Brad Setser

Brad Setser: Follow the Money

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DeLong is right. If the US wants to end up like Australia, US trade deficit needs to fall – unless foreigners continue to do terribly on their investments in the US.

by Brad Setser
June 30, 2006

As Brad Delong notes, the big difference between the United States and Australia is that the United States has a  trade and transfers deficit of close to 7% of GDP.    That implies – assuming the stock of US dark matter doesn’t grow – that the US external debt to GDP ratio (really the US net international investment position to GDP ratio) will rise over time.   

Australia’s current account deficit is comparable to that of the United States.  But – see John Quiggin — its trade deficit is far smaller.   That is at it must be: Australia has to pay interest on all its accumulated debt.   The basic rule of thumb is that if you have lots of debt and your economy is growing, you can borrow to pay interest on your external debt.  But you cannot borrow both to pay interest and run a trade deficit.

Indeed, if the US wants its net debt to stabilize at Australia’s levels, it probably needs to start the adjustment process now. 

In the written testimony I submitted for the record at the recent JEC hearing I provided a lot of the details behind my analysis of the US balance of payments data – including my latest estimates of 2005 global reserve growth and the role central banks have played in the financing of the US current account deficit.  One my charts showing the evolution of the US net international investment position in the “no adjustment” and “fast adjustment” scenarios i laid out in a post earlier this week.  

That chart – reproduced here – shows that the US net international investment position would stabilize at around 60% of US GDP if the US trade deficit started to shrink steadily in 2007 and basically disappeared by 2017 or so.  

us_net_international_invest 

The NIIP to GDP ration in this chart is a probably a bit high. I didn’t adjust for valuation gains from the dollar falls likely to accompany the adjustment path that brings the trade deficit down.    But it gives some sense of the likely dynamics.

But I also prepared my testimony – and this graph – before the latest data on the US Net international investment position was released yesterday.   

And that data does change the story a bit – at least for now.   If the US keeps getting massive capital gains on its foreign investments, there isn’t much too worry about.

I haven’t fully digested the data.   But it certainly didn't match my expectations. 

I was expecting a $800b deficit to push the end 2005 net international investment position up above $3 trillion.   The end 2004 position was around $2.5 trillion – and I didn’t think that the US was going to get net gains of over $300b on its equity investments abroad. 

My general sense was that, in dollar terms, US and European equities did about equally well in 2005.   European equities did better, but some of those gains were offset by the dollar’s rise.  And I didn’t think the US had enough  Japanese/ emerging market exposure to really get huge capital gains.

I was wrong.  The market value of US FDI abroad and US portfolio equity investments in foreign markets soared by $993b, offsetting $379b in currency losses on those investments.    

In the meantime, the market value of foreign investment in the US fell by around $70b. 

Foreign central banks lost $20b on their treasury portfolios.  Foreign holdings of US corporate bonds lost $70b or so in value.  The value of foreign holdings of US equities rose by around $60b.   But the market value of foreign FDI in the US fell by $23b.  

So much for the notion that the US is great place to invest.  Foreigners would have done a lot better investing in their home markets — at least in 2005 — rather than lending money to the US.

The strong rise in the market value of US investment abroad almost fully offset the US current account deficit.  Net claims on the US (claims on the US net of US investments abroad) rose by only about $100b.  the NIIP rose from a revised $2.45 trillion at the end of 2004 to $2.55 trillion at the end of 2005.    

 Mike Mandel take note: this supports your basic case.    Big deficits.   And the US Net International Investment Position doesn’t get worse. 

The huge net gain from the rising market value of US investments abroad (relative to the rise in the market value of foreign investments in the US) really was unprecedented.  Setting currency changes aside, the rise in the market value of US investments abroad – relative to the market value of foreign investment in the US — generated something like a $1000b improvement in the US net international investment position.   That is more than three times the next largest gain the US has ever enjoyed from the rising market value of its investments abroad – a roughly $300b gain in 1999 (see this spreadsheet)

The US shouldn’t count on such gains in 2006.  US investment in Turkey isn’t worth what is was a few months ago.   Indeed the gains in 2005 seem just a bit too good to be true – but, at this stage, that is just a suspicion, not a suspicion backed with any evidence.  

