Canada's GDP fell 0.1 percent in August, its first decline in ten months. Everyone from the Bank of Canada to the Bay Street analysts coven had been warning for some time that the rapid pace of expansion seen in the first half of the year was bound to moderate. Still, today's report of an outright decline came as something of a shock.
Look behind the headline number and it becomes clear that the economy is not about to plunge from heady expansion straight into recession. Of the 20 sectors reported by Statistics Canada, 12 expanded in the month. There was significant weakness in both manufacturing and resource extraction (including oil and gas), but the official release makes it clear that the declines in output in these sectors were mainly the result of the maintenance shutdowns that always occur at this time of the year.
Coming in the wake of a basically flat performance in July, the fall in GDP for August ensures that the result for the full third quarter of 2017 will be weak, though an outright decline remains unlikely. This is consistent with the view from the Bank of Canada, Department of Finance and elsewhere, that the economy's growth rate is likely to slip from the 3 percent-plus rate seen in the first half of the year to something nearer 2 percent over the next two years.
The Canadian dollar promptly weakened by almost half a cent against its US counterpart when the data were released. Expectations that the Bank of Canada would tighten monetary policy further at its December 5 rate setting meeting are being quickly unwound. With continuing uncertainty over NAFTA and household indebtedness, the Bank may well find it has no opportunity to resume its removal of stimulus until the second quarter of next year.
Tuesday, 31 October 2017
Monday, 30 October 2017
What should he have done?
This is not the kind of topic I usually write about, and I do so now with some trepidation, but there's something about one of the day's major news stories that I can't get my head around.
The actor Kevin Spacey has come out as gay, which I suspect is a surprise to absolutely no-one. He did so after another actor I'm not familiar with accused him of a drunken but unconsummated sexual assault more than three decades ago, when the accuser was only fourteen years old. Spacey says he doesn't remember the incident, apologizes if it did happen, but also says that after years of keeping very quiet about his private life, he's now living "as a gay man".
The gay community is outraged that by coming out in response to an accusation of pedophilia*, Spacey is giving credence to the old slur that gay men are a danger to young boys. As one Twitter writer has put it, Spacey has invented something that didn't exist before: a bad time to come out. But here's the thing: it wasn't Spacey that chose this time to come out. He was outed by his accuser as both a gay man (which is fine) and a pedophile (which definitely isn't).
What was he supposed to say? In the current finger-pointing frenzy around Hollywood, a denial of the entire incident would probably not have been believed, and nobody would have believed him if he said he wasn't gay. Spacey was put in a difficult position here; his response may not have been ideal, but it's very possible that the gay community has amplified its negative impact by making such a fuss about it.
The way things are going in the movie industry right now, it won't be long until another scandal comes along and knocks Spacey off the front pages. In the meantime, he must be pondering the wisdom of his decision not to be open about his sexual orientation all along.
* Strictly speaking the incident here is hebephilia as the accuser was 14 years old. Pedophilia refers to adult sexual activity with prepubescent children.
The actor Kevin Spacey has come out as gay, which I suspect is a surprise to absolutely no-one. He did so after another actor I'm not familiar with accused him of a drunken but unconsummated sexual assault more than three decades ago, when the accuser was only fourteen years old. Spacey says he doesn't remember the incident, apologizes if it did happen, but also says that after years of keeping very quiet about his private life, he's now living "as a gay man".
The gay community is outraged that by coming out in response to an accusation of pedophilia*, Spacey is giving credence to the old slur that gay men are a danger to young boys. As one Twitter writer has put it, Spacey has invented something that didn't exist before: a bad time to come out. But here's the thing: it wasn't Spacey that chose this time to come out. He was outed by his accuser as both a gay man (which is fine) and a pedophile (which definitely isn't).
What was he supposed to say? In the current finger-pointing frenzy around Hollywood, a denial of the entire incident would probably not have been believed, and nobody would have believed him if he said he wasn't gay. Spacey was put in a difficult position here; his response may not have been ideal, but it's very possible that the gay community has amplified its negative impact by making such a fuss about it.
The way things are going in the movie industry right now, it won't be long until another scandal comes along and knocks Spacey off the front pages. In the meantime, he must be pondering the wisdom of his decision not to be open about his sexual orientation all along.
* Strictly speaking the incident here is hebephilia as the accuser was 14 years old. Pedophilia refers to adult sexual activity with prepubescent children.
Thursday, 26 October 2017
An idea of limited value
Linda McQuaig has been a fixture of Canadian public life for many years, as a left-leaning, nationalistic newspaper columnist and occasional activist. She ran unsuccessfully for Parliament, as a candidate for the left-ish NDP, in the 2015 federal election. Anyone who has had a running feud with Conrad Black can't be all bad, and a lot of McQuaig's ideas make a lot of sense.
