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Stoked Opinion Gets Challenged! Response: Fantastically Flawed Capitalism For the Win

November 30, 2009 Leave a comment

Last week I posted the rant you see below after reading an article on ex-Bank of Canada Gover David Dodge where he suggested that our country would benefit from an extended period of extremely low interest rates to offest a necessary raise in consumption taxes. In response to my spouting, ex-real estate professional, current world traveller and all-around extremely sharp person Kristina Meakin posted the following on my Facebook wall:

Enjoyed your rant on Dodge’s suggestion for the BoC to keep rates low through 2015. I’m curious, though. If you’re so quick to dismiss Dodge’s suggestion, what do you figure is the most effective way to offset fiscal restraint by the government? Do you really figure higher interest rates for everyone is preferable to a… minor increase in consumption taxes? I don’t think anyone is suggesting the “recession was fantastic”, least of all Dodge…

Thanks Kristina! I’m sure that a lot of people are thinking the same thing.

I believe that many economists are incorrectly focused and looking to pump indicators that are secondary or irrelevant without primary drivers. Very simply, they’re no different than a football coach who so badly wants to increase his team’s passing yardage that he loses sight of the fact that yardage is only useful if it puts points on the board.

Economics suffer from the fact that they are extremely complicated and a bitch to make sense of. Rational thought requires that we simplfy problems into linear equations in order to generate solutions. Dodge has defined the problem as a lack of government revenue (taxes), that will be solved by increased tax rates, which will cause decreased consumption (in addition to reduced Government spending), and low interest rates can prop up consumption until we can return to our previous tax levels.

In other words: there’s a lack of T, so to +T,we should + the rate, which will -C, and G is – anyways, but -i will +C and +I, so the T defecit will be wiped out and we can +i to return C and I to their previous levels.

Simple? To me it resembles a sandwich in a blender: I think I recognize some of the ingredients, but they’re so horribly mutated that I can’t say for sure if it was pastrami on rye, or cat vomit. Even at this horribly over-simplified level, every economist will have a different view of the possible implications and outcomes of a manipulation of each of the varaibles.

There are two cornerstone indicators that should be considered before all others, and every other measure of prosperity will follow if they are strong: Inflation, and GDP.

Dodge is correct in asserting that the governement must raise cash to be sustainable. An increased tax rate may be the answer to that, but it would prove that our recessionary spending and decreased tax rates were truly borrowing from the future to create an un-capitalist, even-keeled economy that is perpetually fighting cycles. Given that no market is perfectly efficient and leakages are inevitable, counter-cyclical forces are like jousting against windmills. You may not lose, but you are definitely not going to be a winner.

Instead, we should embrace the miracle of the free-market economy. The same one that recovered in the forties despite what economists now agree were awful national policies that actually weighed down the recovery rather than boosting it.

I suggest that we should move back to a variable bank rate. The current rate is hammering hot air into the balloon above it, waiting for the ropes of consumer confidence to be unleashed to send inflation rates rocketing past 5% annually. Remember, only a couple of years ago even a half percent move would cause significant ripples in the market and simiarly affect our inflation rate.

Although the market (the national spending market, not the stock market, that’s another issue) may creep back towards pre-recession levels, inflation will not be so kind. By allowing the bank rate to vary based on the supply and demand of cash, a balance will be found and the investments that are made will be more likely to be sound, long-term wins rather than quick-hitters that will flop when we get back to sane levels of capital cost.

Ultimately, Government revenue is much more closely linked to GDP levels than it is to the tax rate. For example: $10B GDP at a 30% tax rate = $3B in revenue. $20B at a 15% rate is also $3B, and the market has twice as much cash to circulate the following year, whereas $5B at 60% is $3B, but also a socialist nosedive. Given that, we can do our economy a much better service by driving up the GDP than the tax rate. The stimulus for that drive has been set by the cheap money that we had, low interest rates driven by decreased demand. Now that the demand is returning, the best way to encourage a capitalist market is to perpetuate capitalism and efficient competition. 

