Home before Brexit!

We are off for a couple of weeks, first to Italy and then to the UK.  What with the European soccer championships and the Brexit campaign, there should be plenty of material to write about when we are back online in mid-June -- ahead of both the soccer final and the actual Brexit vote!

Washed up pol seeks big bucks

We haven't heard much from Stephen Harper since he led his Tories to a heavy defeat in last October's Federal election.  Last night he surfaced in Vancouver to give a brief and surprisingly upbeat speech, but it seems his political career is at an end.  He's expected to resign his seat in Parliament very soon in order to seek his fortune in the private sector -- where, despite his free-market rhetoric, he's never actually worked.

Harper is an economist by training (yeah, I know -- not a lot of it seems to have sunk in) but it seems his chosen field going forward will be foreign affairs.  He is reportedly going to set up some kind of consultancy practice.  It seems unlikely, based on his track record in dealing with the rest of the world, that his clients will be able to turn to him for a balanced approach.  Over his decade in power he enjoyed a permafrosty relationship with the United States; offered support to Israel that was embarrassing even to the Likudniks; talked tough against Russia in order to win the votes of the million or more Ukrainian Canadians; deployed six geriatric fighter jets to Syria for the fight against ISIS; and kept Canada aloof from any and all efforts to deal with climate change.

Still, a history of lies, failures and empty gestures need not keep an ex-PM from cashing in on his fame.  Just ask Tony Blair, who has been positively rolling in dough since stepping down in the UK. Investment banks have beaten a path to his door with fistfuls of money.  One of Tone's first prestige gigs was the little matter of bringing peace to the Middle East. Memorably, the day after he got the job he took off for a vacation in Barbados, and for all the good he's done in the world's most troubled region, he might just as well have stayed there ever since --  though I wouldn't wish that on the Bajans, who already have to suffer the presence of Cliff Richard and Simon Cowell.

Stephen Harper isn't the kind of swivel-eyed loon that Tony Blair has become, but at the same time, he doesn't carry the same degree of prestige -- Blair did, after all, bring the two sides together in Northern Ireland, a truly remarkable achievement.  Still, he can probably count on a decent payday or two, and I'm fine with that, just as long as he never runs for elected office again.  

Fire damage

The huge wildfire that scorched the city of Fort McMurray at the start of the month is still burning, but for the moment it's moving east, away from the city and from the oil sands mines that are Fort McMurray's raison d'etre.  Some of the oil sands facilities that were closed down in response to the fire have re-opened and others will do so soon. The residents of Fort McMurray itself will start returning home on June 1, barring a deterioration in the fire situation.

Today the Bank of Canada took careful notice of the impact of the fire as it issued its latest policy decision -- which was, as generally expected, for no change in its 0.5 percent reference rate.  The Bank estimates that the fire will cut as much as 1.25 percent from Canada's GDP in Q2, probably leading to an overall decline in national output for the quarter.

This is rather more pessimistic than the forecasts from most private sector analysts, which have generally placed the hit to GDP closer to 0.5 percent.  However, the Bank is benefiting from a kind of last-mover advantage.  The shutdown in the oil sands has lasted much longer than seemed likely at the outset, so it stands to reason that the impact will be greater than first thought.  Moreover, after one attempted restart that had to be hastily aborted when the fire changed course, the operators are being cautious. As the operator of the giant Syncrude plant noted, this has been the first shutdown in their facility since it opened in 1978, so they want to be sure they get things right as they ramp back up.

The Bank of Canada correctly noted that GDP will recover in Q3, as the oil sands plants presumably move back to normal operation and the reconstruction efforts in Fort McMurray get under way. This being the case, it is entirely appropriate that the Bank kept rates unchanged today, in the face of a severe but transitory setback caused by the fire.

It is noteworthy that the Canadian dollar, which was on something of a tear from February to April, has not benefited from the recent bounce in global oil prices, which has reflected developments in Nigeria and Venezuela as well as the Alberta fires.  Expectations of a Fed rate hike in June are clearly the major driver of the C$ exchange rate, at least for the time being.  This is welcome news for the Bank, which remains anxious to see an improvement in non-oil exports in order to rebalance the economy away from its previous dependence on the resource sector.  It remains probable that Canadian rates will stay at their current level well into 2017.

