Canada is not the model

Tim Duy has an interesting piece out that dovetails with something I had been saying in the comments here just yesterday. It has to do with austerity as an economic policy response in this post-crisis world. According to Bloomberg News, German Chancellor Angela Merkel used a trip to Canada as a venue to push for more austerity. As Tim notes, Bloomberg writes:

German Chancellor Angela Merkel renewed her call for austerity as crucial to tackling financial turmoil in the euro area, praising Canada’s economic example as she returned to the crisis fight after her summer vacation.

Merkel, facing European pressure to ease bailout terms and allow shared debt, and from global partners to do more to stop contagion, used a visit to Canada as the stage for her first public comments in a month on the crisis. She hailed Canada’s budget discipline, promotion of economic growth and “not living on borrowed money” as models for the 17-nation euro region.

“This is also the right solution for Europe,” Merkel said at a reception in Ottawa late yesterday before talks with Prime Minister Stephen Harper, according to a transcript posted on the German government’s website. “I will report on our political will to overcome the euro crisis and on our determination in Europe to band together for a common currency.

This is all wrong. Tim notes this as well citing Bloomberg again from a March piece by Peter Coy that got it right in quoting Neil Dutta, an economist at BofA, on whether Canada’s model could be exported to the US:

Canada’s impressive achievement is not necessarily a good example for the U.S., where premature austerity is likely to harm growth. Canada benefited from special circumstances that don’t apply south of the border. A report today by economist Neil Dutta of Bank of America Merrill Lynch concludes that “Canada’s experience is more the exception than the rule.”

Key points from Dutta:

• In Canada, austerity helped lower interest rates. Rates are already super-low in the U.S., so there’s no room to improve.

• In Canada, austerity lowered the value of the Canadian dollar, which made Canadian goods more competitive on world markets. The U.S. is a relatively self-sufficient economy, so it would benefit less from a depreciation, even if one occurred.

• Canada benefited from growing demand for its products from the U.S. and China, which compensated for the chilling affect of deficit reduction. No countries today are eager to soak up more imports from the U.S.

• Canada is indeed an exception. An International Monetary Fund study looked at 172 fiscal policy changes in rich countries and found that on average, reducing the budget deficit by 1 percent of GDP reduced output by two-thirds of a percent and boosted the unemployment rate by one-third of a percent.

Bottom line: If an economy is already suffering from a shortfall in demand, as the U.S. is today, cutting demand further through fiscal austerity can make matters worse, not better.

That’s how I put it in the comments yesterday on my post on public deficits and private savings in the euro zone when a commenter protested that Canada was a model for the euro zone.

He wrote:

"Sorry Edward, however I totally disagree with your logic.  As a Canadian, our Federal government we went through this process – of paying down debt in 1995 to 2002. As Canadians, we had a housing bubble bust in 1988, recession from 1990 to 1991 and Federal government debt of 100% of GDP with weak economic performance. In 1994, we were broke!  The Liberal government, at the time, did the hard work of paying down our national debt.  Taxes increased significantly (including a national sales tax), inflation was mandated at 2%, and our currency fell to $0.61 cents to the US dollar.

With an export led economy and private sector spending (yes, demand picked up as the federal government debt decreased). As a small businessman I can tell you these were hard times however, look at us now.  I believe you will find many other countries did the same thing.  Australia and Sweden (which had a banking crises) come to mind in the late 1990’s.

UK is following this example – I believe correctly, however Europe is “gumming up” the process.  Like your post I had to simplify my response,

however you and your readers would do well by talking to people who have lived and experienced austerity and ultimately its benefits."

I responded:

I have seen how austerity works in Canada and elsewhere. To be clear, I never said austerity won’t eliminate the deficit. It will that’s why people do it. But it will work in a deflationary way. It "doesn’t work" if the goal is avoiding recession.

See here:

"People like Hugh Hendry get it. He is not advocating fiscal contraction because he believes it will immediately be expansionary. Instead, he argues there is no policy remedy for debt deflation. Rather than allow the government’s debt levels to climb and fill in the missing private sector demand as Richard Koo advocates, Hendry recommends just letting aggregate demand fall and starting anew. That leads to Depression of course. "

But more importantly, your example is too simplistic because the macro environment is different today than in 1990. The UK, Sweden and Finland also experienced the same housing bust and recovery that Canada did. The recovery that Canada and these other nations experienced was aided greatly by a number of factors including a benign global economic backdrop, lower interest rates and in some cases exchange rate depreciation.

