In Praise of Deflation

It’s counterintuitive that falling prices can be bad. After all, nobody ever complained about stuff being cheaper. The problems, though, are twofold. First, if prices fall across the board, so too will wages — but debts won’t. Borrowers will have a harder time making their payments. More of them will default. And defaults will push down prices and wages even more. This so-called debt deflation is basically a doomsday machine for mass bankruptcy — and it’s exactly what happened in the 1930s. The other way of thinking about why deflation is so toxic is that it effectively increases interest rates just when we want to reduce them. What matters for borrowers is the real interest rate: that is, the interest rate minus inflation. But falling prices mean inflation is negative, so real interest rates go up. Again, bad for borrowers.

Actually, falling prices aren’t bad at all, especially if they are coming down after having been artificially inflated. This is how the market clears itself. Will some get hurt by this? Yes, especially those who foolishly bet on the bubble expanding indefinitely. But this was always a bad bet from the beginning; declining nominal prices merely reveal this fact.

Now, it is generally true that lower prices will lead to lower wages, all things being equal. But, as long as there are generally efficiency gains in labor, the rate of decline in regards to the price of goods should be greater than the decline in regards to the cost of labor. As long as production efficiency is realized in some way, declining wages should not be a problem because they generally will not decline as much as product prices. Caveat: this analysis is predicated on the assumption that there is no expansion in the money supply. Monetary inflation complicates analysis considerably, at least in terms of nominal price, but does not invalidate the fundamental point.

That debts won’t deflate is theoretical nonsense. In the aggregate, debt will most certainly deflate because a certain number of people will inevitably default on their loans. Others may settle their loans in lieu of default. The practical outcome is that deflation will hit debt. And those that get hit the worst by deflation will be those who most encouraged the bubble by loaning to those who caused it.

The conclusion that this will lead to some sort of doomsday scenario is absurd on its face, for it is obvious that aggregate demand will never be zero. Humans always want something, and they will pay to get what they can. And so, while it is most certainly true that practical aggregate demand will decline considerably in the wake of deflation, it is simply farcical to even suggest that aggregate demand will go to zero, or even be cut in half.

Ultimately, deflation is the markets way of cleansing itself, allowing misallocated resource to be used more effectively. Once the market begins to clear, prices rise again until there is once again an optimal mix of resource usage. Trying to prevent nominal deflation from occurring only encourages the continued misallocation of resources, and makes the inevitable pain worse, while also allowing for the possibility of rampant inflation. Thus, preventing deflation is nothing more than a lose-lose proposition, and a fool’s errand to boot.

Ireland, Miracles, and Women

The Atlantic had a short look at the state of the Irish economy of late: Happy St. Patrick’s Day, Ireland! Now About That Miserable Economy …

Hard not to mention that Ireland was once pointed out as paragon for Pittsburgh to follow. See in the PG: We can import the Irish miracle.

Times change.

But that is not why I mention it.  The Atlantic touches upon something more relevant to Pittsburgh today.  Ireland has had a dramatic transformation in its economy, recessionary times of late not withstanding.   I’ve had this discussion with folks from Ireland and it is not me making this statement.  But in Ireland it may be that the case of the Celtic Tiger is really the story of the Celtic Tigress.  Irish women, much like Pittsburgh women before them, lagged their peers in labor force participation and that fact alone may have kept the Irish economy depressed for so long.  So the Atlantic says ” The biggest, and only sustainable, gain of the Celtic Tiger economy lay in coaxing women into the workforce, “.

For Pittsburgh, no matter what you read about transformation this, or transformation that, make no doubt that the most meaningful story of transformation in the Pittsburgh economy has been in the story of female labor force participation catching up with the nation’s.  The impact of that is bigger than most everything else we talk about when it comes to economic change in Pittsburgh.

I will throw out there again the quote from 1947 that presages it all.   Here is the advice that was ignored until it was too late:

(Pittsburgh) will, however, slowly decline unless new industries employing women and those engaged in the production of consumer goods are attracted to the area.

Which is from a report written by a place called the Econometric Institute based in News York City and titled: “Long Range Outlook for the Pittsburgh Industrial Area”, stamped February 12, 1947 and was for the Allegheny Conference and the Pittsburgh Chamber of Commerce.

If that all strikes you as too distant a history to matter.   I will point out again the really remarkable factoid that only in the last couple of years has the number of women working the Pittsburgh region sustainably topped the number of men.   For the region as a whole the employment numbers are about even for men as for women.  For Allegheny County…  it is clearly now a majority female workforce.  Ponder that.  I have yet to see anyone really take notice, but follow the previous link for some hard data showing the convergence of male and female numbers in local employment data.