But not, alas, this one, published on the op-ed page of the Toronto Star. Ms McQuaig is justifiably angry at the way that Sears Canada has been run into the ground under its American venture capitalist owners. She is especially incensed at the way those owners have extracted large amounts of money from the company in the form of special dividends, then fired all of the company's employees without severance and with their pensions chronically underfunded.
Ms McQuaig may be wrong when she suggests that Sears might have survived under different management, but the rest of her analysis is largely correct. However, she veers wildly off track when she tries to suggest a way of preventing this kind of thing from happening again. "No", she says, "I'm not advocating the overthrow of capitalism" (phew!) but something she says is "easier -- changing our corporate laws so that those controlling corporations can be held personally liable for money owed to their employees".
That's right: she wants to put an end to limited liability. Can I suggest gently that she hasn't thought this through very carefully? The type of people who have shafted Sears Canada employees are certainly the unacceptable face of capitalism, but they are very much a subset of the universe of shareholders. Millions of Canadians directly own corporate shares as part of their savings; millions more are set to rely on corporate or individual pension plans that invest heavily in the stock market.
Ms McQuaig can't just take away limited liability from nefarious individuals she happens not to approve of. If it's removed, it's removed for the wicked and the righteous alike. She may not think she's "advocating the overthrow of capitalism", but that would surely be the effect of putting an end to limited liability.
The kind of behaviour that killed Sears Canada and left its employees in the lurch has little to do with limited liability ownership. What allows the "cartoon capitalists" (love that term!) to strip all the value out of a company is their access to vast amounts of debt, with the interest payments tax deductible. If the authorities want to curb bad behaviour, this is surely the place to start, but even here it would be necessary to move very cautiously, because judiciously-used debt is a perfectly legitimate part of most corporate balance sheets.
But not, alas, this one, published on the op-ed page of the Toronto Star. Ms McQuaig is justifiably angry at the way that Sears Canada has been run into the ground under its American venture capitalist owners. She is especially incensed at the way those owners have extracted large amounts of money from the company in the form of special dividends, then fired all of the company's employees without severance and with their pensions chronically underfunded.
Ms McQuaig may be wrong when she suggests that Sears might have survived under different management, but the rest of her analysis is largely correct. However, she veers wildly off track when she tries to suggest a way of preventing this kind of thing from happening again. "No", she says, "I'm not advocating the overthrow of capitalism" (phew!) but something she says is "easier -- changing our corporate laws so that those controlling corporations can be held personally liable for money owed to their employees".
That's right: she wants to put an end to limited liability. Can I suggest gently that she hasn't thought this through very carefully? The type of people who have shafted Sears Canada employees are certainly the unacceptable face of capitalism, but they are very much a subset of the universe of shareholders. Millions of Canadians directly own corporate shares as part of their savings; millions more are set to rely on corporate or individual pension plans that invest heavily in the stock market.
Ms McQuaig can't just take away limited liability from nefarious individuals she happens not to approve of. If it's removed, it's removed for the wicked and the righteous alike. She may not think she's "advocating the overthrow of capitalism", but that would surely be the effect of putting an end to limited liability.
The kind of behaviour that killed Sears Canada and left its employees in the lurch has little to do with limited liability ownership. What allows the "cartoon capitalists" (love that term!) to strip all the value out of a company is their access to vast amounts of debt, with the interest payments tax deductible. If the authorities want to curb bad behaviour, this is surely the place to start, but even here it would be necessary to move very cautiously, because judiciously-used debt is a perfectly legitimate part of most corporate balance sheets.
Wednesday, 25 October 2017
Doubling down or tightening up?
This has been a big week for Canadian economic policy. Tuesday brought Finance Minister Bill Morneau's Fall Economic Statement, while this morning we had the Bank of Canada's scheduled rate announcement. The early takeaway here is that the stage is clearly set for fiscal and monetary policy to start pulling in different directions -- never a good thing.
For the past six months or so, Bank of Canada Governor Poloz has been claiming that the Bank's ultra-easy monetary stance has been the primary factor in the economy's surprisingly strong growth, currently the fastest among the G-7 nations. The Bank now believes that the economy is nearing full capacity, and hence decided to start removing stimulus during the summer.
Hold on there, says Minister Morneau: it's the Trudeau government's stimulus plan that's working, and because of that, the government will be "doubling down". Recall that during the election campaign of 2015, Justin Trudeau took what was seen as a considerable gamble in pledging the Liberals to introduce a fiscal stimulus program. The key word in the plan was "modest", which Trudeau indicated would mean deficits of no more than $10 billion (all figures in Canadian dollars) for no more than a couple of years.
Once safely in power, the Liberals moved quickly away from the "modest" part, announcing substantial spending plans financed by deficits of upwards of $20 billion and no firm plan for a return to balance. It is far from clear that the party would have been elected if it had specifically promised this during the campaign: the opposition parties would have been quick to remind Canadians just how painful it had been to escape the country's last fiscal morass in the 1990s.