In today’s environment, with rates already at record lows and the global macro picture very cloudy indeed, austerity can lead to debt deflation. Will it work? It might do in Britain but at great cost.

P.S. In 1994, Canada was not broke. the government prints money. It can never run out:

For reference, see my post on Ireland’s bank debt problem versus Sweden’s. I give a brief synopsis of the difference in macro environment. I view Sweden’s bank debt workout solution as a good model, one that the U.S. should have followed but that Ireland should not have given the magnitude of losses in the Irish banking system, something that was evident from the NPL charts I showed in the Gold-level member post earlier today. For the Swedish banking crisis history, see my 2008 post "The Swedish banking crisis response – a model for the future?" and my 2009 post "Did Sweden really nationalize its banks?"

The bottom line: Yes, austerity will cut deficits over the longer-term. After all, you are spending less and/or increasing tax rates. But in the short-term, if an economy suffers a shortfall of demand from high private debt, austerity will cause that shortfall to become worse. The pain could be so overwhelming in getting to the longer-term that austerity does more harm than good. You have to look at it case by case. And clearly, the euro zone is the worst example for austerity since it is a large economy in a fixed rate regime without implicit central bank backstops. Spain can’t depreciate the currency against Germany but the euro can depreciate overall. However, the game of competitive currency depreciation would end in an ugly trade war if major currency areas started to try this.

A small country like Australia might be a better example for austerity. Latvia and Ireland have been touted in the past by those who want to use austerity as a policy tool as examples of how austerity can succeed. I think there has been some success, but at great cost. Even so, in this macro environment, the results are always going to disappoint. And the story isn’t even over yet.

When You Only Have a Hammer – Tim Duy’s Fed Watch

Tim Duy makes some good points about Canada, namely that Canada benefited from some great global macro fundamentals that made austerity a lot easier than it is for Europe.

Merkel Cites Canada as Debt-Deficit Model in Europe’s Crisis – Bloomberg

Canada is not the model because they faced different constraints. It is yet another example of the search for a nation that can demonstrate why austerity works when it hasn’t thus far in Europe. Insanity.

George Osborne no longer enjoys faith of former prominent economist backers over deficit – Telegraph

"Only one of the 20 economists who put their names to the letter in February 2010 backing Mr Osborne’s deficit reduction plan said he continued to have faith in the Chancellor."


Following Twitter Suspension, WeKnowYourHouse Returns, Continues To Post Twitter Users’ Addresses, Home Photos | TechCrunch

The Very Real Perils of Rich Kids on Social Networks – Businessweek

Facebook share lock-up expires, adding more pressure to stock price | Investing | Financial Post

"Facebook Inc. is freeing up 271.1 million of its shares Thursday, boosting by 60% the number that could be traded and adding to concerns that have weighed on the stock since the company’s initial public offering."

Investors Using Facebook Options to Bet On More Weakness – MarketBeat – WSJ

This stock looks way oversold. I know that Facebook came out at a fantastic valuation which was hard to hold but it has been beat up pretty badly since then.

New Berlin Airport Opening Delayed Again amid Financing Chaos – SPIEGEL ONLINE
FT Alphaville » State-backed bond-buyers?

"Our objection to purchases of Italian or Spanish debt by their own state-backed lenders isn’t necessarily because of the ESM similiarity. Though we think either scheme is ultimately beside the point in the eurozone crisis. What ails the bond markets, and makes them unable to do their job of price-clearing in the present moment, is now beyond any fiscal backstop’s ability to fix – even one monetarily enhanced. The fix, like the problem, either reaches monetary-scale or there will eventually be a sequence of painful write-downs as the fiscal transfer of choice. All this sovereign-state-backed-lender-loop stuff would do is concentrate the pain of write-downs in the countries most likely to restructure their debt, if it comes to restructuring"

Belgien vor neuer Sparrunde –, 15.08.2012

Belgium will need to cut another 500 million euros from its budget to meet its 2.8% deficit target for 2012 after relatively mild cuts of 78 million euros so far. In particular, problems with bailed out bank Dexia have caused Belgium to need to re-double budget cutting efforts. Debt to GDP stands at 101.8%.

