Wednesday 30 March 2022

Which Way Interest Rates?

 

The Bank of Canada first wanted us to believe that they could hold inflation to 2% per year. This was supposed to be a maximum, not a target. Even while they were expanding the money supply by 33%, they said with a straight face that inflation (by which they meant us to understand price inflation) would be held to 2%. Our Minister of Finance wanted us to believe that prices would actually drop, presumably because demand would drop. Of course, one might expect that when people are staying home and not working as much, they might pare down their purchasing. Yes, one might expect that……if money wasn’t falling into their laps from mailboxes across the land. Suppose you are at a cash auction with 49 other people and that each of you has brought $10,000 to spend --- $500k in total. The most the goods being sold can fetch is $500,000. Now suppose, someone flits through the room, handing another $10k to each of you. What do you think will happen to the prices the auctioned goods will obtain?

So now, price inflation is galloping to catch up to monetary inflation and the Bank of Canada wants to do something about it. It’s the same story in the USA with the American counterpart of the Bank of Canada --- the Federal Reserve. Both central banks are now set on raising interest rates. But when price inflation is running at historic highs (if you adjust for the changes made to how the CPI is calculated), even a fairly large increase in interest rates will still leave real interest rates negative. That means lower than the inflation rate. So the central banks are raising rates modestly to encourage people to save. Somehow, people should be motivated by a negative yield.

Paul Volker stifled inflation 40 years ago by raising interest rates to 20%. I remember a forecaster named Morgan Maxfield predicting those 20% interest rates, and then Maxfield was killed in a plane crash. Will interest rates go up again to 20%?  I don’t see how. The difference between 40 years ago and now is that back then, government debt tended to be 30 year T-Bonds. Now a huge portion of it is one year T-Bills. Back then, mortgages tended to bear fixed interest rates, but now many have variable rates. Raising interest rates to a point where they would actually bring price inflation back into line (by inducing people to save rather than spend, thereby slowing the velocity of money) would bankrupt governments and render a huge portion of homeowners insolvent.

I think we are in for a long period of price inflation. If we enter into an economic depression, which could easily happen, demand might drop enough to bring prices down, or maybe it would be an inflationary depression. It will be interesting to see what happens.

Sunday 27 March 2022

Thoughts on the Ukraine

My opinion is that our federal government has proven its shortsightedness with its wrecking ball approach to our oil industry. Misinformed by their tragic devotion to low potential solar and wind energy technologies, the Liberals and their accomplices in the NDP and Green parties have rendered Canada unable to help our allies in Europe mitigate the problems created by Russian oil exports going offline. And yes, they are headed offline. European ships are refusing to fetch the product and dock workers are refusing to handle it. Russia has pretty much run out of storage facilities for the unsold production, so they are beginning to shut down production facilities.

Of course, the exodus of companies such as Exxon, Halliburton, Schlumberger, which in the absence of skilled Russian workers, have been running the facilities, particularly the easterly ones that export to China, has also contributed to the shutdowns. During the final decade of the Soviet Union, there were substantial closures, and it took 32 years to get things fully operational again. It will take a long time again.

That decade also saw the demise of higher education in Russia. The Russian educational system tended to be like that of some other European cultures: students started technical training during their high school years, went on to post-secondary routes that built on the secondary school training, then apprenticed (even in the professions), and then got jobs based on their training. Ronald Reagan’s efforts that provoked the USSR into spending 50% of their GDP to maintain military parity with the much wealthier USA meant that something had to fall by the wayside. Higher education was one of the victims. So, the last generation that widely received the benefit of higher education are those in their late 50s now. Add to that the fact that over two million more highly educated Russians have left the Motherland since 1995, and Russia is seen to have a deficit of skills. Hence, the problems keeping the petro industry going.

The lack of education carries over into the military. Officers do not have the education that might have given them the know-how to manage the Ukraine war. Combine that with conscripted soldiers who are scared and do not want to be there, and there will be trigger fingers resulting in what are now being seen as war crimes. The higher military brass are skilled and they have powerful weapons available to them, so we must not sell the Russian military short. Kiev has not been taken, but I do not think it was meant to be taken until near the end of the takeover.