Back in the spring of this year, Morneau estimated that the deficit for 2017 would reach $28 billion. Six months on the shortfall is estimated to reach less than $20 billion, thanks to the revenue boost resulting from unexpectedly strong GDP growth. Hence Morneau's assertion that his fiscal plan is working and his pledge to "double down". The Fall Statement includes a variety of measures aimed at the amorphous but much-loved "middle class", as well as a wide range of increases in program spending.
The opposition Tories are expressing alarm at what they see as a lack of fiscal discipline. In truth, the projections are not excessively worrisome. The growth projections, showing a significantly slower pace of expansion through 2018 and 2019, are in line with the Bank of Canada's. There is no target for a return to fiscal balance, but the deficit is projected to decline steadily from year to year. The Government's initial fiscal plan saw public debt rising by $100 billion in four years; now it will take seven years for it to grow that much. The public debt-GDP ratio will fall gradually.
All of that being said, it's hard to gainsay the fact that Morneau is giving up a lot of his room to manoeuvre here. In the event that the economy falls short of his expectations, the deficit may start to mount alarmingly, especially if the government tries to offset the slowdown through further stimulus measures.
And if the forecasts are correct and the economy does not slow down unduly? Then we would have a situation in which the Bank of Canada is gradually reducing monetary stimulus to avoid a resurgence in inflation, even as the government is continuing to stoke demand. As expected, the Bank left its overnight rate target unchanged at 1 percent today, but it continues to see the economy at or near full capacity, and hence warns that further reduction in monetary stimulus will still be needed.
It's been many years since we had monetary and fiscal policy in any kind of harmony. For much of the Stephen Harper era, the Bank of Canada was forced to adopt a cheap money policy because fiscal policy was inappropriately restrictive. We now seem to be going the other way: Trudeau and Morneau's open purse strings may force the Bank to tighten monetary policy faster than it would ideally like. Don't these guys talk to each other?
For the past six months or so, Bank of Canada Governor Poloz has been claiming that the Bank's ultra-easy monetary stance has been the primary factor in the economy's surprisingly strong growth, currently the fastest among the G-7 nations. The Bank now believes that the economy is nearing full capacity, and hence decided to start removing stimulus during the summer.
Hold on there, says Minister Morneau: it's the Trudeau government's stimulus plan that's working, and because of that, the government will be "doubling down". Recall that during the election campaign of 2015, Justin Trudeau took what was seen as a considerable gamble in pledging the Liberals to introduce a fiscal stimulus program. The key word in the plan was "modest", which Trudeau indicated would mean deficits of no more than $10 billion (all figures in Canadian dollars) for no more than a couple of years.
Once safely in power, the Liberals moved quickly away from the "modest" part, announcing substantial spending plans financed by deficits of upwards of $20 billion and no firm plan for a return to balance. It is far from clear that the party would have been elected if it had specifically promised this during the campaign: the opposition parties would have been quick to remind Canadians just how painful it had been to escape the country's last fiscal morass in the 1990s.
Back in the spring of this year, Morneau estimated that the deficit for 2017 would reach $28 billion. Six months on the shortfall is estimated to reach less than $20 billion, thanks to the revenue boost resulting from unexpectedly strong GDP growth. Hence Morneau's assertion that his fiscal plan is working and his pledge to "double down". The Fall Statement includes a variety of measures aimed at the amorphous but much-loved "middle class", as well as a wide range of increases in program spending.
The opposition Tories are expressing alarm at what they see as a lack of fiscal discipline. In truth, the projections are not excessively worrisome. The growth projections, showing a significantly slower pace of expansion through 2018 and 2019, are in line with the Bank of Canada's. There is no target for a return to fiscal balance, but the deficit is projected to decline steadily from year to year. The Government's initial fiscal plan saw public debt rising by $100 billion in four years; now it will take seven years for it to grow that much. The public debt-GDP ratio will fall gradually.
All of that being said, it's hard to gainsay the fact that Morneau is giving up a lot of his room to manoeuvre here. In the event that the economy falls short of his expectations, the deficit may start to mount alarmingly, especially if the government tries to offset the slowdown through further stimulus measures.
And if the forecasts are correct and the economy does not slow down unduly? Then we would have a situation in which the Bank of Canada is gradually reducing monetary stimulus to avoid a resurgence in inflation, even as the government is continuing to stoke demand. As expected, the Bank left its overnight rate target unchanged at 1 percent today, but it continues to see the economy at or near full capacity, and hence warns that further reduction in monetary stimulus will still be needed.
It's been many years since we had monetary and fiscal policy in any kind of harmony. For much of the Stephen Harper era, the Bank of Canada was forced to adopt a cheap money policy because fiscal policy was inappropriately restrictive. We now seem to be going the other way: Trudeau and Morneau's open purse strings may force the Bank to tighten monetary policy faster than it would ideally like. Don't these guys talk to each other?
Friday, 20 October 2017
Bank of Canada has no reason to hike rates
Economic data released by Statistics Canada this morning virtually guarantee that the Bank of Canada will hold interest rates steady when its Governing Council meets next week.