I wonder what Philip Lane thinks.  He certainly has the best data on this.

30 Comments

  • Posted by Stormy

    Your comments seem on target: U.S. assets abroad are doing well.

    While this may help our international investment position to GDP ratio, it will not help the trade deficit, especially because those assets are a good portion of our imports.

    Wonder what will left inside the U.S. after all this is over? A lot of debt, a two-class system (have and have-nots)–but the balance sheet will look great.

  • Posted by psh

    Lane, what a trove, damn. Among the endless wonders to be found there: FDI is 3/4 of developing countries’ equity liabilities. Here’s OECD poop on the intra/inter flows.

  • Posted by Stormy

    psh,

    What say you? You like this picture?

    We’ll send our assets overseas; those of us left behind will be underwater (those not getting the capital gains). One of the reasons foreign assets do not well here is that our labor isn’t cheap enough. But we can fix that.

  • Posted by Movie Guy

    Brad,

    I read your written testimony submitted to the JEC.

    Any record or summary on the JEC Q&A or do we have to wait for the publication of the hearing proceedings?

    What types of adjustments and policy changes by the U.S. and its trading partners were within your personal scope of consideration as referenced within the text of your written testimony submission as only “adjustments” and “policy changes”?

    As you are aware, your written testimony did not discuss U.S. trade policy, actions of the USTR, or trade policies of the WTO. I fail to understand why one provides Congressional testimony on the subject of trade deficits and current account deficits without mention of such policies and related actions.

    Should the U.S. modify any existing and proposed U.S. trade policies?

    Should the WTO modify any existing or proposed world trade policies?

    Your graph, as provided on page 14 of your written testimony, isn’t accompanied by background explanations as to how you arrived at projecting significant trade deficit declines from 2006 to 2011. The questions and observations I stated on your previous ‘two graphs post’ remain the same.

    From your blog remarks above:

    “The market value of US FDI abroad and US portfolio equity investments in foreign markets soared by $993b, offsetting $379b in currency losses on those investments.”

    “The huge net gain from the rising market value of US investments abroad (relative to the rise in the market value of foreign investments in the US) really was unprecedented. Setting currency changes aside, the rise in the market value of US investments abroad – relative to the market value of foreign investment in the US — generated something like a $1000b improvement in the US net international investment position.”

    “The US shouldn’t count on such gains in 2006. US investment in Turkey isn’t worth what is was a few months ago. Indeed the gains in 2005 seem just a bit too good to be true – but, at this stage, that is just a suspicion, not a suspicion backed with any evidence.”

    Do you intend to question or challenge the continued general success of U.S. FDI in China, India, and other key nations where the vast majority of the FDI is invested? If so, it’s clear that you are still a few steps behind on understanding the continued successful transfer of U.S. technologies and sources of manufactured goods to key foreign market sources. More high tech transfers, giveaways, and reverse engineering are next on the list.

    Pretty good testimony, by the way. But I would have asked you the same questions I raised a few days ago if I was a principal or staffer with the JEC. The questions are valid. These are fairly routine questions as pertain to projections, and I have had similar questions put to me during Congressional testimony on the Hill and in the field or discussed key issues with Members in their offices on other matters whenever I have projected given conditions or created various scenarios.

    The notion that U.S. exports will race by the level of U.S. imports between 2006 and 2011 is entertaining, but not particularly realistic absent a massive decline in the value of the U.S. Dollar (and one that would impact China) or “adjustments” and “policy changes” (words from your written testimony) that accomplish similar or better results.

