Wednesday Night #1554

Given that so many are in the throes of packing, traveling, or preparing for incoming family and visitors, we thought it best to issue a double-header invitation for this week and next. Please note that our “Singapore family” will be joining us on the 21^st.
To those who will be away, we send our very warmest wishes for Godspeed, safe travels, joyous reunions with family and friends, and the happiest celebration of Christmas, or whatever religious or non-religious holiday you are celebrating.

The adult version of the Emperor having no clothes is currently being played out on the world stage. The myth that the beautiful new Canadian plastic hundred dollar bill has intrinsic value is valid only as long as people who possess or covet it consider it has value. Once it loses its allure, it is worth no more than any other plastic image. Even more ephemeral is the real value of credit cards, promissory notes and other media of exchange. The double entry accounting system invented by the ancient Egyptians has, for many years, concealed the transient nature of both credit and cash. Even gold, so valued as insurance against the failure of other forms of currency because of its immutability, has no greater intrinsic value and less practical value than any other metal dug out of the ground. The ease with which credit has been created around the world has been useful in repaying debts incurred in previous years and incurring debts to be paid by future generations in the same manner. It is difficult to understand how ignoring this simple process leads to solutions that will inevitably exacerbate the situation. Credit may, in some respects, be likened to a Ponzi scheme, inevitably returning to haunt and impoverish us.

Europe
As discussed at some length last week, Europe is currently grappling with this situation by taking the inevitable step of forced austerity, which in the view of our WN economists is bound to lead to world-wide depression and inflation. Although one cannot pinpoint identical problems, in the past, similar situations have been followed by wars during which governments have been able to successfully convince loyal citizens to save rather than spend in order to help their military effort prevail.
Having finally accepted the concept of monetary federalism, perhaps Europe will now realize the necessity for fiscal federalism. It would appear that, whatever the least worst solution might be, having apparently learned little if anything from the past, the current policy of austerity has the capacity to result in worldwide depression, inflation and unemployment.

Personal debt levels
Responsible government debt financing permits government to repay long term improvement debts with no problem thanks to the inflationary nature of the economy. But unbridled personal debt, encouraged by such recent innovations as credit cards, has done much to alter the equation. In many countries, private sector debt is said to be greater than public debt. Personal debt may be either good or bad, depending for example, whether it is mortgage debt or at the other end of the spectrum used to pay off a previous debt.

Social unrest
What is clearly evident but of relatively little current interest is the ripple effect of the self-immolation of Tunisian Mohamed Bouazizi one year ago and subsequent (post hoc if not propter hoc) world-wide peaceful as well as violent protests against governments. The role of the social, as well as conventional media cannot be overstated in motivating these protests. The Occupy movement and The Tea Party are both cited as a movements for change, and each is apparently supported by many, despite the somewhat unclear goals of the former and the harshly conservative, bordering on Libertarian nature of the latter. Although in the Western World, protests appear to have been non-violent, such popular movements have the potential to attract leaders whose self-interest can be mistaken for group or national interest.

Although the stock markets in both the U.S. and Canada have dropped considerably, our resident technical analyst forecasts that the market will bottom out on December 15th, followed by a rise for the rest of the month. Nevertheless, some stocks are doing well, but in the bigger picture, the banks in both the U.S. and Canada are not doing at all well, as they are exposed to some European problems. 2011 has seen the stock exchanges’ levels decline to a point below the low of 2002.

Among Wednesday Nighters’ solutions are suggestions that lobby influence and funding in the U.S. be curbed, that bonus remuneration of the corporate elite be on a five-year basis rather than short term, that quarterly reports be eliminated. Armchair strategists abound but unless and until leadership becomes more altruistic and patriotic and less self ambitious and until our leaders are held more accountable, solutions will remain evasive. In democracies generally, in Canada in particular, political leaders have been of good quality and are changed if they do not reflect the desires of the population. Unfortunately, the major problems appear to not have been identified, hence proposed solutions risk exacerbating, more than solving them.