Finland Lags Behind Nordic Neighbors –

"Finland is an economic power among countries that use the euro, but compared with its Scandinavian neighbors it is slipping. The dichotomy is putting stress on citizens and politicians here."

Sober Look: Denmark’s foreign reserves still rising

"Denmark’s foreign reserves are still increasing, although Nationalbank claims it didn’t intervene to support the EUR-DKK peg last month. If the ongoing aid negotiations with Greece don’t go well, the flood of euros into Denmark and Switzerland will accelerate further as Eurozone citizens attempt to protect themselves from redenomination risk."


United States

Philly Fed factory activity shrinks for fourth month in August | Reuters

"The Philadelphia Federal Reserve Bank said its business activity index rose to minus 7.1 from minus 12.9 in July, shy of economists’ expectations for minus 5. Forward-looking new orders edged up to minus 5.5 from minus 6.9. Any reading below zero indicates contraction in the region’s manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware."

US-Wahlkampf: In der Außenpolitik gilt Obama als "Bush Plus" |

Obama is considered "Bush Plus" on national security issues. The Republicans will not confront Obama on these issues according to this article because from the conservative perspective he is unassailable.

The well-known story of municipal bond defaults « self-evident

Steve Randy Waldman: "they are simply getting a government subsidy for economic development or other purposes." @munilass ht @cate_long

SoCal home sales up for 7th straight month – Lansner on Real Estate : The Orange County Register

"Southern California home sales were up for a seventh consecutive month in July, and home prices increased for a fourth straight month, DataQuick Information Systems reported Tuesday."

Industrial Production Jumps 0.6% in July | Crossing Wall Street

Along with July retail sales, this is telling us there is no recession.

Mississippi on the brink of total shut down due to record drought — RT

"America’s record-breaking drought is drying up the Mississippi River, which is vital for commercial travel. If the country’s largest river system continues to rapidly shrink, all river traffic could get shut down and cost the US $300 million a day. The Mississippi, which has become thin and narrow, is used for cargo vessels to transport goods. In the US, 60 percent of grain, 22 percent of oil and natural gas and 20 percent of coal travels down the river."

About that “Housing Recovery” | PRAGMATIC CAPITALISM

" I don’t know what the technical definition of a “recovery” is in economics, but this is not a “recovery”. It might be a “stabilization”, but let’s not go all crazy abusing the english language here. I was a housing bear for years and years and I am infinitely more optimistic about the state of US housing here. But let’s be honest here. This is no “housing recovery”."

The strange (but useful) logic of eminent domain seizures of underwater mortgages | HousingWire

Chris Whalen is in favour of Mortgage Resolution Partners using eminent domain to take control of underwater mortgages. I am not. Eminent domain is a much-abused legal tool that should not be used except in extreme cases.



Facebook tumbles below $20 as insiders induce stock swoon — Tech News and Analysis

"Insiders can now sell Facebook stock and the reaction so far hasn’t been pretty. Here’s a quick look at what the financial press is saying."

Omzet muziekstreaming groeit vijf keer zo snel als betaald downloaden ::

Research from the British company Strategy Analytics shows that online streaming services for music like Spotify and Pandora are doing much better than traditional purchase applications like iTunes this past year. Growth of 40% for streaming compares favourably to 8.5% growth for downloads. Still 80% of digital music consumption is downloads, making the music industry 3.2 billion euros, so Spotify and Pandora do have a long way to go.

The Right to Tether: What the Verizon/FCC Settlement Means to You

Another Day In Court: Samsung Argues Galaxy Tab Predated iPad Annoucement, Bounce Back Patent Invalid, Judge Koh Grows Weary

Skyscrpr Makes Direct Ad Sales Easier For Bloggers | TechCrunch

"Selling ads online isn’t easy and unless you have a site with a large audience, chances are the major advertising networks aren’t interested in working with you. Direct ad sales are often an attractive option for smaller blogs and online publications, but managing them can be a major hassle. Skyscrpr, a new startup launching out of Vancouver’s GrowLab accelerator today, wants to make direct ad sales easy for publishers."

