US still Wealthier than Canada

The commentary and Op-Ed spheres are a flutter with talk of Canada having finally surpassed Americans in wealth. The assertion stems from a report by the Toronto based Environics Institute. In its report Environics highlights the average net worth of Canadians and Americans and how Canadians have surpassed Americans in that respect since 2006. The report was than picked up by a plethora of commentators ranging from Jonathan Kay at the National Post and Stephen March at Bloomberg all jumping on the bandwagon calling Canada’s socialism lite version a success relative to America’s capitalism.

 It is being said from all quarters that the Canadian economic tortoise has passed the American economic hare.

While it is heartening to see that Canadians are wealthier than Americans by this measure, the unbridled optimism of the Left needs little reality check. First the numbers they use need some context. The traditional measure of wealth, especially for Keynesians, has always been consumption, or consumption power. By this measure Americans remain much wealthier than Canadians. The Environics report itself states that disposable income (after tax pay) remains much higher in the US than in Canada by a staggering 67%.

Now many would argue, and rightfully so, that after tax income is a poor number for comparison as Canadians live in a country where they receive much more government provided services, not counted in the disposable income number. Turning to the Purchasing Power Parity adjusted GDP per capita number, we get a clearer idea of how many goods and services, public and private, that both countries’ citizens get to enjoy. In Canada that number is of 38,988.94 US dollars as of 2010 by the World Bank’s count. The equivalent number in the US is of 47,198.50 for the same year. That means that counting all goods and services consumed by citizens and adjusted for monetary discrepancies, Americans remain a full 21% richer than we are.

So why does the net wealth number paint a different story than the consumption numbers? The reasons are many but important. The first reason is that the US is in the bottom of a business cycle. After a good few years of growth the American economy is adjusting and correcting a few accumulated imbalances in its economy. Canada on the flip side is not. While we did suffer a mild recession, by no means can it be said that Canada is at the bottom of the business cycle.

While GDP did contract and unemployment did rise in Canada, house prices haven’t contracted at a faster rate than inflation since 1990-1991. The pace at which Canadian housing has grown in the past decade or so, would seem to indicate the Canadian tortoise has grown some long legs and bunny ears. The point is comparing two nations relative wealths at different points in their cycles obscures the long term trends in relative wealth. When Canada’s debt bubble rears its head and interest rates creep up do not expect housing prices to continue in their current upward trajectory. With a correction already in the bank expect American house prices to do some serious catch up (albeit probably slowly at first). With Housing values being literally the only variable where Canadians win in this equation, odds are the current crown on our heads is sure to be a temporary footnote in economic history.

While the likelihood of Americans reclaiming their North American wealth crown within the near future seems all to real, this should not distract us from looking to the future with confidence. Some of the long-term trends that have been developing for years now point to the real chance that Canada may yet come on top one day.

The Oil Sands will provide abundant resource to Canada for the next couple of generations, so the possibility of investing those gains efficiently and fiscally responsibly might yet lead to sustainable wealth which we’ll then be able to boast about.

British-Columbians Without Leadership on Northern Gateway

There used to be an unwritten golden rule for Provinces in Canadian politics; if you are going to do some beggar thy neighbour monetary demanding or demonizing make sure it’s against the feds. Provinces typically demand funds from flush federal government coffers, or when they need a scapegoat for this or that local problem they can always trash the federal government for their ills. They usually abide by a set of rules of solidarity to put pressure on Canadian federal governments. With Stephen Harper immovably tightening the federal purse’s strings, it would seem that hard-pressed Premiers need new scapegoats for populist speeches and monetary extortions.

 This new reality was on full display this week as British-Columbia’s Liberal Premier Christy Clark put down her conditions for the approval of Enbridge’s Northern Gateway oil pipeline joining Bruderheim, Alt and Kitimat in BC. Clark put down five conditions for her approval of the project the most important of which were world-class environmental emergency response plans, for Enbridge to go beyond the minimum legal requirements with respect to First Nations relations and for BC to get its ‘fair share’ of tax revenue from the oil to flow through Northern Gateway.

 The Premier from Alberta Alison Redford responded to Christy Clark today by saying that BC won’t get a looney’s worth of tax money it is not already entitled to from the pipeline. Stating that resource management is the purview of individual Provinces exclusively, Ms. Redford objected to Ms. Clark’s policy of nitpicking projects and subjecting them to targeted political scrutiny.