So what’s going on there? Well, Putin, KGB man that he is in spirit (as post Brezhnev Russian rulers have tended to be), is not happy that Moscow is only 300 miles from a potentially hostile power (Ukraine). Of course, Zelensky, now hailed as a modern-day Churchill, could have prevented the war by agreeing to keep his country neutral and agreeing to stay out of NATO, but he is a U.S. puppet that sits where the Russian puppet sat until America overthrew that regime in 2014. The major powers have been exchanging puppets in Ukraine, and Putin is not happy to be on the losing end of the process.

In western Ukraine are two topographical gaps through which invasions of Russia have occurred over the centuries, and Putin wants to plug them while he still can. With a birthrate of 1.4 children per couple, Russian demographics are collapsing. We have a similar birthrate in Canada, but we have immigrants to supplement the deficit. And as much as I dislike our Liberal government, I commend the Liberals for being friendly to immigration. It is a needed here. By the way, a business associate recently remarked to me “You don’t love the Prime Minister, do you?” to which I replied “I love him. I love all humans. And he is kind of human.” Yes, I love him as a person, but am dismayed with how he has handled the job of being PM. Anyway, back to Russia: Russia, for obvious reasons, does not have the immigration needed to replace its dying population. Now is the last chance Putin has to raise the army he needs to restore the buffer he wants between Russia and western Europe. The buffer isn’t just Ukraine, by the way. It’s wherever invasions of Russia have passed. Romania, Poland and the Baltic states all need to be subjugated.

We are in for a lot more trouble. For example, look at semi-conductors. With the shortage in semi-conductors, we have suffered significant impingement of the supply of devices that use them. It’s about to get worse. A lot worse. A semi-conductor is made by a laser etching a silicon chip. The laser uses neon, 90% of which is exported by the Ukraine from Odessa, soon to be captured by the Russians. Anyway, insurers are no longer insuring ships that ply the north half of the Black Sea, so Odessa is not able to export through its seaport.

The West has mounted an unprecedented set of sanctions upon Russia, a large part of which sanctions have yet to take effect. Russia will be choked, but the sanctions will kick back like a gun. We are already seeing a shortage of fertilizer because of the absence of Russian potash, nitrogen and phosphates. Cut off financially from the West, how will Russia make their international loan payments? The West is being hurt by the sanctions it has authored, but not as much as Russians.

China surely has noticed what is happening and must realize now that Taiwan is off the table. Mind you, even before 2022, I couldn’t see how a Chinese invasion could succeed. It’s a five hour trip by sea from China to Taiwan, and even if the USA did nothing, I doubt that the second largest navy in the world --- Japan’s --- would sit by and let the invasion occur. Chinese military leaders are not trained in battle nor by those who have been. Japan’s military leaders learned from experienced military strategists and tacticians. Five hours is plenty of time for Japan to demolish the Chinese navy.

Back to solar and wind. Great if the wind blows and the sun shines. But it often doesn’t. Germany, with its green sympathies, found out the truth of it, and so reverted to coal. Yes, coal of all things. Lately they are moving more to natural gas, and are even having an overdue look at uranium. Uranium is where abundant safe carbon-neutral energy is.

Solar and wind can supplement a grid. They cannot provide the base load. Storage batteries are no answer. The largest battery factory in the world, if it worked flat out, would take 500 years to build enough batteries to store enough electricity to power the USA for one day. Batteries are built from non-renewable materials. Solar and wind power are not environmentally friendly. They take huge amounts of mining efforts to provide materials that yield a small amount of energy.

On the other hand, hydrocarbons supplies seem inexhaustible, and they provide the benefit of putting some CO2 into the atmosphere where it is needed by plants. We are a carbon based lifeform, and photosynthesis is how the carbon is distributed to the plants from which we derive it. Plants are starving for CO2, which is why greenhouse operators raise the level of CO2 in greenhouse from the normal 400 ppm to 1000 ppm and greater.

Our government made a wrong turn, as ideologues are prone to do, when they selected against the oil industry. Our allies in Europe will suffer for it, and we will too. At least, that’s my opinion.