What Great Recession?

A follow up on my post concerning the performance of US companies versus the unemployment rate was contained in an article by Neil Reynolds in the Globe and Mail business section on March 30 2011.  

Reynolds contends that while certain sectors of the US economy were severly mauled by the great recession the "average" family and the country on the "average" did quite well.  For example US disposable income adjusted for inflation fell by a mere $99 in 2009 and it increased in 2010 to an all time record of $33,019.  The average net worth of the average American household did not fare as well.  Net worth fell sharply n 2007 but is now increasing by $20,000 per household in 2010 restoring net worth to its mid 1990s level.  The decrease in household net worth is a direct result of a decrease in the value of Americans' homes but for those who did not sell or were not forced to sell or remortgage this is paper loss.  There is strong evidence that a person's home will continue to be a significant part of his or her's net worth. 

How badly was domestic per capital Gross Domestic Product hurt during the recession?  Not badly at all. In 2000 the per capita GDP was almost $38,000.  In 2010 the per capital GDP was almost $43,000.  These numbers are adjusted for inflation.

The article goes on to explain that most of the stimulus money was used to pay down debt.  Americans who were, during most of the first decade of the millennium, experiencing a negative savings rate (that is they were spending more than they earned) are now saving at a rate of over 5% (as a percentage of disposable income).  This takes them back to the 1960's savings rate.

The conclusion of the article is that most Americans are better off this year than they were last year.  "The average household is not unemployed.  The average household is not homeless.  The average household hasn't slipped into poverty".  The average household is saving more than at any time since the 1960s. 

We know that employment lags recovery after a recession.  While employers will spend large amounts of money on machinery, equipment and software that makes their company more efficient, hiring is a human commitment has has far reaching obligations.  This is particularly true if the employer is unionized.  However, employment can't lag indefinitely.  There are jobs that only humans can do.  So it appears that the success of corporations is a harbinger of better things to come.

But averages are just averages.  There are a great number of Americans that are in distress.  There are a large number of people who are homeless and there are a large number of people whose work prospects are dim for the rest of their working (or non-working) lives.  The country is experiencing huge deficits and and unparalleled sovereign debt load.  The tax system will have to absorb corporation's previous losses before the new found prosperity has any positive effect on tax revenues.  The US will have to find a way to transition those in distress to the new prosperity.  Some may have to be retrained.  Some will have to accept work at lesser salaries than what they were formerly earning.  Some may never work again.  Some may never own a home again.  However, I believe that the US economy, the largest in the world, can absorb these social costs.  It will take creative political leadership to achieve this goal.  But, I believe that it can be done.

So this may explain further why the Dow is doing so well while the unemployment rate is extremely high.  In my last post I indicated that large American corporations were doing well and unemployment has only come down marginally.  My post indicated that the cheap dollar was fueling foreign sales.  While that is probably true another factor may be that, on the average, the American household is not doing too badly at all. The lines at the Apple store for the iPad2 are a testament to that.

This is extremely good news for Canada whose economy is highly dependent of the American economy.

Bernie.  

More Profits, Fewer Jobs

I don't have time for a post tomorrow so I thought that I would send along an excellent article in Slate Magazine on why US companies are awash in profits and cash and yet the unemployment rate remains high. See:

More Profits, Fewer Jobs
By Annie Lowrey
http://www.slate.com/id/2289619?wpisrc=sl_ipad

Not covered in the article is the fact that the US stock markets (Dow, S&P, Nasdaq) continue to be strong while other economic fundaments are in the toilet. Consumer demand is down, unemployment is high, the housing market is at an all time low and many of the states are virtually bankrupt. One answer may be that the US has steadfastly kept a lid on its currency thereby making American goods a bargain abroad. Most of the companies cited in this article have a very strong ex-American presence. Also what is not covered in this article (but covered generally in the financial press) is that these profits are generating few tax dollars for the US treasury. GE, for example, had $1B in profits but will pay no tax in the US due to loss carry forwards suffered in the down years. Would I bet on the Dow? Not yet.

