Thursday, May 17, 2012

Dutch Disease?

Canada certainly has some serious economic problems, but I don't think dutch disease is one of them. Blaming the problems we're experiencing on dutch disease is over-simplistic to a fault. Canada is regionally quite vast with many geographical and political challenges. Simply picking a small portion of a large problem out of context I find leads some "economists" to strange conclusions.

Just to restate for the purposes of this post: I am not an economist, I don't plan to be an economist, and quite frankly I believe not being an economist leaves me with a fresh and unique view of the world. What I am is a programmer that specializes in custom analytics and I apply my analytical models to global events, this is sometimes called "game theory". This means you weigh all aspects of events, from political, to economical, you weigh events on a global scale. Out of this weighing of events, you create scenarios, and the most likely scenarios are the ones I write blog posts on.

From this perspective I find economic relationships to be multi-faceted. It's never a black and white scenario, it is never a matter of choice A or choice B; in this case manufacturing or resource production. To understand what is occuring politically and economically and make sense of what is seemingly chaotic political times you must step back and weigh different sorts of information.

Free trade and the policies around that should be weighed in the context of resources versus manufacturing. It is free trade which allows these Chinese (etc) goods to be shipped here to be sold for cheap in the first place. So is it "dutch disease" or globalization? It is the manufacturing companies which have seized upon the "advantages" cheap labour in third world countries provides. It's why your Samsung Galaxy retails for $600, not $1200. This is the illusion of growth I've been talking about on this blog. Your wealth is decreasing, it is only through imperialism, exploitation, and accounting tricks that global economic growth is even what it is. It's dismal even with planned obsolesence and the rest of it, which doesn't bold well over the coming years.

Dutch disease is a national pre free-trade condition, one which I think is too recent and rare to even say there must be a correlation there. The "global economic crisis" for instance was used by Alberta to justify a deficit. We're reminded often that things would be a lot better if it wasn't for that pesky "lumpy" global recovery. So it must be more than just globalization too.

Well, cost saving and other efficiencies usually occur when there is a shortage of growth in the company. Manufacturing has input costs of materials, and requires buyers of frequent and increasing numbers to maintain this profit growth otherwise. Aha! here is the dutch disease right? It's that whole dollar-value mumbo-jumbo. Not quite so fast...

First let's take a look at the largest consumer economic bodies, the U.S., Japan, and Europe. Well Europe's situation is pretty obvious I think; they're Über fucked. Japan? energy imports are through the roof, Fukushima news continues to get worse. The cost of Fukushima is an unknown, and so is the true damage and dangers. Not a good combination for growth. This leaves us with the U.S. whose financials are so corrupt and propagandized who knows what the shadow situation waiting to blow is really like. The top 3 consumer/manufacturing bodies are having a rough time. Canada's new focus? the BRICs. What are the BRICs demanding? energy. They have all the manufacturing already, all they need is the energy and their domestic economies are ready to roll.

So now it's a little bit of a "chicken-egg" situation. Was it dutch disease? or "reverse dutch disease"? Was it resources and the high dollar which pushed manufacturing out of the country? or is it in fact a case of after our politicians made it more appealing for companies to offshore manufacturing that this "cheap labour pool" is increasing foreign energy demand? Well maybe, but...

In another one of my posts on here about the penny I pointed out that the Canadian penny hasn't been copper since 1982 and yet "due to inflation" even the steel version is a "burden". There is also the interest rate aspect I've referred to in my posts on housing and debt in relation to the rate of money printing, easing, cheap credit, etc. The value of a currency due to inflation is largely associated with how much currency there is in existence. I've explained this many times, but since the USD is the reserve currency of the world, their money printing devalues global reserves. Nations like China are rightly hedging against the U.S. dollar in gold, oil, or other commodities or currencies that are not as closely tied to the USD. I previously pointed out that the BRIC nations have made public their claim to the reserve currency throne.

Industry profits, commodity or otherwise, don't make a dent in currency value when compared to the effect of global "quantatative easing". It can't compare to the effect of trillions in new money supply being added in a period of just 4 years. Under these "emergency" monetary terms, classic supply and demand models fail. Currencies are compared to other currencies. Compared to commodities, all currencies are at all time lows. Our currency is only "strong" because the U.S. is chasing a debt that's impossible to ever pay in to oblivion.

It won't just be manufacturing thats affected, it will be energy too, one day. Sooner or later all of these bills are going to come due and the major consumer nations will have to pay up. When this day comes energy will most certainly be on the chopping block as well.

Assets in euros 'must be protected'

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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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