Of bankers and boring: Sources of Canadian pride

There is quite a list that Canadian rightly feel proud about such as having better beer than the Americans; adding colour to color and bestowing honour to honor with the extra “u”; and saying the last letter in the alphabet the way the Queen wants us too.

Now we can add one more thing we Canadians will brag about endlessly… having notoriously boring (but solvent) banks.

We are in a new era indeed when bankers become a source of national pride!

What Toronto can teach New York and London

Good and Boring

Damn the Aid

I was recently directed to what is probably the most damning opinion on foreign aid I’ve come across in a while (hat tip Jodi and Tracy.)

Here’s the bottom line:
Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades.

The point the author makes is that Africa (and I would add other developing nations) needs investment and not aid. When you accept investment, be it equity or debt, there is significant responsibility attached to provide a return. In other words, you need to make the money work so you can pay back your investors.

Hopefully the money you make with the investment is more than what you need to pay back. If so, you have economic growth and that is good.

It’s not a perfect system, but it seems to work in places like India, SE Asia and more recently in Latin America (the Economist gushed on Brazil in its cover story a few weeks back.)

I’ve touched on this point before, but my view is that the world is awash with capital trying to find its way into places like Africa. Yes, I know there is a credit crunch going on but I think the view still holds.

African countries could start by issuing bonds to raise cash. To be sure, the traditional capital markets of the U.S. and Europe remain challenging. However, African countries could explore opportunities to raise capital in more non-traditional markets such as the Middle East and China (whose foreign exchange reserves are more than $4 trillion). Moreover, the current market malaise provides an opening for African countries to focus on acquiring credit ratings (a prerequisite to accessing the bond markets), and preparing themselves for the time when the capital markets return to some semblance of normalcy.

I would also add multilateral institutions and development banks as potential partners. Yes they have been part of the problem in the past, endlessly financing non-returning projects. But there are factions within these organizations that are now demanding a return and reform for their development financing dollars, and that is a good thing.

Corporations are eager to invest in developing country as well. The problem is there aren’t any good projects to invest in. There is a lot of money sitting on the sidelines waiting for the right time to enter Africa (I’m talking about investment in things other than resource extraction).

So what is everyone waiting for? Institutional reform for one (or even institutional creation in some instances)

Governments need to attract more foreign direct investment by creating attractive tax structures and reducing the red tape and complex regulations for businesses. African nations should also focus on increasing trade; China is one promising partner. And Western countries can help by cutting off the cycle of giving something for nothing. It's time for a change.

I would disagree with the point on China. Yes, China is pouring money into Africa but it is doing so to buy up resources and it is hard to see China making the demands for reform an outside investor has to make on Africa. Recent news from Dubai may make the Middle East a less active investor as well.



Why Foreign Aid Is Hurting Africa - WSJ.com

Saving grace of slow money

With all the money being pumped into the economy from the Feds, Tom Campbell says we may be looking down the wrong end of 13% inflation in about a year, as soon as the velocity of money picks up.

Paul Krugman says “don’t worry be happy”, inflation is econo-imaginary boogeyman and a bit of inflation will pint-size the debt, anyway.

The story here is why I think the answer will lie somewhere in the middle. If there is one fundamental change that we may be facing is that Americans may begin to save more. Not Asia type of savings, but more than in the recent past. If inflation creeps up, Bernanke and co will have to jack up interest rates which will also create and incentive for increased savings.

So jacked up interest rates and increase in savings may both contribute to lessening the return of high-velocity dollars, which may in turn dampen inflation so it’ll just be high, rather than very high.

Money quote:
With income growth far outpacing spending, Americans' personal savings rate zoomed to 5.7 percent, the highest since February 1995, the Commerce Department reported Monday.

Bathing in Inflation?

Taking a warm bath in all the new money floating around may feel good now, what with the frozen credit markets, but as the economy stops cooling and begins to warm up (even ever so slightly), will the rising temperatures also cause inflation to heat up. (I think this metaphor really got away from me.)

To me, this is a key point:

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.

A lot of floating money may make sense now, but soon the time may be upon us when we need to start drying out this extra liquidity (run-away metaphor again...really, I shouldn't quit my day job...) Hopefully a sense of pragmatism has taken over the financial ruling class and they'll be willing to take the tough decisions to cool down inflation at the first sighting.

Bernanke Bet on Keynes Has Meltzer Seeing 1970s-Style Inflation - Bloomberg.com

Recession to be longer than usual: UMich | U.S. | Reuters

Recession to be longer than usual: UMich | U.S. | Reuters

Here's a quote:
Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

True, but increasing US savings would also reduce the trade deficit and would also help shore up the dollar. Increased savings may also do more to boost lending than the current reduction in the interest rates. Increased savings would keep more money in the US system and mitigate the necessity for aggressive monetary policy.

I'm also guessing that consumers with more savings in their accounts would also be a lower credit risk, making them more attractive to banks.

And finally, increased (and sustained) savings in the US means there won't be a generation of pensioners in about 20-40 year without enough money to live off of.

I'm not begging to a long and deep recession, but if it hurts enough to in some ways impact the mentality of the current generation and encourage them to save more, borrow less and spend within their means, then the current period of pain will be worth it in the long term.

And oh yeah… what would a post be without my obligatory warning on inflation (which increased savings would also help mitigate.)

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.

Please get fiscal policy out of the way...

I'm going to agree with Mankiw on this one, the current mess is no place for fiscal policy. I don't have high hopes for the current stimulus package.

I would even go one step farther and suggest that the Fed's monetary policy isn't helping much either.

The new paradigm: Bubbles

Basically this is MarketPlace article on an upcoming Harper's article relates back to what I said here, about a new bubble paradigm overtaking the economy.

While the Asimov and Frankenstein references in the article point to a woeful misunderstanding of great sci-fi literature, the point is clear... we're entering into a fast and loose economy of blowing bubbles, rather than sustainably creating wealth.

The price of cheap money (see Fed cut) to fuel unreasonable growth (see past dot-com, housing bubbles), is an economy that will continually run through rabid big bang and big crunch phases, sort of like viewing the entire history of the universe in fast forward at a Kagillion time speed.

Fed and a new paradigm?

As usual, the Big Picture succinctly puts into words what many of us may be thinking... is it really the Fed's job to be bailing out the markets? I'm hurting as much as the next guy with the markets tumbling, but it strikes me that much of the cause of the current pain is due to too much meddling in the past (excessive policies on both the monetary and fiscal fronts). Therefore, I'd be willing to go through some pain now to ensure smoother, more sustainable growth in the future.

We're had at least two bubbles in less than a decade... tech and housing (and I suppose an emerging market bubble that is biting me in the ass right now). So maybe this is the new paradigm; in search of increasingly more rapid growth, we need to also be prepared for more frequent bubbles and their subsequent bursts.



The Big Picture | Is the Fed a Paper Tiger?