Bernie

Neither a Borrower or a Lender Be

A piece in the Globe and Mail this morning on a platform item for the NDP brings to mind the quote from Shakespeare. The NDP would peg maximum credit card rates at 5%+Prime. At first blush this does seem to be such a bad idea. About a third of Canadians cannot pay off their credit card debt at the end of the month. But let's look closer.

In order to set the stage, the credit card companies such as Visa and MasterCard make money on the transaction fees paid by merchants. The loan portion of the transaction--that is when you don't pay the full balance at the end of the month is financed by a bank that sponsors the credit card.

Interest is rent for money and reflects both the cost of money and the risk that the borrower will not repay. Banks are not in the business of funding risk. But credit card divisions of banks do just that. They know, as a matter of statistics, that a significant number of their borrowers will not pay. So, the high rates of 19%+ reflects a rate that the credit worthy borrowers pay to subsidize those who do not pay. The fact that the return on equity by banks who advance this debt is not egregious, you can say that the system works well as it is. If you want to be frugal then credit cards cost you little beyond the annual fee that you pay your bank for issuing the card. If the rate subsidy was not correct and banks made a higher than normal return on equity then others would enter the field and drive down the rates through competition. Conversely if the rate subsidy was not correct and the banks made a lower than normal return on equity they would simply get out of the business.

My guess is that a prime + 5% cap on credit card fees would have a significantly adverse effect for the consumer and on the economy. I believe that this kind of return would not result in a reasonable return on invested capital to the bank. The subsidy would be too low. Since Visa and MasterCard does not want to get out of the business--merchants pay fees whether the customer pays or not--the banks would have to adjust its lending pool to reflect the right amount of subsidy. It would mean that a large number of customers would be dropped off the pool. This would, in turn, reflect a decrease of demand and stores would suffer. For an economy that is driven, for most part, by consumption this is not the right answer.

Economic evidence is that a significant increase in credit card rates does not affect demand much. So long as the minimum payment remains affordable the fact that the debt will not be paid off for 30 years does not seem to bother most consumers. There is rarely any "equity" in the loan--that is any real decrease in the principal. Increasing the minimum payment will have a significant effect on consumers. This is like requiring homeowners to come up with a larger down payment when buying a home. If the credit card debt were amortized over 10 years there would be an incentive on the part of the consumer to save. Those who could not pay the minimum payment would either buy for cash or postpone purchases until they had saved enough. Those who chose the minimum payment would have an affordable payment plan that would give them some equity in the debt in the near term. It would make a nation of savers out of Canadians rather than a nation of deadbeats.

But, you say, such a plan would still have a negative effect on the economy. It would mean less purchases. True, that that decrease would be offset by savings that would, in turn, have a positive effect on the economy.

Bernie.

Money Makes The World Go Around

Regards from sunny Barbados.

A recent article that has made the rounds of the financial pages of many newspapers is that the US is taking steps, along with other nations, to increase the value of the Chinese currency in terms of other hard currencies (US dollar, Euro, etc.). China has notoriously kept the value of its currency low so that its goods, in relation to other currencies, can be imported at low cost to the buyer. We in Canada should know all about that. When our dollar was about 75 cents US, exporters basked in the glow in what amounted to a 25% subsidy of Canadian prices.

To most people the wax and wane of money on the international market is either of no consequence (unless you are shopping in the US) or is so complex that eyes glaze over and yawns are hardly stifled when the subject is brought up. This post hopes to be a "guide to the perplexed". So stifle your yawn.

We all know that money is a medium of exchange. If I have too many chickens and you have too many goats for our own consumption the only way we can trade is if we find a common denominator to value our goods, I price my chickens in terms of that denominator and you price your goats in terms of that denominator and we trade. The denominator is the local currency. This currency can be as common as shells or as strictly controlled as government controlled paper currency. So long as the supply of that currency is stable (no counterfeiting allowed) prices will remain stable. Happily I will not write about what happens when the currency supply becomes unstable--like inflation. Maybe for another post.