Headline CPI ticked up to 1.6 percent year-on-year in September from 1.4 percent in August. That's well below the Bank's 2 percent target, and in any case the increase was mainly attributable to a jump in transportation costs, which was in turn attributable to the impact of Hurricane Harvey. Excluding gasoline, September CPI was up only 1.1 percent. The Gulf of Mexico oil patch is back in full operation, so that jump will prove transitory, though it may be noted that retail fuel prices in Ontario are still well above their pre-Harvey levels. The Bank of Canada's three slightly arcane "preferred measures" for CPI were little changed from August, all standing between 1.5 and 1.8 percent year-on-year.
Separately, StatsCan reported that retail sales fell 0.3 percent in August. If higher spending on gasoline is excluded (again the result of price increases rather than volume changes), the fall in sales was a more noteworthy 1.3 percent. Since Harvey struck right at the end of the month, its impact at the pumps likely crimped other categories of retail spending into September. The Bank of Canada may also take note of a monthly decline in sales of home-related items (e.g. hardware and furnishings), which may be evidence that the impact of the slowdown in the housing market is spreading outside the housing sector per se.
Add in the major developments going on in the background -- the aforesaid housing slowdown, with more mortgage regulation coming in 2018; and the signs that the NAFTA renegotiations are not going well -- and the case for the Bank to hold off on further tightening this month is iron-clad. In fact, expectations that there will be one further rate move before the end of this year may now have to be rethought.
Headline CPI ticked up to 1.6 percent year-on-year in September from 1.4 percent in August. That's well below the Bank's 2 percent target, and in any case the increase was mainly attributable to a jump in transportation costs, which was in turn attributable to the impact of Hurricane Harvey. Excluding gasoline, September CPI was up only 1.1 percent. The Gulf of Mexico oil patch is back in full operation, so that jump will prove transitory, though it may be noted that retail fuel prices in Ontario are still well above their pre-Harvey levels. The Bank of Canada's three slightly arcane "preferred measures" for CPI were little changed from August, all standing between 1.5 and 1.8 percent year-on-year.
Separately, StatsCan reported that retail sales fell 0.3 percent in August. If higher spending on gasoline is excluded (again the result of price increases rather than volume changes), the fall in sales was a more noteworthy 1.3 percent. Since Harvey struck right at the end of the month, its impact at the pumps likely crimped other categories of retail spending into September. The Bank of Canada may also take note of a monthly decline in sales of home-related items (e.g. hardware and furnishings), which may be evidence that the impact of the slowdown in the housing market is spreading outside the housing sector per se.
Add in the major developments going on in the background -- the aforesaid housing slowdown, with more mortgage regulation coming in 2018; and the signs that the NAFTA renegotiations are not going well -- and the case for the Bank to hold off on further tightening this month is iron-clad. In fact, expectations that there will be one further rate move before the end of this year may now have to be rethought.
Tuesday, 17 October 2017
Flight into danger
Well, that kind of came out of nowhere! A year or two ago there was plenty of speculation about Bombardier possibly linking up in some fashion with Airbus in order to keep the C-Series aircraft program on track. That talk died away as both the Quebec and Federal governments made cash injections into the company, so the deal announced after trading hours on Monday was wholly unexpected.
And what a deal it is. Although the initial media reports talked of Airbus "buying" a majority stake in the C-Series, the truth is that Bombardier is giving away that stake for no immediate financial return. Once the deal closes, Airbus will have 50.01 percent ownership, with Bombardier itself retaining just under 31 percent and the Government of Quebec 19 percent. Airbus will have the right to buy out both of its partners: Quebec in 2023 and Bombardier about two years after that. Airbus will not assume any of Bombardier's debt.
All sides are saying that this deal has nothing to do with the 300 percent tariffs that have been imposed on the C-Series by the US Government at the behest of Boeing. This can scarcely be believed: a key element of the deal is that Airbus will set up a second production line for the C-Series at its plant in Mobile, Alabama, for the specific purpose of avoiding those tariffs.
It appears this would require at least 50 percent of the value of the aircraft to be manufactured in the US, and Airbus is presumably confident that this can be done. Still, Boeing seems unlikely to back down from the fight. It's easy to imagine the company telling Trump and the Commerce Department that it's being ganged up on by two heavily subsidized foreign rivals. It's easy to imagine Washington agreeing.
The dream of an independent Canadian manufacturer of passenger jets may be over, but there are some upsides to the deal. There seems to be little doubt that the C-Series is a good product, so the reluctance of airlines to buy it in large numbers may well have reflected their justifiable doubts that Bombardier could stay alive long enough to deliver the planes. That concern is now gone, and the marketing clout of Airbus should translate into plenty of new orders. It had better, because the current order book will not support two production lines for very long.
