China? With friends like this...

For 20 years Canada’s wide, open door immigration policy toward China has buoyed the country's real estate prices, auto sales, and food sales. For Canada’s exporters of raw materials, China has principally been a willing purchaser of low cost wood pulp and byproducts, as well as ores, nickel, copper, slag, ash and potash. Should we ask how much ‘value added’ participated in these exports? No. The answer is an embarrassment.

Canada’s overwhelmingly askewed trade ‘imbalance’ with China was -$23,610,999,607 for the first nine months of 2012. There is very little effort expended, or financial clout brought to bear on the evolution of Canadian ‘value added’. Canada has found it so much easier to sell raw materials, and to perform ‘banking’ tasks, than to manufacture finished, or even semi-finished products and then export them. Canada has for too long enjoyed picking the seemingly very low-hanging fruit.

The senior executives managing the handful of major banks who control Canada’s economic landscape have particularly enjoyed the past two supremely fruitful decades of low-risk real-estate and auto loan businesses to the newcomers. With the support of media such as the CBC, the Toronto Star, and the Globe & Mail, an echo chamber has muffled any and all pushback on anything related to China by members of parliament, or by a majority in the current crop of senior business leaders. Referring to the last Harper/Hu meeting, the CBC described it as, “exciting time.” No sign of critical, or discerning thinking there, but undoubtedly way too much breathless adulation.

Even evidence of surreptitious electronic espionage are dismissed, or muffled, lest they stir politically uncomfortable notions which might impact negatively on an artificial and unsustainably propped-up economy. There are bank bonuses to be cashed, cramped pigeon holes in the sky called condos to be sold, and foreign-made cars to be retailed. Distaste for all things 'politically incorrect', fear of reprisal, and fear of racist accusations have muffled the emergence of facts and realities.

China has fuelled Canada’s growth for two decades, and yet, scarcely a word is spoken or printed of China’s ruthless communist party, or that country's centrally manipulated economy, and the communist party's tight control over foreign asset acquisitions. Is there any real insight offered on the long term impact? Not an article in sight about China’s Princelings, and all those who are connected to them, or their direct impact on the Canadian financial and real estate machines. Reality, however, has a way or eventually floating to the surface, no matter how hard it is repressed. This week a couple of hard slaps to the face are waking us up to the harsh and brutal truth that China is not our friend, not our partner, nor is it our well-wisher. On two fronts, Canada and its real allies received a cold shower.

Yi Gang, the deputy governor of China's central bank threatened a currency war and stated that Beijing was “fully prepared,” for such, and “in terms of both monetary policies and other mechanism arrangement, China will take into full account the quantitative easing policies implemented by central banks of foreign countries." Nothing subtle or quietly diplomatic about this throw-down of the gauntlet. He was not only addressing Japan, which has allowed the yen to slide, but he was delivering a thunderous warning to the West, including Canada which follows dutifully whatever The Fed dictates.

Also thunderous, though perhaps more troubling, was the news that Chinese anti-aircraft, heat-seeking missiles have been discovered in an Iranian shipment of arms heading for rebels in Northern Yemen. What could possibly go wrong when a cargo of Chinese missiles, 316,000 Kalashnikov cartridges, 63,000 PK machine gun cartridges, 12,000 cartridges for 12.7 millimeter DShK machine guns and 95 RPG-7 launchers, and 17,000 blocks of Iranian-made C-4 plastic explosives are introduced into the region? What could go wrong with such serious weaponry in the hands of terrorist?

Everything could go wrong. Flying cities known as commercial aircraft are particularly uncomfortable when heat-seeking missiles are heading in their general direction. Yes, what could go wrong when China-armed-Iran-armed terrorists come to your neighborhood?

In its own best interest, Canada should be more forthright with the realities presented by China and its communist government, and we should be reminded that Canada has an important international role to play in the support of its real allies, rather than bending just a little too far, suppliantly, to those who blow an ill wind.