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Prologue
This week’s major news generates little but feelings of uncertainty and we would welcome reassurance, or at the very least, lucid interpretation of events in Europe, South Africa and Russia (among others).
The outcome of the European Summit with the isolation of Britain is first on our list. Was it a success? Can it succeed? Or was it, as Felix Salmon writes, Europe’s disastrous summit? Niall Ferguson believes Great Britain Saves Itself by Rejecting the EU or was it The day Britain’s Prime Minister failed ? Another of our favorite commentators, Gwynne Dyer suggests that it is a question of barking up the wrong tree: “the financial crisis over the euro will roll on, and the collapse of the common EU currency continues to be a real possibility. What the summit actually showed was how divided, distracted, and deluded Europe’s leaders still are.” Last week’s learned discussion,  led by no less than 4 of our distinguished economists, came out strongly against austerity as a cure, but did not foretell this outcome.
You may also wish to note that Bank of Canada governor Mark Carney is warning that eurozone banks are trying to reduce their indebtedness in “a vicious deleveraging process” as the region sinks into recession, a downturn that is beginning to be felt in the rest of the world.
Paul Krugman points out in Depression and Democracy, there is still more to worry about – the rise of right-wing populists. In particular, Hungary is worrisome and as everyone focuses on the euro crisis, little attention is being paid to the rise of serious threats to democracy.
Of course, Mr. Putin might dispute this. But then, Mother Russia is not part of the eurozone. Not only is there a democratic backlash in Russia with people actually objecting to and demonstrating against fraud in the recent election – how dare they? – but several individuals have declared they will run against Putin for the presidency, with Russian billionaire Mikhail Prokhorov the latest entry [Update: The chairman of the ruling United Russia party has resigned as speaker of the lower house of parliament in an apparent effort to placate critics of the country’s recent parliamentary elections, shortly after an editor and top executive at Kommersant Vlast were fired after the Russian news magazine published an issue looking at charges of electoral fraud by United Russia. As predicted, recriminations underway]
Have any of you read Niall Ferguson’s most recent book Civilization: The West and the Rest?
The reviews are as mixed for the climate talks in South Africa as for the EU Summit. After two weeks and two days, an agreement of sorts was arrived at, however the interpretation range from the upbeat summary offered by the UN Daily newsbrief:

“The deal reached early Sunday at the UN-sponsored climate talks in Durban, South Africa, could lead to a major climate treaty by the end of the decade — exceeding expectations for the two-week summit. Delegates also agreed on the creation of a Green Climate Fund to help developing countries adapt to climate change, and to initiatives to preserve tropical forests and boost clean-energy technology. The New York Times (tiered subscription model), The Economist/Newsbook blog , The Guardian (London)“

to the outrage of the Canadian Youth Delegation Durban Climate Summit Saves Face at the Expense of Future Generations and the pessimism of the Guardian’s Damian Carrington A guarantee our children will be worse off than us Presumably, the truth lies somewhere in the middle – but where?
What of China, often touted as the potential saviour of the European economy and as the enemy of Kyoto and all things green? With respect to Europe, there is a deliciously diplomatic and opaque China Daily piece based on comments from Chinese Vice Foreign Minister Fu Ying, e.g. China sticks to the foreign policy of promoting peace, development and cooperation, and has no intention to control European countries through financial tools.
But, Amid Durban climate talks disappointment, China provides unexpected hope – The conference was saved from failure by the deal between China, the United States, India, and the European Union to forge a new pact with legal force to replace the Kyoto Protocol. [And not only was Canada not part of the “Big Boys’ deal”, but has opted out of Kyoto – not our finest moment.]
Second thoughts on the Canada-U.S. border pact from Thomas Walkom of the Toronto Star Why Canadians are right to worry about border deal are worth considering. Briefly, “Criticisms of the border pact are usually described in terms of privacy. But privacy is a remarkably anodyne term for what is at stake. It’s not that Canadians are unusually modest. It is that the U.S. has such a terrible record of misusing information.”
As analysts continue to contemplate the results (or not) of headliner summits and meetings around the world, we thought that we should remind you that indefatigable negotiators and diplomats continue to defend our interests in Abu Dhabi at the Eye on Earth Summit 2011, the global science conference focused on the importance of, and access to, environmental data.
In our concentration on the Eurozone/EU crisis and the Durban Climate talks, we have perhaps overlooked the important new report The Real Outsiders: Politically Disengaged Views on Politics and Democracy It is the result of a four-month long study with/of politically disengaged Canadians. Turns out that people aren’t engaging in politics for the reasons we might think. Samara’s research reveals that the Canadians they talk to “no longer participate in the political system because of very real, concrete interactions with elected officials and government bureaucrats. As a result, they feel like outsiders from their own democracy.” Please read and think about this.