  • Posted by Guest

    I’ll get go through the links (thank you Brad) more thoroughly later today, but some thoughts below, whether for this post or further consideration:

    Re: change, insurance and what attracts investment to a country:

    “Why would BP want to buy a stake in Roseneft?… it would be buying an insurance policy…” http://www.breakingviews.com/freestory.aspx?e=c0i28SA3im7

    “The UK received more inward investment than any other country last year, according to newly released internationally-compiled figures. The Organisation of Economic Cooperation and Development (OECD) said foreign direct investment into the UK hit a record $165bn (£91bn) in 2005. It was driven up by the boom in takeovers of British companies…” http://news.bbc.co.uk/1/hi/business/5127006.stm

    Still thinking about Mr. Grant’s attention to Chinese style finance and how, in integrating markets, it is possible for nations to maintain control:

    “…Chinese companies’ complicated shareholding structures, which can include non-tradable “state shares”. H-share companies will have to ensure that all of their share capital is tradeable before they can qualify for inclusion in the HSI. Another problem is the relatively small free floats of many H-share companies, especially in sensitive “pillar sectors” of the economy such as banking and telecoms that the Chinese government is determined to keep tight control over. Critics argue that if the Chinese government’s majority shareholding in a given H-share is effectively kept off the market, that company’s index weighting should be reduced accordingly…” http://www.ft.com/cms/s/af2eceac-079a-11db-9067-0000779e2340.html

    And further to discussions about stability and data interpretation: “…Separately, research published today suggests the Bank should target factory-gate prices rather than the consumer price index (CPI) to avoid economic instability. Simon Wren-Lewis, a professor at Exeter University, says in the latest Economic Journal: “Monetary policy rules based on CPI inflation may lead to generic instability in an economy that is relatively open, and where the monetary policy rule is quite aggressive. This danger does not occur if the monetary authority’s policy rule is based on output price inflation.” He says, for example, that if the CPI is set to rise, markets push the pound higher, cutting prices of imported goods and putting downward pressure on inflation. This could increase economic instability…”
    http://business.guardian.co.uk/story/0,,1809359,00.html

  • Posted by bsetser

    I agree that a sustained period of faster US export growth than US import growth implies policy changes/ market moves here and outside the US. Yes, it requires a weaker $ — in part to encourage “inshoring.” And it likely requires a deceleration of US demand growth. The policy mix that seems most likely to generate this is tight fiscal (which allows looser money since the tight fiscal slows demand growth) and a weaker dollar. And offsetting steps to support demand growth abroad. I don’t have the level of detail that you keep asking for — these projections do not come from a fully fledged model of the kind that the IMF has. That is a bit beyond my capabilities.

    I take issue with your implicit argument that the majority of US FDI is in China and India. That isn’t the case. The outsourced a lot of electronics manufacturing to Korea, Malaysia and Taiwan a long time ago, and it now has outsourced the FDI to do electronics assembly for US companies to companies in those nations as well. Particularly Taiwan. Hard to do lots of FDI on your own if you don’t have any spare savings …. Most US FDI is in Europe (UK, contintent), Canada, Mexico and to a lesser degree Japan. Europe is particularly important — big investments in the 50s and 60s back when the US actually saved and had a current account surplus, and then lots of reinvested earnings. Look at the data on the distribution of US FDI the BEA publishes in the survey of current business. the updated 05 data should be out soon. And that data matches the chinese data. Neither shows much US FDI in China. Some may be routed thru Hong Kong and so on. But I think the basic story holds.

    That doesn’t mean that US firms don’t source lots of production in China. They clearly do. It just means that they may not directly invest in the factories that make their goods. Think of Nike. OR think of Coke. It doesn’t own its bottlers … ties up to much capital, lowering the return on equity from selling its concentrate. And so on.

  • Posted by Guest

    Back to the question of whether or not this type of ‘investment’ will translate into sustainable, let alone increasing, returns on investment. Another example which refers to China, but not to infer these concerns are limited to that nation alone:

    “…Hu said. “…In some places the phenomenon of corruption is relatively serious, especially with some cadres abusing their power for personal gains, taking bribes and bending the law, becoming corrupt and degenerate.” Chinese people have become increasingly cynical about the party’s role as they see party and government officials getting rich by working hand-in-hand with private businessmen taking advantage of market reforms. In towns and villages across the country, farmers and small-scale merchants assume local officials are corrupt… According to the newspaper Ta Kung Pao, the detained vice governor of Anhui, He Minxu, was also blamed for a riot that took place in Chizhou a year ago. City residents burned a police station and looted a department store after complaining that their officials were more interested in attracting outside investors than in helping the local people…” http://www.washingtonpost.com/wp-dyn/content/article/2006/06/30/AR2006063000458.html

  • Posted by Guest

    psh – disappointed in the deterioration of your more recent posts. Sounds like you’ve got quite a bit to offer. It would be too bad if much of it was lost or diminished, along with any responses, by that style of commentary – or if it attracted too much more of the same.

