Bank of Canada’s Balance Sheet Continues to Swell

The Bank of Canada’s balance sheet shed about a billion dollars in August, but remains at record high levels.

Governor Poloz, like everyone else, is watching the Fed. With no taper in September (as we predicted), he is unlikely to do much to change BoC policy. To keep the Canadian dollar from appreciating too greatly against the US dollar, the BoC must maintain a level of quantitative easing consistent with the Fed’s own. Poloz is a mercantilist, and is therefore opposed to having a strong Canadian currency.

BoC as of October

Former NATO Commander Argues against Syria Strike

To the embarrassment of sane Canadians everywhere, Canada’s Prime Minister Harper is one of a tiny minority of world leaders foolish enough to clamor for military intervention in Syria.

Douglas Macgregor, retired U.S. Army Colonel and director of NATO joint operations for the Kosovo air campaign, argues about why such intervention will probably make no positive impact and more likely make matters worse.

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I gather you think it is not a good idea for any kind of a strike in Syria, so let’s begin there: why is that?

We have no compelling strategic interest that justifies the use of force inside Syria.

There are two wars going on right now in the region. One is the civil war in Syria, and that’s between the Sunni Islamists on one side, aligned with Al-Qaeda, the Muslim Brotherhood, funded by Saudi Arabia, the Emirates, and Turkey — and on the other side, a secular dictator whose protecting the various minority groups inside the country — Christians, Alawites, Shia — who most certainly will be annihilated if the Sunni Islamists expel him from office. We have no interest in, frankly speaking, any side being the victor, but we have spent the last 12 years killing the same people Mr Assad is currently fighting.

And then on a regional level, you have the larger war with Iran on one side, Saudi Arabia and Turkey on the other — the Sunni-Shia War.

What about responsibility to act though? We heard from the White House spokesperson earlier that the world has to act because, as he says, we know the administration in Syria has used chemical weapons more than one time. Is it not a case of having to go in a prevent further chemical attacks?

Well first of all, I don’t think you can, and in fact if you remove Mr Assad and his opponents win (who will benefit from any attacks that we launch) they will certainly gain control of the chemical weapon stocks and turn them against their enemies, which include Israel. So I don’t see how our intervention is somehow morally justified. These people could have just been slaughtered by machine guns and artillery fire. Indeed thousands and thousands of civilians, men, women and children, have died in this civil war since the beginning, so I find this an exercise in hypocrisy frankly.

It certainly sounds as if the US administration is at the ready for some kind of military intervention, so let’s talk about a “what if” scenario then. How would the US work with its allies in the region in that case?

First of all I don’t think we’ll have to work much with our so-called “allies” in the region. We will inform them of our intentions if we decide to launch these strikes, but most of these strikes will be launched from offshore, by naval platforms, various kinds of ships, and various aircraft that can launch cruise missiles without any violation of Syria’s airspace.

The Turks are no doubt very anxious to see the Sunni Islamists win in Syria, and also anxious to see them win in Egypt, will no doubt allow us to fly strikes from Turkish soil if we choose to do so. But these are very limited strikes, strikes designed to attack targets that we think are remote from civilian centers.

So how would they go about targeting? Especially if the goal is to prevent any further use of chemical weapons? That obviously comes with some huge challenges itself.

You’re not going to stop the use of chemical weapons in the future through strikes of the type that we are likely to launch. You would have to use frankly an enormous amoutn of explosive, ultimately even a low-yield nuclear warhead, in order to guarantee the destruction of chemical stocks, because you want to effectively burn them up and make them unusable in the future. We can’t really do that with the numbers of cruise missiles that we might launch. In fact if you are not careful you can make matters worse by causing chemicals to explode and be used accidentally. I think what we’ll do is focus on what we think are Mr Assad’s command and control nodes, his forces — things that we think we can identify with reasonable certainty  are not near civilian centers. We obviously do not want to cause the death of civilians.

As we know more than 100,000 people have lost their lives in this conflict. How tough would it be to avoid civilian casualties?

Well I think it would be very tough, and your point is well taken. We’re trying to tiptoe if you will through a minefield. And again, I don’t see any evidence that strikes will change the facts on the ground. Will they help the Sunni Islamists, allied with Al-Qaeda, the Muslim Brotherhood, backed by Turkey and Saudi Arabia? Probably. But will it be enough to bring down Mr Assad? That seems doubtful.