There is also interesting speculation in the media that there could be co-operation between Canada and Europe on Airbus's next generation of military aircraft. Since Canada is threatening to cancel an order for Boeing fighters as a tit-for-tat response to the latter's battle with Bombardier, this could well be something that appeals to both sides in the new partnership. With the NAFTA talks seemingly heading for failure, this may also be in the Federal government's mind as it ponders whether to approve the deal.
With the C-Series taken care of, what's next for Bombardier? Until recently it had been considering spinning off its rail division in order to raise the cash to keep the C-Series aloft. That opportunity has been taken away by the recent merger between Siemens and Alstom, which leaves Bombardier competing in the global marketplace against a much bigger rival. The successful parts of the rail unit are largely based in Europe; light rail manufacturing operations in North America continue to be plagued by delivery problems and lawsuits.
The company also retains its business jet divisions, though these too have been facing some difficulties, and of course is still in the snowmobile and jet-ski businesses that it started out with. Enabled by lashings of public money, Bombardier expanded into all kinds of businesses it could not properly manage. Maybe resolving one of its biggest problems will allow it to focus on managing the remainder of its empire more effectively.
And what a deal it is. Although the initial media reports talked of Airbus "buying" a majority stake in the C-Series, the truth is that Bombardier is giving away that stake for no immediate financial return. Once the deal closes, Airbus will have 50.01 percent ownership, with Bombardier itself retaining just under 31 percent and the Government of Quebec 19 percent. Airbus will have the right to buy out both of its partners: Quebec in 2023 and Bombardier about two years after that. Airbus will not assume any of Bombardier's debt.
All sides are saying that this deal has nothing to do with the 300 percent tariffs that have been imposed on the C-Series by the US Government at the behest of Boeing. This can scarcely be believed: a key element of the deal is that Airbus will set up a second production line for the C-Series at its plant in Mobile, Alabama, for the specific purpose of avoiding those tariffs.
It appears this would require at least 50 percent of the value of the aircraft to be manufactured in the US, and Airbus is presumably confident that this can be done. Still, Boeing seems unlikely to back down from the fight. It's easy to imagine the company telling Trump and the Commerce Department that it's being ganged up on by two heavily subsidized foreign rivals. It's easy to imagine Washington agreeing.
The dream of an independent Canadian manufacturer of passenger jets may be over, but there are some upsides to the deal. There seems to be little doubt that the C-Series is a good product, so the reluctance of airlines to buy it in large numbers may well have reflected their justifiable doubts that Bombardier could stay alive long enough to deliver the planes. That concern is now gone, and the marketing clout of Airbus should translate into plenty of new orders. It had better, because the current order book will not support two production lines for very long.
There is also interesting speculation in the media that there could be co-operation between Canada and Europe on Airbus's next generation of military aircraft. Since Canada is threatening to cancel an order for Boeing fighters as a tit-for-tat response to the latter's battle with Bombardier, this could well be something that appeals to both sides in the new partnership. With the NAFTA talks seemingly heading for failure, this may also be in the Federal government's mind as it ponders whether to approve the deal.
With the C-Series taken care of, what's next for Bombardier? Until recently it had been considering spinning off its rail division in order to raise the cash to keep the C-Series aloft. That opportunity has been taken away by the recent merger between Siemens and Alstom, which leaves Bombardier competing in the global marketplace against a much bigger rival. The successful parts of the rail unit are largely based in Europe; light rail manufacturing operations in North America continue to be plagued by delivery problems and lawsuits.
The company also retains its business jet divisions, though these too have been facing some difficulties, and of course is still in the snowmobile and jet-ski businesses that it started out with. Enabled by lashings of public money, Bombardier expanded into all kinds of businesses it could not properly manage. Maybe resolving one of its biggest problems will allow it to focus on managing the remainder of its empire more effectively.
Friday, 13 October 2017
The General Theory of Trump
Donald Trump's musings this week about how the rising US stock market is erasing the national debt "in a sense" has prompted widespread hilarity, at least if you're the kind of person who can find anything funny in either (a) Trump or (b) economics. One the surface the hilarity is justified: stock market gains accrue to stock holders, not to the US Treasury, which is the issuer of the national debt.
And yet....we know that Donald Trump watches a lot of cable news TV, so all kinds of facts and ideas flow daily into the roiling nest of vipers inside his head. They then duly emerge in scrambled form in his stream-of-consciousness speeches. But the facts are in there somewhere, with the result that, almost by accident, he's not always wrong. Much of what he says about the NAFTA deal, for example, has some basis in fact.
With that in mind, can we piece together anything coherent about the national debt and the stock market? Start with the proposition that the absolute size of the debt is not indicative of anything very much. Consider Puerto Rico's debt, much in the news lately. The widely-quoted figure of US$ 73 billion is an unbearable burden for the territory, but a debt of that size would be relatively trivial for the Federal government, or even for a richer state such as California. It's the size of the debt in relation to the economy that really matters.
