No New Posts

I’ve been busy at work for a few days, reducing my ability to say or write anything.  Honestly, the problem seems to be that the indicators are not providing a clear picture of where things are going.  Part of the problem is once you’ve stated your position you have to wait for events to catch up.  

I still believe in deflation for North America, because the great debt contraction wagon is still moving ahead (I am speaking of the U.S.), but since Canada is so expose to the U.S. there has to be a certain level of correlation.  Credit is shrinking as is the money supply (in the U.S, right now in Canada both Credit and the money supply are growing -- a reflection of Canada's strong economic growth).

 

Oil Price this morning are still below $69 bbl, no so long ago oil prices were around $89 bbl, an 18% reduction – although the impact at the Canadian pump has been somewhat muted, for a variety of reasons, but first and foremost is that the Canadian dollar has backtracked from parity, Canadian dollar is trading 1.05/.95 (depending on how you look at the exchange rate).

I will not talk about Europe, insofar there’s so much being written elsewhere by people who know what they are talking about, I would just end up being a parrot, and a bad one at that.  More fascinating was an commentary by Michael Pettis, economics Professor in Shanghai see her.  On the impact of the weakening of the Euro on China’s foreign exchange policy.  The impact on Canada of what is says is serious; in a nutshell Professor Pettis is worried of a major trade war between China and the U.S. especially if China doesn’t modify its exchange rate policy.  His salient point is as follows:

I assume that for the foreseeable future the major trade deficit countries in Europe are going to find it very difficult to attract net new financing.  At best they will be able, through official help, to refinance part of their existing liabilities.

·         If these countries cannot attract net new capital inflows, their currency account deficits, currently equal to two-thirds that of the US, must automatically contract.

·         If European trade deficits contact, there must be one or both of two automatic consequences.  Either the trade surpluses of Germany and other European surplus countries – larger than that of China and just a little larger in sum than the European deficits – must contract by the same amount, or Europe’s overall surplus must expand by the same amount.

·         We will probably get a combination of the two, but a much weaker euro – combined with credit contraction, rising unemployment, and German reluctance to reverse policies that constrain domestic consumption – will mean that a very large share of the adjustment will be forced abroad via an expanding European current account surplus.

·         If Europe’s current account surplus grows, there must be one or both of two automatic consequences.  Either the current account surplus of surplus countries like China and Japan must contract by the same amount, or the current account deficits of deficit countries like the US must grow by that amount, or some combination of the two.

·         If the Chinas and Japans of the world lower interest rates, slow credit contraction, and otherwise try to maintain their exports – let alone try to grow them – most of the adjustment burden will be shifted onto countries that do not intervene in trade directly.  The most obvious are current account deficit countries like the US.

·        The only way for this not to happen is for the deficit countries to intervene in trade themselves.  Since the US cannot use interest rates, wage policies or currency intervention to interfere in trade, it must use tariffs.

Prof. Pettis makes a compelling argument and unless certain actions are taken by a number of governments trade conflict will rise.  A beggar-thy-neighbor policy cannot work if the world expects the U.S. to absorb everybody else’s surplus, especially since the world is blaming the U.S. for its trade deficit.  

The impact for Canada could be serious; although Canada and the U.S. participate in the largest free trade area (NAFTA) when the U.S. enacted their stimulus package foreign companies (which include Canada) were excluded from participating.  Trade barriers are often raised in an emotional reaction to global events.   The impact of this is clear.  Overall, Prof. Pettis’ prescription was for China to buy the Euro, and revalue the Yuan to avoid this outcome.  However, the actual outcome is far from clear.