Fed and Brexit

Rhetoric from Fed Governors this week, together with the release of fairly hawkish minutes from the April FOMC meeting, seem to have convinced markets that the next hike in the Fed funds rate will come in June.  That's very likely true, although the FOMC minutes give off an odd sense of having been written in a different era. Some of the recent domestic data, particularly relating to the all-important jobs market,  has been a little weaker than in previous months. Moreover, the FOMC's assertion that the headwinds the US economy faces from events overseas had begun to weaken now seems questionable.  Oil prices have rebounded sharply and China's economy continues to slow.

It may be that neither of those developments will deter the Fed from moving in June -- but what about Brexit?  The FOMC meets just a week before the UK's June 23 referendum on whether to remain in the European Union. It seems as if the vote will be a close one,  although the fact that the "Leavers" are already musing about a second referendum suggests they're not optimistic about how the first one will go. Will uncertainty on that score prompt the Fed to keep rates on hold for a little longer?

The Brexit debate has been short on light and long on heat, including a remarkably stupid invocation of Hitler by Boris Johnson, who really ought to know better. In terms of the economic consequences, various authorities have chimed in with warnings of the dire impact that Brexit would have, including Bank of England Governor Mark Carney and the IMF, which portrays the range of possible outcomes as "bad to very very bad".

In truth, nobody knows, because it's hard to come up with any precedent for what the UK is thinking of doing. In the long term it's quite possible that Brexit would make very little economic difference. Apart from a few crazed souls who pine for the days of the British Empire, even the Leave side is very clear that it would seek to keep the UK within the EU's free trade and financial markets: it's the moves toward political integration and the lack of accountability that they profess to dislike.

The short term, however, might be a different matter.  If there's a vote to leave, the UK can't just wake up on June 24, clear out its locker in Brussels and go home.  There's an enormously complex relationship to unravel, and new arrangements to be put in place. Although at the end of the day the remaining EU members are unlikely to shoot themselves in the foot by taking a hard line with the UK over free trade and financial markets, a period of uncertainty, possibly prolonged, will be unavoidable.  The weakness in Sterling since the referendum campaign began is a clear indication of how markets feel about this, and in the aftermath of a vote to leave, things would only get worse, at least for the short term.

Will that market uncertainty stay the Fed's hand?  It's unlikely that the Fed would want to give the impression that US monetary policy is being dictated by a bunch of xenophobic Brits, so if the Fed does decide not to move next month, expect any mention of Brexit to be mixed in with references to setbacks in the US jobs market and suchlike. A rate hike in June is still the way to bet, but it's by no means certain -- and a lot may happen over the next four weeks.  

Better no deal than a bad deal

Here's an encouraging story.  It appears that the Canadian Federal Government is taking a hard line in negotiations with Bombardier Inc, which is looking for a billion dollar injection of public funds.  It appears that the sticking point is Bomber's dual share structure, which allows the firm's founding family to keep control of the enterprise. The Feds, it seems, are reluctant to accept a non-voting place at the table if they put in such a large sum of money.  That's entirely appropriate, given Bombardier's extremely checkered past and its history of reliance on public bailouts.

In truth, it's not at all obvious why Bombardier still wants Federal money. The company's C-series jets, which have chewed through its liquidity at a fantastic rate, are now starting to sell. Delta Airlines has placed a firm order, and a provisional order from Air Canada is set to firm up at any time. The first CS-100, the smaller version of the plane, should enter commercial service with Swiss Airlines next month.

Bombardier still has problems with its other product lines -- its name is mud in the UK, where it abjectly failed on a contract with London Underground, and it's facing a $50 million damages lawsuit from the city of Toronto over a horrifically botched streetcar order. Still, there's no longer any apparent risk to the company's survival. Unless the Feds can obtain some influence over the company's management and some share in the upside for taxpayers, there's no case at all for putting public money in Bombardier's pocket.

