WhereIn Andrew Coyne MisCharacterizes Re-Shoring

I have always had an on-again/off-again relationship with Mr. Coyne’s writings. When he sits down and thinks an issue through its logical consequences, he can be incredibly insightful and make some really good points. Then there are the times when he misses the point of what something is because it conflicts with either his suppositions or personal interests. 

His recent commentary on “Re-Shoring” over at The Hub is an example of the latter. Largely, he’s arguing that “Re-Shoring” runs contrary to the principles of “Free Trade”, and the market fundamentalism that says money flows to where it’s cheapest to do certain things. He blithely dismisses the concerns around how countries like China have weaponized their control over certain areas of manufacturing against geopolitical rivals - saying that perhaps we should have “stockpiled more”.

The problem with Mr. Coyne’s arguments is that he is ignoring that modern manufacturing has become increasingly siloed, and runs very much on a “zero inventory” approach to parts.  Part of this is the adoption of so-called “just-in-time” models, where factories order just enough of a sub component for a given day’s production so they don’t have to allocate storage space for spares. (Remember that making its way into automotive manufacturing back in the 1980s?). Further, it’s very rare for any one product to be made solely by one manufacturing facility. The creation of an IOT device like a Raspberry Pi depends on bringing together the output from multiple factories for final assembly in another.  

Advocates of Re-Shoring aren’t saying “we need to make things at home so they are made at home” - far from it. What they are really advocating for is a system where the production of goods and provision of services does not become concentrated in the hands of one or two nations whose geopolitical interests may not align well with our own. Chrystia Freeland has referred to this concept as “Friend Shoring”. 

There are other reasons that having a reasonable base of manufacturing and services provision “at home” makes good sense.  As we have seen in the wake of Putin’s invasion of Ukraine, unbalanced trading dependencies (e.g. Europe’s dependency on Russian natural gas) can quickly become weapons in times of conflict.  If Europe had a more diversified approach to energy over the last 40 years, the odds of Putin being able to weaponize its energy trade with Europe are considerably reduced. Likewise, when we look to China, their chokehold on the production of a lot of computer products creates an enormous danger for both businesses and society elsewhere in the world, and makes it much more difficult to address an increasingly bullish government in Beijing.  

Offshoring took hold in a big way in the 1990s, with so-called “free trade deals” being negotiated all over the place, often between parties who have significant ideological differences. The results of that experiment are clear today, with Russia’s invasion of Ukraine, and China once again actively threatening invasion to annex Taiwan.  

These are not coincidental, or incidental to the doctrine of Free Trade.  They are in fact the logical consequences of assuming that deep trade ties would be a moderating influence on the behaviour of all parties.  This is seldom the case.  Even in the world of North America, where “Free Trade” took hold with agreements struck by Reagan and Mulroney, it is hard to argue that Free Trade agreements have stayed the hand of American politicians when it comes to disputes with Canada or Mexico.  Instead, old “grievances” keep being brought up and punitive actions are taken by the larger partner against the smaller (economically speaking) partner.

We also need to acknowledge that allowing goods and services to arbitrarily be “off-shored” also results in a class of workers who are left behind.  The experience of the so-called “Rust Belt” shows us that we have thought very little about how the movement of manufacturing and services affects real people. It’s easy for a business to look and say “well, your job is redundant now, good luck to you”.  Governments need to look at the societal impact of those decisions.  This isn’t to say that occupations don’t come and go, but rather that when we allow wholesale off-shoring of entire industries, we also do our own citizenry a disservice.  Not everybody is suited to the kinds of jobs that remain, nor are they necessarily given access to the kind of counselling and retraining opportunities that will help make a successful career change. As it stands today, the rise of demagoguery and fringe politics is an indicator of how many people feel abandoned by the shifts going on around them.  The rise of those people in our politics is also a very real threat to the stability of democratic government, as Canada learned with the Convoy protests of 2022. 