What this means is that if the economy is growing rapidly, the debt burden becomes less onerous over time. This was well illustrated by the experience of Canada in the 1990s. After two decades of irresponsibility, the government finally started to get serious about its fiscal mess. However, although a degree of fiscal tightening was undertaken, what really allowed the debt burden to be brought down to size in well under a decade was a burst of growth in the economy, largely as a result of the loose monetary policy followed by the Greenspan Fed. For now, Canada's debt/GDP ratio is still the lowest among developed economies, though the Trudeau government seems determined to put an end to that.
OK, so a growing economy means that any given debt burden becomes less of a big deal over time. Now, what about stock prices? The value of any individual stock represents the market's assessment of the future income stream that will accrue to the stockholders, and the value of the entire stock market is investors' collective view of the outlook for corporate profits.
It is reasonable to assume that profits will grow faster in a fast growing economy than in one that is growing slowly or in recession. Thus we can suggest that if investors' views as reflected in current stock prices are accurate, the US economy can be expected to show steady growth in the foreseeable future -- which is, indeed, the most recent forecast from the IMF. So: rising US stock prices portend continuing growth for the US economy, and if that happens, the US national debt will shrink in relative importance, if not in actual size.
That's almost certainly not the "in a sense" that Trump had in mind, and needless to say you can shoot all kinds of holes in it. Heck, I can shoot holes in it myself, starting with the stock market's very checkered track record as a predictor of the real economy. But there's the teensiest kernel of truth buried in what Trump said, even if he himself probably doesn't realize it.
And yet....we know that Donald Trump watches a lot of cable news TV, so all kinds of facts and ideas flow daily into the roiling nest of vipers inside his head. They then duly emerge in scrambled form in his stream-of-consciousness speeches. But the facts are in there somewhere, with the result that, almost by accident, he's not always wrong. Much of what he says about the NAFTA deal, for example, has some basis in fact.
With that in mind, can we piece together anything coherent about the national debt and the stock market? Start with the proposition that the absolute size of the debt is not indicative of anything very much. Consider Puerto Rico's debt, much in the news lately. The widely-quoted figure of US$ 73 billion is an unbearable burden for the territory, but a debt of that size would be relatively trivial for the Federal government, or even for a richer state such as California. It's the size of the debt in relation to the economy that really matters.
What this means is that if the economy is growing rapidly, the debt burden becomes less onerous over time. This was well illustrated by the experience of Canada in the 1990s. After two decades of irresponsibility, the government finally started to get serious about its fiscal mess. However, although a degree of fiscal tightening was undertaken, what really allowed the debt burden to be brought down to size in well under a decade was a burst of growth in the economy, largely as a result of the loose monetary policy followed by the Greenspan Fed. For now, Canada's debt/GDP ratio is still the lowest among developed economies, though the Trudeau government seems determined to put an end to that.
OK, so a growing economy means that any given debt burden becomes less of a big deal over time. Now, what about stock prices? The value of any individual stock represents the market's assessment of the future income stream that will accrue to the stockholders, and the value of the entire stock market is investors' collective view of the outlook for corporate profits.
It is reasonable to assume that profits will grow faster in a fast growing economy than in one that is growing slowly or in recession. Thus we can suggest that if investors' views as reflected in current stock prices are accurate, the US economy can be expected to show steady growth in the foreseeable future -- which is, indeed, the most recent forecast from the IMF. So: rising US stock prices portend continuing growth for the US economy, and if that happens, the US national debt will shrink in relative importance, if not in actual size.
That's almost certainly not the "in a sense" that Trump had in mind, and needless to say you can shoot all kinds of holes in it. Heck, I can shoot holes in it myself, starting with the stock market's very checkered track record as a predictor of the real economy. But there's the teensiest kernel of truth buried in what Trump said, even if he himself probably doesn't realize it.
Wednesday, 11 October 2017
Peak political correctness?
Either I have slept through the winter and this is April 1, or we have reached the apotheosis of political correctness. Per this story in the Toronto Star, the Toronto District School Board (TDSB) is dropping the word "chief" from titles like Chief Financial Officer, out of respect for indigenous peoples.
To say that the rationale presented in the article is confusing would be putting it mildly. At one point an actual indigenous person at the TDSB (more about him later) says "The word has a lot of meaning to our people", evidently in a positive sense. Later an academic who may or may not also be indigenous says the term "carries the weight of being forced to adopt an alien form of governance", which doesn't sound positive at all.
"Chief" is an ancient English word that the indigenous peoples had never used and didn't want, but it was forced on them by the settlers. Now, rather than coming up with a different word that the indigenous people themselves can agree on (difficult, as there are so many indigenous languages), the English school board in Toronto is proposing to stop using this perfectly serviceable word to describe positions that have very little to do with indigenous people. Remarkably, it seems this process of re-titling has already taken several years, and there is still no indication of what the replacement term might be.