"Events, my dear boy, events"

Justin Trudeau's Government has had a good first six months. The PM has larged it up on the world stage, attracting fawning press coverage; the plan to admit Syrian refugees has fallen a bit behind schedule, but retains broad public support; the resort to deficit financing in an effort to jumpstart the economy has met with only muted criticism; and much of the baleful legacy of the Harper Tories has been unwound. Trudeau and his party appear to command even higher voter support than they did on election day last October.

Now, things are set to get harder, as the Alberta wildfires put the Government to its first tough test.  Back in the 1960s British Prime Minister Harold Macmillan was asked by a journalist if there was anything that might derail his government.  His response: "Events, my dear boy, events". It's the unexpected and unplanned-for that puts any government to the test, and the fires near Fort McMurray certainly fall into that category.

So far, the Government seems to be reacting well, expressing sympathy and pledging financial and other assistance, while leaving most of the front-line work to the Alberta Provincial Government.  However, as the fires start to recede, or at least move away from the city itself, there will be some tough questions to be answered.  For example:

• Everyone is pledging to rebuild Fort McMurray, as you'd expect at this stage.  However, this is a community that lives and dies with the oil sands industry.  Given Canada's belated conversion to climate change activism, what is the future for that industry, and what in turn does that mean for the future size and shape of Fort McMurray? 

• How much should the rest of Canada contribute to the rebuilding effort?  Alberta has never been particularly good at squirelling away part of the proceeds of oil sales to provide for the future.  The so-called Heritage Fund has never been more than a fraction of the size of, for example, Norway's Government Pension Fund Global, which has around US$ 900 billion in assets.  Famously, Albertans' prayer whenever oil prices fall has been "Please God, send us another oil boom.  We promise we won't p*ss it away this time".  Once the sympathy factor wears off, how much will Trudeau be able to persuade the rest of Canada to pony up to help out? 

• This being Canada, anything Trudeau does for Alberta will inevitably lead other parts of the country to demand similar largesse. One obvious example: Quebec's Bombardier Inc, which has been holding out the begging bowl ever since the new government took office. Trudeau's team has reportedly been taking a tough stance in negotiations. Will that be politically sustainable if Federal monies start pouring into Fort McMurray?

No doubt there are worse crises to come as the G overnment's term rolls along for the next four years.  However, this crisis is the first time that this relatively inexperienced set of Ministers has been forced to take big decisions on the fly. It will tell us a lot about how they might cope if and when something really testing comes along.    

The second coming

I'm no great poetry buff, but I quoted this wonderful poem by WB Yeats in a post a few years ago.  I was writing about income equality in the UK, where I was living at the time. It seems even more relevant to the current Presidential campaign in the United States, so here it is in full:

Turning and turning in the widening gyre   

The falcon cannot hear the falconer; 

Things fall apart; the centre cannot hold; 

Mere anarchy is loosed upon the world, 

The blood-dimmed tide is loosed, and everywhere   

The ceremony of innocence is drowned; 

The best lack all conviction, while the worst   

Are full of passionate intensity. 

Surely some revelation is at hand; 

Surely the Second Coming is at hand.   

The Second Coming! Hardly are those words out   

When a vast image out of Spiritus Mundi

Troubles my sight: somewhere in sands of the desert   

A shape with lion body and the head of a man,   

A gaze blank and pitiless as the sun,   

Is moving its slow thighs, while all about it   

Reel shadows of the indignant desert birds.   

The darkness drops again; but now I know   

That twenty centuries of stony sleep 

Were vexed to nightmare by a rocking cradle,   

And what rough beast, its hour come round at last,   

Slouches towards Bethlehem to be born? 

It's almost a hundred years since Yeats wrote that.  This is not the first time that it's seemed prophetic. 

Disaster and aftermath

It's fair to suggest that a week ago, most people around the world had never heard of Fort McMurray, Alberta.  Now, the horrifying images of the destruction wrought by the wildfires in and around the city have topped news reports everywhere.  At the time of writing, the worst of the danger appears to have passed for the city itself, as winds push the inferno away from the built-up areas. It's a tribute to the people of the city and the emergency services that the city was evacuated so quickly, with only one reported casualty, a young girl killed during the rush to leave.

