Lessons in Secession for the Quebec Election

Separatism was a hot topic for the latest Quebec election. Quebec’s separatist party was defeated, but regardless of the outcome secession will remain one of the most important controversies underlying Canadian confederacy.

Hoppe writes:

Secession increases ethnic, linguistic, religious, and cultural diversity, while in the course of centuries of centralization hundreds of distinct cultures were stamped out.

There are also economic reasons to favor secession. Although Quebec receives transfer payments from Ottawa, these ultimately make Quebec’s economy weaker. This kind of provincial welfare creates an environment where people have stronger incentives to get money from the government (because there is more loot up for grabs), either through welfare or cronyism, rather than serving one’s fellow man in the market and truly benefiting society.

Furthermore, smaller countries have a stronger incentive to favor free trade, and reject protectionism. It is surely correct that if Quebec maintained its same economic policies post-separation, it would be a disaster for the citizens. But there would be far greater pressure to actually liberalize the economy if there was less subsidization available. Additionally, any of Quebec’s wealth that is currently sucked into the black hole of Ottawa would remain in Quebec.

It would be an advance in Canadian civilization for the country to split. But it would not be enough to stop there — there should be hundreds, or thousands of Canadas, which would create a land of amazing prosperity and happy coexistence. There can still be a “Canada” — but Canada should be a coalition of cooperating territories, not a exploitative system where some groups use Ottawa to rip off other groups.

Is the Taper a Big Lie?

The much-talked-about taper could be nothing more than a big joke. Where is the statistical evidence of the taper?

Let’s look at the last 10 years of the Federal Reserve’s balance sheet.

Here you can see all three QEs laid out nicely.

Let’s “zoom in” and look at just the last year.

 

The rate of growth briefly slowed then picked right back up. Other purchases appear to be offsetting the taper, at least so far.

Meanwhile, despite media reports and promises from European central bankers that they will inflate to prevent recession, the ECB is engaged in a deflationary policy, and has been for nearly a year.

Sometimes the official central bank statistics don’t match their words.

The Fed has been saying it will not let interest rates rise, yet at the same time it will slow its rate of purchasing assets. I don’t know how that is supposed to work, since regardless of the Federal Funds target rate, the market sets the real Federal Funds rate. Yet it almost makes sense if you assume while they might buy less crap via QE3, they will balance that with more purchases of different crap.

Did Canada’s Housing Bubble Just Get Popped?

Canada’s housing market has soared while the US market crashed.

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Canada has the most overvalued housing market in the world:

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The WSJ recently commented:

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system.

Now, the Canadian government is eliminating “its controversial investor Visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.”

The story continues in The South China Morning Post:

Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.

The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.

The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.

The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires. Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.

In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.

For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.

Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.

A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.

Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.

All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.

The investor visa plan is truly stupid and should be eliminated. The idea of requiring loans to the government in exchange for citizenship is incredibly perverse. All money lent to the government is wasted and hurts the economy. The Chinese and Hongkongers who participated in this program could have really invested that money in productive endeavors instead. But this is a double-whammy to the Canadian economy, because to pay back those loans the Canadian state must tax its citizens, which hurts the economy even more.

But what effect will this have on Canada’s housing bubble? It will reduce demand for Canadian real estate. That obviously doesn’t help keep prices high.

Yet the really critical factor is central bank policy. The Bank of Canada is not up to date on its financial statements, but as of November it held more assets than ever. I am interested to see whether Poloz will “taper” with his American counterparts.

My intuition says that he won’t. Poloz wants to keep down the Canadian dollar and subsidize exports.  The Bank of Canada has been expanding its balance sheet since mid-2010. Canada’s M1 money supply has grown dramatically. Canada’s housing prices are high. Canada’s interest rates are low. Yield on Canadian government bonds have fallen below American bonds. Yet consumer prices are not rising quickly, so the Bank of Canada sees its policy as an epic success so far.

– Read more at zerohedge

Why They Never See It Coming

Mainstream economists fail to see why crises occur.

Financial Crises Don’t Happen by Accident

By Marc Faber

As a distant but interested observer of history and investment markets I am fascinated how major events that arose from longer-term trends are often explained by short-term causes. The First World War is explained as a consequence of the assassination of Archduke Franz Ferdinand, heir to the Austrian-Hungarian throne; the Depression in the 1930s as a result of the tight monetary policies of the Fed; the Second World War as having been caused by Hitler; and the Vietnam War as a result of the communist threat.

Similarly, the disinflation that followed after 1980 is attributed to Paul Volcker’s tight monetary policies. The 1987 stock market crash is blamed on portfolio insurance. And the Asian Crisis and the stock market crash of 1997 are attributed to foreigners attacking the Thai Baht (Thailand’s currency). A closer analysis of all these events, however, shows that their causes were far more complex and that there was always some “inevitability” at play.

Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses…

Take the 1987 stock market crash. By the summer of 1987, the stock market had become extremely overbought and a correction was due regardless of how bright the future looked. Between the August 1987 high and the October 1987 low, the Dow Jones declined by 41%. As we all know, the Dow rose for another 20 years, to reach a high of 14,198 in October of 2007.

These swings remind us that we can have huge corrections within longer term trends. The Asian Crisis of 1997-98 is also interesting because it occurred long after Asian macroeconomic fundamentals had begun to deteriorate. Not surprisingly, the eternally optimistic Asian analysts, fund managers , and strategists remained positive about the Asian markets right up until disaster struck in 1997.

But even to the most casual observer it should have been obvious that something wasn’t quite right. The Nikkei Index and the Taiwan stock market had peaked out in 1990 and thereafter trended down or sidewards, while most other stock markets in Asia topped out in 1994. In fact, the Thailand SET Index was already down by 60% from its 1994 high when the Asian financial crisis sent the Thai Baht tumbling by 50% within a few months. That waked the perpetually over-confident bullish analyst and media crowd from their slumber of complacency.

I agree with the late Charles Kindleberger, who commented that “financial crises are associated with the peaks of business cycles”, and that financial crisis “is the culmination of a period of expansion and leads to downturn”. However, I also side with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”.

Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis. Usually, as was the case in Asia in the 1990s, macroeconomic conditions deteriorate long before the onset of the crisis. However, expansionary monetary policies and excessive debt growth can extend the life of the business expansion for a very long time.

In the case of Asia, macroeconomic conditions began to deteriorate in 1988 when Asian countries’ trade and current account surpluses turned down. They then went negative in 1990. The economic expansion, however, continued — financed largely by excessive foreign borrowings. As a result, by the late 1990s, dead ahead of the 1997-98 crisis, the Asian bears were being totally discredited by the bullish crowd and their views were largely ignored.

While Asians were not quite so gullible as to believe that “the overall level of debt makes no difference … one person’s liability is another person’s asset” (as Paul Krugman has said), they advanced numerous other arguments in favour of Asia’s continuous economic expansion and to explain why Asia would never experience the kind of “tequila crisis” Mexico had encountered at the end of 1994, when the Mexican Peso collapsed by more than 50% within a few months.

In 1994, the Fed increased the Fed Fund Rate from 3% to nearly 6%. This led to a rout in the bond market. Ten-Year Treasury Note yields rose from less than 5.5% at the end of 1993 to over 8% in November 1994. In turn, the emerging market bond and stock markets collapsed. In 1994, it became obvious that the emerging economies were cooling down and that the world was headed towards a major economic slowdown, or even a recession.

But when President Clinton decided to bail out Mexico, over Congress’s opposition but with the support of Republican leaders Newt Gingrich and Bob Dole, and tapped an obscure Treasury fund to lend Mexico more than$20 billion, the markets stabilized. Loans made by the US Treasury, the International Monetary Fund and the Bank for International Settlements totalled almost $50 billion.

However, the bailout attracted criticism. Former co-chairman of Goldman Sachs, US Treasury Secretary Robert Rubin used funds to bail out Mexican bonds of which Goldman Sachs was an underwriter and in which it owned positions valued at about $5 billion.

At this point I am not interested in discussing the merits or failures of the Mexican bailout of 1994. (Regular readers will know my critical stance on any form of bailout.) However, the consequences of the bailout were that bonds and equities soared. In particular, after 1994, emerging market bonds and loans performed superbly — that is, until the Asian Crisis in 1997. Clearly, the cost to the global economy was in the form of moral hazard because investors were emboldened by the bailout and piled into emerging market credits of even lower quality.

…because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.

Above, I mentioned that, by 1994, it had become obvious that the emerging economies were cooling down and that the world was headed towards a meaningful economic slowdown or even a recession. But the bailout of Mexico prolonged the economic expansion in emerging economies by making available foreign capital with which to finance their trade and current account deficits. At the same time, it led to a far more serious crisis in Asia in 1997 and in Russia and the U.S. (LTCM) in 1998.

So, the lesson I learned from the Asian Crisis was that it was devastating because, given the natural business cycle, Asia should already have turned down in 1994. But because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.

This debt financing in foreign currencies created a colossal mismatch of assets and liabilities. Assets that served as collateral for loans were in local currencies, whereas liabilities were denominated in foreign currencies. This mismatch exacerbated the Asian Crisis when the currencies began to weaken, because it induced local businesses to convert local currencies into dollars as fast as they could for the purpose of hedging their foreign exchange risks.