All of this works well if we are on an island and we all have what we and others on the island needs. Once we trade off the island--that is with someone who has currency other than our own--another set of rules apply. As between our foreign buyer and ourselves we have no common denominator. You will not accept his currency in payment for your products because you cannot spend that currency on your island. Similarly he cannot accept yours if the trade is the other way. Therefore, before a trade can be made, he must first buy your currency and then trade. Money traders have been engaged in this business for centuries. They buy and sell currencies. What the buyer has to take into account is the cost of buying your currency (if it's a one for one trade then no one suffers; if he gets two of your currency for one of his, i.e. your currency is worth half of his, he is (all other things being equal) a big winner). You, as the local seller do not care. You satisfy your needs with your own currency. So, simply stated, the lower the value of your currency in terms of the foreign purchaser's currency the cheaper your goods are in terms of his currency.

So far so good. Let's take chickens. Lets assume your currency is worth half of the foreign buyer's currency. You want to sell your chicken for $10. It will cost the foreign purchaser $5 in his currency to buy the chicken. But if chickens in his country only sell for $3 then its no deal. He then has to buy your currency at a 70% discount to his currency in order to make a trade

But why are your chickens only worth $3 in terms of the foreigner's currency? Perhaps it is because his country raises chickens through mass production and you are still raising chickens on the farm. Therefore, the 70% discount in currencies reflect your inefficiencies in the production of chickens. In that way, relative currencies keep good score between the efficiencies in various economies. For years, the devalued Canadian dollar measured inefficiencies in the Canadian economy vis a vis the US economy. Some will say Canada caught up (though I doubt it) and therefore the US and Canadian dollars are roughly at par.

All this assumes that currencies can be bought and sold on an open market. If a country artificially reduces the value of its currency (how doesn't matter now) it will makes its goods less expensive in terms of other currencies. That is what China is doing. Aside from the low cost of labour and the efficiencies of mass production it is said that China is adding an additional "sale discount" to its goods by artificially keeping its currency low

What to do about it is for another post. Suffice to know just what's happening in the news.

Bernie.

The Right to Know

A case pending before the Ontario courts involves a divorce case between Mary Elizabeth Harriman and her husband (soon to be ex-husband) the notorious ex colonel Russell Williams.  It appears that soon after Williams’ confession he entered into a marriage contract with his wife transferring to his wife property either owned by him or owned jointly by them. The Ottawa Citizen and the CBC and CTV want the document to be disclosed and be available for public scrutiny. Ms. Harriman wants the document to be sealed and argues that she has had enough grief from the press without enduring yet another invasion of her privacy.  To complicate matters further there is a civil suit between Williams and one of his victims in which it is alleged that the marriage contract is a fraudulent preference shielding Williams’ assets from his creditors.  The court has not yet ruled. Who is right?

Normally courts rule in favour of openness.  The public’s right to know often trumps inconvenience and embarrassment of the person trying to suppress the document.  The assumption is that there is some public benefit to disclosure.  These cases usually involve governments who, for reasons of national security or otherwise, refuse to disclose volatile documents.  But why should the public have any interest in what was a private arrangement between Williams and his wife?  If the document has any relevance in a civil suit it will be disclosed to plaintiff’s counsel in the discovery process.  If I choose to give assets to my wife should this matter be publically disclosed and commented on by the press?

The press’s right to know has been enlarged over the past decades.  Governments have participated in this enlargement by passing omnibus freedom of information legislation that gives the public access to certain public documents.  The voracious appetite for news and the endless news cycle of cable stations such as CNN has fed on the expansion of the “right to know’ to the “right to know everything”.  The privacy of both public persona and the individual has suffered. 

Add to this the public’s disregard for its own privacy.  Contributors to Facebook and Twitter are not shy about revealing the most intimate details of their lives.  Acts of rape are transmitted through cell phones.  Teenagers send salacious pictures to their friends only to find out that these communications can go viral on YouTube. This disregard for personal privacy makes the courts less likely to rule in favour of the individual when the right to privacy comes up in civil litigation.  There is almost a presumption biased in favour of disclosure.