  • Posted by psh

    Stormy, what’s nice to know is that so much non-OECD capital is likely to be a little patient. That lets me hope that their real economies are less prone to get yanked around in a panic by Joe Blow retail investor and by hedge fund guys bending spoons with the sheer power of their minds. My interest is in the prospects for the US disengaging from global growth without too much general pain. Recall Japan, which went quietly off to the elephant graveyard to die in the first Iraq recession, yet the nineties were great. The charts are a dog’s breakfast, true, but that’s mostly cause of us. What’s heartwarming is to see the improvement in emerging mkt balance sheets – I’ve heard about it, but seeing it is striking. Another nice thing is seeing the extent of small-country financial integration. While you hear a lot of “only the US is deep enough, liquid enough,” little squirts like us can hide in nooks and crannies that afford favorable covariance with reasonable quality. I take your broader point: Joe Blow is going to get screwed. But Joe Blow should have thought of that when he voted in the GOP.

  • Posted by psh

    Ah, you have emerged again from hiding! We have missed you. Indeed, you are the Chuck Wepner of learned discourse. Perhaps you remember the Bayonne Bleeder. He would step in the ring and boof-boofadoof-boof, right away he’s squirting blood from every pore, but he never falls down till after the bell. It is well for you to keep your judgments general and nonfalsifiable, lest we titter & laff at you.

  • Posted by Movie Guy

    Brad,

    Thank you for clearing up some of the “adjustments” and “policy changes” discussion. I am still interested in more detail on how we really do that, though. We’re still a long way from resolving what the specific changes will be.

    Let me eat crow on the following statement:

    MG: “Do you intend to question or challenge the continued general success of U.S. FDI in China, India, and other key nations where the vast majority of the FDI is invested?”

    Brad: “I take issue with your implicit argument that the majority of US FDI is in China and India. That isn’t the case.”

    Yes, you are absolutely correct. U.S. FDI flows to China, India, and other countries to which I am referring are pretty far down the list of U.S. FDI investments. I was focusing on those nations where U.S. FDI (direct and indirect) is resulting in higher trade deficit positions for the U.S., as opposed to overall U.S. FDI investments. And I may still have some problems making portions of that argument by referencing U.S. FDI abroad.

    Your point:

    Direct Investment Positions for 2004
    Country and Industry Detail
    http://www.bea.gov/bea/ARTICLES/2005/07July/0705_DIP_WEB.pdf

    One example of my position (though not updated):

    U.S.-China R&D Linkages: Direct Investment and Industrial Alliances in the 1990s
    National Science Foundation
    February 2004
    http://www.nsf.gov/statistics/infbrief/nsf04306/

    I believe that you have provided the shell for accomplishing the reduction of the U.S. trade deficits. It looks good. Hopefully, some bright minds (including you, of course) can move to the next phase of identifying those initiatives and steps necessary to support the desired outcome identified in the shell strategy.

    I would like to see a post or reference that ties U.S. FDI investments by country directly to specific contributions to U.S. trade deficits by country. The goal is to separate U.S. FDI abroad which increases the U.S. trade deficit positions from those U.S. FDI flows which result in foreign sales growth but do not necessarily contribute further to U.S. trade deficits. Granted, it appropriate to say that all U.S. FDI abroad helps the local national economies grow, and that should help grow U.S. exports to such markets. But the discussion shouldn’t stop there. We should be willing to discuss the merits of U.S. trade and corporate investment policies.

  • Posted by Guest

    re: “We have missed you”

    You are the undisputed king of crude on this blog. Hopefully none of ‘us’ will challenge your title. But thanks for balancing your remarks with the addition of a bit more content.