Years ago I was involved in a major initiative with indigenous peoples and met a whole lot of chiefs, all of whom wore the title proudly. (They told me that the term "Indian", though no longer much used, was not seen as insulting because until the white man showed up, the indigenous people did not really have a collective term for themselves). The TDSB may be tying itself in knots for no-one's real benefit: as the TDSB's indigenous arts creator, Dr Duke Redbird, tells the Star, "we do not have a problem with their use of the word for what they want to describe in their own communities".
Oh, and about your own given name, Dr Redbird: Duke?? Cultural appropriation or what?* A duke is a personage of great importance in many white cultures, so how about.....
* I'm joking. Just wish the TDSB was joking too.
To say that the rationale presented in the article is confusing would be putting it mildly. At one point an actual indigenous person at the TDSB (more about him later) says "The word has a lot of meaning to our people", evidently in a positive sense. Later an academic who may or may not also be indigenous says the term "carries the weight of being forced to adopt an alien form of governance", which doesn't sound positive at all.
"Chief" is an ancient English word that the indigenous peoples had never used and didn't want, but it was forced on them by the settlers. Now, rather than coming up with a different word that the indigenous people themselves can agree on (difficult, as there are so many indigenous languages), the English school board in Toronto is proposing to stop using this perfectly serviceable word to describe positions that have very little to do with indigenous people. Remarkably, it seems this process of re-titling has already taken several years, and there is still no indication of what the replacement term might be.
Years ago I was involved in a major initiative with indigenous peoples and met a whole lot of chiefs, all of whom wore the title proudly. (They told me that the term "Indian", though no longer much used, was not seen as insulting because until the white man showed up, the indigenous people did not really have a collective term for themselves). The TDSB may be tying itself in knots for no-one's real benefit: as the TDSB's indigenous arts creator, Dr Duke Redbird, tells the Star, "we do not have a problem with their use of the word for what they want to describe in their own communities".
Oh, and about your own given name, Dr Redbird: Duke?? Cultural appropriation or what?* A duke is a personage of great importance in many white cultures, so how about.....
* I'm joking. Just wish the TDSB was joking too.
Friday, 6 October 2017
Mixed signals
The Bank of Canada and private sector analysts agree that the rapid growth in the Canadian economy in the first half of this year will not persist through the latter half of the year, and a slower pace is expected to persist through 2018 and 2019. On the surface, key economic data released this weak only partly support this outlook, with strong employment data offset by a weak international trade report. However, on balance it remains likely that the Bank will leave rates unchanged when its Governing Council meets at month-end.
The headline employment number for September was unremarkable: an increase of 10,000 jobs, in line with the consensus expectation. However, the numbers behind the headline were much more extreme: an increase of 112,000 in full time employment (one of the biggest monthly increases on record) offset by a decline of 102,000 in part-time employment. If we take these numbers at face value, the job market was a lot stronger in the month than the headline number makes it appear. However, such wide and offsetting swings inevitably revive questions about the reliability of the data.
A further quirk in the underlying numbers also raises eyebrows. Supposedly there was an increase of 25,000 in the number of males over the age of 55 working, and most of the job gains were full-time. Yet it is also reported that employment for males in the 25-54 age group fell by 29,000 in the month, with all of these losses being part time jobs. There is no obvious explanation for these wildly divergent trends between the two age cohorts, which adds to the difficulty of assessing the overall direction of the labour market.
The international trade data (for the month of August) are much less ambiguous: they're simply bad. Canada's deficit in good trade widened to C$3.4 billion in the month from $3.0 billion in July. The deterioration was entirely due to weakness in exports, which fell by 1.9 percent in volume terms in the month. The export weakness was very broad-based, with shipments of everything from consumer good to chemicals declining in the month. Export volumes have fallen in each of the past three months, the first time this has happened since 2011. It is unlikely that the recent relative strength in the exchange rate has yet had an impact on the data, so the weakness in export volumes may well persist for the remainder of the year.
All in all this week's data, together with ongoing events, give the Bank of Canada little cause to tighten policy at its October 25 meeting. One notable factor is an ongoing strike at a GM plant in Ingersoll, Ontario. This is leading to layoffs among the plant's suppliers, and is also likely to have a negative impact on October export data. News of the cancellation of the planned Energy East pipeline project, along with regular evidence that the NAFTA renegotiation process is not going smoothly, add to the signs that the economy is about to face much stiffer headwinds. It begins to look as though there will be no further rate hikes this year, and the pause in tightening may last well into 2018.
The headline employment number for September was unremarkable: an increase of 10,000 jobs, in line with the consensus expectation. However, the numbers behind the headline were much more extreme: an increase of 112,000 in full time employment (one of the biggest monthly increases on record) offset by a decline of 102,000 in part-time employment. If we take these numbers at face value, the job market was a lot stronger in the month than the headline number makes it appear. However, such wide and offsetting swings inevitably revive questions about the reliability of the data.
A further quirk in the underlying numbers also raises eyebrows. Supposedly there was an increase of 25,000 in the number of males over the age of 55 working, and most of the job gains were full-time. Yet it is also reported that employment for males in the 25-54 age group fell by 29,000 in the month, with all of these losses being part time jobs. There is no obvious explanation for these wildly divergent trends between the two age cohorts, which adds to the difficulty of assessing the overall direction of the labour market.