The invasion of personal privacy is everywhere.  From security cameras posted on public building that broadcast the image of persons passing by to Google that sends cars through cities in order to photograph cityscapes a person’s right to privacy is invaded every day.  Add to this invasive searches in the name of national security at airports and other transportation services and it becomes apparent that the right to privacy is not only eroding but its erosion is taken as a fact of life by the younger population.

These trends tend to embolden the media.  Who cares if the Williams’ engaged in some “estate planning” after his confession?  If anyone needs to know, really needs to know—such as a creditor—there is a way to make that available to the creditor without making it available to the world.  I hope that the judge sees it my way.

This is the last post for about a week.  Don’t be shy.  Post your comments.

Bernie.

The Politics of Politics

Why does a country like Canada have 4 elections in 7 years?  Why does a country that is supposed to be otherwise as dull as dust believe that yet another election will solve its structural problems?  For those with a long memory, minority governments are no stranger to the Canadian political landscape.  The following are minority governments since Confederation followed by the party and the prime minister of the day:

1921-1925	Liberal	William Lyon Mackenzie King
1925-1926	Liberal	William Lyon Mackenzie King
1926-1926	Conservative	Arthur Meighen
1926-1930	Liberal	William Lyon Mackenzie King
1957-1958	Progressive Conservative	John Diefenbaker
1962-1963	Progressive Conservative	John Diefenbaker
1963-1965	Liberal	Lester Pearson
1965-1968	Liberal	Lester Pearson
1972-1974	Liberal	Pierre Trudeau
1979-1980	Progressive Conservative	Joe Clark
2004-2006	Liberal	Paul Martin
2006-	Conservative	Stephen Harper

Except for the long reigns of Mackenzie King and Louis St. Laurent the country has chosen to be fractious and has elected many minority governments.

Consider the make up of Canada, old a new.  During the Mackenzie King and St. Laurent years Quebec was politically quiet under the iron fist of its fascist leader Maurice Duplessis.   With the rise of Quebec nationalism came a flexing of its political muscle both provincially and nationally culminating in a national party that is somewhat dedicated to the secession of Quebec from Canada.  The Canadian west and in particular the prairie provinces were home to some of Canada’s wackiest political parties (Social Credit) and some of it’s most socially conscious (the NDP).  The Maritime Provinces have been mainly a Liberal stronghold with a smattering of Conservative and NDP support.  Ontario, once a liberal stronghold has diluted that support to the benefit of both the Conservatives and the NDP.  The real balance of power in Canada lies with the Parti Quebecois.  Once a Liberal stronghold, Quebec can no longer deliver the votes that kept Louis St. Laurent and Trudeau in power.

Note the legislation that was enacted by minority governments:

•                In the 1960s, Pearson's minority Liberal government introduced several key components of Canada's modern social-welfare system, including universal health care, government loans for university students, the Canada Assistance Plan (CAP), and the Canada Pension Plan (CPP). These initiatives were in part due to the close cooperation between the Liberals and New Democratic Party during Pearson's minority governments.

•                Between 1972 and 1974, Trudeau introduced a program of economic nationalism that included the creation of Petro Canada. In addition, old age pensions were indexed to the cost of living. Again, this was due in part to the close cooperation between the Liberals and NDP during Trudeau's minority government.

Note that these significant pieces of legislation were enacted with the co-operation of the NDP.  This is the political alliance that were much touted as an alternative government in the past year until the Conservatives prorogued Parliament in what amounted to a coup d’état.  In recent years the Conservatives have governed without much input from the minority parties.  In fact the Conservatives have governed without much outside input from anyone.

The problem, as I see it, is in the center left of Canadian politics.  The Conservative party is made up of the rump Conservative party tied together with the prairie Reform Party.  This has moved the new Conservatives well to the right of Canadian politics.  The Liberal party used to occupy the center left.  However, the NDP has move sufficiently to the right to occupy most of the Liberal political space.  Therefore the Liberals are, as they are in the UK, becoming redundant.  There is not enough political space between the Liberals and the NDP to cause voters to choose definitively between one and the other.  The far right voters will now have to choose between Conservatives and the NDP.  The Liberals are are a much less significant factor in Canadian politics.  Until the political left center is occupied by a credible political party the Parti Quebecois will continue to hold the balance of power and we will continue to have minority governments.

Bernie.

The Budget and Other Mythologies

I am back from the sunny south. 

I remember being in lockups on budget day so that state secrets would not be leaked to the avaricious business community.  I also remember taking a significant part in the budget of 1984 as a consultant to the deputy minister of Department of Finance.  I therefore had an outside and insider's look at the budget process that you might find interesting.

The budget is made up of two or even three components.  First, there is the big picture.  This is the economic component of the budget that signals the government’s fiscal intent in the next year.  The second component is the “goodies” and “baddies” part of the budget that tries to fine tune existing provisions to the detriment or benefit of certain taxpayers.  Lastly there is the remedial part of the budget that tries to fix what is called “loopholes” in the legislation.

It appears to me that this budget was drafted knowing that it would never see the light of day as legislation.  There were obvious sops to the NDP.  The signs that government was to take on a much smaller dimension was offset by a tax gift to corporations that is sure to be translated to large party gifts from industry for the upcoming election.  The $300 tax credit to children participating in the arts is laughable.  The $3,000 tax credit to volunteer firemen seems excessive.  It was all for show.

However, the provisions aimed at plugging a “loophole” regarding flow through shares is interesting.  This loophole reduced the after tax cost of making a charitable gift to about 15 cents on the dollar This government has never been big on the arts and culture of the nation.  The flow through share mechanism did two things that seemed beneficial to Canada.  First, it funneled money into the extractive industries.  Many millions of investment dollars went to create jobs in the mining sector.  Second, it funneled money into the arts and other charities on a highly tax subsidized basis.  With the remediation of the so called loophole there will be a considerable swing of funds away from mining, the arts and other charities.  What appears strange is that this process was sanctioned by letters from CRA indicating that the process was quite legal and within the provisions of the Income Tax Act.  What changed the government’s mind?  No one knows for sure.  If you love the arts or hold mining stocks don't vote Conservative.

The other economic indicator that is worrisome is the stated aim to reduce the size of government.  There are several belt tightening provisions that require a freeze on hiring and the requirement that the departments do more with less. Shades of the Tea Party in the US. Having lived this long in the capital of Canada I know that government reduction plans are doomed to failure.  These usually result in the outsourcing of work that is hidden somewhere in departmental budgets.  Governments grow because they are tasked with more and more work as programs expand.  True that there could be significant efficiencies in government but, unlike the US, our government faces unions at almost every level that have the effect of perpetuating inefficiencies.  Like it or not, that’s the way it is.  Outsourcing makes the departmental spending process less transparent.  So why has the Conservative government participated in this pretense?  Its good politics.  It shows fiscal prudence that everyone knows is a sham. 

So, we’re in for another election.  More about that in a later post.

We Have Met The Enemy and They Are Us

This is the last post for about two weeks.  I will be wintering in Florida for about 10 days and “working” in Barbados thereafter.  I will recommence early April.

Today’s title comes from the famous comic strip Pogo.  After much political strife in the US (no can remember what the specific events were) Pogo makes this declarative statement.  We are our own worst enemies.  And why bring this up now?  I read an article in the Globe and Mail by Jeffrey Simpson entitled “The Truth About Attach Ads: They Work”  (See: (http://www.theglobeandmail.com/news/opinions/opinion/the-truth-about-attack-ads-they-work/article1934235/)

A short summary of his findings on political attack ad strategy is that (1) they fire up the party base and,  (2) they misinform (or is it dis-inform) the uninformed.  Nothing new here.  Politicians have been slinging mud since….well, since there have been politicians. 