The larger problem is how does the rest of the world react? You mention people in London, Washington, and Paris who are a minority of people who think they should act as imperial policeman, essentially behaving as a large nanny-state in the world arena. Inside the United States there is virtually no support among the American people for this, and we don’t quite know how the Russians will react, or Iran. But we know one thing: If we launch these strikes, Mr Assad has no absolutely incentive to exercise any restraint. In fact the opposite is the case, we are likely to see much worse in the future.

So are you saying that you think the best option for President Barack Obama right now is no option at all? That the world has to sit back and potentially see more images such as those we’ve seen coming out of Syria in the last week — hundreds of people, children, women, killed by chemical attacks?

London, Paris, and Washington are not the world , let’s get that straight. They don’t speak for the world — they speak for themselves. This is a small minority of people who think they are morally superior to everyone else. There is nothing nice about civil wars. The civil war in the United States was far worse than anything you’ve seen in Syria. Civil wars are “no quarter given” conflicts. There are no good guys in the civil war. There is a winner and a loser. If you don’t like what you’re seeing, you probably shouldn’t watch. But as far as our intervention is concerned, the only thing we can do is make matters worse and then ultimately look ridiculous at the other end of the strikes, when things get worse and we end up changing nothing.

You talk about the limited of capacity of airstrikes to have any effect on the chemical weapons. I wonder if the US does see a scenario where there is intervention, if there was boots on the ground — and the White House says “that’s not our plan” — but in your opinion would that be a better way to go to try and get at those chemical weapons and make sure they don’t get in the hands of anyone?

If you intervened in Syria, you’d have to use a lot of armor — tanks and armored fighting vehicles — to get into the country and execute the kind of mission you’re outlining. If you use boots on the ground, that is men with rifles, you’ll simply get large numbers of people killed and you won’t accomplish very much.

The real question is why would we do that to begin with? Where is the strategic interest on the part of the United States to do that? I don’t think there is one. The country in the region with an interest in what you’re describing is Israel, and the Israelis have been very prudent so far. They see no reason to intervene in this conflict for the reasons we’ve already covered. They understand if they embroil themselves in this they’ll be shot at from every side by everyone, as we would be. So I don’t see any good options and I think that’s why the president has said there will be no ground forces.

You touch on the effect on the region if there are strikes, and President Assad in Syria has warned that the entire Middle East would be affected. What kind of scenario would we be looking at then on the neighboring countries in the region?

We have to be careful of the hyperbole. Russia has said this would be a military catastrophe. No, I don’t think that’s accurate. Quite frankly the people who are most interested are those in the immediate vicinity: the Turks, Lebanon, Iraq. Their interests vary tremendously. They’re the ones with the greatest interests, they’re the ones dealing with refugees, Jordan as well. Israel has an interest. But beyond those countries, no one really cares what happens in Syria to be perfectly blunt. It just doesn’t affect the rest of the world. So I discount the regional war scenario. I think this is hyperbole designed to persuade everyone to stay away. I happen to agree that we should all stay away from it. But having said that, I don’t see a major regional war erupting as a result of all this.

 — Watch the interview at CBC — 

Capital Is Flowing Out of the U.S. Faster Than Ever

The US Treasury Department reports that Japan and China — the biggest holders of America’s debt by far — has dumped $40.8 billion in US bonds.

Interestingly, government bonds were not the only products being sold. Foreigners sold:

  • $5.2 billion in Freddie Mac, Fannie Mae, and Ginnie Mae bonds.
  • $5 billion in corporate bonds
  • $116 million in bonds composed of packaged US mortgages.

And they also sold $26.8 billion in US stocks.

All counted, this withdrawal of foreign capital is greater than during the 2008 crisis. It is greater than any time in history.

The Fed’s QE3 program, which creates $85 billion per month to suppress interest rates, is rapidly losing its effectiveness.

It prompts the worrying question: How big is QE4 going to be?

Read more at Money and Markets

What the Middle East Really Needs

The West likes to say it stands with the Egyptians and the Syrians and so forth in their “fight for democracy.”

The conventional wisdom which says the Middle East needs more “democracy” is, like a lot of conventional wisdom, nothing but nonsense.

Democracy is not freedom.

What the 380 million Arabs need are property rights, not the right to cast a useless ballot every four or so years. If America and Europe insisted on only this, it would make millions of Arabs who hate us today love us overnight.