  • Posted by Guest

    Have to wonder how much this might contribute to a bunch of problems:

    “…”So many wealthy people are getting so much money off this, it’s going to be hard to cut,” said Michael Wollam, a rice farmer from Brazoria County. At a housing development rising from old rice fields on the outskirts of El Campo, 70 miles southwest of Houston, local real estate broker John K. Petty purchased a 75-acre tract from investors in July 2002… Petty informed potential buyers that because their land had once been an active rice field, they could collect an annual payment from the USDA on the portion that was not developed…”If you have 10 acres and build a house on one, you can continue to get farm payments on those other nine acres without farming,” the USDA’s Johnson said… “Does it increase the marketability?” Petty asked. “Sure it does.”

    …Among the most fervent critics of the annual payments are hundreds of Texas farmers who rent land on which they grow rice. Under the rules, tenants receive the money if they operate the farms. But landlords can simply increase rents to capture those payments. Other landlords have evicted the tenants from land they had farmed for years. Then the landowners can collect the checks themselves, even if they do not farm… “As soon as they figured they could take the payments, they said, ‘I don’t need you anymore,’ ” he said. “They were renting me land for $40 an acre, but they could get $125 an acre from the government.”

    Some of the rice land he lost has been turned into pasture for cattle, while the landlord continues to receive the rice money. “You can sell the calves and still stick the rice payment in your pocket,” Zapalac said. “It’s a hell of a deal.”

    For years, Rex Bailey III, a rugged 6-foot-5 rice farmer, sharecropped near Angleton, Tex., an arrangement in which he and his landlord divided the costs and shared in profits and government payments. “It was all based on what was produced,” he said. “We shared the risk.”

    That changed in 2002, when the owners of one tract changed their arrangement with Bailey, 55, from sharecropping to a fixed annual rent, pegged to capture the $90 an acre that the government was paying him on 214 acres. “A lot of landlords increased their rental rates to equal or exceed the direct payments,” Bailey said… Even though the payment is in my name, I turn around and give it to” the owner.

    In 2004, the property was sold to Shin Shan Chu, an elderly investor who lives in Vancouver, Canada. Once a year, Bailey, who still grows rice on part of the 4,000 acres, cuts a $25,000 check and sends it to Chu, whom he has never met. Reached by telephone, Chu said he hoped to eventually “develop some residential buildings there… Chu, who also owns and leases 17,000 acres of farmland in west Texas, grew up in mainland China and Taiwan, worked in electronics and moved to Vancouver 36 years ago… “I’m waiting for the money.” http://www.washingtonpost.com/wp-dyn/content/article/2006/07/01/AR2006070100962.html

  • Posted by DOR

    Movie Guy,

    Until and unless there is a single global tax jurisdiction, you’re not going to find honest and complete data on trade related to overseas investment. It just ain’t gonna happen.

    There are very large amounts of US goods made and sold outside the US, just as there are Japanese cars made and sold in America.

    .

  • Posted by MrBill

    “Why would BP want to buy a stake in Roseneft?… it would be buying an insurance policy…” http://www.breakingviews.com/freestory.aspx?e=c0i28SA3im7

    The skinny on Tverskaya street is that the Kremlin is leaning hard on locals to make sure that Rosneft’s IPO is successfull despite its very high valuation. $60-85 billion for a collection of assets that need to be integrated properly, and who have an interferring majority shareholder in the name of the state.

    Versus Lukoil who are market leaders, innovative, have a strong foreign partner in ConocoPhillips, and have the second largest private oil company proven reserves in the world, and yet are still only worth about $70 billion on the open market and trade at a P/E discount to their western counterparts.

    Just going through the Rosneft preliminary prospectus now and I am not exaggerating when I say it is the thickness of a medium sized city’s telephone book. 267 pages plus appendices almost as large again! Given all the legal certainties of doing business in Russia, a cocktail napkin would have been sufficient for those who want to invest or feel they have to buy for strategic reasons? The banks and lawyers involved read like a who’s who of Russian finance including some banks who walked away after 1998 and are now looking to get back in the game. Too bad all the low hanging fruit has already been picked! ; – )

  • Posted by MrBill

    Brad wrote: “The basic rule of thumb is that if you have lots of debt and your economy is growing, you can borrow to pay interest on your external debt. But you cannot borrow both to pay interest and run a trade deficit.”

