Fiscal Fear Mongering in Quebec or Separatist Number’s Lunacy?

Independent Quebec’s greatest economist or numbers’ charlatan

Earlier this month Ed Devlin the head of Canadian portfolio management at Pacific Investment Management Company warned Quebec politicians to be careful in the upcoming elections. Devlin an expert in fixed income market and liability-driven investing wrote a research note¹ on Quebec’s debt dynamics and the possibility that talk of sovereignty had the potential to derail the province’s current virtuous debt dynamics as has been the case in parts of Europe in the last few years, most notably Italy.

The research note sparked indignation in French language media and in separatist circles. PQ economic critic Nicholas Marceau was ‘shocked’ by the scare tactics employed by Devlin and Martin Aussant head of the party Option National, an ex-economist himself, stated that the head of PIMCO Canada’s analysis wasn’t credible. Even the federalist Parti Liberal du Quebec felt the need to chip in, with finance Minister Raymond Bachand saying that Quebec and Italy were not comparable as they were not in the same ballpark.

It would seem that the lively reactions from the political sphere have proved Devlin right, Quebec politicians just don’t get it. The Liberals and the Option National seem to agree, Italy and Quebec cannot be compared. Martin Aussant actually went on record saying that Quebec was in the average of OECD debt to gross domestic product (GDP) percentages. The question now is whether Aussant wants to plead guilty to ignorance or deceit has he is wrong about Quebec’s relative average debt load.

If one were to take Quebec’s provincial ‘net debt’, which measures the provincial government’s debts minus the province’s assets, Aussant would be right, Quebec is just slightly below average in terms of debt to the size of the economy with a debt of 47% in 2010 versus 56% on average in the OECD. The conversation might have stopped there if Aussant had done his economic homework, but having been in politics for much too long it would seem that his professional due diligence might have slipped a little. Quebec’s net debt measure doesn’t use the same methodology as the OECD, one would have to add all provincially guaranteed debts to the equation to properly compare with the OECD’s numbers.

Thankfully the provincial Auditor General wrote a 2010 study attempting the exercise of comparison. He came up with another net debt number 53% of GDP. While this number is higher it remains squarely in the OECD average, this was surely the number that separatists like Aussant think about when talking debt dynamics. However it still isn’t the same number the OECD uses. The OECD calculates total debts not net debts. Using that number Quebec jumps straight to the top and comes in just shy of the podium in fifth place of most indebted jurisdictions in the OECD. Not really close to the average as certain like to claim.

But all this fails to take into account that separatist want to separate from Canada, hence the Canadian debt proportion that an independent Quebec would certainly have to assume. Adding today’s Quebec gross debt to its proportional share of the federal debt, an independent central Quebec government would have a whopping debt load of 135%. There you have it folks Quebec would take the bronze medal for national debts if independent, right behind gold winning dysfunctional Japan and bankrupt and bailed out Olympian Greece with silver.

Some might ask how is it that Quebec can be one of the most indebted jurisdictions in the world and not go bankrupt, while even the United States is quietly considering² State bankruptcy legislation for its lesser indebted local jurisdictions. The answer is hotly debated in Europe right now, and was correctly pointed out by Devlin in his research paper. Europe and even the US to a lesser extent are monetary unions without fiscal unions; they share currencies without sharing fiscal resources much to the contrary of the Canadian federation.

Through the equalization formula Quebec receives a fiscal top up (worth over 10% of its provincial budget), effectively buffering it against the reckoning of financial markets. While Europe dithers on the question of bailing out its member States, every year ‘have-not’ provinces get a mini bailout. Without assurances that this money stream is permanent international investors would drop Quebec debt securities so fast Spaniards would thank financial markets for having gone easy on them.

Another rationalization separatist economists like to use to explain why Quebec is much stronger than the rest of the worlds is that when looking at net debts Quebec’s finances are resilient. That could be true if there actually were assurances that those assets that can be sold off to pay debts were worth what Quebec’s balance sheet says they’re worth. Unfortunately, that never seems to be the case. Just before Iceland got into trouble and got bailed out by the IMF it had one of those on paper fortress like balance sheets. It actually had a much lower net debt ration than Quebec does today. Unfortunately when a country gets hit by a deep recession, increasingly likely nowadays, asset values tend to drop and net debt ratios tend to shoot up. Since the Caisse de Depot et Placement du Quebec (a huge chunk of Quebec’s assets) has already proved it’s capable of loosing 40 billion dollars in a single year, what assurances remain that those losses won’t repeat themselves. And If Quebec were to separate who exactly would like to swoop in and buy Quebec’s crown corporations? Greece has been selling its State owned enterprises for pennies on the dollar in its crisis, what assurances are there that Quebec’s assets will sell for much more? Using accounting valuation to describe the worth of a government’s assets is quite the precarious game and it takes a lot of optimism to believe those numbers as credible.

Another favourite retort against Devlin’s research note is that Quebec doesn’t have the fiscal evasion problems that Italy and its ilk have. While this is true, Quebec has a much lower proportion of taxable wealthy citizens than Italy does. Given wealthy anglos historical propensity to leave in times of separatist pressures, the issue in Quebec shouldn’t be whether we have a tax evasion issue come separation but rather will Quebec have a wealth migration issue if that time comes. All in all separatists may continue to find tricky accounting techniques to rationalize separation economically, but at the end of the day numbers and facts can only lie so much. The separatist project remains far from credible economically.

If separatist political parties want to head out the door of Confederation giving up equalization payments and accepting a whopping debt bill on the way out of the restaurant maybe a little more fear mongering is in order. Let’s hope that cooler heads prevail in this election campaign and that market rattling talk of separation can go back to were it’s been hiding for the past two decades: the dust bin.

CNOOC’s Nexen Bid Doesn’t Pass the ‘Net Benefit’ Smell Test

China National Offshore Oil Company bid 15.1 Billion dollars last week for Canada’s eight largest oil producer Nexen. The friendly bid offers a 60% premium on Nexen’s pre-offer stock price and was further sweetened with assurances of a new head office for the Chinese company’s North and Central American divisions in Toronto as well as an eventual listing of the company on the Toronto Stock Exchange.

Much of the talk surrounding the deal has had to do with the possibility that the deal may be blocked under the Canada Investment Act, which states that all foreign investment over 300 million must pass a ‘net benefit’ test before being approved. Such discretionary government powers have only been used twice to block deals in the past. MacDonal Dettwiler and Associates, a Canadian satellite-imaging firm, was the first firm to be saved from takeover based on national security concerns. BHP Billiton’s hostile takeover bid for Potash Corp of Saskatchewan was blocked by what can only be described as economic nationalism.

After an initial outcry from both Potash Corp’s management and the public in Saskatchewan BHP sweetened it’s then 39 Billion dollar offer by promising to continue any pre-existing community investments and reneging any potential tax breaks it would be eligible for following the takeover. That wasn’t enough to convince the political establishment in Regina.  For some reason the public outcry against the CNOOC bid is much more tame this time around.

Maybe the facts that Nexen is only the eight largest Canadian oil producer and that half its producing assets are foreign makes the pill easier to swallow for corporate nationalists. Also, assurances of heightened employment levels thanks to the new head office might endear CNOOC to Canada’s corporate and political elite. This time however Canadian corporate cheerleaders may actually have something tangible to worry about.

BHP Billiton is a commercially focused enterprise bent on squeezing out profit from all its assets. With BHP already building the world’s largest potash mine in Saskatchewan, any corporate or engineering synergies the company could have squeezed out of the takeover would simply have led to more labour productivity gains in the short run and more corporate profits to tax in the long run. The profit motive and BHP’s long track record in commercial ventures assured Canada both the those benefits. CNOOC’s bid for Nexen insures neither.

CNOOC has no efficiencies or productivity gains to offer, as it has never operated a steam assisted gravity drainage mine in the oil sands before. As a matter of fact we have no assurances that the company is a commercially minded institution as the Chinese have a longer track record of promoting its political interests than its commercial interests. A small example for the record is China’s financing of a new National Stadium in Costa Rica for no other reason but to make buddy buddy with the political class there. No one in Canada really understands what motivates the Politburo in Beijing, and since CNOOC is controlled by that same Politburo, why should Canada trust such sensitive and strategic assets such as the oil sands to them? As another example of the shadiness of China’s intentions, it is reported by Canadian security services that there may be as many as a thousand Chinese corporate spies passing on industrial secrets from Canada to China. China’s aggressive self-centeredness doesn’t stop there.

China has long had a policy of trying to secure energy assets to help feed its industrial base back home. In almost every commodity market China is one of the largest players, ever attempting to ratchet up the best deal so that its manufacturing base can wipe out the international competition. As far as we are concerned China may yet be willing to operate natural resource companies at a loss in order to bump up its local industries profitability. This has long been the case of the Chinese steel sector operating at a loss to bolster Chinese manufacturing competitiveness.

With such a history and the potential for direct trade in oil between China and the oil sands should Enbridge’s Northern Gateway get approval, it isn’t far fetched to imagine Chinese energy traders attempting to manipulate prices so as to reduce profits from their Canadian divisions, thus contributing less taxes to Canada and more profits to China. While this scenario is speculative many industry insiders wouldn’t be surprised to hear it.

There also remains the issue of environmental record. Chinese companies aren’t especially well known for green track records. Canada’s environment is prized by its citizens, and it is doubtful that Canadians would really trust a government backed company from the worst polluting country in the world.

Whether it be for national security reasons, environmental concerns, Canada’s commercial and economic interests, it would seem that everything points towards the necessity of prohibiting foreign government backed companies from buying up our strategic national assets. Canada did a great disservice to itself when it refused BHP Billiton’s bid for Potash Corp. We let our petty corporate nationalism get in the way of a deal that would have attracted financial and human capital to our country. We smudged our image as a trading nation open for business. Today for the sake of protecting that image we have spoiled, we are readying ourselves to accept a bid that is short on benefits and long on potential risks.

Canada already looks like the scared kid unwilling to dip more than a toe in the swimming pool of big business, and we may look it more so after blocking CNOOC. If the reasons for such a use of the ‘net benefits’ test are properly articulated and China is called out for its only half hearted adoption of capitalism, everyone outside of Beijing will understand and accept such a decision.

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.

Germany Chastises Canada, Sort Of…

Germany reiterated calls today for Canada to participate in the beefing of the IMF funding. The IMF is currently seeking to raise its war chest to 430 Billion dollars in preparation of possible new bail-outs in Europe to serve as a firewall against liquidity contagion of sovereign debt financing. Canadian Prime Minister Stephen Harper and his finance minister Jim Flaherty have resisted demands for the country to participate. While Canada has received praised from Germany for its take on austerity it continues to be admonished for showing little ‘solidarity’ in matters of bailing out Europe.

Harper has repeatedly said that taxpayers in Canada would not participate in financing the welfare state of some of the Richest nations of the World. It must be noted however that Germany is showing a little lack of consistency in its criticism. Much of the political difficulties in the current European sovereign debt crisis stems from Berlin’s refusal to risk its own taxpayer moneys on alleviating required austerity in the Eurozone periphery, so how can Angela Merkel, Germany’s Chancellor, turn around and ask of Canadians what it won’t ask of its own people.

When a country goes bankrupt it makes sense to stabilize that country’s finances and currency through an IMF led debt restructuring with the objective in mind to return that country to a sustainable growth path and government spending. But when the World is faced with the likes of Greece whose sense of state welfare entitlement is so strong that it refuses the policy prescriptions attached to IMF lending, why should the World backstop its governmental spending. European style welfare states require generous taxpayer funding and strong longterm growth to be sustainable, countries desirous of receiving lending from the IMF must accept a model that both generates growth and taxes heavily. For countries to achieve those dual requirements they cannot be hampered by distorted fiscal incentives, which lax IMF lending standards embody.