The point that Mr. Coyne’s argument misses is that recent events have shown quite clearly that Free Trade as it has been practiced to date results not in a moderation of all parties, but rather a concentration of trade (and thus geopolitical power) in the hands of those willing to take advantage of the assumptions of Free Trade.  Re-Shoring, or even Friend-Shoring, seeks to address the geopolitical imbalances that have been created. In essence it is a move towards a sense of justice in our economies and geopolitical realities. 

Labour Exploitation In The Knowledge Economy

The basis of the economy has changed over the last fifty years, and with it has come a change in how companies operate.  Arising from these changes is a new form of exploitation that affects workers at all levels.

Through the industrial revolution, we moved from artisan labour producing most products to an environment of mass production.  Artisans became factory workers, and when the predations of employers became too much, organized into labour unions to have the collective strength to fight back and gain better treatment for workers.  (This is a bit of an oversimplification, but for the purposes of this essay, it sets out the basis from which I will be building an analysis of today's issues)

Since sometime in the 1980s (especially in the wake of Thatcher's efforts in the UK), Neo-Conservatives around the world have been working actively to weaken the power of the trade unions.  This has resulted more recently in so-called "right to work" laws in the United States.  Laws which clearly undermine the effectiveness of unions and collective bargaining.  Superficially, these laws only appear to affect traditionally organized labour groups - manufacturing, government services and so on.

However, that is far from the full picture.  In fact, it is miles from it.  Conservatives have spent a great deal of time in the last forty years painting unions as slothful, entitled and wasteful in their efforts to undermine them.  The net effect has become that the balance of power has once again shifted heavily in favour of the employers.  Many unionized labourers find that their unions are of limited help when it comes to addressing grievances related to working conditions, pay or other workplace issues.  Contractual negotiations have turned again to a situation where the employer is dictating terms to the unions and so on.  In Alberta, for example, the government has just legislated the "agreement" with teachers in the province without actually negotiating with the ATA and other related bodies.  This is not an agreement, it is something else entirely.  Whether the ATA and its members agree with the imposed settlement is moot.

Now, as we turn from the labour economy to the so-called information economy, we find a new problem arising - and it is an ugly one indeed.  Knowledge workers, whether in IT or other domains, are highly skilled, highly intelligent people with extensive backgrounds in a myriad of areas.  They often hold advanced degrees as well as professional certification as engineers.  These people are used to being treated similarly to other professionals such as lawyers or doctors.

Unfortunately, the world has been changing dramatically since the early 1990s.  First of all, the rise of the multi-national corporation has begun to present a serious challenge.  Most countries have some kinds of laws which regulate corporate activities and place boundaries around them to some extent or another.  These laws are not, however, consistent across nations.  So, Canada has one set of laws, the United States another, and India another set of laws entirely.

When corporations have become so large as to span many nations, they become a law unto themselves at the moment.  If they don't like the conditions in one country, they simply move the bulk of their operations to another country where it is more favourable.  More favourable could mean anything from cheaper labour to fewer restrictions on how business is conducted or lower taxes.

The problem for Knowledge Workers has become one where their skills are emerging in more and more markets.  IT skills have become "commonplace" in the minds of many employers, with the consequence becoming that suddenly the notion of hiring skills locally has been replaced by "offshoring" - hiring expertise from India or some other country where "you can hire 10 programmers for the cost of one in North America".

The same thing is emerging in other "knowledge" domains such as engineering.  Building bridges is rapidly becoming something which is done "offshore", with only local labour being used for final assembly.  The design can be exported to an engineering firm in India, the manufacture of segments could happen elsewhere in the world.  As we found with the Temporary Foreign Worker program recently, this can result in local talent being shut out of the work simply because they are deemed (arbitrarily) more expensive.  In the case of the TFW program, Canadians are being obliged to train their replacements in how to do their jobs which will then be shipped off to another country.