    That is so true. Brad, speaking of Australia, along that commodities vein, do you have any take on Canada’s previously large debts created by its cradle to grave social safety net, recent budget surpluses, high oil & gas royalties, and perhaps the effects of a strain of Dutch Disease on the rest of Canada’s manufacturing sector given the rigors of NAFTA? Just curious. It is becoming a Tale of Two Provinces and other assorted haves and have nots looking on with either envy or trepidation. Thanks.

  • Posted by bsetser

    MrBill — i have not looked at Canada recently. And i will concede i have a hang-up about russian private oil cos linked to the set of crimes, or perhaps not crimes just the aquisition of oil producing properties at very low rates by private individuals in the 1990s that led to the private ownership of oil rents and associated corruption … the initial contracting was so rotten that it clouds my judgement about everything else.

  • Posted by Guest
  • Posted by Guest

    Perhaps also interesting to watch this, not that it would be news to anyone on this blog:

    “…Until now, Russians wishing to transfer funds to a foreign account were required to put a quarter of the sum in an account in the Central Bank. Meanwhile, foreigners transferring money to Russia were required to deposit a “collateral” as a means to protect against speculative capital. These controls will now be scrapped, and the rouble is on its way to becoming a trading currency like the US dollar or the euro… He also said he expected the new currency regime to give Russia “tens of billions of dollars of foreign investment”. However, some analysts warn capital could also flow out of the country as Russians become free to transfer money abroad. On the other hand, they warn the Russian economy could overheat if foreign traders sense a good deal on the rouble and start to buy them up too fast. ” http://news.bbc.co.uk/2/hi/business/5135946.stm

  • Posted by Guest

    “…Premier Ralph Klein loudly proclaimed earlier this month that the province is not engaging in a wide-ranging royalty review. Behind the scenes, however, Alberta is examining small, but crucial, changes to the royalty system that could shift tens of millions of dollars, perhaps hundreds of millions, from industry profits to the province’s coffers each year. It might seem paradoxical that Alberta is concerned about losing out on royalties at a time when oil is selling for more than $70 (U.S.) a barrel, and the province is awash in energy revenues. Although the oil sands account for a quarter of Alberta’s production of oil and gas, they make up just over a tenth of its total income from non-renewable resources, a reflection of the extremely low royalty rates much of the sector is currently paying. In addition, most oil sands projects do not pay royalties on expensive crude oil; instead, they pay the levy on much cheaper bitumen, which this winter sold for less than $40 a barrel. That discrepancy has caught the eye of the Alberta government…” http://www.globeinvestor.com/servlet/story/GAM.20060703.RALBERTA03/GIStory/

  • Posted by Stormy

    DrBill,

    For an overview of Canada and its proposed budget.

    http://www.fin.gc.ca/news06/06-013e.html

    Reducing the GST may be a silly move. Canadians dislike it; but it pays the bills. The liberals ran a surplus (you know, those socialists who like “socialized health care.”)

    Canada’s debt is now approximately 39% of GDP, compared to 65% for the U.S.–thanks to the liberals.

    http://www.optimist123.com/optimist/2006/06/us_national_deb.html

    I sense in your remarks a bit of hostility towards the Canadian safety net. Well, in Ontario, minimum wage is approx. $7.75/hr. In February 2007, minimum wage goes to $8.00/hr. Health care works–to which I can personally attest.

    The Harper government (Bush-lite) is treading on shakey ground.

    Frankly, Canada is doing quite well, despite how the American media likes to spin the facts.

  • Posted by Stormy

    DrBill,

    For a history of minimum wage in Canada plus other stuff, see:

    http://www.labour.gov.on.ca/english/es/factsheets/fs_wage.html

  • Posted by Guest

    I didn’t sense any hostility in Mr. Bill’s remarks. The list of interesting things about Canada is quite extensive. With all due respect Stormy, you sound like you may have been taking in a bit too much of that good old Canadian Liberal spin, not to say that Harper’s brand is an improvement, even if Canada is home to one of the world’s larger, shyer, media companies:

    (“The Thomson Corporation may be the biggest media company most people have never heard of…” http://www.nytimes.com/2006/07/03/business/media/03thomson.html)

  • Posted by Stormy

    Guest,

    DrBill can answer for himself. If there was no hostility, he can surely speak up. I would certainly then withdraw that part of my comment. But I will let DrBill speak first.