It should be unacceptable that the IMF, funded by every country in the World including its poorest, should serve as a tool to preserve un merited entitlements in the richest nations of the World. The Conservative governments stand is that the IMF should only serve the Worlds poorest governments, this isn’t right, the World Bank is there to help the poorest, the IMF’s role should be to stabilize the World’s financial system by increasing sovereign liquidity to governments hampered by temporary market pressures.  But Harper is right with regards to who those fledging governments are.

Spain is a prime example of a relatively responsible government facing pressures outside its control and in need of a temporary backstop. Greece however is the antithesis of a responsible nation, underserving of outside help since all its problems are internal. Canada should increase its participation in funding the IMF, but this extra funding should come with conditions. Those conditions should be that the IMF serve strictly the needs of governments willing to accept the longterm rebalancing of their public expenditures, as has been the historical norm. Countries that dither and object to bail-out conditions ex-post, should be blacklisted so that the IMF may concentrate its ressources on countries like Spain who can actually benefit from it and Ireland who has shown responsibility and a willingness to proactively deserve it.

Germany has made many correct economic arguments over the course of the current crisis, let’s hope she can continue to make them consistently going foreword.

EI Changes

Ottawa. Unemployment Insurance (or employment insurance as its ironically called in Canada) is getting its first make over in a while. The Conservative Government has come out with an outline for its proposed EI changes. The government intends to tighten eligibility requirements. The exact structure will be presented in a bill once the governments omnibus budgetary bill has been passed.

The outline roughly sketched out calls for the creation of three categories of unemployment benefit seekers. The first one for long-term workers who enjoy EI benefits the least, another for infrequent EI benefit recipients and the last for chronic EI recipients or EIers. These three groups would see their EI benefits taken away were they to refuse jobs of equivalent pay or equivalent trade, with the long-term workers given the most leeway to choose their next job and repeat offenders the least. EIers will be expected to accept jobs earning as little as 70% of their previous employment remuneration. The government estimates that these changes to EI should only curb eligibility for 1% of current recipients.

There are two kinds if structural unemployments. First there is the natural one, people between jobs, students at various times, people waiting for that perfect job offer before jumping back into work, etc… Than there is the policy induced structural unemployment. Labour market restrictions, credential compatibility issues, high minimum wages, high unemployment entitlements, etc… When the policy induced structural unemployment is reduced it is most often a reason to cheer. Unfortunately government policy corrections not involving the elimination of the underlying policy often add a layer of market distortion.

So here’s hoping the reservation wage won’t actually go up. Because this could certainly be spun into a Nash equilibrium, whereby workers (especially newly active labourers) refuse to take on jobs as they’ll be looking at that 30% discount they’ll have to swallow if laid off. While the effect will surely be smaller than that of reducing entitlement rent seekers, their remains a risk that for certain categories of workers structural unemployment could increase.

Here’s a Suggestion Mr Carney

The governor of the Bank of Canada Mark Carney has again continued to scold and give lessons to Canadians. He does this in his Monetary Policy Report of April 2012 where he reiterates some of the comments this blog criticized in a previous post. Those comments were that Canadian exporters needed to retool and refocus and that Canadian consumers needed to slow their pace of debt accumulation. The focus of the ‘retool, refocus and retrain’ mantra is largely advocated so as to increase Canadian firm’s ability to compete internationally and export. While this blog has already stated its objection to paternalistic economic communication from government institutions towards the private sector, this blog does accept Carney’s view that Canadian prosperity is underpinned by healthy trade numbers and international competitiveness. There is one criticism the Governor could have levelled that balances private sector independence and improved competitiveness, that critic should be less debt supply and it should be levelled at governments.

Talk of trade competitiveness unfortunately always boils down to currencies. In Canada manufacturers and commentators are always complain about the high Canadian dollar and how many jobs it kills. Leaving aside the fact that a high currency has as many benefits for a country as it has costs, a currency artificially above its equilibrium (or below it for that matter) is however  a concern. Let’s assume that the Canadian dollar is artificially overvalue, who might the culprit be for this imbalance? The Loonie isn’t a reserve currency so that can’t be it. Contrarily to McGuinty’s opinion oil isn’t to blame either. As the Central Bank report notes, Canadian oil is sold at a steep discount to certain international oil benchmarks, meaning that eastern Canada imports at high prices while the west exports at cheap prices, so the impact of higher oil prices only marginally affects the Canadian currency. In any case studies have refuted the claim of the Loonie being a petro-dollar. So who exactly is contributing to the Canadian dollar remaining above par with the US dollar?

To answer that question the certain economic facts need to be reviewed. Commentaries on trade and currencies often emphasize a restricted number of causes for currency fluctuations. Currency movements need to be understood in terms of foreign exchange market equilibrium. Every currency trade impacts the prevailing exchange rate but every trade does not just involve a quick speculation or an oil contract purchase. Much purchasing and selling of currencies involves savings diversification by institutional money managers. To give some colour to this point in 2007 before the crisis hit, foreigners shed roughly ~10 Billion of government paper while exporters sold just over 460 Billion dollars of exports. Since the beginning of the crisis over 400 Billion of Canadian government financial papers have been sold to foreigners. What does all this mean? Government budget surplus reduces the supply of government debt available to foreigners for purchase, a government deficit increases the supply. Since foreigners must buy Canadian dollars to purchase both export goods and government debt, Canadian governments’ profligacies are partially to blame for the high Canadian dollar. Part of their issuance of debt has been sold to foreigners increasing the demand for the Loonie and crowding out exports of goods and services.

Some might be tempted to point to Europe to refute these assertions. They would note Europe’s deficits have widened since 08 while the Euro has generally fallen. This is easily explained by sovereign risk. Canadian government debt is perceived to be a safe investment while much of the Euro area’s debts are considered very risky. Investors the World over generally prefer to buy Canadian debts than those from the PIIGS as they could be described as better quality products. Essentially Canada’s two most popular exports have now become oil and debt, small wonder manufacturing in Ontario can’t keep up. So if Mark Carney is so considered with the twin problem of profligacy and competitive weakness why isn’t he calling for Government austerity?

Could Carney Be Wrong

Mark Carney the Bank of Canada’s Governor has been one of the most vocal central bankers Canada has yet seen. He intervenes in the media often and repeatedly about some of his worries concerning the health of the Canadian economy. His chief worries revolve around three subjects broadly vassal to the theme of international competitiveness. The first of his worries is that Canadian manufacturers aren’t using the combination of low interest rates and high Canadian dollar to invest in cheap foreign capital goods. His second ”keep me up at night” issue is that of Canadian businesses’ low exposure to rapidly developing countries and over exposure to stagnant markets. His third problem and dilemma is that of rapidly escalating household debt load. While not explicitly saying so, Carney’s fear is that Canada will increasingly ressemble the pre-crisis US; a debt saddled and internationally uncompetitive economy. Commentators have been doing a fair bit of wall painting by noting that Canadian Households are second in indebtedness in the G7+BRIC category. Economic nationalists regularly plaster business newspapers with doomsday scenarios foreshadowed by Canada’s perennially lagging productivity. Alright, let’s breath… wait a minute and think about this.

It is a little funny that Carney’s most recent musings about Canadian manufacturers and business came less than a week after the latest numbers of the Canadian Survey of Business Investments . The survey’s data reveals that new capital expenditure (read fixed capital formation) is expected to run at the fourth highest clip in over two decades, only failing to surpass the dotcom bubble fueled investment mania at the turn of the millennium. One would have thought that the BoC Governor would have taken note of such a survey. It seems that manufacturers were just waiting for the Goldilocks’s moment of low interest rates, easy lending conditions and better international sales prospects to start investing. A traditional Canadian conservative way of doing business, one that served Canada’s financial sector well during the crisis. In any case with Chairmen Bernanke of the Fed’s pledge to keep interest rates near zero through 2014, Canadian manufacturers probably expect their low rates + high currency combo to persist a while longer, so what’s the big rush to invest? As noted above business investment isn’t our central bankers only preoccupation. Our aversion to developing nations export markets tick’s him off as well.

When it comes to Canadian exporters’ choice of export markets, I propose that bureaucrats who have never managed anything other than a hyped up economic think tank (say a central bank) or sovereign debt investment bank department (say at Goldman Sach’s), stay out of real businessmen’s head. When Mark Carney proposes exporters start doing business with emerging markets, which ones is he talking about? Is he talking about Russia? a country where ex-KGB mafia is indistinguishable from the oligarchical business class and where the contracts you sign are only as good as the prevailing mood of the Kremlin? Is he talking about Brazil? Brazil a country where if your company spills a drop of oil in the ocean your executives risk loosing their passports and being prosecuted by only thinly-veiled xenophobia infected local prosecutors. Maybe, he meant China? That very same country that will toss Rio Tinto executives in jail just to squeeze a better deal out of those executives’ native country and supposed business ally Australia. International business is a tough business in itself, why don’t we let those entrepreneurs that have first hand experience decide when they want to abandon the largest markets of the World (Japan, US and Europe) for some of the riskiest markets on Earth.

We’re left to examine the remaining entry on the Carney sin list. Our profligacy and lack of thriftiness. So Canadian household debt levels have jumped to never before seen heights. With interest rates at a historic low this is to be expected. The number however only gives an incomplete picture of Canadian households’ health. Household average debt says nothing about the distribution of that debt. In the US, the subprime crisis became a crisis because debtors were at or not far away from the bottom of the income distribution. In Canada most of the ongoing issuance of debt is for mortgages, and less than 9% of Canadians have less than 10% equity in their homes. If we add the two together it says that on average wealthy Canadians are the one’s increasing their average debt load, since homeowners that own a decent amount of home equity are generally well off. Something which makes sense as most wealthy Canadians do not need to indebt themselves to live, whether they choose to invest when their financing costs go through the floor is a whole other ball game. Maybe commentators want to come out with more data on the distribution of indebtedness in Canada before alarming national rate strategist.

The accusation that Canada is uncompetitive however is rooted in other numbers than simply those on indebtedness or exposure to this or that foreign market; it is rooted in the fact that on an aggregate level more Canadian workers working longer hours have not been producing as much. The US has seen its per worker productivity increase faster than Canada’s for much of the last few decades. Something that we should all be worried about in normal circumstances. Canada is not living in normal circumstances. Canada is in the midst of reallocating some of its labour and capital resources to a sector where it actually holds a comparative advantage. For the last few years Canada’s workers, corporations, entrepreneurs and capital markets have been investing time and effort in developing its valuable natural resources. There are very long lags between payoff and investment for some of Canada largest most capital intensive projects. The Business Investment Survey forecasts fixed capital formation in the resource extraction industries will beat the record set last year by $13 Billion dollars. For now this money creates little revenue, profits or exports but 3, 5, 10 years down the line expect to see GDP jump. Building Oil Sands steam assisted gravity drainage mines takes years, likewise BHP Billiton’s Jansen potash mine wont be operational for years. The Canadian mining landscape is only now starting to bubble, when it starts to boil those productivity numbers we spend so much time worrying about will become jokes. All in all Canada is shifting. The economic landscape we now see will not be the same. Mr Carney rest easy, Canada’s households and entrepreneurs have got this one under control.

Wildrose in Hot Pursuit

The Provincial election in Alberta is underway. Alberta which has consistently elected majority Tory governments since Peter Lougheed’s Progressive Conservative win over the Social Credit in 1971, may now be flirting with a new sheriff in town. The blog Three Hundred and Eight who’s tracking of polling results tends to shadow actual voting results fairly accurately, is now forecasting a razor thin majority for Allison Redford’s Tories.