However, that begs the question.  There used to be public floggings, hangings and the English sheriff dropped the accused down a well to prove his innocence in a trial by ordeal.  I am more interested in the overall social context of negative political advertising and personal attacks. 

It is well know that 50 years ago the press exercised considerable restraint in reporting on the various and varied sexual escapades of President Kennedy.  Kennedy's deed were important not his personal life. They were less restrained when it came to President Clinton.  Now, every peccadillo is reported in the press and the insatiable maw of "news" television.

So why complain?  I complain because of the general loss of civility that seems to plague society.  There appears to be nothing that is sacrosanct.  Every fall from grace whether by entertainers, actors and politicians is reported.  We draw the fine line between the right to know to the right to be nauseated.  TV sitcoms depict family life that is, frankly, bizarre. Some of the viewing audience can't distinguish between fantasy and reality.  Bizarre behaviour is taken as the norm.

Some time ago I read a book that posited that there are eternal truths that are learned in kindergarten.  These are truths like sharing, not speaking when others are speaking, respect etc.  This is what we teach children who are very young.  Unfortunately by the time they are adolescents, or even earlier, they have become jaded and skeptical. There is almost no reasonable ethical standard of behavior that isn’t violated by politicians, entertainers, athletes and others in public life.  The documented evidence of adolescents cheating on tests, plagiarized papers, life threatening bullying and other antisocial acts has a serious effect on conduct in later life. Some writers have linked these behaviours to predatory business practices in later life. What happened to the eternal truths that we learned in kindergarten.

Political negative and attack ads are just a part of the overall incivility that increasingly occurs in society.  These ads have two negative effects that are long lasting.   First it demeans politicians.  The Parliamentary system is all we have.  If a private member’s bill to bring more civility to question period can’t get off the order paper we are lost.  Second, it brings a level of skepticism to politics and politicians that repels young people from public service.  And that’s not good.  Because good people  people will not stand for public office we are confining the pool of prospective politicians to those who believe that the cesspool of name calling and finger pointing is justified.  Thirdly it reinforces an attitude that the means, no matter how despicable, justify the ends.   This is not the kind of values that we want to transmit to our kids and grandkids.  Perhaps we should have kept them all in kindergarten.

Bernie.

Singling Out the Enemy

Congressional hearings in the United States have been called by the powerful Homeland Security Committee of Congress into “the Muslim threat to the country”.  A hue and cry has gone out from the liberal press decrying these hearings as discriminating against a minority group.  This, they say, is akin to McCarthyism.  Bob Hebert in an op-ed piece in the New York Times  (http://www.nytimes.com/2011/03/08/opinion/08herbert.html?ref=opinion) writes that Rabbi Marc Schneier, the president of the Foundation for Ethnic Understanding, was among some 500 people at a rally in Times Square on Sunday that was called to protest Mr. King’s hearings. “To single out Muslim-Americans as the source of homegrown terrorism,” he said, “and not examine all forms of violence motivated by extremist belief — that, my friends, is an injustice.”

We have all lived through  (or at least, for my younger readers, read about) the circumstances where minority groups have been singled out for “special treatment”.  While the Holocaust immediately comes to mind there are other equally egregious actions that are undertaken under the watchful eye of human rights activists. Think Darfur, the Balkans and the unending tribal strife in Africa.

However, that is not what I want to write about today.  I want to recount an emotional walk that I took in Berlin where banners were flying from streetlamps. The banners indicated the subtle “rights” that were taken away from Jews in Germany by a legally elected Reichstag.  These included a ban on sitting on park benches, a ban on attending concerts, a restriction on shopping hours and the removal of healthcare rights.  Each ordinance by itself was a small matter.  Each one, by itself, would hardly stir up the local population. The local population, as a whole, did little or nothing to protect a minority group from these injustices.  I wonder why.