What does all this suggest?  First, we have to recognize that money is fundamentally psychopathic.  It has no moral or ethical framework which bounds it.  Only individuals can bound money with ethical and moral considerations.  As corporations grow, they eventually expand to a point where decision making at the top is only bounded by profit considerations.  The impact on people becomes a secondary consideration.

As an example, when a company I used to work for moved to new facilities in the 1990s, the company was comparatively small.  A lot of decisions were made in terms of working environment that specifically accounted for the needs of the staff, and respected the input received from the staff.  More recently, I have heard that the same firm is moving into new facilities.  However, it is now part of a much larger multinational entity.  The new facilities are designed around minimizing the costs of office space per employee.  In fact, staff weren't even consulted about the working arrangements during the planning process.  The message?  Staff don't matter - even specialized knowledge is deemed to be replaceable by cheaper labour abroad if necessary.

The upshot is that there is nothing that obliges a company to utilize local talent in the course of business.  In fact, because the multinational company is able to sidestep local labour laws and suchlike, they can move business wherever they see maximum profit.

Because professional workers are not accustomed to having the "weaker hand" in negotiating with employers, they are only just beginning to recognize what is happening to them.  It used to be that having significant skills and depth of knowledge was a significant bargaining lever.  It still is, except that for a lot of knowledge domains, the competitor isn't down the street, but halfway around the world living in dramatically different circumstances.

What is happening is a two-ended exploitation.  Knowledge workers are being pressured to do more work for less money and in ever deteriorating conditions on one side of the equation, and on the "receiving side" of the offshoring discussions, the workers are being exploited with lower wages and no doubt poor working conditions as well.

The problem really boils down to there being a lack of effective tools for restricting the money-centered predations of large companies.  Local unions have limited leverage simply because much of the work can be moved elsewhere so easily, and the fact that work can be moved around with such minimal consequences for the employer further compounds matters.

I do not know how long it will take for knowledge workers to begin to recognize the degree of exploitation that they are currently experiencing.  I do know that the recognition of that exploitation is emerging and it will take some significant organization and change in the world in order to overcome this.  It will take more than just a trade union like construct to start to change this.

A part of the solution may well involve some kind of international union construct.  Another part will be the creation of a form of legal and regulatory environment that overcomes the ability of a multi-national company to sidestep local labour laws by shuffling the deck of cards as they are currently able to do.

The construct of corporate boards to oversee and guide the management of a corporation is no longer an effective tool in managing large organizations.  They are too far removed from the local consequences of their decisions to understand those effects on people and regions.  The construct of the board has become a means for the elites to communicate and share information, rather than a means of guiding a company with respect to ethical considerations.   This too may yet need to change in order to balance off the otherwise predatory nature of a company's desire to acquire more wealth.

In essence, we need to reinvent the notion of capitalism so that it works at a global scale, and the relationship between capitalism and labour must also be revisited.  Corporate accountability at the level of the nation-state is far too easily sidestepped.

How UnSurprising

Right on cue, the idiots in Edmonton start cutting health care spending at the first sign of financial trouble.

Anyone who lived through the horror that was Ralph Klein's years already knows that the Alberta NeoCon$ will use Health Care as the whipping boy for all of their difficulties balancing the books. Never mind that it's one of the most valuable public services Canada - and in particular Alberta has.

For those not thinking that it works to our advantage, consider that health insurance premiums south of the border can easily approach 100% of a middle income earner's salary. When employers have to foot that bill, suddenly the cost per employee goes skyrocketing over the salary plus payroll taxes and lease space.

Calgary has seen the brunt of the Klein-era cutbacks, and has only recently been starting to recover from the damage that slash-and-burn funding did to health care in our city.

Now, we see the parsimonious bunch of twits in Edmonton going after Health Care - after prostituting themselves to big oil in recent weeks.

According to the AHS's website, the unfunded units include transplant, lab, mental health, emergency and hemodialysis services.

I see. So, a health care system that is already starved for space for emergency care, and has never even come close to adequate space for serious acute mental health issues (ever since they went to "in community care" sometime in the late 1980s) is about to be constrained even further. I don't doubt that hemodialysis is similarly shorted on available service times.

Stelmach once again shows us that like his predecessor, he's all about big oil money, and not so much big on doing things for the people who live in this province. I can hardly wait to see what will be visited upon the citizens of Alberta when the budget is unveiled.

Awkward!

So much for that NeoCon talking point about how the "Free Market" should be left entirely to its own devices. The HarperCon$ just threw it out the window:

"Regulation" and "oversight" will be among the summit's buzzwords, with Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney likely to stress that each country needs to establish stronger domestic regulation as a necessary first step toward international co-ordination on banking rules.

Canada's financial system has proven more resilient than most during the global economic crisis.

The country has been sheltered by capital rules – the base capital that banks need to have to make loans – that are more stringent than the international standard, as well as a cap on how much debt banks can take on.

Considering how the Con$ squealed when Canada's banks were told by then Finance Minister Martin to take a hike on the subject of deregulating and allowing them to merge in fifteen different ways with other Canadian banks and foreign banks, there's a perverse irony to them now spouting off how wonderfully well our regulatory system has worked...a regulatory system that they have fought tooth and nail against for years.

One has to wonder how spinmeisters like Tom Flanagan will try to assimilate that into their next joint and smoke it? (Should produce something nice and acrid, I'm sure)

There Are Reasons I Don't Hire An Economist To Do My Accounting

So ... today's Budget Day, and Big Daddy's crew delivered the fantasy trip spending budget that had been hinted at. (I haven't had the time to look very closely at the spending portion of things yet - I'll start to take that apart later, after I've had a few hours to read it and think about it all)

But, it amazes me the logic that the Conservatives are using here. While a federal government budget is two parts prognostication, and one part actual accounting, we have to step back for a moment and wonder a little at the following:

The budget also vows to freeze EI premiums charged to employees and employees for 2009 and 2010, a measure that will cost Ottawa $4.5-billion over the next two years because the rise in claims will create a deficit it must cover.

So ... the government is expecting, and in fact planning on, an increase in expenditures; but it is going to freeze the incoming money stream? Actually, it's more twisted than that - they're going to freeze an income stream that is going to shrink. A ten percent increase in EI claimants isn't just a ten percent increase in the demands on the EI system, it also represents a reduction in the income the government has to work with in the first place.

I find this particularly ironic, since Conservative governments usually claim to be such great fiscal stewards and then they promptly overspend while shackling the government's ability to raise funds. (Remember, the HarperCon$ have been busily spending money like drunken sailors since 2006 - as long as it's for the military, they seem to have no restraint in their spending)

So Eddie, How Much Did Harper Pay You?

I can only imagine what the conversations between the PMO and Stelmach's office this past week must have been.

"Put Canada first and stop the nonsense,” the provincial Progressive Conservative leader told reporters in Edmonton Monday. “This is a time where we need sane, prudent leadership dealing with the bigger elephant in the room which is the global economic crisis. It's a real concern to all Albertans.”

He said he expects that “cooler heads will prevail” and that coalition talks will die by next week.

“I think it's just imperative that we move ahead with good, strong economic policies. Give us some predictability and some certainty in policies so that we can attract the investment that's necessary.”

However, he said his right-wing government already has a strategy in place to deal with a possible Liberal-NDP coalition in Ottawa. “But I'm not going to play the cards until such time and until we know who are dealing with and what the issues are.”

How blatantly partisan can you possibly be Stelmach? Did Harper pay you to come up with that drivel, or did you think it up all by yourself? But then again, Stelmach lives in Alberta where a bale of hay can be elected as long as it is nominated on the conservative ticket.