Read more at Taki’s Magazine

Fed Discontinues “Excess Reserves” Chart

The St. Louis Federal Reserve Bank will no longer publish the chart showing excess reserves of commercial banks.

I can say little about why this decision was made. I suspect the Fed wants to draw minimal attention to the fact that most QE money goes into excess reserves.

The charts unequivocally show that the increase in excess reserves has corresponded almost exactly to the increase in the Fed’s monetary base. Observe:

MONETARY BASE

FRED Graph

EXCESS RESERVES

Graph of Excess Reserves of Depository Institutions

Why is this important? It shows to what extent the Fed’s different batches of QE are stockpiled by the commercial banks rather than pumped into the economy in the forms of loans.

When the Fed increases its balance sheet, the general rule is that the money will cause the money supply to increase because of fractional reserve banking.

However, after in the 2008 crisis, the M1 Multiplier tanked, meaning that each dollar added to the monetary base added much less to the money supply (M1). 

Graph of M1 Money Multiplier

The Fed has expanded its monetary base dramatically, but the M1 Multiplier makes us wonder where all that money went. The excess reserves chart shows us where most of the QE money goes.

As QE continues, we will have to assume excess reserves are rising if the M1 Multiplier remains extremely low. If the multiplier begins to rise, then more new money is entering the economy, not being added excess reserves. If M1 begins to skyrocket, then that means excess reserves are being loaned out.

— No more excess reserves charts — 

 

 

Windsor and Detroit: What’s the Difference?

Detroit has declared bankruptcy. The images and descriptions of the city evoke a wretched ghetto. Meanwhile, if you cross the border to Windsor, Ontario you find a relatively nice place.

Both cities have economies heavily invested in automobile manufacturing. Both cities also have various welfare systems available. They are both rife with municipal regulations. Canadian and American cultures are fairly similar.

So what’s the big difference?

Detroit’s bankruptcy filing lists about $18-20 billion worth of debt. Even if you low-ball it, this amounts to debt of about $26,000 for everyone in Detroit. This is a city where the average per capita income is a pathetic $14,700 per year.

Windsor’s debt is around $115 million. They have about a third of Detroit’s population. Windsor’s debt per capita is $545 only.

Debt is not bad. The key is to use the debt for something productive. Since all government spending is inherently wasteful, cities should spend as little as possible and minimize their debts. Otherwise they will become Detroit.

The Bank of Canada’s Balance Sheet: Bigger than During the Financial Crisis

During the 2008 financial crisis, the Bank of Canada intervened with an unprecedented 50% expansion of its balance sheet to a total of nearly $80 billion. This was done by creating money and purchasing assets from the big banks in order to add liquidity to the market.

By mid-2010, they had unloaded these emergency acquisitions and their balance sheet returned to pre-crisis levels.

But now, after years of growth, the Bank of Canada’s balance sheet is bigger than ever. The BoC holds nearly $90 billion in assets.

boc july 2013

But the crisis is over, isn’t it? The Bank of Canada is trying to keep the Canadian dollar down and interest rates low. They are acting like the crisis is not over, or like another crisis is waiting to emerge.

Marc Faber: Central Bank Intervention “Will Be Very Painful”

Continuing the theme from our last post, Marc Faber — publisher of The Gloom Boom and Doom Report — argues how central bank policy distorts asset prices. The unwavering commitment to monetary expansion will reach its conclusion when inflation explodes or the system becomes so unwieldy it just collapses.

He takes this analysis a step further, to the social implications of central bank intervention. He says monetary intervention ultimately foments social unrest and must culminate in disaster, be it financial meltdown or war.

 

Jim Rogers: “Everyone Will Suffer.”

Jim Rogers, the commodities investor, argues that the Canadian economy is not as bad as in many Western countries.

However, he believes there is a “major disconnect” between “asset values and economic realities” all over the world. Central banks, desperate for growth, are inducing these distortions by aggressively pumping money into their economies.

This dependence on central bank intervention to propagate what he calls an “artificial boom” guarantees disaster.

So even if Canada’s footing seems strong, the interconnected nature of the world’s economy assures that problems in the US, Asia, and Europe are problems for everyone.

Basically, it’s business-as-usual in the maturing business cycle.

He still looks favorably on agriculture. I can corroborate what he says about farming. Part of my family owns a big farm in Alberta.

In general, farming is a horrible business and no one wants to get involved in it. As more people, particularly in Asia, rise from grinding poverty and increase their demand for food, supply will be significantly constrained.