Balanced Budget Bluster
Joe Oliver presented the delayed Government's budget yesterday and touted it as "balanced". All the fuss was done to lead off the Government's campaign into the upcoming October Federal Election by assuring voters of the incumbent's prowess as responsible managers.
Journalists coming out of the lockup were quick to make the point that the "balance" ie: slightly more revenue than expenditure, is a product of selling assets, reducing federal expenditures and delaying "promises" into the future.
To assuage our fears, the government will spend $7.5 million (The Tyee) of our tax-payer money beginning next month to encourage us to continue voting for the present management.
One problem that is never discussed in the mass media is the lack of understanding about how a modern national economy like Canada, which has the authority to issue and enforce the use of its own currency, actually works.
There are 3 sectors to the national economy in terms of income and expense:
And the simple balance sheet equation is that the net sum of the 3 sectors have to balance to zero, ie:
Net Public Sector+Net Private Sector+Net Foreign Trade Sector = 0
The result of this accounting reality is that:
Most people on the political right or left are programmed by their ideological beliefs and have never been presented with the above accounting reality.
Yesterday's heralding of the budget does nothing but further limit the Private Sector.
Because the current federal government has been methodically cutting its own spending since taking over in 2006, today, Canadians have fewer choices to maintain their lifestyle. They either have to continue to drain their savings or take on more debt, or find new earning sources (the search for yield).
Since the Pit of Gloom in 2009, the Feds have been on an ideological mission to "balance" the federal budget by ignoring the Negative Trade Balance and by adding to the Negative Private Sector Balance.
The following is an abstract of some of Cullen Roche's observations about how a modern national economy works with links to further reading. I originally posted this in June of 2012.
Why is the chart above a big idea?
The following is from PragCap.com edited by Cullen Roche, December 18, 2012 taken from research by Tanweer Akram of ING discussing the economics of Japan over the course of their continuing balance sheet recession.
Worried About a Canadian Housing Bust?
BMO study finds nearly 20% of Canadians surveyed didn’t save a dime in 2014
Financial Post April 7, 2015 via Canadian Press
A new survey of Canadians found almost 20% of respondents didn’t put aside a dime in 2014 and a further 40% felt they were not saving enough.
Net Private Sector (Savings less Investments)
plus Net Government (Taxes less Spending)
plus Net Trade (Imports less Exports)
(S-I) + (T-G) + (M-X) = 0
In terms of the private sector:
(S–I) = (G–T) + (X–M)
ie: The private sector balance is equal to the addition of the government and trade balances; or "... private sector saving is the source of net finance for the government deficit and the international capital account deficit." Source Material: monetaryrealism.com
- If society wants more private sector saving (which is the source of investment capital), then either the Federal government must run a bigger deficit or exports must increase.
- When the government runs a surplus, then the private sector must run a deficit unless exports are booming and make up the difference.
Well guess what folks... Canadian exports are not booming, there is a global slowdown in demand for commodities, finished products and services and a falling CA$ which is good for exporters has not yet materially changed the current account balance which remains in a deep funk since the Pit of Gloom in March 2009. The CA$ dropping is however affecting the private sector balance with increased costs on import prices and a rising cost of living for our consumer dominant society.
But the government also knows that their ideological policy of "balancing" the federal budget always sounds good in question period and in media sound bites because every tax payer has a visceral reaction to the notion of having to balance 'the budget" and this fear of "going broke" is a prelude to staging the coming federal election where we will hear that the federal "surplus" will be "spent" funding the most deserving lobbies and loyalists and that will energize the job creators.
Look at the chart again and notice the U.S. federal government surplus during the Clinton years of the late 1990's and the subsequent March 2009 crash and reversal back to federal deficit financing. The federal surplus led directly to the private sector deficit which caused weak hands to liquidate, repair balance sheets and build up savings again.
So Long Mr. Flaherty, nice timing on your exit. The new guy Joe Oliver cut his teeth with Merrill Lynch investment banking and probably also understands sectoral balances but finance ministers are hired on ideology not merit.
Jim Flaherty (1949-2014) died April 10, 2014 soon after his resignation.
Live at Wembley Arena, London 2012
Canadian Consumer Debt Zoomed 9% Y/Y in 2013 according to Equifax as reported by CBC News today in advance of Minister of Finance Mr Flaherty's Budget, scheduled to be tabled tomorrow. If the government budget again includes their mantra "We are going to Balance The Budget in 2015" (Oct 2015 is when the next federal election is), then a 9% annual growth in private sector consumer debt is going to increase even more unless lenders freak and turn off the tap, or consumers withdraw into balance sheet repair. Don't worry about non-conventional mortgages (mortgages of more than 80% Loan to Value); they are all insured mostly by you dear tax payer. Mortgage debt clocks in at almost two thirds of Canadian Consumer Debt and that increased 12% over the last year.
As can been seen by the charts below, Government Debt to GDP is curving down and that is not occurring because we are a successful export country. Nope... we are an import country as reflected in our Trade Balance which has been locked into a 5 year negative channel since the March 2009 Pit of Gloom. Government Spending Growth has been reduced (via Balance the Budget Policy) and the hit to the CA$ in the last year has driven up the cost of imports and most of the stuff we buy. In order to maintain its lifestyle, the Private Sector is using credit in the absence of Government Sector spending and a chronic Trade Balance deficit.
According to the Postmedia News reading of the just released Canadian Budget; Flaherty, Harper & friends "... plan to leverage billions in spending on military equipment into making Canada an arms exporter."
The chart to the left suggests there is plenty of room for Canada to move up in rank.
The Star reports that the new Canadian budget passes along their survey of forecasters who have a very bullish call for a big spike in growth next year.
Get thee down to the retraining center for a placement in the bullet and bomb department.
I wonder who the Economic Growth Forecasters are. They do not appear to be business people at ground level.
As the chart left demonstrates, the PMI (Purchasing Managers Index) which reflects Business Owner Confidence, has been in a downtrend since the peaks in 2010-2011.
But only two weeks ago to the question: “How much of a kick are we going to take on the revenue side because of lower nominal GDP?"
Mr. Jim Flaherty replied "Significant, it’s significant.”
The Military Industrial Complex Northern Edition
The Huffington Post Canada notes that the Tom Jenkins OpenText Corp report (commissioned by the Canadian Public Works Department) said that the production and trade of military goods is "powerfully influenced by governments" that can encourage the development of a country's defence industry.
The Canadian government will move this spring on Jenkins' recommendations and will begin an analysis that will look at "selecting a series of interim key industrial capabilities to help guide immediately pending defence procurement projects."
Global News picks up the story with:
"But the budget affirms the core message the Jenkins report delivered: that the government must ensure future purchases of military equipment be used to "create economic opportunities for Canadians by developing key domestic industrial capabilities" on future procurement."
"A key opportunity for doing so is by targeting, as estimated by Mr. Jenkins, the $49 billion in Industrial and Regional Benefits obligations that foreign prime contractors are expected to accumulate by 2027 to support high-skill and high-value opportunities and jobs in Canadian industries."
"The budget document said the overall strategy would "provide Canada with a stronger manufacturing base with a capacity for leading-edge technology and innovation. The potential benefits for the Canadian economy are significant."
OpenText Corporation is a software company headquartered in Waterloo, Ontario, Canada. As Canada's largest software company, it produces and distributes computer software applications designed to enable enterprise content management solutions for large corporations across all industries.
OLD NEWS DEPT:
The Times Colonist in Victoria tipped us off back in August 2011 with "Citizens not consulted about buying drones. Military to spend $1 billion on ARMED drones for Arctic patrols"
Follow the money.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy