2009: The Year of Sustainability?

By Cheryl Grey, on April 1st, 2009

Pundits have referred to 2007 as The Year of the Crash and 2008 as The Year of Deleveraging. Both are appropriate and with the initiation of 2009, as the aftereffects of the crash and its subsequent deleveraging continue to dominate economic reality, we look for hints as to what the next four quarters may hold.

One recurrent theme among the many New Year prognosticators is that of sustainability. While this theme is obviously appropriate in discussions of environmental concerns, its applicability to economics isn’t necessarily as immediately clear. But consider sustainability—

—in energy. T. Boone Pickens has done the United States a service by demonstrating the economic unsustainability of current energy usage patterns. While everybody certainly has the right to use (and waste) energy if they can afford to, consider the boost for the domestic economy from reduced imports of crude oil, replaced by renewable energy sources or those domestically available, such as nuclear power or natural gas. Narrowing the trade gap can only strengthen the economy at a fundamental and sustainable level.

—in consumerism. The U.S. consumer cannot support the entire planet and manufacturers in emerging economies must base their anticipated growth elsewhere while households in the States retrench and pay off loans. The current ratio of household debt to after-tax income stands at 139% and in 2007, consumer spending was fully 70% of U.S. gross domestic product, above the historical average of 66%. While four percent may not sound like much, that’s an estimated $550 billion of spending per year, much of it enabled by credit rather than income.

Central banks, including the Federal Reserve and the Bank of England, regularly survey loan officers, and the results of these surveys show that credit remains tight and may tighten further. Many households in developed economies (not only the U.S.) will therefore have no choice but to continue deleveraging before going on another spending spree, reducing debt-income ratios and levels of consumer spending to sustainable levels.

—in real estate. All markets, including housing, should be driven by demand, not by investors or builders. So-called “house flippers” who purchase residential real estate, slap on a coat of paint and plant a few shrubs, then resell within months, do little for the market beyond driving up prices. In the most heavily overbuilt and overpriced areas of the nation, such as Florida, California, Arizona, and Nevada, these short-term investors accounted for as much as 33% of the prime loans in default and 25% of the subprime ones, pushing the first round of foreclosures in those areas. (The second round is being driven by fundamental factors such as lost employment.)

Even more telling is the regional ratio between the average monthly mortgage payment and the average monthly income. In Houston, one of the most residentially affordable metropolitan areas in the nation, this ratio is 16.6; however, in Reno it’s 30.2, in Miami it’s 46.8, and in Los Angeles it’s 63.5. Such levels are not sustainable and it’s possible housing prices in these areas have further to fall.

—in financial markets, including currencies and commodities. This is too obvious to require discussion. The most egregious examples are crude oil at $150 per barrel and the yen trading at such high levels against the U.S. dollar that Toyota registers its first operating loss in 70 years and the market invites intervention by the Bank of Japan.

The overindulgences of the U.S. economy are best summarized by the single term consumer. Beloved of economists and widely utilized (mea culpa) for its simplicity and clarity, it nevertheless reduces people to a biological and need-driven level rather than a human or reasoning one; after all, bacteria are consumers, too.

Perhaps its all-too-common usage by economists and the media has convinced us that consumption is the true meaning of our financial existence. Perhaps the change most needed by the U.S. economy isn’t in political parties or governmental administrations. Perhaps it’s in our view of ourselves.



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Forced to be a Good Citizen and Buy American?

By Norbert Haag, on January 13th, 2009

When I heard about the “big 3″ (GM, Chrysler and Ford) whining for “bail outs” I remembered Atlas Shrugged. It is long ago, I read that novel, but I remember very well, what those “honorable” industrials did to survive in spite of their obvious incompetence. They asked the government to protect them. Some things never change. Is it really a prerequisite to be incompetent, arrogant and evil to get on top of a big corporation? Sometimes it looks like. I tend to believe, that most of the workers at the assembly line have more of a backbone, than their “leaders” that fly in with private jets to as the government to help them run a business they obviously have no clue about.

How can they believe, government would know? Or do they only like to have the money thrown after them? Probably that is what they want. Keeping their chairs, private jets and their incompetence and having the taxpayers bay the bill.



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George Bush and the Bailout Loophole

By Tamera Daun, on December 29th, 2008

A looming question has busied the minds of the general public regarding initial funds given from the $700 billion bailout account. We observed that several financial institutions received unconditional aid. There were seemingly absolutely no strings attached in Paulson’s plan. As the situation unfolded, criticism led a few CEO’s to cut their pay and benefits.

Many of us have wondered, ‘how can this be’? Why, for example, were The Big Three hit with harsh criticism and clear demands for a plan, while those first institutions basically received an easy check? Stating that it made little sense to many of us, is an understatement.

There was, however, a key piece of information in The Washington Post (December 15th) that escaped my attention at the time. I’ll put it to you as cited by secondary source, The Center for Media and Democracy.