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Truth On Fiscal Cliff Negotiations

We apprehensively advance through this nail biting moment in history as a great Nation floats, uncertain, caught in a holding pattern, hoping its leadership will find wisdom enough to avert the so called Fiscal Cliff, even if most of us don’t fully comprehend what such a cliff entails, or even if such a thing exists. We’re too busy struggling, hanging on to whatever we have, hoping for stability, and hoping that tomorrow brings some relief to our stress.

So let’s look for a little insight into what astute and gifted minds are really doing deep in the core of the negotiations apparently so critical to the very future of the Nation. Let’s dig for a sign of prescient coherence determining the very nature of our future.

Here is a discussion/interview which John Mauldin recently conducted with Rob Lehman and David Krone, the chiefs of staff for Senator Rob Portman (R-OH), and of Senate Majority Leader Harry Reid (D-NV), respectively. Lehman and Krone are two very key individuals in the current budget negotiations. Mauldin, who writes on economics and investments, usually refrains from using an ideologically tempered pen. Late in the somewhat non-descript forty minute discussion, a head snapper gets dropped by Lehman, who works on the Republican side of the negotiating table.

At minute 37:00 of the linked video Lehman (R) makes a statement about spending. “We’re talking about reductions in the growth of spending.” He confirms that there will be no reduction in spending. Krone (D), sitting next to him, is drooling out of camera shot. Washington does not spend less year-to-year. Ever. Is that clear? Negotiators are only negotiating amounts of spending increases and areas of such increases in spending. That’s it. Don’t believe anyone standing at a podium performing waffling prevarications in Washington while making claims of imminent spending cuts.

Oh, but wait, you say, what about that the $16.2 trillion in debt which we cannot ignore? When you spend $3.6 trillion, but receive $2.3 trillion, you have to cut over a trillion from your annual expenditures somewhere along the line if you harbor any hope of getting ahead of the backlog of debt and the corresponding overwhelming interest. What about that looming additional commitment in entitlements which will more than quadruple that debt? Hmm. Well, forget about it. Ignore it. Have a good Christmas, and Happy New Year. You’ll never be able to endure that burden, so why worry? We’ll just crank up the presses. Isn’t that how you pay back what you owe? Just print money?

Obama continues down the seemingly never-ending campaign trail, arrogantly pretending that he is providing tax cuts to the middle class and further pretending to demand a “balanced approach.” He has repeated his limited talking points at every recent use of the teleprompter. Someone might explain to him that retaining the Bush tax cuts which are due to automatically expire at the end of December, does not mean reducing the middle class tax rates. He either has no grasp of what he is claiming, or is knowingly lying to the taxpayers.

There are no tax cuts on the horizon and there are no expenditure reductions coming. Spending is out of control, and the truth is that tax increases are coming for all levels of society.

Everyone knows that the mantra “tax the rich” is just demagoguery, . . . well everyone except those with a paucity of common sense. Tax increases for the so-called rich will not put a dent in the deficit. And Obama’s claims of the approximately $10 billion in revenues anticipated from the rich is annoying. He still won’t acknowledge that such supposed anticipated amount is over 10 years. Please, someone tell him. The very rich probably don’t much care, since the increases will simply mean less real redistribution of wealth, but the increase will not impact their lifestyles.

Obama professes that only agreeing to his demands would avoid the ‘fiscal cliff’, and doing otherwise, “would be bad for the economy, it would be bad for those families (supposedly the whole middle class), in fact it would be bad for the world economy.”

He’s getting ahead of Republicans on the “message,” so that no matter what happens, Boehner and the Republican controlled House of Representatives will eat the negative fall-out. And the fall-out is coming, but what is not coming is spending reductions.

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• Obama & Middle Class Income Tax Increases

The recession is dealing a hard blow to government revenues with tax receipts expected to drop 18 percent this year. The big question being lathered across the Nation, but not being answered honorably by the Administration, revolves around tax increases. The double-speak and denials are only adding annoyance to the feelings surging around the stress already felt by the taxpayers. Not only will the “middle class” be saddled with fresh tax increases, but so will you and your neighbor if you live in America.

