are limited to fiscal policy. I agree that President Obama has done a poor job on his end, but that just leaves Ben Bernanke with fewer options.

 

[kevincanada]

I'm not looking to debate you on any of these examples, I think you bring up some good points.  But can you show how reforming the tax code will fix the present problems?  It's a very good point. 

The problem of inflation is actually not so much the Big Banks for this, with cheap money.  There is a few types of inflation, the main two are printing money, and the second raising prices.  Just because they are printing money does not mean the cost of living will go up.  Business raising the cost of goods looking to make a profit is what raises the cost of living.  Easing of credit offsets this.  Somewhere in the wisdom of the Federal Reserve, they use a 2% annual cost of living increase as a target number that seems to keep things running and people happy.

The whole world is so far in the hole now, that doing Quantitative Easing will actually help, there simply is not enough money in circulation.  I should correct that statement, there is enough cash to go around, everyone is still putting it into holdings and pay off debt. Neither of which is good for job growth.  It appears to me that the Federal Reserve has recognized this issue hence the new round of Quantitative Easing.

I just noticed a advertisement here in Canada on television today showing the Canadian economic action plan?  This too is inflation yet another form of it.  If we still have that running, it means we are not out of hot water yet also.  It's a pickle of a situation.
Printing money isn't really that bad,  GDP doubles roughly every 10 years, and the Cost of goods (cpi index) has went up 78% in the last 10 years for the Americans,  We are actually wealthier today than 10 years ago with printing of money, wars and recession all included.

Printing money and devaluing currency really only has one end point, as the people living at the end of the Weimar Republic could tell you. Argentinians have also been on the receiving end of hyperinflation, and the Iranian people are learning about this as well.

Devaluing the currency is not the only option for the Americans, nor is it the best. Really the only reason that the Administration allows or encourages this behaviour from the Treasury is:

1. It avoids making tough choices and kicks the can down the road a little farther

2. Real changes like cutting entitlement spending, reforming the tax code or eliminating crony capitalism would inflict huge amounts of pain on the population or political client groups, which politicians would avoid to maintain their power and perques.

Jobs do not "come back" because the government devalues the currency; jobs are created through investment, which needs savings and accumulated wealth to kick start. Creating piles of monopoly money just won't do.

 

[kevincanada]

I should just throw this out there.  All countries print money.  Always have. Get a mortgage? Swipe a credit card? Car loan?  Student loan?  It is all printing money and inflation of the currency, only difference is now people are taking notice.  It's like GST, PST and HST.  PST/GST was always there, it was just buried in tax code.  You were paying it all along, just you only took notice of it recently since someone made a stink about it. Prime Minister Brian Mulroney, is credited with creating GST, which is 100% false, he only relabeled a existing tax and brought it to the surface and made it public.

Same thing goes for world economy and printing money.  It's been going on since days we all lived in mud huts and traded silver shillings and probably longer than that.

 

[Redeye]

The latter Obama has already tried.

He did? When? Not that protectionism is any broad terms good for anyone, but when did he try it?

 

[a_majoor]

Actually, no.

Commodity money was very "inflation proof", since there was a very fixed supply. You could get the occasional influx on "new" money if you were able to conquer another polity and seize their supply of silver (the best example was the overthrow of the Persian Empire by Alexander III, which liberated a huge horde of gold and silver); but generally, coinage was debased through practices such as "shaving" (done by people) or issuing new coins with a lower weight of precious metal (done by the State).

The next time a large segment of the economy was hit hard by inflation was when the Spanish discovered silver in the New World. Since the Hapsburg economy wasn't growing or generating real wealth at anywhere near the rate new silver was entering the economy, an inflationary spiral began in Spain and spread across Europe. One marker was the replacement of free rowers in galleys by convicts and slaves; it became too expensive to hire rowers so first the Spanish, then the French and eventually the various Italian city states replaced free rowing gangs with convicts (by the Battle of Lepanto, only the Venetians had a large fleet with free oarsmen).

Your point about the difference between "money" and "circulation" also indicates some popular misconceptions. There is indeed a vast amount of money, but it is not in circulation because various factors are discouraging it. Paying off personal and corporate debt is not one (money going from my pocket to pay off a debt is still in circulation, someone else gets to use it), in a larger sense money is sitting idle because there is no practical place to put it. Interest rates are near zero everywhere, suppressing cash investment in bonds and money accounts, while various State actors have basically declared war on investment through various tax schemes (would you want to invest in France when the government declares they want to take 75% of your income? How about Quebec with unspecified future taxation measures against the "rich"). You should note that tax receipts in the UK dropped when the Conservative government raised tax rates, and "millionaires" have vanished in various US States which passed "millionaire tax" laws; mostly through people rearranging their affairs to reduce their tax burdens. Apple Inc. is sitting on an estimated $35 billion in cash since bringing it into the United States would expose it to a punitive tax rate.