One major result of interest rates that is often missed is foreign capital. There is no real advantage to investing in Canada over a box under a mattress right now. This, in a market that is desperate for a haven to store trillions of uninvested dollars. The Indians are buying unprecedented quantities of gold, China is converting to a basket, leaving their USD reserves untouched and diving into other currencies, and American companies are frantically searching for inflation and energy cost hedges. Canada is an ideal market to store all of that money; our banks are stable, we are resource-rich and relatively low corruption. All we have to do is gove the world a reason to hand over their cash and it will come flying in with very few strings.

Australia was the first G20 country to release their rates, and since then they have returned to a 2.1% interest rate (target 2-3%) and measured their fastest rise in GDP since ’07 this quarter. Interest rates rising gradually create more cash in the systam, and much more confidence in the future. A cash-rich economy that is spending is much better than one that is leveraging an artificially low-rate in hopes that the economy sweep up to fill in the gap between where our spending is and where it should be.

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Analyst Uses “Facts” and “Data” to Support an Argument

November 1, 2009 2 comments

We’re less than a week in and we’ve already got our first guest writer. Engineer, Financial Analyst and aspiring economic saviour Kelly Galway wrote me yesterday to express his take on the warm glow that business-folks seem to be wearing after the release of the US’s most recent GDP numbers. He is aware of my feelings about numbers that contradict my personal opinions (they’re obviously false), and well-structured arguments that cite reputable sources (left-wing propaganda), but he sent the following submission to me anyways.

Read on, you just might learn something. I know I did.

Economics Commentary
 
Apologies in advance for all the numbers in today’s economics commentary…
Equity markets were buoyed yesterday by the headline print, “US GDP Climbs 3.5%: US Recession Comes to an End,” or some variant thereof. I am all for optimism and economic recovery; however, here is some food for thought. Firstly, the 3.5% number is an “annualized” number, meaning that Q/Q growth was around 0.87%. In order to get 3.5% annual growth, this Q/Q would have to be sustained for four quarters straight without any further hiccups. Secondly, US Real GDP is actually down 2.3% Y/Y (13,324.6 billion USD in 3Q08 vs. 13.014.0 billion USD in 3Q09.) Thirdly, GDP numbers are revised at least twice to account for new data. Fair enough this one could go either way. The all-so-important Personal Consumption category was responsible for 2.36% of the 3.5% GDP growth, which sounds great in theory, but a closer look reveals that (1) motor vehicles and parts were responsible for 43% of the growth in Personal Consumption, (2) Disposable Personal Income fell by -0.2% Q/Q (-0.75% annualized), and (3) personal saving fell by 32% Q/Q. 
 
Both the DOW and the TSX have virtually erased yesterday’s gains in trading so far today on tempered Consumer Confidence. The TSX broke the 11,000 mark yesterday but has fallen today back to the 10,850 range. 
 
Canadian August GDP came out today. Showing just how much the world cares about Canadian GDP vis-à-vis US GDP, I had to do no less than four Google searches in order to find the figures for Canada this morning. Canadian Real GDP fell by 0.1% in August M/M and was down 4% Y/Y according to BMO Capital Markets. A comparison to the US numbers is difficult because today’s numbers were for August only (not 3Q09.) As BMO reports, Domestic activity was relatively robust, but manufacturing and other sectors reliant on the US market had a tougher time. All told, the Goods Producing sector continues to be outperformed by the Service Producing sector.

To rebut, I’ll simply quote a much-respected, successful executive talking about his company in the midst of a similar crisis:

“The third quarter is looking great. We will hit our numbers. We are continuing to have strong growth in our business and, at this time I think we’re well positioned for a very strong fourth quarter.”

-Ken Lay, Former CEO, ENRON

Unrelated side-note: ENRON filed for bankruptcy in the fourth quarter

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