Browsing the blog archives for October, 2012.

Prorogued or Paid?

Canadian Politics, Legislative Gaps

Dalton McGuinty’s decision to use his minority position to prorogue (i.e. suspend) Ontario’s legislature is the latest in a series of disturbing tactics by Canadian politicians that threaten our democracy.

The act of proroguing a legislature supposed to be used to end one session of a parliament so that another can be started under a new legislative agenda.

  • The new session starts with a Speech to the Throne that outlines the legislation that a government plans to bring forward during that session.
  • The session normally ends when the government has met its stated legislative objectives and needs to table a new agenda.
  • Prorogation is used to provide the time required to prepare the new agenda.

Prorogation is not intended to be used to abrogate democracy.  Both McGuinty and Stephen Harper have used loopholes in the prorogation procedure to escape public enquiry that might lead to a vote of non-confidence in their minority governments.

Just because something is legal doesn’t make it right.

The date of the next session of parliament / legislature should be announced when the previous session is prorogued.  The amount of time between sessions should be reasonable (60 to 90 days) so that a new legislative agenda can be prepared.

Unfortunately the Ontario Legislative Assembly Act does not require the date for the new session to be announced at the time of prorogation, and allows the Assembly to be suspended for up to a year.

The Ontario government doesn’t pay teachers for not teaching during the summer, or doctors who don’t see patients, so why do we pay our elected representatives for not representing us?

It’s time we closed these gaps in our democracy by amending the Legislative Assembly Act:

  • Members of the Assembly should be paid only when the Assembly is in session or is prorogued for less than 90 days.
  • The Lieutenant Governor should be required to proclaim the date of the next session at the time of proroguing the current session of the legislature.
  • In the event that a minority government requests prorogation before completing all of their objectives as declared in their most recent Speech to the Throne, the Lieutenant Governor should be required to ask the other leaders in the Assembly if they can form a government which can carry out its objectives.  Only if no other leader can form a government should premature prorogation be granted to a minority leader.

If every legislature and parliament in Canada made similar amendments, the likes of McGuinty or Harper would think twice about using prorogation to escape the democratic process.

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Demystifying The Price of Gold

Economic Reality, Financial Crisis

Putting long-term savings into GICs is turning out to be riskier than investing in hard asset such as precious metals, land, or other commodities such as oil, copper, etc.

The World Gold Council just published a historical view of central bank “balance sheets” since the 2007 crisis: (click on the chart if you need to make it larger)

A central bank’s “balance sheet’ is a relative measure of money supply.  Although there are more exact measures of money supply, when you see a central bank’s “balance sheet” tripling in the case of the USA, or quadrupling in the case of the UK, it really doesn’t matter which one you use and this one is good enough to understand the price of gold.

The buying power of money over time reflects the forces of supply & demand in an economy.  Basically you have money supply on the one side and economic demand for money on the other (i.e. the size of the economy).  If these are not in balance, then inflation or deflation will occur.

  • Suppose a country has $1 T dollars and an economy measured using a hard asset (like gold) worth $1 T dollars.
  • If the economy grows, as it has since 2007, by roughly 2% compounded per year, it will have grown 10.4% after 5 years – i.e. to $1.1 Trillion.
  • If money supply had stayed constant, each 2007 dollar would be able to buy 10% more in 2012 than it did in 2007 since there is more economic value for the same amount of dollars.
  • But if the money supply tripled over the same time period, as it did in the USA, there would be $3 T dollars to balance that $1.1T in economic activity.
  • So each 2012 dollar is actually worth 1/3 x 1.1 = $0.37 compared to its buying power in 2007.

Can that be true?

  • Consider that the price of gold on Jan 2, 2007 was $639.75 in USD.
  • On Oct 18, 2012 it is $1752 in USD.
  • Deflating back to 2007 dollars, we get $1752 x 0.37 = $642.33!
  • Not quite spot on since we used an average of 2% for economic growth over 5 years instead of individual values.  But you can plainly see what has happened.

By inflating the money supply beyond the natural growth in the economy, the buying power of our long-term savings has dropped by 60%.  The reason why we haven’t seen prices radically increase depends on the type of good:

  • Any commodity which is consumed by economic activity (oil, copper, iron, etc.) will have its price primarily determined by the forces of supply and demand for that commodity (to establish a value) and secondarily by the buying power of money (to establish a price for that value).
  • As an example, we’ve seen a significant increase in the cost of oil & gas but this increase is also affected by global consumption of the fixed supply of oil.  Recently global consumption has been dampened by the global recession being experienced everywhere except Asia, causing a drag on what would otherwise be a soaring price.
  • A manufactured good contains both commodity and labour as inputs.  While the input commodity prices in a manufactured product like a refrigerator or car has increased, the labour cost has decreased since most manufacturing has moved to low cost labour centres such as China, Thailand, and Vietnam.
  • Cheap labour has acted as a brake on inflation in developed economies – effectively exporting the inflation problem to Asian economies.  As an example, the official inflation rate in China has been 2 – 4x the North American rate since 2007 and the actual rate is widely believed to be higher than the official numbers.
  • A precious metal such as gold, or a non-consumable good such as land, will act as a perfect reflector for the buying power of money.  For example, although the value of land in the USA was artificially depressed by the explosion of the housing market bubble in 2007, the price of housing in economies unaffected by that crash, such as Canada, has soared.
  • Much of this increase is not due to another bubble forming, but due to the decline in the buying power of the dollar.  In other words, the house is still worth what it was in 2007, it just takes more 2012 dollars to buy it since a 2012 dollar buys less than a 2007 dollar.

So if you think that the banking crisis is over in Europe and that the USA can afford its ridiculous debt levels without either raising taxes or cutting military spending, then go ahead and invest your hard-earned savings in GICs.

Or you can invest some of your savings in gold as a safe hedge against further erosion of your buying power in future.

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