I once asked my brother what he thought about the interment of the Japanese and the confiscation of their property during World War II.  After all, he was a member of a minority religious group who, at that time, suffered prejudice almost every day.  My brother thought nothing of the injustice meted out to the Japanese.  They were, after all, the “enemy”.  The fact that they were Canadian citizens did not seem to count.  The mere possibility of “dual loyalty” was enough to put them away.

We are too fast to categorize minority groups, whether ethnic, religious or otherwise as having, as a group, this or that undesirable trait.  We accuse some of being, at best, unpatriotic and, at worst, enemies of the state.  As the song in South Pacific says, “You Have to Learn to Hate”. 

In Canada the problem is exacerbated.  Our immigration policy has encouraged people from third world countries to make Canada their home.  We have some of the largest expatriate populations of any country in the world.  For the most part these immigrants have made splendid contributions to Canada.  However, some of the younger members of these groups have fallen on bad times.  This is, largely, because our education and social services systems do not have the infrastructure and the money to give these young people the necessary skills to obtain higher education or to be integrated into our workforce.  Too often, I hear racial slurs against minority groups as a whole. 

We can all help.  It starts with our children.  If they hear racial slurs at home they will get repeated at school or in the playground.  It starts with standing up to someone who utters a racial slur or tells a racial joke. Tell them that this kind of behavior is unacceptable.  This takes fortitude.  It starts with joining civic groups that help newcomers integrate into our communities as productive members.  Possibly we can avoid the kind of finger pointing that is now going on in the US congress.

Bernie

Going to Bed Hungry

On Sunday night (March 6 2011) 60 Minutes (http://www.cbsnews.com/sections/60minutes/main3415.shtml) ran a feature on the new poverty levels among children in the United States.  In the past about 15% of the children in America were considered to be at or below the poverty level.  Within the last two years that level has jumped to 25% overall and up to 30% in some regions of America.  That is, one in four and in some states one in three children go to bed hungry.  No matter how one defines poverty that number borders on the scandalous for a country that boasts that it is the number one economy in the world.

No one suggests that China is a children’s haven and no one would suggest that living under an authoritarian regime is better than living in the West.  However, China has taken huge steps to deal with child hunger in that country.  True, this may not be an altruistic gesture on the part of the leaders.  Child hunger leads to revolution and civil unrest.  There is already enough of that in China.  But America boasts world-class achievements in business, science, technology etc. It cannot boast about child hunger.

I have lived in the United States for many years.  Many Canadians believe that the undefended (not so much now) border, a common language (with a significant second language) and much importation of cultural detritus means that we are like them and they are like us.  Not so.   There are so many ingrained differences that to compare Americans to Canadian is to compare chalk to cheese.

The American nation was born out of conflict. This long-ago conflict gives rise to Wild West attitudes. These include First Amendment rights that insure that even the most venomous speech is protected by the Constitution and freedom of assembly rights that protect Nazis walking the streets spewing anti-Semitic and racial slogans with impunity.  The right of the individual is so paramount that the collective ethos is to disregard basic social safety nets that we take for granted in Canada.  Providing basic healthcare is seen as a government takeover of society. Americans cherish their rights.  Including the right of children to go hungry and receive poor medical services. 

I would invite everyone to see the 60 Minute segment.  It’s heartbreaking.  What’s more, the long term negative effects both economically and socially on these children are yet to be felt. 

Millions, even billions of dollars have been spent on bailing out the banks in America.  Billions are spent in largely useless wars.  Where is the money to bail out these people?  People have been dispossessed of their homes and their jobs.  People’s families have been ripped asunder.

We are far from blameless in Canada for neglecting our poor and our homeless.  However, I believe that the Canadian ethos is more inclined to spend public money to bring relief to these people. 

Bernie.

The Gas Crunch

A recent article in The Economist indicates that the rising price of oil will have little effect on the recovery of most G20 economies.  These countries have very low inflation rates and can absorb a reasonable hit before the rising prices of gas and other commodities that are affected by gas (food, transportation) have a negative effect on demand.  Rising oil prices, they say, is merely a blip that may be painful in the short term but will have little or no long-term effect.