In turn, the weakening of the Asian currencies reduced the value of the collateral, because local assets fall in value not only in local currency terms but even more so in US dollar terms. This led locals and foreigners to liquidate their foreign loans, bonds and local equities. So, whereas the Indonesian stock market declined by “only” 65% between its 1997 high and 1998 low, it fell by 92% in US dollar terms because of the collapse of their currency, the Rupiah.

As an aside, the US enjoys a huge advantage by having the ability to borrow in US dollars against US dollar assets, which doesn’t lead to a mismatch of assets and liabilities. So, maybe Krugman’s economic painkillers, which provided only temporary relief of the symptoms of economic illness, worked for a while in the case of Mexico, but they created a huge problem for Asia in 1997.

Similarly, the housing bubble that Krugman advocated in 2001 relieved temporarily some of the symptoms of the economic malaise but then led to the vicious 2008 crisis. Therefore, it would appear that, more often than not, bailouts create larger problems down the road, and that the authorities should use them only very rarely and with great caution.

In Manitoba, Feed Your Children Ritz Crackers for Lunch or Be Charged $10

To run a child care facility in Manitoba, one must be licensed by the Manitoba Government’s “Early Learning and Child Care” department. In order to be licensed, the care center must enforce certain requirements about what food the children eat for lunch on site.

One woman, obviously an uncaring and incompetent mother, sent her children to daycare with packed lunches consisting of meat, carrots, potatoes, milk, and an orange.  Mmm… that actually sounds really good… ::drool::

Uh. Pardon me.

So anyway. Guess what happens? The daycare must ensure that all children receive a “balanced meal” according to the Canadian Food Guide, otherwise it violates its licensing requirements. If a child has an unbalanced meal, then the facility must “supplement” their lunch with the appropriate item.

So these children’s lunch lacked a grain item. So what did the facility provide to fulfill that requirement? A piece of bread or something?

Don’t worry, we’ll make sure your children get their Ritz Crackers.

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RITZ CRACKERS? Are you kidding me? When your body breaks those down, they are basically just sugar. A perfectly healthy lunch, like the mother gave her children originally, becomes less healthy when you add Ritz Crackers to it.  Ritz Crackers are snack foods.

Government regulation always produces inanity such as this.

No government should regulate what parents feed their children, either directly or through intermediaries like regulated daycare centers. The consequence is less healthy children.

– Read more at LRC

A Different Take on the Rob Ford “Crack Mayor” Story

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Rob Ford should resign, but not for the reasons that are very popular right now.

Claim #1: Rob Ford smoked crack, so he should resign.

The tendency of government is always to grow. It is an insatiable beast that becomes bloated by feeding upon the wealth of its subjects. Anything that distracts politicians from trying to pass new laws, new taxes, and new regulations should be welcomed.

Weirdly, that includes smoking crack. The more time a politician spends smoking crack, the less time they can spend trying to do “serious work” like using the law to take more of the peoples’ wealth.

If the entire city council of Toronto was high on crack all the time, they would be high on crack all the time. So they would be pulsing with inflated confidence and sensory stimulation, but they would be unable to do their normal job — which is exercising power over their subjects, generally making their lives worse.

Look at how much energy is being expended to deal with a mayor who apparently smoked crack one time. Instead, they would be working on “fixing problems” in Toronto (read: making Toronto worse).

Normally, crackheads don’t have jobs because they can’t keep a schedule, they can’t concentrate on anything, and they are always desperate to smoke more crack. That would be a far less threatening politician.

Wouldn’t you rather have politicians smoking drugs instead of raising property taxes or creating exploitative regulations that make life difficult?

Claim #2: Rob Ford lied, so he should resign.

I am sure you’ve heard this joke before:

Q: How do you know a politician is lying?

A: His lips are moving.

The term “lying politician” is completely redundant. Politicians lie all the time. If they were actually elected, it is guaranteed that they lied profusely to achieve office. The best politicians are the best liars. The entire premise of democratic politics is people competing against others with one outlandish deception after another.

Mencken said of politicians:

They will all promise every man, woman and child in the country whatever he, she or it wants. …. They will all be curing warts by saying words over them, and paying off the national debt with money that no one will have to earn. When one of them demonstrates that twice two is five, another will prove that it is six, and six and a half, ten, twenty, n. In brief, they will divest themselves from their character as sensible, candid, and truthful men and becomes simply candidates for office, bent only on collaring votes. They will all know by then, even supposing that some of them don’t know it now, that nonsense, and they will apply themselves to the job with a heart yo-heave-ho. Most of them, before the uproar is over, will actually convince themselves. The winner will be whoever promises the most with the least probability of delivering anything.

If people were less selective with their outrage and instead demanded that all politicians resign if they lie, they would seriously require all politicians to pack up their stuff and retreat from public office immediately.

Which would probably make the world a much better place. But people aren’t demanding anything like that at all. So their whining about how Rob Ford lied to them seems extremely contrived and arbitrary.

Read more at CTV.ca –

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