Canada Sees Mining Resurgence: Scott Jobin-Bevans

Scott Jobin-Bevans Amid the bustle of the 80th Prospectors and Developers Association of Canada (PDAC) convention in Toronto, The Gold Report sat down with PDAC President Scott Jobin-Bevans for his take on the challenges the mining industry faces. In this exclusive interview, he covers a wide range of topics, from skilled labor shortages to the trials of mining in remote northern Canada.

The Gold Report: What are the key challenges the mining industry faces in 2012–2013?

Scott Jobin-Bevans: PDAC, under the leadership of newly appointed Executive Director Ross Gallinger, will be conducting a strategic review involving the board of directors, staff and gathering membership input. There are a number of issues facing the association and the industry, and I am sure that human resources challenges will surface as a key issue.

TGR: When you say human resources, what are you talking about specifically?

SJ-B: It’s the skilled workforce: geologists, geophysicists, process engineers, mining engineers, miners and skilled labor. There’s a huge gap between the young people who are out there now and the older ones who know those skill sets from years ago. For instance, we’re nearly missing the 35-to-45 age bracket.

There is a tremendous opportunity for industry associations such as ours, the government, private sector and educators to work together. This is a hugely important sector that represents nearly 3.5% of our national GDP and pays billions of dollars in tax revenue and royalties to the various levels of government.

It presents an opportunity to university students, but it also presents a challenge to the industry. The Mining Industry Training and Adjustment Council led an industry-sponsored study released in 2005 that found that the Canadian mining and mineral industry would need at least 80,000 people in the next 10 years just to replace current jobs. The industry has grown quite a bit since 2005. So, the estimates in Canada are now something like 100,000 jobs will need to be filled in the next 10 years.

TGR: Where are those numbers coming from?

SJ-B: You can find them on the Mining Industry Human Resources Council of Canada’s (MiHR’s) website. The PDAC supported a more recent sector study by MiHR, “Unearthing Possibilities,” which looks specifically at the exploration sector; it’s important to understand that mineral exploration is different than the mining sector. In this study, we were able to show how many women are in mineral exploration, how many people are employed overall and the demographics on the age distribution.

You can see the late ’80s downturn in the 35-to-44 age group when the industry and the economy tanked. People left the industry and never came back. You can also see the effect of the Bre-X scandal and market decline in 1997, which saw the departure of record numbers of professionals from the industry. The report does show an increase in the 25-to-34 age group coming into the industry, which is really encouraging.

The connection between human resources and supplying the metals of tomorrow is that we can still find the mines but we can’t put them in production because we simply don’t have the people. The only way we survive now is by poaching from other projects, so it’s not a healthy environment for industry success.

PDAC has been making efforts in terms of our support for educating the work force of tomorrow. We have a strong program that we support through PDAC Mining Matters that has helped educate nearly 500,000 school-age children about the sector. We’ve got a number of university programs and scholarships but the industry needs to do more.

TGR: What are some of the other challenges facing the industry?

SJ-B: I’m not sure it’s a challenge so much as a new opportunity in Canada in terms of working with First Nations and aboriginal communities, which ties into land access. Canadians are leaders in developing strong dialogues with our aboriginal partners and PDAC is very committed to ensuring our members are equipped and prepared to have those conversations, whether in Canada or abroad.

TGR: Is this a global issue?

SJ-B: I think we need to understand this in a different context. This isn’t a problem as much as it is a reality that companies need to adjust to. The issue of aboriginal and indigenous people’s rights is extremely complex and extends into places like Chile, for example, which is not dealing with the issue to the same degree as Australia or Canada; but it recognizes that it must be dealt with soon. The major mining companies and Codelco, the state-owned enterprise in Chile, haven’t had to deal with it because most of their mines are in remote areas where there are very small villages; companies tend to be good corporate citizens by making donations and providing infrastructure and job training to the local villages. But, as the industry expands in Chile, I believe there will be more focused attention on indigenous peoples.

Another issue is profit sharing and the desire for local communities to want a piece of the pie, a portion of the production royalty. We also see this happening in India, Peru and many other countries, as well as in Canada. India has proposed that iron ore and copper miners set aside 26% of the royalty they pay to states to share with locals affected by mining. The PDAC is in favor of resource revenue sharing as long as it is introduced in a fair and sustainable manner.

TGR: On another subject, Canadian Natural Resources Minister Joe Oliver spoke at PDAC. Do you think we’ll ever see a national securities regulator, like the SEC in the U.S.?

SJ-B: PDAC supports having a single regulatory system administered by one regulator, applying one set of rules in a consistent manner across Canada. We would welcome a one-window central process. But it isn’t easy because each province has the right to control the regulatory process and collect fees in its own jurisdiction. This results in duplication and higher cost for financings and ongoing compliance. We need to have a system that allows all potential Canadian investors the equal opportunity to participate.

TGR: What is another industry challenge?