While the campaign has barely started, the drama is already quite high. One poll by Forum research is giving the Danielle Smith’s Wilderose party of Alberta  a 10% lead over the PC’s, other polls have either the PC’s slightly leading or in a statistical tie with Wilderose.

Before I pronounce myself for or against either party some due diligence is required, but in the mean time let’s indulge in the fact that competition has returned to Alberta politics, and more competition is always welcome.

Cius

A Montreal Manifesto

Yesterday I chose to walk home from school. It’s not an entirely short walk, walking from Guy street downtown to Monkland avenue and Girouard street in the Notre-Dame de Grâce neighbourghood will take the common walker an hour to cover the 5 kilometer distance. The walk wasn’t entirely unpleasant from a nationalist economic point of view. Signs of development abounded.

The very beginning of my walk began in the heart of Concordia University’s downtown campus. One is surrounded by the new glimmering Business School building, the slightly aged but just as freshly sophisticated Fine Art’s and Engineering building and the 70’s designed work of horror administrative building, being actively given a contemporary face lift. Walking westwards along Maisonneuve street one eventually reaches just north of the old Seville Theater block. Pausing for a moment I could not help but feel proud of seeing the old decrepit structure vanished, replaced with a massive hole in the ground from which a giant crane was erecting new 10 story condo development. Turning away from the Westmount city hall and walking past the illustrious Selwyn House school for boys I began the St-Antoine street climb. Halfway up the side of Mount Royal, the middle of the island historical mountain overlooking downtown, and peering south down one of Westmount’s steep streets, I caught a glimpse of an army of cranes in the distance.  The next street provided a better view of what is to be one of Montreal’s two Super Hospitals. Half a dozen tall cranes were churning and jostling in the air over the largest construction sight I’d ever laid eyes upon.

Finally reaching my own neighbourghood and the avenue us locals call Monkland Village, looking westwards along Monkland my gaze was met with the sight of not one, not two but three different developments of mixed residential and commercial use. This street which had not seen any change in the last decade, asides from a butchery moving and a store or two closing, was now alive with construction and development. Arriving at my house and picking up the day’s Gazette I hadn’t finished, I read an editorial of a popular and recurring idea in the Montreal media. Montreal is renewing! The editorial listed all the great developments of the city: Two Super Hospitals in the building, extension of the southern belt 30 highway, a new bridge linking Montreal and Laval islands (actually called Isle Jesus), announcement of a Champlain bridge replacement, refurbishing of the Montreal airport and surrounding highway circle, extension of the public transit systems, replacement of the Turcotte interchange, new skyscrapers in the works (none built since 1992) and a great many other examples of urban renewal. However, are these really the mark of a resurgent Montreal?

A few details escaped the description of my homeward walk, so banal they were to the average born and bred Montrealer that I am. The first was that while standing in the middle of Concordia’s campus, staring at its newer features my back was turned to its flagship buildings, the Hall and Library buildings. These buildings are of such a particular ugliness most of us stop looking up as we walk past them. Nor did I pay much attention to the multitude of grey apartment buildings surrounding the campus. It is actually hard not to draw parallels between this part of downtown and Beirut. That resemblance is further accentuated by the massive pot-holes lining the streets ad nauseam, reminding us of Lebanon circa 2006 (apologies to the Lebanese for the hyperbole). Another over looked detail is the neighbourghood hiding in the shadow of the old Seville Theater development, Shaughnessy Village. One of the more depressingly poor and socially ill quarters of town, with its streets strewn with drug users, aboriginal poor and its sad overcrowded women’s shelters. Even Westmount the richest neighbourghood in Montreal as decaying streets filled with cracks and pot-holes.