    Why is it that all your remarks are laced with personal attacks? It really gets tiring.

    Harper is on a very short leash. If he acts foolishly, any combination of the following parties will undo him.

    1. The liberals could not get their act together: Too much in-fighting.

    2. The NDP thought they would gain ground by going against the liberals; it is way to the left of the liberals.

    3. The Quebecois played the same game as the NDP.

    Harper’s election was hardly a ringing endorsement.

    The Conservative party would most probably be to the left of the Democratic Party in the states.

    As for your citing a media giant: I fail to see any relevance. So? So?

    Is this a rebuttal to the fact that the two last prime ministers (both liberals) significantly cut the national debt?

  • Posted by MrBill

    Sorry definately no hostility, but it is as hard to talk about politics in Canada as it is to talk about them in the USA. Therefore, I usually prefer to avoid it at all costs and talk economics. Unfortunately, ‘big L’ liberals use universal healthcare to beat-up on anyone and everyone who would reform anything in Canada to streamline costs and make Canadian manufacturing more competitive.

    As I see it from the outside looking in the debate remains black & white. Either you are with us or against us. Even the terms neo-liberal and neo-conservative have been tainted by US politics, so the debate in Canada focuses on comparing Harper to Bush, which he is clearly not. But in any case, I am fiscal conservative, social liberal, and I do not like my government spending my money on wealth transfers to spendthrift Provinces or or telling me how to live my life.

    Before you go over the top defending Liberal balanced budgets you might look at the Liberal governments starting with PET who started running deficits in the first place, and how that impacted Canada’s national debt. Then they fought against NAFTA, but naturally did not revoke it once in power again. And you may have noticed that since subsequent Liberal governments have been in power, running those balanced budgets, Canada’s trade surplus with the USA has boomed. Just a coincidence?

    As issues like softwood lumber, BSI, fishing, and other trade frictions as well as US violations over fresh water sharing agreements have amply demonstrated, the US puts its own national interests first and does not care about treaties entered into in good faith. Therefore, Canada needs the WTO, the courts and arbitration boards to speak-up loudly about violations of agreements and treaties, but it also has to negotiate with our larger and not always benevolent partner. That is realpolitik. Something Cretien did not understand. He was an embarassment to Canada on the international stage. I cringed everytime I saw him speak with other world leaders.

    Mr. Harper may be not much, but a safe pair of hands. Let’s hope the balanced budgets continue as well as our trade surpluses, and hope subsequent governments, whether they are Conservative or Liberal, keep their hands off oil & gas revenues and do not try something as disasterous as another NEP!

    Other than that, I have no problem with any social programs a country can afford to pay for without running a deficit and passing along the costs to future generations including unfunded future liabilities. If you want it, pay for it.

  • Posted by MrBill

    “MrBill — i have not looked at Canada recently. And i will concede i have a hang-up about russian private oil cos linked to the set of crimes, or perhaps not crimes just the aquisition of oil producing properties at very low rates by private individuals in the 1990s that led to the private ownership of oil rents and associated corruption … the initial contracting was so rotten that it clouds my judgement about everything else.

    Written by bsetser on 2006-07-03 11:35:59″

    Brad, it is quite easy looking back now to say some assets were absurdly cheap and picked-up under suspicious circumstances. But at the time, that was not the concensus opinion. There were many abuses to be sure. But it was an opaque legal environment. Ownership of assets, especially land, was not clear. The courts were corrupt and there was wide spread asset stripping as well as erasing the legal title from share registries. You may remember TNK and BP suing one another before they eventually became partners. It really was the Wild East under Yeltzin.

    But this process took place in other former CIS countries as well including some CEE countries that are now part of the EU. The distribution of shares in the Czech Republic was no more a successful privatization as canny businessmen quite legally bid up small holdings of shares and built them into controlling interests. The whole being worth quite a bit more than the sum of its parts. So it is quite easy to look back now and say, oh those assets were so cheap, but the problem was not so much acquiring them, but then turning them into profitable businesses afterwards.

