Wednesday Night #1406

See also U.S. economy 2009

T H E  R E P O R T

Zero Growth
Zero growth is a theory that all economic activities and policies should be oriented towards achieving a state of equilibrium. It asserts that the continuous growth model is inherently unstable resulting in a “boom/bust” cycle, and that continuous growth in the context of finite resources is unlikely to support current levels of prosperity indefinitely. The problem with the concept for some is that  it is human nature to strive to move forward; the alternative is to stagnate (‘rot’). Should growth be defined in a pure economic sense? John Rawls, the moral philosopher who taught at Harvard, in his Theory of Justice postulated that no economic action should be taken unless it benefits the least well-off in society. Applied to zero growth, this would mean that the least prosperous in society would have to agree that they did not require more. Would the most prosperous give away all their money to ensure an equivalent standard for all? The question comes down to whether the Earth has reached or will soon reach the limits of its carrying capacity as was predicted by the Club of Rome’s “Limits to Growth“. Peak oil might well be an indicator of limit to growth.
More worrisome is the explosion of Earth’s population with its persistent demands for Earth’s resources. Curbing population growth appears difficult, and given that there is an inverse relationship between family size and education, this idea would not be in the interest of those whose  influence over countries and ethnic groups depends on unquestioning obedience and loyalty of the masses. Equally problematic is the developed and developing world’s untrammeled consumption, but in the latter case,  it is time to stop blaming government, or waiting for government action and to remember that “we have the power” to curb consumption.
[Another approach to the economy and sustainable development options is put forth in Peter Brown‘s writings including It Is Time to Order a New Economic Order which espouses limited growth rather than no growth and frugal use of earth’s resources as a guiding principle.]

We are Canadians; we are steadfastly in favour of free trade — as long as we have a trade surplus

As the current economic crisis worsens, the disastrous policy of protectionism appears to gain favour.  These proposals have not only failed in the past, but none attacks the root of the problem, namely human greed and collusion between banks, businesses, brokers and governments to the detriment of the population.

The economy

The only real surprise about the current situation is the unanticipated shock when it finally hit.  Governments failed or preferred not to foresee the inevitable.  President Obama’s proposed plan to aid the disadvantaged and the sick poor was suddenly cut short when, to the inexplicable surprise of all governments, the bottom suddenly fell out of the global economy in October, 2008.  The average portfolio has diminished in value by twenty to thirty percent since that date and although recent events give the appearance of improvement, values are likely to continue to drop significantly as the crisis wears on.  What, on the surface, appeared to be a banking and financial crisis, has begun to affect the entire population.  Although the unemployment rate has risen significantly, the current rate of unemployment has not been sufficiently high overall to have warranted the popular reaction that it has.  In an apparent attempt to conserve assets in anticipation of a worsening situation, retail sales have dropped significantly, far in excess of that reasonably anticipated by the decrease in employment.  Significant decreases in the sale of beer, soft drink and consumer staples are an indication of the fear that has hit the world in the last four months.

In uncertain times such as these, gold appears attractive to some as a means of conserving capital.  Being both a commodity and a medium of exchange, the value of gold may very well decline in tandem with securities but not as sharply and its role as universal currency can be valuable in difficult economic times.  During the Great Depression, the value of gold held up very well.  [Ofer Avital recommends MISH’S
Global Economic Trend Analysis: You Can’t Fool Gold The last paragraph is significant – Gold is making new all time highs in nearly every currency except the Yen and the US dollar. Moreover, and as shown above, gold has recently been moving in tandem with a falling Euro and rising dollar. This is not a sign of hyperinflation or indeed any kind of inflation. This is a sign of extreme credit stress, in nearly every country in the world. And the Economist explains Why gold prices will probably remain high in 2009]

Investment in infrastructure (see also WN #1403)
Current plans are based, in large part, on infrastructure renewal in the belief that it is a highly desirable plan that will rapidly reverse a deteriorating financial situation through financing over a long period.  However, even if successful, that plan, constantly described in terms of “shovel-ready projects,” has not yet gotten underway, especially in Canada because Parliament has not yet enacted the required legislation. Additionally, part of the problem is current ecological and environmental impact analyses requirements, the satisfaction of which is, of necessity, time consuming, ad as has been mentioned before, the danger is that in the haste to pour money into job-creating infrastructures, the authorities will neglect to do the long-term planning required to ensure that infrastructure projects do not simply replace crumbling infrastructure with equivalent new structure designed to meet past priorities and parameters.

