Why Are The Tories Pushing Canada Into Recession?

Remember how the Tories are the party you want to vote for in tough economic times because they're great managers and willing to make the tough decisions? Remember all that stuff?

Yeah, well, the Tories are poking holes in the Canadian economy faster than the rest of us can bail.

Two figures tell the tale. The first relates to the government's quiet austerity. At a time when, if anything, the economy faces contraction and deflation, the last thing you want to do is add momentum to that contraction and deflation. In fact the Tories promised a stimulus budget in the last election - they fought the election on that basis. But as soon as they were elected, it now turns out, the Tories scrapped the budget and started slashing. Is it any surprise that unemployment remains stuck at 7.4% and that the economy shrank in August?

Really, the only thing that has kept the economy on life support has been China's continued demand for resources and cheap money, that made it possible for workers with otherwise stagnant income (at best) to borrow & buy. But the Tories & Bank of Canada governor Mark Carney have put the kibosh on that strategy of ad hoc Keynesianism by making mortgages harder to get. There's still cheap money for the corporate sector - but they aren't buying and are, instead, simply banking hordes of cash. There's no stimulus to the economy from here.

The result: the housing sector, particularly the condo market are headed towards freefall with a 30 percent contraction in Toronto's condo market in the third quarter. Home sales nationally are off by 15 percent. With the industrial sector contracting, this is like solving the sickness of the economy by killing the patient. According to a CIBC report:

"A 5-per-cent per year drop in house prices, for example, would shed roughly a half-point off GDP growth through its wealth effect on consumer spending, given historical sensitivities," he added in his report. "The shift in the volume of construction will be even more consequential. If, as we expect, homebuilding returns to levels aligned with the longer-term trend in household formation, taking [housing] starts from the 220,000 per year range today to 180,000 by 2014, there will be a near 1-per-cent adverse swing in the contribution of homebuilding to GDP growth ... before allowing for any multiplier effects.

The same report forecasts growth of perhaps one percent, but given that August saw a .1 percent contraction, even that seems optimistic. If the housing market continues to contract, with house prices declining, that 1 percent prediction could easily be wiped out. The real question that arises is: why do the Tories want to push the country back into recession?

After The Debt Ceiling: Back To Our Regularly Scheduled Economic Meltdown

It must have been pretty weak pixie dust, that debt ceiling agreement that was supposed to stave off imminent collapse, put America on a sound economic footing and bring sunshine and joy to the democratic peoples of the earth, because its affect on the mood of the world's stock markets lasted about thirty two seconds.

The champagne was barely drunk as the meltdown of the world's stock exchanges continued on a bevy of bad US economic data and further targeting of European sovereign debt by the parasites who run the ratings agencies and the human detritus known as bond traders. The only logical conclusion that anyone can draw is that this deal solves absolutely nothing and was really just so much sound and fury at a time when manufacturing was slowing, growth was barely above one percent and income growth is stone cold dead. And while I hate to quote Lawrence Summers, whose lobbying against regulating the derivatives market helped to create the present mess, he has a point when he writes in the Financial Times that the problem here isn't the budget deficit, it's the broader economy:

Economic anxiety should be our final reaction. America’s current problem is much more a jobs and growth deficit than an excessive budget deficit. This is confirmed by the fact that a single bad economic statistic more than wiped out all the stock market gains from the avoidance of default, and the fact that bond yields reached new lows at the moment of maximum apparent danger on the debt limit.

In fact, there are some fundamental contradictions at the heart of the American - not to speak of the global - economy that make it nigh impossible to restore growth using a tool so blunt and simple as cutting public sector debt - something that the present debt ceiling deal doesn't do in any case. Mostly what the shabby compromise does is cut stimulus spending enough to depress the economy without actually eliminating the debt load in the public sector of the economy, thereby freeing it up to provide stimulus spending. The rich will continue to have their tax breaks - notorious for not providing any economic stimulus whatsoever - but everyone else is too broke to spend money, worried that their house will face foreclosure, that they will lose their job or suffer a pay cut. In fact, just as the politicians in Washington are debating how much to slash spending, foreclosure rates continue to rise - the crisis is anything but over.