As Milton Friedman stated: "inflation is always and everywhere a monetary phenomenon." More money chasing the same amount of goods causes people to bid up the price; that is the essence of inflation.

 

[Edward Campbell]

There is a fundamental difference between debasing coinage, which Gresham described, and devaluing modern currencies and one should be careful about mixing the two; see e.g: http://eh.net/encyclopedia/article/selgin.gresham.law / Extensions to Paper Money and Bimetallism.

The fundamental historical lesson is that a debased or devalued currency reduces confidence which, we can see, does have an impact on the national economic performance.

 

[GAP]

I should just throw this out there.  All countries print money.  Always have. Get a mortgage? Swipe a credit card? Car loan?  Student loan?  It is all printing money and inflation of the currency, only difference is now people are taking notice.  It's like GST, PST and HST.  PST/GST was always there, it was just buried in tax code.  You were paying it all along, just you only took notice of it recently since someone made a stink about it. Prime Minister Brian Mulroney, is credited with creating GST, which is 100% false, he only relabeled a existing tax and brought it to the surface and made it public.

Same thing goes for world economy and printing money.  It's been going on since days we all lived in mud huts and traded silver shillings and probably longer than that.

Actually the GST replaced the hidden Manufacture's Tax that was in place. The GST is a consumer's tax, is visible and covers far more items than the old tax did. It was the Federal Government's mother lode.....

 

[Redeye]

Actually the GST replaced the hidden Manufacture's Tax that was in place. The GST is a consumer's tax, is visible and covers far more items than the old tax did. It was the Federal Government's mother lode.....

Mulroney is often demonized for it, but he replaced a complicated, hidden tax system with a straightforward and visible, transparent consumption tax. And it helped substantially in deficit eradication for his successors.

 

[kevincanada]

Actually, no.

Commodity money was very "inflation proof", since there was a very fixed supply. You could get the occasional influx on "new" money if you were able to conquer another polity and seize their supply of silver (the best example was the overthrow of the Persian Empire by Alexander III, which liberated a huge horde of gold and silver); but generally, coinage was debased through practices such as "shaving" (done by people) or issuing new coins with a lower weight of precious metal (done by the State).

The next time a large segment of the economy was hit hard by inflation was when the Spanish discovered silver in the New World. Since the Hapsburg economy wasn't growing or generating real wealth at anywhere near the rate new silver was entering the economy, an inflationary spiral began in Spain and spread across Europe. One marker was the replacement of free rowers in galleys by convicts and slaves; it became too expensive to hire rowers so first the Spanish, then the French and eventually the various Italian city states replaced free rowing gangs with convicts (by the Battle of Lepanto, only the Venetians had a large fleet with free oarsmen).

Your point about the difference between "money" and "circulation" also indicates some popular misconceptions. There is indeed a vast amount of money, but it is not in circulation because various factors are discouraging it. Paying off personal and corporate debt is not one (money going from my pocket to pay off a debt is still in circulation, someone else gets to use it), in a larger sense money is sitting idle because there is no practical place to put it. Interest rates are near zero everywhere, suppressing cash investment in bonds and money accounts, while various State actors have basically declared war on investment through various tax schemes (would you want to invest in France when the government declares they want to take 75% of your income? How about Quebec with unspecified future taxation measures against the "rich"). You should note that tax receipts in the UK dropped when the Conservative government raised tax rates, and "millionaires" have vanished in various US States which passed "millionaire tax" laws; mostly through people rearranging their affairs to reduce their tax burdens. Apple Inc. is sitting on an estimated $35 billion in cash since bringing it into the United States would expose it to a punitive tax rate.

As Milton Friedman stated: "inflation is always and everywhere a monetary phenomenon." More money chasing the same amount of goods causes people to bid up the price; that is the essence of inflation.

Regarding trading metals back in the day. There was still inflation,  there was never enough money to go around, the bankers at the time issued paper I.O.U's effectively devaluing the money.  It was called fractional banking, there was never enough supply to go around pre-1913? Whenever the Central banks took over.  It's still done today, they use a different method now.  Yes paying off debt doesn't take money out of circulation.  It is still out there I 100% agree.