Does it strike anyone else as only mildly ironic that Stelmach's ire is directed at the opposition, not a Prime Minister who directed his government to play the most vicious of partisan games at a time when Canada's government needs to be focused on the economy?

Mr. Harper decided to play politics - he picked an exceedingly volatile moment to engage in a game of political chicken...and his bluff got called. Yes, he's backed down on some of the most volatile propositions, but at this point, can anybody trust him to actually do his job? Or does he believe that all he is responsible is political points - as if running Canada were some massive videogame where high score is all that matters.

[Update]
Just maybe, the rank and file of the CPoC will remove Harper as leader if they get bounced to the Opposition benches. It's time this bunch learned that politics really is all about compromise.
[/Update]

Harper's Hand - Firmly on the Trigger

Harper has his people talking about 'staying the course' and a 'firm hand on the tiller'. Even though the Con$ have blinked in their most recent game of political chicken, Canadians should be wary.

Harper has shown us that he is much more intent on playing for partisan advantage than he is in governing Canada for the benefit of Canadians. The fact that he slipped in several ideological turds into Flaherty's "Fiscal Update"(most ironically, a term that abbreviates to 'F.U.'...) last week tells us that he simply doesn't get it. If he wants to play the 'steady hand on the tiller' card, the first thing he needs to do is start governing rather than acting as though it was all a game of "scoring political points'.

Today, based on what I have seen, Harper's hand is not on the tiller, but on the trigger - and it is aimed at Canada and Canadian democracy. Make no mistake, Harper is an autocrat in the extreme. His fiscal policy is not fiscally responsible, it ideological. He seeks to impose a style of government that is extreme indeed - hard-fisted towards all who dare transgress or defy his ideology.

Deficit Spending - Thoughts

With renewed speculation that the Federal government will run a deficit this year, I thought I'd spend a few moments discussing where I land on the subject - because it's not as cut and dried as "Deficit bad, Surplus good", as has been common mantra in recent years.

Let me start out with a review of the terminology - in part because here in Alberta, people have long since comingled the ideas of debt and deficit.

Debt: is the money that the government owes to various lenders from whom it has borrowed to finance various aspects of its operations. Sometimes, debt is a necessary thing - usually to finance assets which have a fairly long life (e.g. buildings, roads and other infrastructure) - paying that down over the first phase of the asset's life (before maintenance becomes an issue), is just fine - little different actually than the mortgage most of us carry on our homes for some period of time.

Deficit: is a different proposition. Deficits are what happens when the government borrows to finance its day to day operations. Probably the best way to look at a deficit is to consider it as similar to credit card spending. If you can pay the card off every month, you don't have much of a problem. Start carrying a balance, and suddenly you are compounding that balance into your overall Debt picture.

That doesn't mean that the credit card debt is necessarily bad. For example, your furnace in the house dies during a cold snap in the winter. It costs you a few thousand to replace it which you slap on the Credit Card to cover the cost now, and perhaps you flip the credit card balance to your Line of Credit at the bank at the end of the month, knowing that you just don't have that extra $4000 lying around to pay off the furnace.

Did you incur a deficit for that month? Yes. Did it compound your debt? Yes. However, it was also a necessary purchase to keep your home livable, right? That isn't such a bad thing. If, however, you are incurring a credit card balance every month because you are overspending on dinners out and going to movies, you have a more serious problem - because the costs will continue to occur unless you take specific steps to change your patterns.

Government has a somewhat trickier balance to maintain than most of us with a mortgage and a few credit cards. Government spending exists on multiple levels, and cannot simply be blindly cut without understanding what is being cut. For example, cutting EI spending dramatically during a downturn is actually a very destructive thing to do, especially during a time period when demand on that program will very likely escalate.

The challenge that the government faces in these times is deciding where cuts can be made with a minimal negative impact upon the citizenry of the country - you know - the same people that pay the taxes that fund government in the first place. So, how deeply do you cut before real damage is being done to the country? What is important to maintain, and what is simply an unnecessary burden on the country?