Lenders are poised to take back more homes this year than any other since the U.S. housing meltdown began in 2006. About 5 million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts forecast.

GDP growth declines slowly starting at the end of the 1960s,
never rising above 5 percent after 1985.

As I've said more than once, the massive growth in debt - and the private sector debt is much bigger than the government debt, by about four times - is a symptom of a deeper problem in the aging, industrialized economies of Europe and America. There has been a long term decline in the rate of profit - roughly, the rate of return on investment - that began in the 1970s, had a slight recovery, and then turned down again. As Chris Harman, a Marxist economist, noted in 2007 as the present recession was just about to seize the world in its grip:

Profit rates did recover from about 1982 onwards—but they only made up about half the decline that had taken place in the previous period. According to Wolff, the rate of profit fell by 5.4 percent from 1966-79 and then “rebounded” by 3.6 percent from 1979-97; Fred Moseley calculates that it “recovered…only about 40 percent of the earlier decline’’; Duménil and Lévy that “the profit rate in 1997” was “still only half of its value of 1948, and between 60 and 75 percent of its average value for the decade 1956-65”.

Profit rates declined in three of the biggest post-war
industrial economies from the beginning of the 1970s

The decline in the rate of profit had some very clear impacts in terms of economic growth. It meant, on the one hand, that growth in GDP - the total domestic production of the US economy - never went above five percent from about the mid-1980s (see chart above). It also meant a slow decline in industrial utilization, as factories never reached their full capacity.

All of these factors - decline in the rate of profit, decline in utilization, decline in rates of growth of GDP - have had the effect of pushing the system towards seeking out new sources of profit. One of those places has been the newly industrializing countries, particularly the rise of China, which attracted for a time a significant chunk of foreign investment. However, this wasn't sufficient to absorb the surplus in the US economy, particularly as profit rates enjoyed a mild revival in the mid-80s. Instead profits were increasingly invested into those places where higher rates of return seemed a possibility - the casino known as investment banking. This financialization was an attempt to restore profitability but has had the long term effect of making the system less stable and more crisis prone. John Bellamy Foster, writing in Monthly Review, describes financialization as follows:

Financialization can be defined as the long-run shift in the center of gravity of the capitalist economy from production to finance. This change has been reflected in every aspect of the economy, including: (1) increasing financial profits as a share of total profits; (2) rising debt relative to GDP; (3) the growth of FIRE (finance, insurance, and real estate) as a share of national income; (4) the proliferation of exotic and opaque financial instruments; and (5) the expanding role of financial bubbles. In 1957 manufacturing accounted for 27 percent of U.S. GDP, while FIRE accounted for only 13 percent. By 2008 the relationship had reversed, with the share of manufacturing dropping to 12 percent and FIRE rising to 20 percent.

The upshot is that no matter how many panto plays the politicians in Washington put on as long as the weight of the economy continues to weigh more heavily on the financial sector, it will be unstable. It appears from the spreading "debt crises" that a tipping point has been reached where debt threatens to paralyze the ability of the European and American economies to restore growth. However, the irony is that the focus on debt will only result in a painful and further destabilizing shift from public debt to an already bloated private sector debt.

In the US the aggressive rise of the Tea Party model of economic policy - eliminate all borrowing as quickly as possible - will itself only exacerbate the problem as growth goes into full reverse, tax revenues fall, and debt levels rise. If they manage the unlikely act of passing "balanced budget legislation" this will create a positive feedback loop where lost tax revenues lead to more debt which leads to more cuts, leading to slower growth, leading to lower tax revenues. On the other hand, the attempt to put off dealing with the debt for another day will simply delay the inevitable. Ultimately, the system needs a reboot - the debts should be cancelled, the banks nationalized and national investment geared towards building a real economy of infrastructure, green industry, and providing healthcare, decent housing, education and quality food to all.