 Ms. Clark’s approach to Northern Gateway however deserves much more scrutiny than Alberta’s Premier has so far leveled against it. Let us start by examining BC’s request for world-class environmental disaster response plans. That such regulation wasn’t already the norm in BC should be news to British-Columbians. Since environmental regulation is as much a provincial responsibility as a federal one, why is BC home of Canada’s most ardent environmentalists not already the most protected and best regulated in the world? Does this mean that other energy projects aren’t going to be subject to such environmental scrutiny? Why single out Enbridge when it comes to protecting Canada’s Pacific coast?

 Moving on to the provincial Liberals’ demand that Enbridge go above and beyond legal requirements in dealing with First Nations. Enbridge states that it already has 60% of concerned Native bands signed on to Northern Gateway. If so many First Nation’s have already of their own volition accepted Enbridge’s proposals one might assume that the company has already gone beyond legal requires in enrolling Native support. Why go into the media playing the ‘white man guilt’ card against Enbridge? This looks like an almost Orwellian display of government interference in private affairs. Governments should not ever, be in the business of telling private citizens or corporations how they should think and behave. Ms Clark shames the name of her party with such private affairs meddling.

 That Ms Clark should go after private enterprises in trying to boost her pre-electoral profile seems to fit with the times but for her to go after another Province for revenue is a relatively new development in Canadian political history. Ms Clark has asked for a ‘fair share’ of tax revenue from Alberta.

 A report by Calgary firm Wright Mansell estimated that BC would only be getting a paltry 6.7 billion dollars worth of tax revenue from the pipeline over 30 years from a total pie of 80 billion. Ms Clark pointed out that BC would be shouldering 100% of the maritime environmental risks and over 50% of the land based risk. With such false assertion the BC Premier is effectively spitting in Albertans and Canadians faces. The environmental risks don’t start at Bruderheim, they start near Athabasca Lake where the extraction occurs and where Alberta will cover 100% of the risk. Let’s face it, the oil sands represent the largest oil related environmental risk worth monitoring, Northern Gateway is a sideshow. The oil must flow through pipelines all the way down to Bruderheim first where again Alberta is responsible for all leak risks. In any case the monetary responsibility of cleanup falls squarely on Enbridge so what kind of risk is the Province assuming exactly? With proper regulation, which BC is entitled to implement, risks can be minimized if not eradicated so why demonize Alberta?

 Ms Clark further added injury to insult when she said, “This project is good for Canada. It’s great for Alberta and at the moment it’s not very good for British Columbia”. It would seem that 60% of concerned First Nations disagree. Such blatant ‘not in my backyard’ styled blackmail is unbecoming of a Canadian Premier. What would Canada look like today if it weren’t for generations of Ontarian and now Albertan uncompromising funding of equalization? Such inter-provincial self-centeredness hasn’t been seen since the Lower Churchill Falls deal where Quebec unceremoniously screwed over Newfoundlanders.

 If political leadership is bringing out the best out of one’s constituents, BC’s Liberals have succeeded in wrestling the crown of leadership deficiency from Quebec. It was bad enough when Obama blocked Keystone XL for electoral purposes to the detriment of America’s economy and North American relations, that such demagoguery and populism should have crossed the 49^th parallel is a new low in the history Canadian Confederation.

(First published on The Prince Arthur Herald website)

***Apologies to all readers, this post has somewhat strayed from the more economic level headed commenting this blog was started for. None the less this was worth posting enjoy.

Let Sleeping Corpse Lie: Dawn of the Eurozone

Europe has long been a place of economic stagnation. Asides from the odd place or two such as Ireland or the Baltic States, Europe has generally seen its citizens’ standard of living stagnate over the years. Europeans are used to seeing inflation slowly eat away at their purchasing power, asset price inflation eat away at housing affordability and taxes reducing their disposable income. But when you are some of the richest people in the world as measured by per capita GDP stagnation isn’t the worst thing that can happen to you. What is about to happen to Europeans however is less tenable. What is about to happen to Europeans is a repeat of the Japanese experience with their ‘Lost Decades’, but in a World with heightened international competition and rapidly increasing productivity of developing nations this version of the Lost Decades syndrome will seem much more punishing.