The strategy of repeatedly pretending that only the wealthy are going to pay for the massive spending increases is quickly getting old and not believable. From the mansions in Beverly Hills to the park benches of Central Park, all residents will be sending more dollars to the government in one way or another. This is not about new tobacco or alcohol consumptions taxes, or even about the massive tax-grab that will come from Cap And Trade, this is about new tax measures, and new taxes on everything that can be squeezed for cash starting with your income. Forget the campaign promises you almost believed about middle-class tax cuts, and forget Sunday meet-the-press equivocations by well-trained emissaries like Geithner and Summers. Your taxes are about to increase dramatically.

The Administration is very demonstrably building a government well beyond anything that national revenues will be able to support either in the mid-term, or the long-term. With the Nation stuck in a long-term economic quagmire hurting all taxpayers who are already feeling the weight of chronic tax-creeping, the imposition of obvious and visible new income taxes is politically dangerous. The sophistication of the speciousness will find new levels of creativity during the coming weeks.

The White House will no doubt launch a campaign to “talk-up” the economy in the hope that positive proclamations will make them so. Reality is that unemployment, well above the claimed 10%, is somewhere around 16% when you include “marginally attached workers” as well as those employed “part time for economic reasons,” calculated as the “U-6 rate” by the Bureau of Labor Statistics. Unemployment increasing is neither a turn around, nor a bottom to the recession, and is a far different reality from the “8% or less” predicted by the Administration when it launched its stimulus program. So much for rose-colored forecasting by economists.

Tax receipts are apparently down by 22 percent on individual incomes, and are down 57 percent on the corporate front. When you blend that with a deficit that will surge to almost $2 trillion this year, and a National debt accelerating past $11.6 trillion, your options are limited. We can assume that cutting federal spending is an ideological impossibility, leaving the government with two principal choices, and neither induces positive tingles up your spine. You can be asked to sacrifice and have your income taxes increased massively, or the dollar’s value can be allowed to drop significantly as more of them get printed. The likely path will be a less harmful blend of both of these alternatives. The key will be to allow the dollar’s value to slide gradually so that there are no sudden shocks striking at the heart of national and international markets. International creditors like China will be irritated, but will accede to the gradual process of easing down the dollar. Forget the doomsday scenarios, however, America will take years to work its way out of this recession, then pay off past and current government spending sprees, on its way to growing through the new financial demands on its treasury that will surface over the next decade from baby boomers, social security and healthcare.

In order to initiate an advance on the lengthy economic turnaround, the joy ride of debt-spending-with-wanton-abandon mindset enjoyed by Bush and continued by Obama must be brought to a close. Deficit growth cannot continue on a path exceeding the rate of economic growth. The Administration should surface out of its decision closet, and become resolutely emphatic on a course of action that will reverse the deficit's current trend. Obama’s next address to the Nation should be, “I know I promised that if you made under $250,000 per year, you would not see your taxes increased a single dime. Not your income tax. Not your payroll tax. Not your capital gains tax. No tax. I was wrong. I was hasty in forming that covenant with the electorate. We are a government living beyond its means, with currently no end in sight to the discrepancy. Here is my plan for an overhaul of the tax code, and what it will mean to every single one of you. You can expect your income taxes to increase an average of ten percent, for starters. Now, about a national sales tax, …”

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• Obama’s Squandering Of More Than Capital

With a straight face, Obama has announced that just as Americans are tightening their belts, so too he is taking fiscal responsibility seriously. He magniloquently claims he has “charged” the OMB to go through the budget line by line taking action to save Americans tax dollars. He assures that he is taking “aggressive” action, and result? $17 billion in Savings “next year alone.” America is not laughing, and while the MSM is reporting this presentation with languidly deferential support, some of the reporting appears to be betraying some signs of embarrassment with the absurdity of its task.

How can the majority of the MSM not feel queasy when reporting on the Administration’s new aggressive savings claims? After emphatic campaign promises, and consistent affectations since the election that Obama would bring change to Washington’s addictions to spending, a $3.55 trillion dollar budget can only yield $17 billion in cuts?

Evidently the Administration believes that this one half of one percent scrubbing of the budget will be easily “bought” by the public if it is presented with “we can no longer afford to spend as if deficits do not matter and waste is not our problem.” At least that’s how it’s sold to the media since even the NYT and the Washington Post couldn’t find a term in their dictionaries to call this perversion of the truth for what it is, ... a lie.

