economy

Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

Posted by

6

UPDATE 2:  I asked Denis, my economist friend, how much of the US treasuries is owned by the Canadian government and how much would be owned by the private sector, and he suggest consulting the Bank of Canada balance sheet.  It is clear that the total assets on the balance sheet are 60.8 billion, which means that there is no way that the government of Canada could have lent $134 billion to the US, and that most of the ownership of these US securities must be in the Canadian private sector and can be explained by covered interest arbitrage.  Nevertheless, the reason why this arbitrage happens is because the Bank of Canada has kept the interest rates at low levels and is therefore to blame if the loonie is inflating like crazy.  Denis provided me with the following chart of interest rates:

UPDATE:  Thanks to the comment by blogger 101 Centavos, I finally asked my local Canadian economist if he could tell me what the number $134 billion means.  He says it is not the Canadian government alone that holds this debt, but all Canadian holders both sovereign and private.  I am going to try to reach him by telephone for clarification.  Meanwhile, in the words of the ever opinionated Emily Latella of Saturday Night fame, “Never mind”.

[Please note: the updates above are intended to substantially correct  what follows, which is the original post]

I am thinking about writing a blog for the American Thinker about the announcement that China would spend another 5.4 billion in the Canadian resource sector, this time to buy 5.4 billion of Encana’s natural gas holdings.  My view is that China’s purchases of Canadian resources is more about diversifying themselves out of US treasuries.  But  I found a table updated in November 2010, which shows that the Chinese have actually increased their US treasuries by $265.3 billion since November of 2009 (the chart only goes back that far).  Meanwhile, one stat jumped off the page.  In that same period, Canada has increased its holdings of US debt by $84 billion! I am shocked.

Canadians greatly fear the death of the manufacturing sector.  So now they will tolerate this.  But I am dismayed and shocked that our government is manipulating the Canadian dollar so that it will not rise against the US.  The immorality and the bad management of this situation is beyond words.

A couple years ago, I thought that given the bad fiscal policy of the US government would lead to the loonie soaring against the US dollar.  But now I see that rather than allow that to happen, the Canadian government is subsidizing the American lifestyle and the American bubble.  So that finally explains to me why the loonie remains at par and why price inflation is slow to happen in the US–why price inflation is happening in Canada the same as elsewhere in the world.

Why I think QE will create inflation and why it is qualitatively different than credit expansion

Posted by

2

Meredith Whitney has come down hard on the municipal bonds and she is getting a lot of heat from others, including David Rosenberg.  But even if she is wrong, bonds of all sorts are bad investments because the US dollar is going to hell in a hand basket.  But what about shrinking credit which causes deflation?  I am no economist but here is why I think QE causes inflation while credit expansion is less inflationary:

Inflation is caused by too much money supply chasing too few goods.  Money supply can be created through credit expansion or through QE.  Credit expansion results in the creation of goods and services such as building of houses and manufactured goods, for every time a business borrows, its creates more real wealth in the form of its products.  Every time a home owner buys a house with a mortgage, the demand for new housing goes up and it results in larger supply of homes, i.e., more goods.  Thus, though credit expansion can obviously create bubbles, it also results in the increase of goods and services.

QE, quantitative easing, or the monetization of debt results in a disproportionate demand for goods and service without the creation thereof.  This is because the US federal debt is being monetized, and the US government in turn gives the money to government workers, pensioners, social security, welfare, food stamps, etc.  I.e. to people who increase demand without increasing the quantity of goods and services.  This increased demand, too many dollars chasing to few goods, devalues the dollar.

And this is why I think that QE leads to inflation and why it is much worse than credit expansion.

While helping the poor, remember to be human

Posted by

3

[Originally posted here: While helping the poor, remember to be human]

Steve Hays recently wrote a post analyzing Peter Singer’s (the infamous advocate for infanticide) arguments about poverty. To briefly sum it up: Singer argues on a strictly utilitarian principle that every dollar earned beyond what someone absolutely needs should be given to the poor. No doubt, even if we haven’t read Singer’s arguments, many readers of this blog will have heard this logic expressed by a well-intentioned person at some point in their travels.

Now, Steve already replied along some lines, focusing partly on biblical principles and partly on ones of common sense, that would problematise Singer’s argument. But I wanted to suggest another possible line of response.