On the face of it bank bailouts may seem like the appropriate thing to do when your banking system looks like a rocking Humpty Dumpty on the wall. The Japanese experience should have served as a warning to other governments against the dangers of bailing out banks. When Japan’s property and equity bubble burst at the end of the 90’s the government hit the bailout peddle full steam in an effort to avoid bank runs. The result, was the creation of Zombie banks. Bank’s in Japan had the real value of their assets crippled, forcing Japan’s central bank to come in and pump massive amounts of liquidity into the banking system to keep banks liquide. As banks used the extra liquidity to pay down their overstretched balance sheets’ liabilities, instead of lending them out into the real economy, growth stagnated for years. Japanese banks became simultaneously liquide and insolvent.

The usual process of bankruptcy is to have a judge look over the balance sheet of a corporation and determine how much of the liability side needs to be reduced to create a solvent and sustainably profitable firm. Equity investors are typically wiped out and debt investors get a ‘hair cut’ on their bonds, or see their bonds converted into equity (shares). The process reduces the debt of a bankrupt company to a level that can be covered sustainably. The alternative to this form of bankruptcy is a winding down of the business. If a company is recognized to have a permanently crippled business model and is expected to sustainably loose money, it becomes preferable to liquidate all assets and try and pay back as many debts as possible. In the US these two forms of bankruptcy are called chapters 11 and 7 respectively.

Following a chapter 11 bankruptcy two things may occur that will send a company back into bankruptcy or forced to liquidate. Either business conditions deteriorate and the company’s revenues no longer suffice to pay its interest costs, or the debt reduction is not steep enough from the get-go and the corporation’s normal revenues never really cover the newly diminished interest expense.

The emergence of Zombie banks would occur when both the above mentioned difficulties arise. Bailouts, taking the usual form of a capital injection (the government buying lots of newly issued shares, to the detriment of previous share owners) has the partial effect of of wiping out equity investors but saves debt investors. Without hair cuts to bonds a banks interest expense remains high hence crippling the banks ability to inject loans to underpin the real economy. This problem is further compounded by a lack of chapter 7 style bankruptcies.

Banks’ profit margins tend to be extremely narrow in the best of times; According to the Bank of International Settlements Spanish banks’ current profit margin as a percentage of assets is a measly 0.61% at present, while Germany’s big banks barely squeak out a 0.20% profit margin in 2011. Hundreds of variables will explain why European banks profit margins are razor sharp but Anglo-Saxon banks in Canada and Australia rise above the 1% mark, most economist and financial analyst would chalk up a big part of this discrepancy to the competitive nature of banking in different countries. Canada and Australia are countries were industry concentration is high whereas in the US and Europe the banking industry is atomized and fiercely competitive.

When chapter 7 style bankruptcies are effectively ruled out by bailouts, banking industries are prohibited from consolidating to a more natural level of concentration. Profitability is kept artificially low by excessive competition to issue loans and attract savings. The effect of too much competition in an environment where bank profitability is hampered by both excess industry atomization and crippled balance sheets is obviously the creation of Zombie banks. What European authorities are doing with bailouts is stopping progress in its tracks. While bank bankruptcies might raise long term interest rates in the sector, it would mostly lead to consolidation and concentration which would embolden banks to lend to the real economy. This is how over the counter European bailouts are killing growth.

There is however bailouts of the under the counter sorts. The ECB has done what the Bank of Japan has tried before it, albeit in its own way. The ECB’s LTRO (Long Term Refinancing Operations) have been used to increase the liquidity of banks in Europe. Instead of its normal refinancing operation, lending to banks for less than 6 months with adequate collateral posted, the ECB has accepted lower quality collateral (despite what it may say) and refinanced at maturities up to 3 years at favorable rates. The idea was to buttress banks’ balance sheets to avoid a dry up in lending. The effect however was to lend cheaply to banks in PIIGS countries (but also elsewhere) who then plowed the money back into high yielding Spanish, Italian governments bonds and the like. So we are in a funny situation, bank profits in Europe are dismal (Italy’s banking sector is yielding -1.22% profits over assets) but their net interest margins are creeping up, all while real business is starved for credit.

Astute observers will have seen this all before, in Japan. Most will be distressed at the pueril actions of leading bureaucrat financiers and economists. Many now regret the resignations of Jurgen Stark and Axel Weber, some of the last monetary hawks who warned against the current ECB roster of economists frivolous policies. Time alone will tell how foolish or not the current fiscal and monetary policies of the Eurozone are. Let’s all hope that a repeat of Japanese banking woes don’t make a repeat appearance and finally slay what was one of the noblest experiments of our times.