While the certain media gushes about urban renewal, most journalists and commentators know this to be superficial. Underneath the glimmer and hope of new construction, lays a deep corruption. Montreal’s construction industry is one of the most corrupt in the western world and openly so. Foreigners reading our press may be confused as to whether they are reading a Canadian daily or a southern Italian one on most days. Most city procurement or maintenance contracts are rigged. These problems are small in comparison to the larger issues facing the city. While once the most populous city in Canada and first to reach a million inhabitants, Montreal lost that title to Toronto in 1976. While Montreal used to be a commercially imperial city second in clout only to London in all of the British Empire, Montreal long ago relinquished those epithets to the likes of Toronto, Hong-Kong, Singapore, Sydney, Mumbai and Johannesburg. Montreal also used to be home to some of the greatest corporations in Canada, many of whom have left. Adding insult to injury some of the great names that left were named after the city: Bank of Montreal, The Sun Insurance Company of Montreal.

Although Montreal has been the subject of some renaissance of activity, undeniably the city endures a stagnant state of affairs when compared to thriving cities like Toronto, Vancouver or Calgary. The causes of Montreal’s ‘greatness’ demise are all documented and obvious. The advent of a separatist and anglophobic  mouvement in Quebec’s political life are the main culprit. Separatists have always believed that Quebec and Montreal by extension were great because they are francophone. Nothing could be further from the truth. What makes Montreal great is its bilingual and bi-cultural identities (now more multicultural than ever). The attempts by ethnocentrical separatists to preserve french or more exactly to enhance Montreal’s french heritage has been an attack on Montreal’s very soul. This situation has arisen because governments in Quebec are formed by constituencies outside of Montreal in its francophone heartland. The government’s vicious cultural and economic attacks on the city have been further compounded because the seat of governmental power resides outside of Montreal, where ignorance about the true strengths of the city are rife.

Montrealers need to wake up and understand that what plagues their fair city is the city’s lack of sovereignty. Quebeckers once led political and constitutional battles to become as they would say: “Maitre chez nous!”. Or master in their own house. It is high time Montreal embarked on such a quest for economic and cultural independence. As an anglophone friend of mine was telling me the other day, she is tired of our province’s petty and destructive language wars and she is considering moving to another province for better work and more ‘political peace of mind’. What I heard in her lament was disheartening to say the least. Many Montrealers feel the same, they are tired of having people in Saguenay or in Gaspésie telling them what language they need to work in and what culture they should be instilling in their children. Enough with the outside influence already.

What Montreal needs is to become a Chartered City. Like Hong-Kong being freed from China to pursue its own destiny Montreal needs to be free from the cultural dictatorship that strangles it. Montreal needs to be free from the petty politics of separation. Montreal needs to be free to work and grow in the language that bests suits its aspiration to rival some of the Worlds great metropolises. Montreal needs to free itself from the pervasive anti-business, anti-wealth mentality that corrupts this province. Montreal needs to stop waiting for a distant government to prosecute the criminals that daily rape the islands treasury and tax payers, she must do it herself. Montreal needs to be free from the ineptitude of its provincial political duopoly.

To move forward and become the great metropolis it was destined to become Montreal needs to take back the assets that make it great away from those that would have them be chains. French should have made Montreal greater than just another anglophone city in North America, instead, it has become its greatest drag, a secular dogma weighting it down and prohibiting enlightenment. Montreal must become a “Bill 101 free zone”, it must become a separatist free zone, it must invite the legions of hard working industrious anglos to come back to their native island. It must demand that all infrastructure building and conceptualizing be repatriated away from Quebec City. It must firmly but curtly ask the rest of Quebec to butt out of its affairs. Montreal needs to start thinking of itself as an aspiring city of Lights. Hope and ambition are the greatest fuels for change and progress. Let us together reclaim the spirit that made Montreal the center of the Universe in 1967.

Montrealers could not tell you why they believe their city is the greatest. Montrealers cannot describe why they have faith Montreal will some day erupt into one of the greatest urban cores of the World.  Montrealers wont even tell you about this faith so crazy the notion must seem to outsiders. It is time for us to grab our pride by the buckles, raise our heads and forge ahead to where our true destiny resides. Our mission should be: to never again let an off-islander impose their timidity or apathy on us and to never let one of us leave because the pastures are greening faster on the other side.