Thursday, April 12, 2012

#abdb8 barely touched what may be Alberta's most important issue

I'm pretty disappointed. For a province that relies on energy for revenue: I heard a lot about surpluses and very little about revenue. I heard even less about the elevated cost of living that revenue depends on.

There is clearly a lack of understanding on what the problem Alberta is facing really is. Raj Sherman asks during the debate:
"With oil at $100 / barrel how do we have a deficit?"
A high price of oil isn't good, for anybody. Two very interesting reports came out recently. One from Mark Carney of the Bank of Canada and another from an independant economist: Robyn Allan. What's important isn't the price of oil, what's important is the cost of producing that oil. The cost of production rises with the cost of oil.

These reports both reflect what was inevitable if the price of oil should level off or become volatile. The profit from the past 20 years did not come from the price of oil, it came from a steady exponential increase in the price of oil. This resulted in the production price lagging the selling price. Until it all fell apart in 2008 and the projects halted that is, but with government stimulus and even cheaper debt than before so-called economic growth has begun again and already in just 4 years we are back above $100 / barrel.

Peter Kent made what is almost a comedic statement the other day:
Mr. Kent said this means that Canada is beginning to de-link its growing economy from corresponding increases in greenhouse-gas emissions, which have been blamed for global warming.
Yes, we are "beginning to delink our economy from GHG" - that must be it! It couldn't be the much more logical explanation that all of this cheap debt has simply stimulated "growth" through consumer purchases but not through true productive capacity? How is Canada's economy delinking from GHG when Budget 2012 (which I am still working on the analysis of) focuses on fossil fuel energy production and trade? It's not, what is actually happening is what little real production there is going on in Canada which is not being exported at rock bottom prices shadows in comparison to the growth simulated by debt driven consumer purchases. The products people are buying are over-valued houses, over-valued cars, and imported items. As well as using it to pay gas, mortgages, etc.

All of this talk about rising interest rates isn't likely to happen anytime soon I believe, there are 2 reasons for this:
  1. We can not raise interest rates to reasonable levels until the U.S. raises their rates to reasonable levels. If you don't understand much about modern currency, what is important to know about this is that banks create 95% of the money in circulation, through loans, which has compound interest attached. The more money in circulation, the more "inflation" (in reality devaluation as real inflation should come from a true increase in wealth). I've written more about inflation and fiat currency here. If we raise our interest rates too much above the U.S. to discourage cheap loans, there will be a decrease in the amount of currency being injected in to the system. If the U.S. dollar depreciates too much beyond our currency they will not afford to trade with us. I first wrote about this interest rate debate last April.
  2. As I recently explained: With both housing and oil at peak, there is no growth left to grow. They are depending on consumer spending for more than 1% of 2012-2013 GDP. That spending can only be fueled by cheap loans/government stimulus.
The economic problems we face today are a direct result of the economic climate we are in today. I do not see a true understanding of this climate from any political party at this time. The last 20 years are over, that growth is gone. No policy will bring it back, we need to look forward and accept what is rather than what we wish it to be.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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