The international trade data (for the month of August) are much less ambiguous: they're simply bad. Canada's deficit in good trade widened to C$3.4 billion in the month from $3.0 billion in July. The deterioration was entirely due to weakness in exports, which fell by 1.9 percent in volume terms in the month. The export weakness was very broad-based, with shipments of everything from consumer good to chemicals declining in the month. Export volumes have fallen in each of the past three months, the first time this has happened since 2011. It is unlikely that the recent relative strength in the exchange rate has yet had an impact on the data, so the weakness in export volumes may well persist for the remainder of the year.
All in all this week's data, together with ongoing events, give the Bank of Canada little cause to tighten policy at its October 25 meeting. One notable factor is an ongoing strike at a GM plant in Ingersoll, Ontario. This is leading to layoffs among the plant's suppliers, and is also likely to have a negative impact on October export data. News of the cancellation of the planned Energy East pipeline project, along with regular evidence that the NAFTA renegotiation process is not going smoothly, add to the signs that the economy is about to face much stiffer headwinds. It begins to look as though there will be no further rate hikes this year, and the pause in tightening may last well into 2018.
Tuesday, 3 October 2017
Alt-right math
Canadian-born, New Hampshire resident writer Mark Steyn used to describe himself on his website as "the one-man global content provider". For years, much of the content was entertainment related; Steyn watches a lot of movies, and knows way more about the Great American Songbook than is healthy for a man just entering middle age.
In recent years, however, Steyn's writing has taken a much more serious tone, and a very right-wing one. He is a ferocious climate change denier. Currently he is embroiled in a lawsuit with Michael Mann, a professor at Penn State. Mann, unaccountably I'm sure, took offence when Steyn saw fit to drag a sex scandal involving the Penn State football team into one of his diatribes about Mann's work.
The main string to his bow, however, is rabid anti-Islamism. Steyn believes that Europe's fate as an outpost of the caliphate is all but sealed. It all gets very wearing, particularly given Steyn's tendency to play fast and loose with the facts.
This week, however, the appalling massacre in Las Vegas has driven Steyn over the edge. In this mind-boggling article , Steyn brings up three small terror attacks by Muslims in recent days, in Alberta, Marseille and Stockholm. The total number of fatalities in these three events runs to less than ten, but in Steyn's mind, they are of far more significance than the 59 killed and 500-plus wounded by a white madman in Las Vegas. This sentence about the perp in Vegas is astonishingly callous: "An old dog taught himself a new trick, on a spectacular scale". Trick?? Yeah, nothing to see here folks, just an ex-accountant going postal: happens every day -- which, sadly, it almost does.
If you get randomly targeted for extermination, you're not going to care if your killer is a white serial gambler or a "dimwit Mohammedan" (Steyn's phrase). But what Steyn is saying is that if you're unfortunate enough to be in the line of fire of Stephen Paddock, you're just collateral damage in America's daily life: sorry about the Second Amendment, but that's just the way we do things around here. If you get stabbed non-fatally in Edmonton, you're a part of history, a victim of a life-and-death interfaith struggle. It's a bizarre and immoral way of looking at the world.
In recent years, however, Steyn's writing has taken a much more serious tone, and a very right-wing one. He is a ferocious climate change denier. Currently he is embroiled in a lawsuit with Michael Mann, a professor at Penn State. Mann, unaccountably I'm sure, took offence when Steyn saw fit to drag a sex scandal involving the Penn State football team into one of his diatribes about Mann's work.
The main string to his bow, however, is rabid anti-Islamism. Steyn believes that Europe's fate as an outpost of the caliphate is all but sealed. It all gets very wearing, particularly given Steyn's tendency to play fast and loose with the facts.
This week, however, the appalling massacre in Las Vegas has driven Steyn over the edge. In this mind-boggling article , Steyn brings up three small terror attacks by Muslims in recent days, in Alberta, Marseille and Stockholm. The total number of fatalities in these three events runs to less than ten, but in Steyn's mind, they are of far more significance than the 59 killed and 500-plus wounded by a white madman in Las Vegas. This sentence about the perp in Vegas is astonishingly callous: "An old dog taught himself a new trick, on a spectacular scale". Trick?? Yeah, nothing to see here folks, just an ex-accountant going postal: happens every day -- which, sadly, it almost does.
If you get randomly targeted for extermination, you're not going to care if your killer is a white serial gambler or a "dimwit Mohammedan" (Steyn's phrase). But what Steyn is saying is that if you're unfortunate enough to be in the line of fire of Stephen Paddock, you're just collateral damage in America's daily life: sorry about the Second Amendment, but that's just the way we do things around here. If you get stabbed non-fatally in Edmonton, you're a part of history, a victim of a life-and-death interfaith struggle. It's a bizarre and immoral way of looking at the world.
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