The MSM must have accepted that Obama’s cutting of a $35 million long-range radio navigation system had taken superhuman effort, and been convinced by Obama's refrained, “we cannot accept business as usual.” Repeated often, with a frown, and earnest conviction, this affirmation apparently becomes convincing. Evidence that it works rests in the fact that a majority (though a shrinking one) of the nation is buying into the brilliant salesmanship committing taxpayers to almost $15 trillion in debt in four years.

Perception is everything, it seems, and the Obama White House has mastered the art of affecting consciousness. It can make absurd statements with seemingly no serious challenges from the Fourth Estate. The repercussions from this complete lack of fiscal acumen will bring an electorate far beyond the change it was seeking after eight years of Bush.

Bush believed it was his right as President to run helter-skelter and without discernment through the corridors of debt. He was clearly apathetic to the consequences. Obama, a little more than a hundred days in office, is making the object of his blame look like a miser.

Obama’s determination to grow government, plus the bailout / stimulus funds he is being manipulated into providing, will bring America’s national debt to a level approximately equal to the nation’s GDP. His supportive Congress will ensure that his programs win the day, however, the nation will become weary of the reality behind the presentation well before the First Term is over, and a popular President will have squandered an opportunity to bring positive change to Washington.

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• A Nation Changing First 100 Days

Marking the First Hundred Days of a Presidency is a benchmark, a reflective moment of sorts, and more importantly it is a point at which a nation assesses the job done by its new leader. In an environment where the vast majority of the national media has demonstrated no objectivity in its reporting on the Obama White House, America is being aggressively rushed into potentially destructive economic adventures.

Two social objectives of the new Presidency that should be commended are Obama’s goal to extend the availability of education and the provision of universal health care. That he plans to achieve both in a time of economic crisis is difficult to comprehend, nevertheless, these should be long term objectives worthy of a modern nation since superior education of a country’s youth ensures its stability for the foreseeable future. Even the much maligned George Bush initially set out to bolster educational spending when he stepped into the Oval office.

Obama came to the White House an ideologue, with experience very distant from the world of economics, business and entrepreneurship. He has been energized by a voting public seeking renewal, promises of a better tomorrow, end to the war in Iraq, and deliverance from the weight of the recession.

The President’s principal focus and attention through the First Hundred Days should have been the economy, and should have remained the economy. His shotgun approach to administration has exposed his weakness on the economic front which allowed Bernanke, Geithner and Summers to wreak havoc over the taxpayers’ futures with commitments of trillions of dollars to the banking community. Obama’s lack of knowledge, experience and interest in all things economic, have left individuals who were responsible for the mess, in charge of directing the grand Wall Street bailout program, the stimulus package, and the restructure of corporate America.

Seemingly stuck in silent stupor, the MSM uncritically observes an administration already heading to almost $2 trillion dollars of deficit, and planning the spending of $4 trillion in the 2010 fiscal year. It almost appears as if the numbers have numbed taxpayers. "The size of such spending is incomprehensible, so why worry about it?" “The Administration and Congress aren’t worried, so why should we be?” “Wall Street seems to be in agreement, so that must be good? No?” Bankers on Wall Street are in fact ecstatic with the Administration’s profuse distribution of taxpayer dollars.

Somewhere floating through the ether is the assumption that all this bailout and stimulus spending of trillions by the government will magically create a vibrant surging economy that will enable repayment of the trillions borrowed. Preventing failures of major financial institutions has been sold to taxpayers as “a must do or we all starve,” concept with absolutely no valid presentation of the facts underlying either the size or nature of the bailouts or the assets being bailed or even where the cash really went. All the while Obama promised transparency, … well, actually he pretended he wanted transparency. There is no transparency, but this is a minor footnote on the real agenda.

The escalation of government presence, government interference and government corporate welfare is an ideologically launched imperative that has very effectively used fear to restrain objection. The public has acquiesced. This government expansion will not only never be reversed, as is the tendency with most government expansions, but it will create a fundamental shift in the core of the American psyche, the American business landscape and in the American social system.