But when you owe $100 a month, and are only earning $110 a month.  You need to pay down that debt first before you can spend it somewhere else.  Only way to pay it down faster so you can spend it on job creation is with more credit becoming available.  Ergo Quantitative Easing.  The money is in circulation, although not enough to offset the debt load.  The money is out there, but is presently useless.

You can see this looking at the Federal Reserve balance sheets,  They added trillions of dollars since the recession began, the job creation remained stagnant and trillions went into debt repayment.

 

[Edward Campbell]

Regarding trading metals back in the day. There was still inflation,  there was never enough money to go around, the bankers at the time issued paper I.O.U's effectively devaluing the money.  It was called fractional banking, there was never enough supply to go around pre-1913? Whenever the Central banks took over.  It's still done today, they use a different method now.  Yes paying off debt doesn't take money out of circulation.  It is still out there I 100% agree.

But when you owe $100 a month, and are only earning $110 a month.  You need to pay down that debt first before you can spend it somewhere else.  Only way to pay it down faster so you can spend it on job creation is with more credit becoming available.  Ergo Quantitative Easing.  The money is in circulation, although not enough to offset the debt load.  The money is out there, but is presently useless.

You can see this looking at the Federal Reserve balance sheets,  They added trillions of dollars since the recession began, the job creation remained stagnant and trillions went into debt repayment.

:goodpost:

Plus there is, often, some tension between a monetray policy push being offset by a fiscal policy pull in a different direction.

 

[Kirkhill]

If I'm following the conversation correctly what I am hearing is that with QE the Fed is following the same strategy as Chretien and Martin with the Canadian Peso.

They allowed the dollar to fall  thereby devaluing the work of Canadians on the world market.  That made it harder to buy Korean stereos and American cars.  That caused a great deal of aggravation.

That devaluation had little impact on most folks lives because they bought their milk and beer from Canadians, bought their houses from Canadians and bought their money from Canadians.  All of those transactions were unaffected by the international price of Canadian money.

Short form: Canadians were aggravated but employed and not rioting in the streets.

The theory should work for the Americans - and will - and has. 

The problem is one for the rest of the world that is using the American dollar as a means of squirreling away treasure.  They are seeing the size of that pile of treasure get smaller and smaller. 

It is also true of American savers but not equally so.  They are seeing the number of Korean cars they can buy decrease, and the number of barrels of Saudi and Canadian oil.  But they can still, and will still be able to, purchase American cars, American natural gas and American milk at the same rate as ever.

(I accept over-simplification as a criticism).

 

[a_majoor]

Only way to pay it down faster so you can spend it on job creation is with more credit becoming available.

Once again, no. This statement is about as sensible as saying the only way to avoid a hangover is to remain drunk. While it may be "true" in a very narrow sense, getting deeper into debt simply reduces your freedom of action and range of available choices, and having access to more or easier credit is simply a recipie for more debt.

In the age of free banking, any bank could issue currency based on its own asset base, but if it became apparent that the bank was not able to make good on its currency people would collapse the bank by withdrawing all their assets (a bank run). Bank collapses were localized for the most part because most banks did not have a vast asset base or customers covering a wide geographic area. It is also an interesting observation that economic crisis in the free banking era were smaller and over much faster than in the central bank era, although correlation is not causation.

There is evidence that the Great Depression was ultimatly caused by the inflationary excess and debt loads of the Great War, and if true then the current economic crisis starting in 2008 can also be seen as a gobal unwinding or deleveraging. Since Governments around the world seem determined to devalue their currency and inflate their way out of debt, inflation and even hyperinflation will be a large and growing concern. (edit to correct typo)

On that note, I offer the following comparisons:

http://www.theblaze.com/stories/not-just-gas-check-out-the-drastic-price-increases-on-these-21-everyday-items/

NOT JUST GAS! CHECK OUT THE DRASTIC PRICE INCREASES ON THESE 21 EVERYDAY ITEMS
Posted on October 17, 2012 at 11:20am by  Benny Johnson Print »Email »

Tuesday’s presidential debate touched on some massive economic issues that are affecting all Americans. The immense increase in gas prices was a crucial part of the discussion, but have other everyday products seen a drastic increased in price over the same time period?  According to Blaze research on data provided by the the Bureau of Labor Statistics* gas prices are not alone in skyrocketing over the last decade.  Wait till you see chocolate chip cookies!