SJ-B: Mine permitting and the related regulatory process. This is a global issue. Governments often don’t have the capacity to administer their own acts and legislation. I believe we are going to see this capacity issue in Ontario with the current revision of its Mining Act. We see capacity issues in British Columbia and the Yukon Territory, largely brought on by increased industry activity and record mineral claim staking. We also see a lack of capacity within the provincial governments and within First Nation governments to deal with the required paperwork, which is becoming more and more onerous. Minister Oliver spoke at length about this at the Association for Mineral Exploration British Columbia Roundup in January and again at the PDAC Convention. He believes that regulation should be practical, useful and not overly bureaucratic, and I, for one, support that.

Another example is Finland. Finland is a great jurisdiction for mining. It embraces and promotes it. The GTK or Geological Survey of Finland actively maps, explores and even drills holes to build up resources, which it then puts out to auction. It recently introduced a new mining act and at the same time made changes to staff size and location, which almost overnight resulted in license granting going from a 6–12 month window to a 3–5 year time frame to establish land tenure. This is very discouraging to mineral exploration companies thinking about investing exploration dollars in Finland. My recent discussions during the PDAC convention with the Federal government does suggest that they are committed to improving the system in the very near future.

TGR: I guess this makes Ontario and Nevada look better all the time.

SJ-B: Finland still beat Ontario in the Fraser Institute’s annual survey of the best jurisdictions for mining in the world. We also saw New Brunswick being ranked as number one and for the first time ever we saw Ireland in the top 10 along with the Yukon Territory.

The survey ranks jurisdictions on things like administration, corruption, environmental regulation, duplication, fair trade, transparency, taxation etc. The most recent survey came out in the last few weeks.

TGR: Northern Ontario’s Ring of Fire region includes chromite, base metals and gold deposits. There are billions of dollars of potential revenue there, but there is zero infrastructure. You have to have rail to get the minerals out of there. All these different deposits have been found and they have NI 43-101 resources on them, but they’re not going anywhere.

SJ-B: I think we have to see the various levels of government as partners in the extraction of our mineral wealth and my view is that there really is an opportunity for the government to partner with industry and help build infrastructure in the north. There is a huge discovery that could be world-class size. The potential for northern development—for wealth generation in the province—is very real. I think both federal and provincial governments are still recovering from the financial crisis and at this point are not able to invest the dollars today for the long term in spite of the economic development opportunities that exist. Economic development is all based on favorable returns and future earnings through increased taxation and other revenue, and right now governments have a tremendous opportunity to show that measure of foresight for this industry.

We think that we finally got the Feds to understand the importance of mining to this country. We have had Minister Oliver at the conference, a record number of members of Parliament, members of Provincial Parliaments, senators and we were really pleased to see Jean Charest, the Premier of Québec, join us at the conference.

TGR: Most of the readers of The Gold Report are precious metals investors. Can we talk about your personal view as to what you see as opportunities for North American investors right now who like resource stocks? What are some of the commodities that you see really gaining traction in 2012? Do you see particular interest in micro caps, in the near-term producing stories?

SJ-B: Certainly, I’m in agreement with gold and silver being the mainstay of the industry and, of course, copper. There’s a big push with anything having to do with country- or economy-building commodities, iron ore, for instance. Rare earth minerals are a complicated commodity, but I think a lot is going to happen in that space.

For example, Germany canceled its nuclear power program and is now having to look for alternative green energy. It recently created an alliance for securing critical raw materials after it essentially closed down the mining and metals industry 20 years ago, thinking that mining was a sunset industry.

TGR: Well, it’s pretty clear that Europe is waking up to the idea that these critical metals are very important for growing clean energy.

SJ-B: For sure. Germany is a good case in point because the German market is really hunting for those metals, not only for internal consumption but also for building the technologies that it exports. To produce a windmill for instance, you need neodymium for the magnets and so a source for this rare metal needs to be secured to be a successful producer. The Germans asked Canada what we have. Well, the short answer is nothing because we basically shut down all of those operations years ago. To bring any production on-line in the near term is going to be very costly.

Look at Thor Lake’s Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX). PDAC Director Don Bubar is heading up the company and PDAC Past President Bill Mercer is also involved. Avalon has a great story, a great deposit in Thor Lake. Infrastructure-wise it is fairly remote. In the global size of rare earth deposits, it’s small and has a very specialized suite of minerals that are desirable, but it will take very high production costs to extract and build a plant. Doing that in Canada is challenging. I don’t believe that there is enough critical mass in Canada to justify such a high capital expenditure. I am, of course, always hopeful that it will work, but it’s not like a copper or nickel discovery or a base-metal discovery where you have five or six deposits in one general area that you can then aggregate to feed a smelter or a processing facility. In the case of most rare earths in Canada you have a relatively small deposit with complex metallurgical challenges that would be feeding a $1 billion production facility.

TGR: How do you feel about copper, silver and gold?