Timothy Geithner, U.S. Secretary of the Treasury faces the same problem as his predecessor, Hank Paulson, including banks with balance sheets that in no way reflect their market value. Losses have already been incurred. The question is who is going to bear these losses? The speech Mr. Geithner gave on Tuesday was inexcusably vague and would more appropriately have been given on January 21st, with a firm plan announced this week. The listening world was left with the impression that either there is no political will, we are not yet ready to face reality, or the problem is so enormous that even the administration cannot comprehend it. The plan’s as outlined has provoked much criticism, even from friendlies. And on Wednesday the China announced that guarantees would be required for the debt they own. Under the new plan the government is pumping money in without getting an ownership position, unlike the U.K. Are there not lessons to be learned from the S&L crisis? Or FDR’s declaration of a week-long bank holiday after which one-third of the banks did not reopen.  There is concern that there appears to be no consensus in the U.S., as to how to deal with this situation. The government is reluctant to intervene in the financial market place and with respect to the banks, is trying to put the taxpayers on the hook for the downside while private investors will benefit on the upside.
The cap on bankers’ salaries bewilders some who wonder why these people are still in their jobs, given that they are largely responsible for the mess we are in – in any other business, they would have been fired long ago. Meantime, the appearance on Capitol Hill of the CEOs of the major financial institutions failed to impress. The classic line? Please do not call these bonuses, they are [retention] awards. Meanwhile, there was a report early this week that a bank in Indiana or Ohio stupidly ran deficits, yet received $267 million under the TARP Program. This does not instill confidence.

Expect the unexpected continues to be the watchword.
Although the Canadian market is only down one percent so far this year and some companies have better results than expected, the average portfolio has lost between twenty and thirty percent since October and is likely to remain around that level or decline further.  The prudent investor will aim at the preservation of capital.  Should the markets fall to below the November low, they likely will have a more difficult recovery. Canada may do quite well in 2009, according to one investor. There are some positives including the climate of geopolitical risks in other parts of the world. The L curve could extend out over two to three years, but this winter’s wet weather promises good crops – and exports – this year. On the other hand, the export picture for Canadian manufactured products is very bleak. Furthermore, there has been no form of encouragement from the Prime Minister, possibly in the belief  that it is not politically advantageous for elected representatives to appear in the media at the same time as bad news is presented although by merely coexisting, the two may be totally unconnected except in the psyche of the viewers and readers.

Canada’s oil
Warren Buffett speaks of the glowing future in the oil sands, ignoring the disastrous environmental consequences of current operations, including the huge volumes of fresh water used during the processing of bitumen.  When you look at the geopolitical risks and canceling of oil projects in the Middle East, it could be very slow but we do have solid assets and Canada’s situation and prospects for recovery appear more positive here than elsewhere.