GASOLINE [ALL TYPES]
2002 Average – $1.44
2012  Average- $3.73
Percent Increase:

158%

BEER [PER 16 OZ.]
2002 Average – $.99
2012 Average-$1.24
Percent Increase:

25%

EGGS, GRADE A, LARGE [PER DOZ.]
2002 Average – $1.03
2012 Average-$1.80
Percent Increase:

73%

COFFEE, GROUND ROAST, ALL SIZES [PER LB.]
2002 Average – $2.92
2012 Average-$5.58
Percent Increase:

90%

PEANUT BUTTER [PER LB.]
2002 Average – $1.96
2012 Average-$2.75
Percent Increase:

40%

MILK, FRESH, WHOLE, FORTIFIED [PER GAL.]
2002 Average – $2.75
2012 Average-$3.47
Percent Increase:

26%

LOAF OF BREAD, WHITE
2002 Average – $1.01
2012 Average-$1.41
Percent Increase:

39%

SPAGHETTI AND MACARONI [PER LB.]
2002 Average – $0.91
2012 Average-$1.32
Percent Increase:

 
44%

ORANGE JUICE [PER 16OZ.]
2002 Average – $1.84
2012 Average-$2.69
Percent Increase:

46%


APPLE, RED DELICIOUS [PER LB.]
2002 Average – $0.94
2012 Average-$1.35
Percent Increase:

43%

WINE [PER 1 LITER]
2002 Average – $6.23
2012 Average-$10.03
Percent Increase:

60%


ELECTRICITY [KILOWATT/ HOUR]
2002 Average – $.091
2012 Average-$.130
Percent Increase:

42%


BEEF STEAKS [PER 16 OZ.]
2002 Average – $4.40
2012 Average-$6.22
Percent Increase:

41%


MARGARINE,SOFT, TUBS  [PER LB.]
2002 Average – $o.86
2012 Average-$2.09
Percent Increase:

143%


TOMATOES [PER LB.]
2002 Average – $1.18
2012 Average-$1.44
Percent Increase:

22%


TURKEY, WHOLE [PER LB.]
2002 Average – $1.05
2012 Average-$1.65
Percent Increase:

56%


BACON [PER LB.]
2002 Average – $3.23
2012 Average-$4.52
Percent Increase:

39%


GROUND BEEF [PER LB.]
2002 Average – $2.28
2012 Average-$3.69
Percent Increase:

61%


COOKIES, CHOCOLATE CHIP [PER LB.]
2002 Average – $2.59
2012 Average-$3.61
Percent Increase:

39%


BUT HAVE NO FEAR, STRAWBERRIES HAVE ONLY INCREASED BY 1 ¢ PER PINT!


STRAWBERRIES [DRY PINT]
2002 Average – $1.70
2012 Average-$1.71
Percent Increase:

.006%
*[Data based on "U.S. city average".]

 

[Kirkhill]

Extract the highs and lows (Gas and Strawberries) and the average increase is 52% over 10 years (2002 to 2012).  Linearized that is about 5.2% per year.

Approximate equivalent inflation rate is a bit over 4.4%.

Actual inflation rate between 2002 and 2012 according to the same BLS source is 2.68%

The delta between the Cherry Picked Data and the BLS Data is 1.7%.

Aggravating but not enough to produce riots in the street.....

 

[Brad Sallows]

Debt needs to be paid off.  Resisting the correction is the equivalent of oversteering in a skid.

If the money supply is increased while productivity remains constant (or falls), it just means more money chasing the same amount of stuff.  The end state is to reduce the "value" of debt, but also savings.  People can tolerate a small amount of price inflation - enough to prevent a deflationary crisis, which means about 1-2% annually - but any more is simply taxation of savings and fixed incomes.  Stealth taxation is abhorrent and should not be tolerated.  I still have a long ways to go until retirement, and my retirement is essentially "defined contribution".  I'm basically inflation-proof, unless the returns on investments can't keep pace with inflation.  I will not suffer if GICs go to 10-12% for 5 year terms again. But there are people - low income seniors, retired (or soon to retire) people who held public or private sector jobs and live on defined benefit pensions - who will be squeezed rather hard.  A little more thought needs to go into their interests.  This blithe "Oh, let's just apply a little monetary inflation" that pundits roll out as if there are no harmful effects is bullsh!t.  I'd rather see some honesty from politicians: jack up the income and other tax rates and face the consequences.

 

[kevincanada]

With the food prices listed above, I'm going to assume you guys did not take notice to the severe drought in the United states which destroyed all kinds of crops and virtually bankrupted many farms in one season this year.

It wasn't inflation that drove those prices up, it was the weather.