But, should we be so sanguine?  Let me suggest two scenarios that give pause for thought. 

1.     Further price increases in developing countries cannot be tolerated.  Where so much of the population is barely about the world poverty line of $2 per day per worker any reasonable increase in food prices can be catastrophic.  With many of the developing countries in turmoil (and others close to turmoil) rising food prices will fuel demand for reform.  Some of the leaders in these countries (Saudi) have promised food subsidies but these do not last forever.  The simmering pot of unrest of much of the developing world would quickly come to a boil.  With devastating results for the world at large.

2.     The United States recovery is so fragile that any hard hit in prices may have the effect of dampening demand resulting in a double dip recession.  Recent performance of the US DOW and NASDAQ would indicate that the market, at least, is optomistic about world conditions in general and the price of oil in particular. However, the DOW has been wrong before. We may be looking for a sharp correction in equities in the near term.

For the present time the Saudis are increasing oil production to counteract the loss of production in Libya.  The OPEC countries count on recovery of world economies to push demand for oil.  However there is some consensus that the new normal will be high oil prices.  Some analysts peg the new normal at about $130 for Brent crude.  That new reality will result in gas at the pump at more than $1.30/liter or close to $5/gallon in the US.  While gas has been that price in Europe for many years there is excellent public transportation and food prices have adjusted (or there are significant farm subsidies—think France).  In Canada and the US farm subsidies continue so that the price of food is still artificially low. In the US and Canada we still have to build one high-speed train for inter-urban travel.  Our public transportation systems are obsolete  and  are crumbling (think the New York Subway, Amtrak and Via Rail) when compared to other countries outside of the North American hemisphere.

While we see a great deal of analysis of this in the press there is very little discussion about this by politicians.  In the US the far right wants to disengage government.  In Canada there is no leadership by any political party (with the possible exception of the NDP) on these issues. We have to be concerned.   Our future and the future of our kids and grandkids depend on it.

Bernie.

Machines Do The Work of Thousands of Lawyers

A story published in the New York Times this morning (March 5 2011) indicated that new computers armed with artificial intelligence can do the work of thousands of lawyers in vetting documents in the discovery process of a lawsuit.  The cost has dropped from millions of dollars to mere hundreds of thousands of dollars.  I won't go into the rising cost of lawsuits that have relegated litigation to the wealthy but, another thought crossed my mind.  What about those lawyers who will be unemployed in this cost saving measure.  Not an idle thought.

The G20 world is based on innovation and the export of low tech jobs to less developed countries.  This has resulted in the loss of millions of jobs in the United States and elsewhere.  On the flip side these have created millions of jobs in countries like India.  It has fired the economy of China to being the second largest in the world.  In economics it is called comparative advantage.  Everybody wins. The developed economies keep the higher paid skilled jobs.  The less developed economies get jobs at better rates than t workers normally make.

The challenge of the G20 world is to keep its edge in innovation while exporting low tech jobs to developing economies.  Israel has done this very well, but it's a small country.  It requires that education levels in the higher developed countries will produce people who can create and sustain innovation.  America is falling back in creating a literate/numerate work force.  Yes there is a sliver of highly educated people doing innovative work.  But generally he United States are falling behind.  Compare this to India or China.  These economies are creating better trained workers who will, in turn, drive innovation.  China is already the world leader in battery storage devices for electrically powered automobiles.

Getting back to the smart computer.  In the past, innovation has created employment.  Not so much for the innovator--it does not take thousand of job to create and maintain Facebook.  But what about the labour situation where the job dense task is taken over by a machine!  Where do the low tech jobs go?  Who replaces the thousands of lawyers who now don't have document reading/analysis to do?  In a world where machines will be doing more and more of the work the dislocation of workers even at the mid level of employment will be severe.  Watson may have all the answers.  But who will be listening. More of this later.

Bernie.