SJ-B: Canada is a fantastic jurisdiction in which to explore and I think people are realizing that we still have the opportunity to make discoveries in commodities like copper. We’re seeing the copper porphyry business come back to British Columbia (B.C.) with interest from Newmont Mining Corp. (NEM:NYSE). We’ve also got interest in the region from Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) and even BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) is known to be watching the area. The majors are taking note of projects that until recently have been considered too small a target for copper-gold or copper-moly porphyries. I’m involved with junior explorer Tiex Inc. (TIX:TSX.V) working in B.C. in the Quesnel Trough. We believe we are sitting on a brand new Cu-Au porphyry discovery that is off-trend from the traditional Quesnel Trough past producers. We have another project that is right next to Spanish Mountain Gold Ltd. (SPA:TSX.V), so there is great gold in sediment opportunities.

Overall, I would say that we are seeing a resurgence in Canada. Most people I speak to are saying it’s a great opportunity for copper-gold in B.C. and gold in the Yukon, and strong interest continues in Quebec and Nunavut. I find B.C. is particularly interesting because it has a recent track record of actually permitting mines. With almost half of Canada’s proposed mining projects located in B.C., it has shown the industry that exploration and development projects can be moved into mine permitting–a step that many other jurisdictions in Canada are failing to make. Plus, in Canada you’ve got diamonds, and we are well positioned to become the third-largest diamond producer in the world.

TGR: Do you mean the third-largest producer by value?

SJ-B: Yes, we do produce some of the highest quality diamonds in the world, but we are also gaining on total production with additional projects turning into mines. In terms of gold, we still have the prolific Abitibi gold camps in Ontario and Quebec. I think around half of the Abitibi Greenstone Belt is covered by clays and impermeable surface material that you can’t see through with traditional exploration techniques such as geophysics and geochemistry. So you have to drill it. This is the world’s largest continuous greenstone belt with some 160 million ounces of production with about 50% of it covered. So the opportunities for gold and base metals in that region alone in Canada are huge.

TGR: You are saying that investors looking for opportunities in the junior mining space have plenty of opportunities in their own backyard?

SJ-B: Absolutely. Canada is politically stable, reasonably well regulated and has a fairly streamlined process to put the mines into production. Minister Oliver said he is committed to making the process even tighter. So, it will become a less-than-two-year process.

Also on the list of metals to watch, I would add platinum group metals (PGM).

TGR: In Canada or elsewhere?

SJ-B: In Canada. I think that although we have a high palladium-to-platinum ratio in our deposits, it’s usually 2:1 or 3:1. The sustained price in platinum, and now palladium, is great for the industry.

TGR: What are the names in that space?

SJ-B: There are Magma Metals Ltd. (MMW:TSX; MMW:ASX) and North American Palladium Ltd. (PDL:TSX; PAL:NYSE) near Thunder Bay. North American Palladium is our only producer. Also there is Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE), which is working on a project in the Yukon and on projects in northern Manitoba.

TGR: There are definite supply and demand issues with PGM because of conflict in South Africa.

SJ-B: South Africa controls 80% to 90% of the world’s platinum. And Russia still has a significant portion of the world’s palladium. But, my consulting group does not have clients in South Africa because there are issues in working in that jurisdiction that most junior exploration companies are not comfortable with. Most of our work in Africa is elsewhere such as Tanzania, Zambia, the Democratic Republic of the Congo, Ghana and Mali. There has been a big rise in interest from Canadian companies in Western Africa. I also predict that we can see a significant increase in interest from Canadian explorers and investors in the Dominican Republic.

TGR: Well, that’s another whole topic.

SJ-B: It is. For example, we are seeing Sierra Leone coming back on the map in a big way.

TGR: I think that is a perfect ending to today’s conversation. Thank you so much, Scott.

Scott Jobin-Bevans is the president and a director of the Prospectors and Developers Association of Canada (PDAC) and an exploration geologist with more than 20 years of mineral exploration industry experience. He is a director and founding partner of Caracle Creek International Consulting Inc. (CCIC) where from 2001–2008 he served as managing director. Since May 2011 he has been at Caracle Creek as a director and vice president of corporate development, Latin America. He is also a director of numerous companies including Maudore Minerals Ltd., Tiex Inc., Strike Minerals Inc., Jiminex Inc., Lakeside Minerals, Mukuba Resources Ltd., Ateba Resources Inc. and Northern Skye Resources Ltd. Jobin-Bevans has also served as president, CEO and a director of Treasury Metals Inc., vice president of exploration of Takara Resources Inc., a director of Absolut Resources Corp. and vice president of exploration of Pacific North West Capital Corp.

Economic Events on March 19, 2012

At 10:00 AM Eastern time, the Housing Market Index for March will be announced.  This index is created from a survey of home builders, so it shows the confidence that the sector has in the overall economy and their business.