When Congress drafted the $700 billion financial bailout bill, they intended to limit Wall Street executives’ sky-high pay. To do this, they included a process for reviewing executive pay, recovering bonuses based on unrealized earnings, prohibiting “golden parachutes” and punishing firms that break the rules.

But just before the bill passed, the Bush administration insisted Congress make one little change in the bill’s wording that pertained to that provision.

The change said that penalties would only apply to firms that sold their troubled assets at an auction, since that was how the Treasury Department originally said it planned to use the money. But auctions have not been used to dispose of bad assets after all, and Bush’s change effectively created a loophole allowing companies that take bailout money to circumvent restrictions on top executives’ lavish pay.

Senators on the Finance Committee are considering whether they should amend the law to assure the enforcement mechanism applies to firms that participate in the bailout.

Senators should get a move on to rectify the situation.
For the public observing inconsistencies in payouts, this seems to be a ‘key event’ in loss of confidence.



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Canada’s Economy Resilient Despite U.S. Financial Woes

By Cheryl Grey, on October 13th, 2008

The trade relationship between the U.S. and Canada is globally unique and intensively intertwined. As the United States’ most significant trading partner, 80% of all Canada’s exports are shipped south (and 21.4% of America’s travel north). In 2007, more goods passed back and forth across just one U.S.-Canadian border crossing—the Ambassador Bridge between Detroit and Windsor—than the U.S. sent to the entire nation of Japan.

The first U.S.-Canadian Free Trade Agreement went into effect in 1989; between 1990 and 2005, Canadian GDP expanded 51.1%.

The Motion

The downside to this extraordinary exchange is that a lot of Canada’s economic eggs are in one basket.

Gross domestic product (GDP) is the measure of all goods and services produced and it’s the universal economic scorecard. With exports supplying approximately one-third of Canadian GDP and exports specifically to the U.S. dominating that contribution, whenever the U.S. economy slows down, historically, Canada has not been far behind. During the current volatile year, as U.S. consumer demand weakened and market after market imploded, economists watched and waited for Canada’s economy to tank.

But like the commercial with the toy bunny that just keeps going, Canada’s economy has proven incredibly resilient. While it’s true that, in the first quarter of 2008, Canadian GDP shrank by 0.8% and in the second quarter it expanded merely by 0.3%, after that point the economy seemed to catch a second wind. In July, the most recent for which data is available, Canada astonished financial markets by a 0.7% surge over June’s performance. Considering the global financial climate, that’s pretty impressive.

The Canadian labor market remains remarkably tight, with the unemployment rate steady at 6.1% in September and jobs continuing to be created even in this climate. In stark contrast, the U.S. job market has declined for nine consecutive months through September, and no one seriously expects that to quit before at least the end of the year.

The Battery

So what’s sustaining the Canadian economy?

Despite opinions to the contrary, NAFTA was never about jobs but all about oil. The greatest percentage of U.S. crude oil imports, around 18% annually, are extracted from Canadian soil, in comparison to 11% each from Mexico and Saudi Arabia. With 99% of all Canada’s crude oil exports flowing south in a steady stream, well, what are a few jobs between friends?

Petroleum cash poured into Canada. The U.S. trade deficit with much of the world is shrinking, mainly due to the recent low value of the greenback and reduced domestic demand for imported products. But in August, the trade deficit with Canada expanded by $200,000,000.

In Alberta, the Texas of Canada, the average annual after-tax family income is $12,000 higher than the average of the other nine provinces.

As the price of oil ballooned through 2007 and the first half of 2008, the value of Canadian exports and, therefore, the Canadian dollar (CAD) surged to follow, climbing 17% against the U.S. dollar (USD) on international foreign exchange markets. Because it then required more USD to purchase Canadian crude, this surge in CAD contributed to the hike in oil prices that climaxed on July 11 at $147.27.

But that weekend, IndyMac was seized by the FDIC and global financial markets turned skittish. Investors backed out of riskier investments and ran for the safety of Treasury notes. Rising demand for USD increased its perceived value, contributing to the popping of commodities prices and the resultant deleveraging.

With the shift in relative values between the two currencies, the flow of funds into Canada began to weaken although the flow of crude into the U.S. barely slowed. When Lehman Brothers fell, the skittishness became panic, and on October 10, the Canadian dollar collapsed against the greenback, along with most other major currencies around the world, as investors exited markets en masse and ran for shelter.

The chart above tracks the depreciation of USD against CAD, beginning in March 2007 at the upper horizontal red line, dropping to an historic low in November 2007 and re-appreciating strongly since the fall of Lehman Brothers.

As long as the U.S. needs crude oil, the Canadian economy will be in no danger of collapsing, although the standard of living in Alberta might not be sustained. Meanwhile, in the U.S., there’s panic over the possible self-destruction of the entire financial system; in Canada the budget may run a deficit for the first time in 11 years.



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