Saturday, April 08, 2006

Canadian Trade Balance and Housing Market

In Ned W. Schmidt’s Moneyization #21 [], he says:

The structural nature of the U.S. trade deficit and denial by U.S. policy makers, in the form of Bernanke's Delusion, mean that the U.S. dollar is going down in value over time. With the housing bubble now deflating, the Federal Reserve policy will move to further destroy the value of the dollar in an attempt to prevent a financial calamity in the mortgage debt markets. Pressure will increase on domestic prices, regardless of how the government statisticians attempt to cover up the problem. Rates are going higher and a Mega-Recession is on the way. Only twice before has a major economy faced a collapse in demand, the U.S. in 1929 and Japan in 1990.

Ramifications for many economies around the world of such a development could be severe. Recessions are a problem for two reasons, people lose jobs and debts are not repaid. That latter problem is the biggest concern. Debts will be liquidated, and not by repayment. Gold, as the only money not a debt, will obviously benefit from such a situation. For the neighbor on the southern border of the U.S., the unemployment problem will exacerbate the shift to the left in Latin American politics. "Chavesism" will have a fertile soil in which to breed discontent. Each nation that has gained from the U.S. consumer boom will have to face the consequences of their biggest customer unable to borrow money for purchases.

The neighbor to the north has related issues that need to be remembered. The fourth graph looks at the balance of trade for Canada at the end of 2004 and 2005. Canada has benefitted tremendously from a consumer gone mad in the U.S. The Canadian trade balance has improved dramatically over recent years. That improvement, along with the hostile nature of U.S. banking regulators, has caused the Canadian dollar to enjoy an improvement few would have expected.

Remember, though, to look behind the headline numbers. Two other sets of bars are shown. One set shows the Canadian trade balance without the benefits of the trade surplus with the U.S. In the coming recession all will not be lost, but vulnerability of the Canadian economy to a slump in U.S. consumption is high. Canadian dollar could sink dramatically when the U.S. enters the coming recession, especially given the depth and duration of it. Imploding asset price bubbles in Japan sent that country into a recession that lasted well over ten years.

The final set of bars is the trade situation if the energy surplus is removed. Yes energy is a good business, and likely will continue to be so. High energy exports alone are not enough for a strong currency. No Swiss banker has ever complained of depositors shifting from francs to nairas or dinars. Regrettably more often than not the bounties produced by natural resources are spent by the government rather than long-term investment. How long will it take the new government in Ottawa to discover the cash cornucopia of western Canada? Republicans practiced fiscal responsibility right up to the next election.

The trade deficit of the U.S. is both structural and long-term in nature. The spewing forth to the rest of the world of green pieces of paper is not about to abate soon. Analytical delusion on the part of the Federal Reserve has prevented and will prevent actions before a dollar crisis is in full bloom. With the U.S. housing market already showing the first signs of implosion, the Federal Reserve will "toss dollars from helicopters" in a vain attempt to stop the collapse of mortgage debt. As the U.S. economy plunges into a policy created economic abyss Canada will be dragged along, like the roped mountain climbers plunging to their death.


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