We can expect that the commitment of such unprecedented government intervention, expansion and spending will lead the nation into double digit inflation since the economy will not generate the surge in tax payments necessary to cover the debt, the interest on that debt, and the total government committed funds over the coming twenty years.

As noted here previously, this President’s First Hundred Days should have been spent understanding the complexities permeating the economy of the great nation he was taking charge of, and most of all he should have established for himself a thorough grasp on the nature of this peculiar economic ingredient we call inflation. Inflation is a destructive force that destroys the wealth of a nation, of companies and of individuals.

With all the brain power available to the largest media outlets, it would be enlightening to occasionally hear a perceptive question, or a contrarian article of substance objectively assessing the measures being implemented by Washington. All Presidents obfuscate when selling themselves, however, after One Hundred Days, it is about time the media presented taxpayers with some analysis that might bring about some restraint on the abuse being escalated on them and the next generation by the Obama White House and its suppliant Congress.

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• Obama - The Second Tell

As follow-up to a November 21, ’08 article on this post regarding signs that may reveal the direction that an Obama Presidency might take, the following presents another “tell.” This one is less innocuous, but may prove to be more expensive to America.

Perceptions inside the current White House, when Bush and Cheney took office, were that incurring debt was its right and was its political capital to spend with Cheney supposedly claiming “deficits don’t matter.” Hindsight was temporarily kind to them with support from William Niskanen, a member of Reagan’s Council of Economic Advisors also claiming, “The lesson we should have learned is that deficits have little or no short-term economic impacts.”

Through the early years of this decade, everyone accepted the premise that debt was a normal, perhaps integral conveyance of a modern society, possibly even an applauded one. From economists to taxpayers on assembly lines, everyone dwelled in the comfort that deficits and borrowing could bring unfathomable respect from acquisition of material possessions. Second mortgages were objects of desire and their procurements were cause for boasting. And didn’t second cars and gigantic cinema sized TV screens provide jobs for people in foreign lands anyway? Who could possibly argue with success?

Debt administered through spinal shunts delivered energy into the U.S. economy. The amphetamine rush sent economic experts into undiluted delusions of grandeur, and the exploiters into creative overdrive on derivative concoctions too complex for their corruption and decomposition to be diagnosed. Somewhere along the delivery track, the drug magically transformed into analgesic and the rest of society, including government, slid into either acceptance or compliance. Some sectors of government abdicated responsibility, when their persuasion to appear oblivious was finessed with financial seduction.

Debt is seductive. Its power is evidently overpowering. America is anxious to move on beyond the current administration and is anticipating a new President with promises of change. We listen for signs of that impending change, and so here is the Second Tell. During this past weekend President Elect Obama, while making promises of unprecedented public works projects, stated, “We've got to provide a blood infusion. And that means we can't worry short-term about the deficit." At least Obama’s delivery of attitude toward economic probity was less arrogant than Bush and Cheney’s, but identical in its bearing. He seems more genuine, even if misguided. The legal debt ceiling has already been increased to $11.3 trillion and more increases will be requested.

Evidently not so much has changed or will change, and deficits be damned, full steam ahead with borrowing and government intervention. An additionally disconcerting sense is felt when accepting the reality of the notion that even bigger government may not be just an enigmatic abstraction over the coming four years.

A preceding article on this post discussed the need of the 44th President to urgently obtain an intensive and thorough education on inflation. With the coming boom in currency creation, not doing so would be tantamount to an abdication of responsibility.

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• AMERICA’S OBAMA CAPITAL

The American electorate has placed a bet. It is betting: That Obama will burnish the image of America in the eyes of the world, that he will pull America out of its economic crisis, and that the President Elect will lead the nation into a new era of change. Peering through the Obama enigma, there is a very real ray of light that may bring energy to the turn-around, however temporarily. A majority of taxpayers await with hope the revelation of the “change” definition in the Obama encyclopedia, although fear continues to permeate the country, and bad news persists in dominating the news.

The world witnessed an international reaction to the U.S. election of its first African American President. Most Americans, including many who voted for McCain, could not help but be touched by the event, and most were inevitably moved by the possibility that “hope” might find traction, though much of that hope rose from weariness and disappointment rooted in a failed 43rd Presidency.