As Google Fiber rollouts begin, here’s what cable will watch most closely — Cloud Computing News

"Google set its sights squarely on the cable Internet industry with the launch of Google Fiber. While it has a long way to go before truly disrupting that mammoth industry, cable executives are watching a few of Google’s idea very closely. Here’s a list."

S&P Downgrades Nokia. Again. – John Paczkowski – Mobile – AllThingsD

"The market’s loss of faith in Nokia grows more profound by the day. Standard & Poor’s on Wednesday morning cut its long-term debt rating on the company to BB- from BB+ and reiterated its already negative outlook. Driving the ratings agency’s decision: Nokia’s worse than expected second quarter earnings and third quarter guidance"

Samsung: Over 10 Million Galaxy Notes Sold Worldwide

"Despite naysayers predicting a flop, it turns out the 5.3-inch Galaxy Note was a success with consumers all around the world, with Samsung selling more than 10 million units world wide since the device’s debut last October."

Adobe Pulls Flash Player From Google Store – John Paczkowski – Mobile – AllThingsD

Flash is history now.



Taking the High Out of High Yield – MarketBeat – WSJ

This is exactly the issue I rant about with regard to zero rates. Investors are starved for yield so they are willing to get 8-year BB-rated paper at 5 3/8% yield. The average in the last ten years is 9.55%. That’s what financial repression is all about. Are investors being adequately compensated for the risk? Heck no.

Ecuador offers Assange asylum –

"Ecuador has granted Julian Assange asylum, saying the founder of WikiLeaks faces “grave danger” and a possible threat to his life because of his work publishing classified documents."

Bridgewater to Spend $750 Million on New Offices –

"If its assets, which at $130 billion are nearly double the size of its closest competitor, were not enough to set it apart from the rest of the industry, then a potential new $750 million headquarters on the Connecticut waterfront certainly will."

No Criminal Case Is Likely in Loss at MF Global –

How to Get Doping Out of Sports –

"People who end up living their dreams are not those who are lucky and gifted, but those who are stubborn, resolute and willing to sacrifice. Now, imagine you’ve paid the dues, you’ve done the work, you’ve got the talent, and your resolve is solid as concrete. At that point, the dream is 98 percent complete but there is that last little bit you need to become great."

Rate of Arctic summer sea ice loss is 50% higher than predicted | Environment | The Observer

"New satellite images show polar ice coverage dwindling in extent and thickness"

Sober Look: Shutting down China’s IPO machine and other government actions to stem declines

"With China’s equity markets stuck at multi-year lows, the Securities Regulatory Commission (CSRC) put a freeze on new IPOs. Given limited appetite for China’s stocks, the goal is to tighten the supply and avoid siphoning available liquidity with new IPOs."

FT Alphaville » Shale oil everywhere… for a while

"Two-hundred modern Bakken horizontal wells are now strippers, says Brackett. He has some other interesting little facts: these ‘stripper’ wells initially cost about $10m to drill and have a lateral length of almost two miles. Once they hit “stripper” status of about 15 barrels/day, they produce oil “at the same rate that rain falls in Seattle”. "

Argentina: companies cling to dollars and borrow | beyondbrics

"But in the teeth of intensifying currency restrictions, which have made access to dollars highly tricky, companies are apparently opting to take on debt rather than give up their valuable greenbacks."

Alfred W. McCoy: Impunity at Home, Rendition Abroad

"The modern American urge to use torture did not, of course, begin on September 12, 2001.  It has roots that reach back to the beginning of the Cold War and a human rights policy riven with contradictions. Publicly, Washington opposed torture and led the world in drafting the United Nation’s Universal Declaration of Human Rights in 1948 and the Geneva Conventions in 1949. Simultaneously and secretly, however, the Central Intelligence Agency began developing ingenious new torture techniques in contravention of these same international conventions."

Brazil unveils $66bn stimulus plan –

"Brazil’s president Dilma Rousseff has launched a R$133bn ($65.6bn) stimulus package to spur investment in the country’s creaking infrastructure and shore up ailing investor confidence in the world’s second-largest emerging market economy"

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