Stuart Brown (M.D.) and Christopher Vaughan have written a book about the function of play in the life of human beings (with some mention of its presence in other species as well), arguing about how important it is for human flourishing. They even spend time showing that some business managers have recognized this fact of human nature and have incorporated it into their businesses in some way or another, to good benefit for productivity.

These facts about human nature, then, would seem to suggest another problem with Singer’s position. For, if as all business-people know, “time is money”, by Singer’s logic, we should never spend any time playing. Yet, Brown and Vaughan have shown that play is necessary and beneficial for psychological flourishing and for productivity. The unavoidable conclusion from their work is that, in some sense, human beings need to spend some of their resources on play, rather than only charity, to be the best people they can be. Thus, Singer’s logic will inadvertently, if obeyed, lead to people being less helpful for the poor than they would be if they behaved more like human beings, and less like machines for helping the poor.

And in case the true darkness of such a Singerian ethically pure world escapes anyone, consider what Brown and Vaughan say:

The ability to play is critical not only to being happy, but also to sustaining social relationships and being a creative, innovative person.

If that seems to be a big claim, consider what the world would be like without play. It’s not just an absence of games or sports. Life without play is a life without books, without movies, without art, music, jokes, dramatic stories. Imagine a world with no flirting, no day-dreaming, no comedy, no irony. Such a world would be a pretty grim place to live.

Minimum wage

Posted by

0

One of the factors in this last Great Recession that began in 2008 has been the Federal increase in the minimum wage implemented by US Congress.  Some believe that minimum wage laws actually increase unemployment, but it will be an uphill battle to convince most people that the current unemployment rate, especially of young people, is the direct result of the increase in minimum wage.  I would argue it is at very least a factor.

The builder of the library at the seminary in Africa where I taught told me a story.  He built these massive arches with concrete, all of it mixed by hand, and each arch in a single pour.  Each arch would thus keep dozens of unskilled laborers going several hours as they mixed with shovels and 5 gallon buckets.  One day, one of the workers said, “You know Ken, you should really buy a concrete mixer: just think how much concrete we could make with a mixer!”  So Ken said to them, “Ok.  I’ll buy a mixer but first you have to tell me which eight of you don’t want a job anymore.”

This is a general principle business:  if labor is cheaper than a machine, people will have jobs.  If machines are cheaper, then people get replaced by machines.  Fearsome Tycoon makes this same point: “Wal-Mart responds to a minimum wage hike by replacing more cashiers with machines … ”  At the same seminary, workmen cut grass with machetes.  Suppose the government decided that everyone deserved a raise and so they raised minimum wage.  Guess what?  The seminary would buy lawn mowers and lay off a bunch of people.  If they said you can’t lay off people?  They would just quit that country and go somewhere which didn’t have such onerous labor laws.  (Fearsome Tycoon makes this point too:  quitting is always an option).

In Ontario the minimum wage is about $10.  So as a consequence, there are self-serve check-outs in many of the stores here, including Home Depot.  They are not preferable to a human cashier, but one person making minimum wage can monitor four lines of customers.

Do you want high unemployment?  Increase the minimum wage and make sure that payroll taxes are high.  This increases the cost of labor and people will be replaced by machines or businesses will just simply quit.

The definition of insolvency

Posted by

4

Imagine that you maxed out your credit card, your line of credit, and that you are late making payments on your Visa, your car loan, your mortgage, and all your other bills.  The bank comes to you and says if you don’t pay your credit card bill, your car loan, your mortgage, and your line of credit, we will seize your car, your house, and anything else of value that you may have bought with the credit card.  Now you look at your bills: they are $3500 every month.  But your monthly net income is $2000.  You’re insolvent.

Timothy Geithner, the Treasurer of the United States says that if Congress doesn’t increase the debt limit the United States will default.  Why?  Because the bills are higher than the income. The United States is insolvent.  This is the definition of insolvency.  And Geithner is not lying.  He is, after all, working for the Obama Administration.

So you say to the bank:  Ok.  I’ll be able to pay my bills.  Just let me start another line of credit, and I’ll be able to make the regular payments on all my bills (mortgage, credit card, old line of credit, and car loan) using the new line of credit.  The bank says sure.  Then starts handing out the money.  That bank is called the Federal Reserve, and it is monetizing the insolvency of the United States. When this happens, hyperinflation follows.  It is just a question of doing the math.

(Hat tip:  Monty Pelerin, “The Government is Like NPR pimped by Tim Geithner“)