The balance is not trivial, although I suspect that the way the HarperCon$ are going, any cuts made will be excessively damaging not just to Canada, but to Canadians as individuals.

The finance minister will keep his post in the upcoming cabinet shuffle, insiders say, and they insist he remains hawkish on balanced budgets even if others are starting to resign themselves to red ink.

They say Flaherty has three ways to stay in the black.

The Tories can cut program spending. They can scale back future commitments - reducing the scope of the tax-free savings accounts created in the last federal budget, for instance. And they can freeze public service hiring.

There's an obvious area we could cut back our spending - Afghanistan. However, I doubt very much that Harper will do that. The typical neoCon line is all about making authority structures bigger, and more aggressive - whether that is the military, police or prisons.

Unfortunately for everyday Canadians that means that the Con$ will be going after the programs that benefit them on a day to day basis - health care, EI, and others that the Con$ typically argue are all about 'poor judgment' and 'individual irresponsibilty'.

A certain amount of deficit spending to keep important government functions and programs running is reasonable over the short term - especially when the world's economy is so volatile, and government revenues are therefore similarly unpredictable.

Using deficit spending as a club is neither productive, nor useful - unfortunately, I suspect that is exactly what we'll see in the House of Commons when it next convenes:

"(Harper) will be able to have a deficit and take no criticism for it. Who's going to criticize him for going into deficit when you get their buy-in first?"

A Conservative MP made it clear what political tack the government would take if forced back into the red. When asked whether he expected a deficit the MP smiled and replied: "Only if the opposition agrees."

Economics and the Ideology of Deep Integration

If you have been paying attention, there's an active movement afoot to tie Canada to the United States often called 'Deep Integration'. Think of it as Free Trade only with serious implications for Canada's sovereignty in many ways.

The HarperCon$ have been big on this for years - in fact they'd like to go a step or two further. Now, consider the current economic mess in the United States for a moment. It's not pretty, is it? So, someone explain to me Harper's utter lack of policy - or even proposals - to protect Canadians?

There's no policy there because doing anything would fly in the face of one of the tenets of Harper's ideological dogma. I'll take Dion's ideas over Harper's absenteeism on this one - even if Dion's ideas are incomplete.

Let's Talk About Logical Consistency For A Moment...

As if Harper couldn't sink any lower, he proves that he can.

Canadian bitumen – the thick, heavy oil that is transformed into crude oil – is exported mainly to the United States. Mr. Harper's ministers noted that both U.S. presidential candidates have promised tougher emissions standards, so a ban might never apply to exports to the United States.

Wait a second, wasn't he just talking the other day about handing more and more of the regulatory regime around resource management over to the provinces?

Then he proceeds to brag about a supposed surplus in the last quarter:

Crowing about new figures that show Ottawa posted a $1.7-billion budget surplus in July, Mr. Harper told reporters that Liberal Leader Stéphane Dion has been irresponsibly trying to drive down confidence in the economy.

Now, there's two problems here - Mr. Harper's magic surplus is more than overshadowed by the currently unfunded, but committed, contracts for military equipment that he has sent various parts of the military scurrying after - from shiny new equipment to extended term leases of "gently used" gear to tide them over in Afghanistan. The costs of those bills alone more than exceeds the $1.7 billion he's blathering about.

As for confidence in the economy, the shakiness has nothing to do with any of the politicians or what they are saying. Voters aren't stupid - we know damn well what's going on right now in the financial sector south of the border will inevitably splash Canada. It can't help but do so.