Relief at an agreement will give way to alarm - FT.com

Death Of The American Dream

THAT IS THE TITLE OF THIS MULTIMEDIA PROJECT BY LAUREN GREENFIELD, with beautiful & haunting photos of the wreckage of the US housing sector and the lives ruined by its collapse. These are the voices you don't hear on the news when they're talking about bank bailouts (followed by record bank profits). When you see and hear these stories, you won't be able to think about the massive bonuses at the big banks and not feel angry.

Lauren Greenfield's "Foreclosure: Death of the American Dream" from Frank Evers on Vimeo.

Undigested Thoughts On The Present Economic Collapse

I haven't had a chance to sort through all the elements of what I've been reading regarding present economic conditions but I wanted to get down some preliminary thoughts. It's clear that things are bad. Very bad. The UK may well be driving down the fast lane on the road to Iceland. That is, it may be approaching a situation where its insolvent banking sector is too big to allow it to fail and yet it is too big to save - ie. the government can't afford it because no one will lend them the money. Or, if they go to the IMF, the IMF may well not have sufficient money. If that were to happen, look for disaster to unfold - a collapsing currency, a government forced (according to the rules of the game) to impose austerity measures against its population, and other such notable treats, as outlined by Nouriel Roubini:

"At best, the UK faces an economic and financial crisis that will be as bad as the US one: a severe and protracted recession that could last two years with very weak growth recovery once it is over; a near insolvent financial system, most of which will be formally or informally nationalized; a large fiscal costs of budget deficits surging because of the recession and the bailout of financial institutions; a weakening currency that may risk a hard landing if the crisis is not properly managed. "

It used to be that Roubini would outline the details of what the worst case scenario was but he doesn't any more. Could it be that even "Dr. Doom" is afraid of what might happen?

But lest you think it's only Britain, we shouldn't forget America's spiralling economy. The latest figures out regarding housing starts indicate the biggest collapse since records were kept, back in 1959. Just look at the graph, it's got a drop so sharp even one of those pot-smoking rock climber hippies would shit their pants. And it doesn't look much like its bottoming out.

It could be worse, of course, you could own an import/export business in Japan. The same report(pdf) that highlighted the collapse in US housing starts also points to the collapse in Japan's imports and exports - particularly exports. 

"December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion."

In the face of this kind of global collapse in demand, alongside the spreading implosion of the international financial system, it is unclear what fiscal stimulus packages, such as the one planned by our very own Tories and the stratospheric one being mooted by Obama, will actually do to save the economy.

Obama and the Tories are both trying the same halfway house measures between Keynesianism and neo-liberalism, a combination of infrastructure spending and tax cuts, as a means to try and maintain consensus within different wings of the ruling class. And while the Keynesian side of the equation is still timid, with the Tories, for instance, insisting on forms of spending that aren't permanent programs, such as healthcare or daycare. The neo-liberals, like failed presidential candidate Senator John McCain want "to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes.”

Of course this is ideology written by idiots, not true bourgeois class consciousness. After all, if they want to save their consumer driven economy, they need to get the vast majority of the population to consume. The trouble is, it is those people who are most fearful right now, facing job losses, the loss of their pensions - often tied up in investment plans that have nose-dived in value, and suffering from a debt hangover the could drop a moose. If you handout tax breaks, like Bush did in spring 2008, it has no effect on growth because the cash is applied directly towards paying down debt. Money invested in infrastructure at least buys goods - even though the companies and individuals who will be paid for those goods and their construction will also probably sink a hefty sum of their wages and profits into lowering their debt load.

And there is the rub of the problem, taking us back to Mr. Roubini. Does the US or any combination of governments acting individually have the political will or, frankly, the credit rating, to "deleverage" their nation sufficient that the debt blockage to further growth can be removed? It's not at all clear that the US can even achieve this domestically. Just look at the insatiable appetite of the banking sector scrambling for more cash, on top of the $700 billion it sucked back quicker than a light beer in a heat wave. And the banks are merely one expression of a problem worth trillions upon trillions.