It will be some time before an accurate estimate of the damage can be made, though that hasn't stopped some wild speculation -- one insurer suggested that claims could reach C$ 9 billion.  What can we safely infer about the short-term prospects for recovery, and what does all this mean for the long term?

Let's start with the city itself.  It's reliably reported that the major infrastructure -- civic buildings, hospital and such -- is unscathed.  The airport had a close call, but it's open and operational. Industrial parks around the city are reported to be largely undamaged.  However, most media reports suggest that 1600 "structures" have been lost.  How do we put that into perspective?  Well, if we assume that all of those structures are homes -- which they're almost certainly not -- and that each home housed five people on average (probably high), then we can estimate that about 8000 people have no homes to go home to*.  That's awful, but if you keep in mind that the population of Fort McMurray is somewhere near 80,000, then it's "only" 10 percent of the population that needs to rebuild from scratch. That's a formidable task, but maybe a somewhat smaller one than some of the media coverage would suggest.  

Now, how about the local economy, heavily dependent on the oil sands?  Oil production has been largely shut down in the immediate area, but not because of damage to the facilities themselves:  those are well to the north of the city, while the fire is to the south.  Rather, production has been shut down so that the lodging facilities at the mines themselves can be used to house those fleeing the fires.  Many of those people have now begun to relocate to the south -- enduring what must be a perfectly horrifying drive through Fort McMurray itself -- so it's unlikely that the shutdown in production will be prolonged. Still, expect some negative impact on GDP, and especially exports, for the month of May.

As to the longer term, it's worth recalling Keynes's advice from the Great Depression, that it would make perfect sense to pay the unemployed to dig holes and fill them back in again.  Natural disasters always compel even the most anti-Keynesian of governments to spend heavily on reconstruction; to the extent that this spending is not financed by cutting back on planned spending in other areas, this creates a boost to the local economy.  With left-leaning governments in place in both Ottawa and Edmonton, such a boost seems assured.

There's one further complication, however.  Prime Minister Trudeau has mused that it could take years to rebuild Fort McMurray.  That may be true, if you plan to put everything back as it was.  But....there's growing sentiment in much of Canada that the oil sands operations that are the city's prime reason for existence will need to be scaled back in short order, so as to meet the environmental targets set by the Paris Accords.  Some workers from across the country who had moved to Fort McMurray to work in the oil sands had already started to return home even before the wildfires struck, as opportunities and employment began to dry up.  Deciding how big the city will need to be in one or two decades time will be a very tricky task, once the fires finally die down.

*This estimate will be on the high side if a lot of the destroyed structures are not homes, and on the low side if many of them are apartments rather than single family dwellings.

Gerontocracy

Back in the waning days of the Cold War, commentators in the West would express wonderment at the age of the people who led the major communist countries. In China there was the Gang of Four, led by Chairman Mao and his equally unpleasant wife. In the USSR there was the triple play of faceless apparatchiks, Brezhnev to Chernenko to Andropov.  Could never happen in our ever-changing democracies, right?

Well, apparently it can and will. It's now all but certain that the US election this fall will be fought between Donald Trump, who will be 70 years old on election day, and Hillary Clinton, a mere stripling at 69.  If Trump is elected he will be the oldest man ever to take the oath of office for the first time.

You surely don't have to have strong feelings about Trump's or Clinton's policy proposals (such as they are) to find this a profoundly depressing outcome.  Even leaving aside the non-trivial possibility that either of them could become ill or even die while in office,  these two seniors are going to be setting policy for the only major First World country that isn't already confronting the problems posed by a rapidly aging population.  If President Trump or President Clinton turns out to be an absolute disaster in the job, well, they're not going to be around for too long to suffer the consequences, are they?

Living literally five miles from the US border, we've had a ringside seat for the whole primary election process.  It's been dispiriting and scary,  and it seems it's only going to get worse from now until election day in November -- and beyond. How has it ever come to this, America?  

50K

Some time in the past 24 hours this blog recorded its 50,000th hit.  Which would be more impressive if a lot of those hits hadn't originated with some kind of bot in Italy. Oh well, thanks for coming by anyway -- unless, of course, you're the bot -- in which case, vaffanculo.