To this point, Harper's idea of fiscal prudence is nothing more than corporate welfare for the wealthy and no protection whatsoever for middle class Canadians. The Harper approach has placed the government in the perilous position where it may be unable to respond to the shifting economic conditions in a way that benefits Canadians - largely because Harper has increased government spending at a profligate rate while reducing the government's revenues - a model which even the most elementary understanding of finances and economics shows to be deeply problematic. (In essence, Harper's approach to government finances is equivalent to using a sub-prime mortgage to finance the purchase of a new car - it depends entirely upon the overall value of the economy increasing at all times)

Schadenfreude

The irony in this story is hilarious.

"They were always producing negative reports about Venezuela," Chavez told reporters. "They forgot about themselves ... and 'boom!' they were bankrupt."

For years, we've been listening to the Americans trashing Hugo Chavez, but as he rightly points out, the American government and the large financial institutions haven't exactly been doing a good job of stewardship where their economy is concerned.

I may not agree with everything Chavez says or does, but in this case I'd say he's earned the right to poke the current meltdown in the US financial sector.

The tally so far?

Taken over (for all intents and purposes) by the US government:

Fannie Mae
Freddie Mac
AIG

Bankrupt:

Lehman Brothers

Bailed Out By US Government: (not sure if control moved or not)

Bear Sterns

That's quite a list of failures. I'm not actually sympathetic to any of these businesses - they hung their fates on the 'subprime mortgage' hook, and it fell off the wall.

What does surprise me is that they were foolish enough to do that in the first place. It doesn't take a genius to figure out that the terms of the sub-prime mortgages were predatory, nor does it take a lot to realize that giving people credit when they can't support it is going to sooner or later backfire.

The entire US economy has relied entirely on consumer spending since 2000/2001, and what gains were to be had after 2004 were almost entirely based on debt-funded consumer spending. You had to know that this was going to be messy.

It really does put paid to the standard right-wing shtick about good fiscal management. Every time we see a paleoCon government, the economy ends up tanking, it seems. It was a mess in Canada throughout the Mulroney era, and under Bush II, the US economy is being left in a deplorable state as a result of short-sighted policy and a dogma about not intervening in the so-called 'free market'.

Corporate Welfare a la PMSH

The Harper government is almost bad comedy when it comes to anything even remotely resembling economics - especially when you consider that Harper himself is supposedly an economist.

For a man who has railed about the supremacy of the free market, and against government intervention in the economy in years past, the announcement today of a multi-million dollar corporate welfare payment to Ford smacks of both hypocrisy and vote buying.

I'm sure over the next few weeks we'll hear more money thrown at Ontario voters in an effort to buy their votes, all the while this will be done against a backdrop of an economy that is slowing significantly and a government which ran a deficit in the first quarter this year while increasing military spending to support Steve's Excellent Adventure in Afghanistan.

You Don't Say...

Tell me it isn't so...Calgary's house prices are overvalued.

Markets in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal are all more than 10 per cent overvalued, as calculated by economists David Wolf and Carolyn Kwan.

Anybody who has lived in Calgary in the last five years knows too well how nutty the housing situation was getting. House prices more than doubled in the space of less than five years - you had to know that was overheated.

I don't know why anybody is surprised by either a cooling of the housing markets or news of significant job losses.

The reality is that with oil over $100/barrel, the only people that really win are the big oil companies. Other sectors of the economy have to pull back when the end prices they pay for energy begin to reflect the inflated commodity prices. There will be a cycle of consumer inflation that we have yet to experience as well - this will further stretch the demands on people's paychecks. I expect 'big ticket' purchases such as homes, cars etc. to slow down dramatically as people adjust to the realities of economic uncertainty.

Whether this turns into a full blown recession or is just pull-back in our economy to reflect the changing situation on the world stage is yet to be seen. I suspect it may produce a "regional" recession - with parts of Canada getting hit harder than others.