    One US oil company said at the time, they would invest maybe $20 million in Russia and see what happened, they were not prepared to lose more there. Now which oil company would not fork over $20 million or $2 billion for a slice of the business? And which banks that left Russia in 1998 (for good) would not lend them the cash to do it?

  • Posted by Stormy

    DrBill—

    Trudeau faced real issues: October Crisis, etc. He did get the government out of the bedroom. Good on policy—but may have needed a better finance minister. We agree there.

    To Mulroney’s credit, he established the GST. Nonetheless, Chretien and Martin did balance the budget. Whether Harper is “a safe pair of hands” is very debatable. I do not think so. Reducing the GST is not a good idea.

    Frankly, I find Harper an embarrassment—more of a U.S. lap dog than anything else; Chretien much smarter and far better on the world stage and obviously a thorn to the U.S. Harper would have had Canada deeply embroiled in Iraq. With the run-up to Gulf War II, Chretien was under a lot of pressure from the White House. Threading his way through that was an achievement. Harper would have had Canada standing shoulder to shoulder with the Brits.

    I would put Harper ahead of Bush as an effective actor on the world stage. Martin was a good finance minister, but never got off the ground as a Prime Minister. Too much in-fighting, a sign perhaps of Chretien’s power.

    We see Harper and Chretien quite differently. I doubt that Harper can resolve the U.S.-Canada trade disputes. If he does, he will pay a steep price. The U.S. with its power and wealth is a difficult neighbor.

    I am always amused watching the U.S. weather channels—weather starts at the Canadian border. Quite the opposite for Canada; Canadians see weather reports throughout the states. Says a lot, doesn’t it?

    I do not share your view of not having the government involved. We are seeing the results of American style capitalism; I find it dangerous and destructive. Not everything should be privatized or sold or exploited willy-nilly with no thought for the consequences.

    Oil? That certainly will be a top-burner issue soon; as will global warming, although a bit later. Right now, GW is simmering at the local level and boiling in the scientific community.

    Freewheeling, unrestrained capitalism cannot handle either. The next 10 or 15 years is going to be interesting. Frankly, I would start worrying now about both energy and global warming/environmental destruction. But the market place sadly has its priorities.

    All of these issues are complex; it is easy to be seen as making cavalier judgments or summations, especially when we try to spin a worldview inside a tiny comment on a blog.

    Thanks for the response. I appreciate it. Thoughtful and interesting.

  • Posted by Guest

    “Trudeau faced real issues: October Crisis, etc. He did get the government out of the bedroom. Good on policy—but may have needed a better finance minister. We agree there.”

    Don’t agree. Lalonde and McEachern were good ministers – made the wrong bet on oil. And paid the price.

    “Frankly, I find Harper an embarrassment—more of a U.S. lap dog than anything else; Chretien much smarter and far better on the world stage and obviously a thorn to the U.S. Harper would have had Canada deeply embroiled in Iraq.”

    Like Australia?

    “Reducing the GST is not a good idea.”

    On it’s own I agree. But Flaherty has been running around talking about giving taxation room back to the provinces. So if you see federal tax reduction as part of a strategy including reducing transfers and allowing provinces and muncipalities to increase their taxes to pay for local social programs, Harper’s tax reductions make sense.

    And Dr. Bill – free trade in Canada started with the McDonald Commision – McDonald was a good liberal – of course the Liberals would not have revoked it.

    The Conservatives to the left of the democrats? – except on things like taxation of dividends, where the liberals are to the right of the republicans.

    Canadian politics is not US politics and trying to impose a US template is plain wrong.

  • Posted by Guest

    Stormy – calling Harper Bush light is mean spirited and bigoted. Is it because they are both evangelical christians?

    I mean if you compare the two men, their histories and their policies you have two guys who are very very different.

    The only other thing they have in common is they are the two men considered least capable by peers to run their respective countries.

  • Posted by MrBill

    Well, now that we have bored the rest of the free world with Canadian politics, we can return to normal, an overwhelming US-centric view of the world! Or were we talking about Australia? ; – )