And the problem is international - so if the US fixes their problem, it won't solve China's, or Iceland's or Britain's, etc. 

That's why there is no agreement on Obama's plan. Even Liberals are suggesting that it won't work, that it's not enough. And certainly, if the system continues to unwind the way that it has over the past year and a half, with housing starts in freefall, employment dropping quicker than the 1980-82 recession and the banking sector doing a fine imitation of musical chairs on the Titanic, then a program of new investment that will be smaller than the present banking bailout package, will have negligible effect. As an article in The New Republic noted, it was the massive and unprecedented spending of World War Two that ended the Great Depression.

"Most economists agree that what finally pulled the U.S. out of the Great Depression was military spending for World War II... in 1936, unemployment was still at 16.9 percent; by 1942, after two years of war spending, it was 4.7 percent, strongly indicating that it was war spending that did it. I am not suggesting that the United States start a world war in order to solve the world's economic problem. But I am suggesting a strategy that could be called the fiscal equivalent of war."

However, I would suggest, it was more than just the spending. It was also the destruction that was key. Then, like now, there was the capacity to create too many goods. It has been sustained up till now with the massive accumulation of debt. But that strategy has come to an end. Capital must be destroyed on a vast scale to re-open the vistas for further accumulation. America must reconquer her markets - and thus there are noises from the new Treasury Secretary about China's currency manipulation to sell its products to US consumers. The next step will be trade barriers. China's factories will close, creating the space for factories to open in America.

And this creative destruction will also have the effect of lowering the price of capital (and other inputs) relative to labour. Labour is the source of all profit - which isn't a natural phenomenon but merely a social creation requiring some common source of comparison, in this case labour. When the amount of investment in capital rises in relation to labour, profits tend to fall (though there are a whole number of means to countervail this, including rises in technological efficiency leading to a fall in the price of capital goods, etc). When the investment in labour rises viz the investment in capital goods, profits can also rise.
I'll stop myself here before I get too deep into a subject I can only half defend. Suffice it to say, even on the basis of the need to destroy other capital to conquer new markets or reconquer old ones - the ultimate expression of which is war - the present system is utterly mad and getting crazier every day. Surely we can come up with a better way to run the world than this.

“The U.S. Just Isn't Going Anywhere Good”

With all the death and destruction in Palestine, it’s sometimes easy to forget that the North American economy is going down the toilet.
The pre-xmas bull market has now come to an end as retail sales numbers have come in (they stank twice as bad as everyone expected) and more major financials stand on the edge of a cliff and windmill their arms.
Citigroup, a massive financial services company operating in 107 countries and with 350,000+ employees, is in a seemingly endless tailspin, cannibalizing its business divisions in a desperate effort to raise cash. It has now sold a controlling stake in “crown-jewel” investment arm, Smith Barney to Morgan Stanley. Not that this stopped its stock dropping by 23 percent in one day.

“The bank is trying hard to bolster capital after suffering $20.3 billion in losses in the year ended September 30, 2008. Since the third quarter of 2007, Citigroup has booked $45 billion in writedowns. It has received $45 billion from the government's $700 billion Troubled Asset Relief Program, and another $20 billion in a government bailout announced in November. The US government also agreed to guarantee most of a $306 billion pool of troubled assets if losses exceed $29 billion in return of control over executive pay and limits on dividends.”

There’s an old saying that if you owe the bank $1,000, that’s your problem. But if you owe $1 million, that’s the bank’s problem. Well, apparently, if you invest in $300 billion worth of toxic debt, that’s the United States government’s problem.