I have always been a proponent of Canada expanding its trade network to diversify beyond the massive dependence we have on trade with the United States. Sadly, in the last ten years, none of our governments have acted on that - content to ride the short term wave of a housing-bubble fired spending boom in the United States. Since oil is a 'global commodity', the current price spike is affecting economies around the world, and a more diversified trading network would still result in a net exporter country like Canada experiencing a significant economic slowdown. What it would do is make the recovery cycle smoother, and likely faster as the various regions of the world will recover at different rates. (I fully expect Europe and Asia to recover from the current slowdown quite a bit faster than the US - the US economic picture has depended for too long on growth due to 'bubble spending', and it's going to take quite a while for the economic engine to start producing product again)

Chavez Moves Towards Barter Economy

Hugo Chavez is proposing a "trade for goods/services" model instead of a cash economy in the Caribbean. BBC Story.

Chavez is already doing this with Cuba, and has been for quite some time. His motives are clear enough - Chavez feels that the US in particular has too much influence in the region, especially via devices like the World Bank and World Monetary Fund, which tend to impose political structure as a condition of the loans that they provide.

Like recent moves in the Middle East to establish commodities trade based against the Euro, Chavez's recent maneuvers show us a different strategy for undermining the historic dominance of the US greenback as the "lingua franca" of international trade currency.

In spite of "globalization", what we may be seeing the early stages of is a balkanization of the world along economic rather than political lines. Consider the following - Canada, the United States and Mexico form a significant "free trade zone", and much of South and Central America appears to be poised to step back from the dominance of the Northern hemisphere. (and Chavez's approach may well appeal to countries who are struggling under IMF/World Bank imposed economic structures in the region)

While one may look at Chavez's proposal as "mere posturing from an insignificant dictator", it has some interesting subtleties to it that I would not be so quick to dismiss. By switching to a barter system, Chavez and his allies quite effectively undermine the ability of organizations like the World Bank to dictate political and economic conditions to them - restoring a level of political autonomy that has been missing for those governments for some time, a very appealing proposition indeed.

There are other signs of growing segmentation in international trade to be considered as well.

As the EU grows and stabilizes, it becomes an important economic player for two reasons. It represents a single block of trading countries whose combined economies exceeds that of the United States, and the Euro becomes an appealing currency for international trade because it is perceived to be more stable, and less susceptible to the whims of a single country's government.

There are also signs of a reinvigorated Russia emerging as something of a unifying factor in much of the Middle East, and evolving ties with China that seem important.

The overall picture starts to suggest that the world is shifting, and opportunities to back away from relying on the US dollar as a "standard" in world trade are emerging in some unexpected ways - and those will change the landscape of world trade in the years to come.

Stephen Harper's Bad For Business

If you are a Canadian based business, it seems that Stephen Harper doesn't want you to remain so for much longer. The effects of two key Conservative government decisions are now starting to ripple through the business world.

The first decision to set the stage was a ham-fisted handling of the Income Trust issue. While I philosophically agree with the move itself, it was done in such an abrupt fashion it has left Income Trusts sitting on average around 20% below "fair market value" for the same company if they were still structured as a conventional corporation.

The second decision I commented on was the changes to taxation on interest which essentially oblige Canadian companies to hoard their capital in Canada.

These two policy decisions are making Canadian companies ripe targets for foreign takeover.

Sure enough, in the business news yesterday, two significant announcements popped up:

1. Algoma Steel being bought up by an Indian company.

2. 3 Income Trusts consumed by foreign takeovers:

a) VoxCom bought by UE Waterheaters
b) UE Waterheaters purchased by Alinda Capital Partners
c) Clean Power by Australia's Macquarie Bank

Lest some accuse me of being a hypocrite, complaining about protectionism in one sense, and then demanding it on the other hand - I don't object to foreign buyouts per se - I object to our government setting the stage for a discount auction of Canadian assets by the fiat of bad taxation policy that hamstrings the options that would normally be open to Canadian companies.

Under Harper's rule, the only way a Canadian company can grow onto the international stage is to be purchased by a foreign company - otherwise they are subject to a punitive tax regime when they try to finance expansion abroad.