Populations in Asia, Europe, Africa and even in the Middle East, genuinely applauded the event, and demonstrated a new support for possibilities available in the American society, polity and economy. Most countries around the world envy such freedoms, and many were stirred with a refreshed affirmation of America’s glassless ceiling. Obviously many of those countries also look to America as a source of capital coming from purchase of their products and resources. A few also procure loans for America’s expenditures.

The “goodwill” generated from the Obama election presents America with a window of time during which it will be able to further extend its borrowing practice from countries holding significant dollar reserves. America remains the only safe haven for cash. The Obama Presidency will find that extending the portent of “hope” beyond the borders of the United States could provide the Treasury an additional trillion dollars in borrowed funds with which to structure a turn-around for the world’s largest economy. The care, diligence, boldness and intelligence with which Obama allocates the country’s newfound capital will dictate the length and depth of the current recession. The window provided by this goodwill may be opened only temporarily. We will watch as he attempts to deliver on his promises, but the real “hope” is that he will use this window to dramatically energize the economic engine much of the world depends on.

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• 44th. PRESIDENT - YOUR FIRST CHALLENGE

The 44th. President of The United States will inherit a financial house in state of disarray. Upon assuming the Office, the new President will have to be furnished an unobstructed perspective on a slowing economy clouded with surging inflation baring its indignant and unprejudiced fangs. Add, to the context of this vista, the enormous interest on the national debt, along with the long term consequences of sustained budget deficits of the size America has been consistently incurring, and you have potential for serious adverse impact on the social fabric of the country. First and foremost, this troubled and uncertain economic scene has to be effectively addressed.

The recent rate of commodity price advances, particularly oil, and the resulting hikes in the costs of goods is unsettling all forecasting based on economic indicators and cycles. Price escalation on certain products will simply reduce their consumption, however strong price increases in all staple goods are placing hard upward pressure on inflation, and demand continues unabated. These price pressures are coming in significant measure from a large number of developing countries that have created a demand that was not present in the pressures responsible for the wild inflation swings of the mid 70’s to early 80’s.

There is debate as to how inflation should be calculated, however, Inflation rates are currently fundamental measurements dependent on the contents of the basket of prices used for the calculations. Such calculations can be manipulated. Accurately defining current inflation toward the higher levels might not be advantageous if it were shown to be at a rate of 8%, for example, instead of the 3.9%, while ten year treasuries are at 4%. A central bank may enjoy the current understatement of inflation, and such understatement might also serve to minimize government liabilities which are indexed to the floating rate, like Social Security. Furthermore, a high level of inflation would suggest stagnant, if not contracting GDP. Then if this isn't enough to unscramble, we will likely see a reduction in total lending which will incite the winds of deflation. Amidst the confusion of reporting, the new President will have to provide some guidance and leadership to the Federal Reserve, rather than humbly await its decisions, and doing so will require accurate, untainted information. Altering the course on the Fed’s current strategy to continue dropping interest rates would affect inflation and the current slowdown inversely, making any decision difficult.

From the perspective of any conventional analysis and whatever the published inflation rate might be, the reality is that purchasing power of the dollar, meaning the purchasing power of the taxpayer, is dropping. That is the critical element that all taxpayers can feel without being fed convoluted or distracting statistics. Their real income is shrinking.

The medicine, which may well include higher government revenues coupled with reductions in spending, while initially having a bitter taste, would satisfy one critical leg of managing any government, that of paying current bills without laying off staggering debt onto future generations of taxpayers.

The current economic climate and feelings of uncertainty affecting North America differ from those of previous downturns in relative breadth and depth, and require unique solutions. Even a decision to overtly confront the challenge would be reason for applause since it would present a sign of impending responsible governance.

The 44th. President with have to rapidly re-establish a long lost sense of confidence, that perennial footing upon which national and international leadership, as well as economic progress, are built. The new White House will have to assertively confront the fiscal challenge, sell it to the taxpayers, and energize Congress to support the required major budget overhaul toward sound fiscal policy.

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