And that should give Citigroup some comfort. Prior to Xmas General Electric tried to sell off its financing division for $30 billion but gave up because no one was interested. The chances of any private firms buying the toxically leveraged business components that Citi is trying to sell are next to nil. Look for the government to step in very soon to avoid a mega-Lehman's Brothers scenario unfolding.
The same day as Citigroup’s shares were digging their way to China, Nortel was declaring bankruptcy. Once Canada’s largest corporation and North America’s largest telecom equipment maker, with 95,000 employees and a value of $366 billion, it now has just 26,000 staff and a market value of $192 million.
At the peak of the tech boom, Nortel’s shares were worth $1,231. Before they were pulled off the market, they were worth 38¢. Bankruptcy protection could send the 110-year old company into a death spiral, according to analysts.
All this is happening before the US federal government announces phase two of its TARP bank bailout program – the release of another $350 billion, some of which might, finally, be used to help out drowning homeowners. With the collapse in retail spending in December, it is becoming clear that giving money to banks to stuff under the mattresses, isn’t really doing much to slow the decline of the economy. And it’s because banks are hoarding cash, rather than lending it, that any stimulus by Obama is unlikely to offset this deflationary effect. After all, the economy is dependent upon debt to keep the wheels in motion.
However, banks and consumers all face the same problem, which is that they are over-leveraged, ie. drowning in debt, and are now desperately trying to pay off credit cards, lines of credit, etc. That’s why Bush’s initial $150 billion stimulus plan, which amounted to sending cheques to taxpayers across the land had zero effect. People just plunked most of the cash against their debts, which did nothing to stimulate new growth.
And so the economy has continued to fall, losing 2.6 million jobs in 2008, the biggest annual drop since World War Two, pushing the unemployment rate to 7.2%. Here in Canada the Conference Board is predicting our unemployment rate will hit 8% by the end of this year and that house prices will fall by 10 percent.
But, since every prediction by the big wigs of the economy world has so far been way off the mark, I wouldn’t start planning your purchase of a sea-faring yacht for 2010 just yet.
Nouriel Roubini, who has so far been the most prescient of mainstream economists regarding the depths of the recession, predicting it in advance of everyone else, suggests that there is a decent chance of an “L-shaped” recession. That is, it bottoms out and stays there like the heart monitor on a dead man.

”The credit crunch will persist and spread beyond mortgages. Deleveraging will continue, as thousands of hedge funds -- many of which will go bust -- and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing price declines and driving more insolvent financial institutions out of business. Credit losses will mount as the recession deepens. And a few emerging-market economies will certainly enter a full-blown financial crisis.”

With US house prices predicted to collapse up to 40% and housing starts in utter freefall, it’s hard to see what it will take to end the present spiral. Certainly, Obama’s stimulus plan will help offset a total collapse in the economy but it creates its own problems by increasing the US debt to unimaginable levels. No one knows how that will effect confidence in the dollar, for instance, or whether major sovereign funds, like China, will start to get nervous about the solvency of the US government and sell its massive holdings in US debt.
If everything goes according to plan, which is what the economic thinktanks, economists and government bureaucrats base their estimates on, there will be another year of painful recession. But if things go awry – more major financials like Citibank fail, a series of big corporate bankruptcies add to the quantity of toxic debt and loss of consumer spending power – we could be facing something much worse.
This is a definite possibility. As one financial consultant put it: “I think there's going to be a tsunami of restructurings."

"I think the next three months will determine the fates of a lot of the major retailers," said Robert McMahon, managing director for restructuring at General Electric Co's (GE.N) GE Corporate Lending. "Casino and gaming will continue to feel stress, as will casual dining and newspapers," he added.

Whatever the final outcome of the present disaster, it hasn’t been so clear in a long time that capitalism is about the dumbest way to run an economy. The whole model of driving down wages over the past generation has meant that the only way to sustain economic growth has been on the basis of debt – whether government, corporate or consumer. That chicken is now coming home to roost.
A system that allocated resources and products on the basis of what is needed and where, something only possible with a fully democratized economy, would eliminate the absurdity of the global casino, which encourages dangerous speculative bubbles in housing, tech gizmos or even tulip bulbs.