T H E  I N V I T A T I O N

Last week’s discussions were wonderfully stimulating, with new dimensions added by our favourite historian, who has discovered somewhat to his chagrin that he is now counted as CBC’s expert on The Great Depression.
The debate on matters economic, financial and political will continue this week, with new insights from Peter Perkins and other Leading Wednesday Lights.
Fuelled by some cheering words from such as Chil Heward and Ron Meisels, we admit to a certain amount of cautious optimism about the current economic climate. And in the same spirit, we suggest a look at Fareed Zakaria’s February 7 piece in Newsweek:  “Worthwhile Canadian Initiative Canadian banks are typically leveraged at 18 to 1–compared with U.S. banks at 26-1″, which actually praises Canadian banks and other public policy/governance initiatives. For this item, we thank André Saumier. [It’s nice to hear praise, but Tony Deutsch reminds us in his inimitable fashion:  “Just before we are carried away by bubbly enthusiasm, let us remember that it was the use of the Canadian judicial system which kept $32 B of ABCP from the banks as would have been the case in the U.S., and simply distributed the losses to the rest of the community. As is, I do not exactly know what still hides on the books of the National Bank, the B of M, and the CIBC. The TD Bank simply sold its toxic paper to its customers, and now is squeaky clean.”]
The federal government has proposed major changes to Canada’s competition and foreign investment laws that will rewrite the way government interacts with business when it comes merger and acquisition activity and provide competition bureaucrats with more policing powers. This seems to have caused quite a stir as the changes are buried in the budget. The National Post informs us that “Lawyers welcome the changes to the Canada Investment Act” and then goes on to quote several influential lawyers who appear to be very unhappy.
Meanwhile, is this a good idea?  Bank plan calls on Wall St. for help “Wall Street helped produce the global crisis. Now, as the Obama administration prepares a revised bailout plan for the banking system, policymakers hope Wall Street can be part of the solution.  ” Isn’t there a saying about either being part of the problem or part of the solution? More on the plan will come on Tuesday, according to Bloomberg [see also: New twist for toxic assets: U.S. seeking private capital to fund new ‘bad’ bank]
Guttenberg to be named the new economics minister of Germany – does this mean he gets to print money?
Back on the happy trail, Andy Nulman‘s new book “Pow! Right Between The Eyes! Profiting From The Power of Surprise,” was released today (Monday) by John Wiley and Sons.
Andy sends the following typically irrepressible message:

“My first really big, mass-market book is being released across the continent today from John Wiley and Sons. It’s a non-fiction/business title called “Pow! Right Between The Eyes! Profiting From The Power of Surprise,” and it’s about harnessing the power of the unexpected.
The initial reviews have been kinda wild:
— Jack Covert, the founder of the prestigious 800 CEO-Read says, “Andy Nulman, the king of Surprise, has succeeded in writing a book full of ideas that every organization can find value in.”
— Publishers Weekly calls it “colorful and enlightening,” and “[filled with] astute insight“;
— Karen Yi of went as far as to say “Nulman’s radical new methods are bound to POW through traditional marketing and leave their mark.”
Here’s why I’m writing.  One of my ultimate life dreams is to be a New York Times best-selling author.  This book gives me my best opportunity.
But I need your help to fulfill it.
You see, the book business works like the film business inasmuch that the first week of release is of utmost importance.  First week sales set the pace, and plant the seed for future success.
That said, if you would actually consider buying the book, I would appreciate forever if you would do so-uh, how do I put this tactfully?- right now.  You can do so easily, this very instant!, by clicking on: CHAPTERS or AMAZON.CA
But here’s the real favor.
I am asking you to personally recommend me to YOUR mailing list, tell them that I’m not a bad guy, and that THEY wouldn’t be wasting their time or money by investing in my book right now as well.
I know that this is a big ask.  But in all the time that I’ve known you, I haven’t solicited donations for any “good causes,” haven’t sent you any chain letters, haven’t even forwarded you any X-rated jokes or videos, have I?  I don’t ask often, but when I do…
So what do you get for helping me?  Well, say that my dream does come true and Pow! hits that New York Times list.  Like on American Idol or in an election where your vote helps decide a winner, you could forever say that your influence helped make me a best-selling author. In the end, all I can offer you is bit of pride…and a ton of gratitude.  I truly hope you deem that enough. For now. “

There’s more, but this gives you the essence of the Ask, and Andy promises to autograph Wednesday Nighters’ copies at a future session.
Another Wednesday Night author, David Jones, writes for The MetropolitaIn on Lessons for Democrats. As always, David is a good read.
More thought stimulation is Rethinking Diversification by Catherine Austin Fitts – despite her apparent enthusiasm for Naomi Klein, the piece is well worthwhile.
This Wednesday, the West Wing meets in its 11th iteration. Alexandra introduces a new concept to us –buyology . We were intrigued by this tagline “Is it possible that some brands have managed to create their own religion by, coincidently or deliberately, adopting triggers and tactics from the world of religion? ”  So, is Wednesday Night a brand, or a religion? – Whatever your decision, come to “buy in” or worship (we know who prefers worship).

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