Tuesday, 7 August 2012

Rand on Marilyn


It’s fifty years this week that Marilyn Monroe died, aged 36.

I’ll bet you didn’t realise, but her passing and the manner of it profoundly moved Ayn Rand—who wrote in the LA Times shortly after that people were right to feel “her death had some special significance, almost like a warning they could not decipher.”

If there ever was a victim of society [write Rand]. Marilyn Monroe was that victim--of a society that professes dedication to the relief of the suffering, but kills the joyous.

Read Rand’s posthumous tribute to Marilyn Monroe here—and discover who she thought her real murderers.

“Stimulus” doesn’t stimulate


Whatever your view of arch supply-side economist Art Laffer—inventor of the Laffer Curve, and infamous as one of Peter Schiff’s adversaries in the months before the big crash who boneheadly refused to see the coming problems—whatever you think about him and his acumen, his piece examining the results of the last five years of government stimulus experiments is undeniably correct.

How did government “stimulus” work in the real world? His conclusion after studying the facts and figures: “In country after country, increased government spending acted more like a depressant than a stimulant.”

Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

That seems fairly conclusive.

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).image

…If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a sure-fire recipe for less work, less output and more unemployment.

It’s unsurprising that rewarding failure from the proceeds of those who are successful is hardly a recipe for making great gains.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

“Stimulus” is a zero sum gain at best.

imageBut all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the table above, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.

Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.

In many countries, an economic downturn, no matter how it's caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.

The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.

There is no evidence, either empirical or theoretical, that “stimulus” stimulates.

But stimulunacy is not an economic theory. It’s a bout politics. Which is why stimulunacy will continue—right up until the pool of real savings runs out altogether.

[Hat tip Phil Hayward from NZ’s Foundation for Economic Growth]

AusZealand hits the top ten!

Nice to see that Australians, or some Australians at least, have retained a sense of humour over their athletes unexpectedly poor gold medal haul.

Sick of seeing Australia so far down the medal table,  in yesterday’s Sydney Daily Telegraph a new nation appeared called AusZealand, allowing Australia to “co-opt” New Zealand’s gold medals for their own.


Meanwhile, the Sydney Morning Herald has started to refer to the success of something called Team Oceania.

I hope the sense of humour continues.

It’s better than the gnashing of teeth, which is all that can be heard in the Melbourne papers.

Monday, 6 August 2012

ECONOMICS FOR REAL PEOPLE: How the Problem of the Chickens Fixed the Tragedy of the Goats

Here’s the news on tonight’s meeting from our friends at the Auckland Uni Economics Group:

Hi everyone,
Here are some questions to ponder before this evening's discussion:

  • Why do people in shanty towns build their furniture before their roofs?
  • Why did the Industrial Revolution happen first in England?
  • Why do some places produce factories and enormous wealth, while in others all they have are pushcarts and penury?
  • How did problems with goats and chickens seven-hundred years ago lead to an enormous humanitarian advance we still enjoy?
  • And why might your neighbour want to invoice you for his new flower bed?

Join us tomorrow night to discuss the answers to these questions and much more--and find out what they all have to do with our subject: property rights.

    Date: Monday, August 6
    Time: 6pm
   Where: Room 215, Level 2, Business School Building (OGGB)

See you there!
Keep up with the Econ Group on the web at Facebook & at our blog.

But, there’s more!  Wednesday night sees the Auckland semi-final of the Next Generation Debates between the University of Auckland and the University of Otago, on the subject of Chinese investment in New Zealand farms.

Sponsors tell us that free beer and pizza will be provided, and that registration is essential.

    Date: Wednesday, August 8.
    Time: 5:30pm
    Where: Ernst & Young Building, downtown Auckland

More details here.

“The Olympics represent the exact opposite of everything polite society requires” [updated]

The Olympics is a fish out of today’s politically-correct water, says Michael Hurd, which is probably why it’s such compelling viewing: because “the Olympics represent the exact opposite of everything polite society requires.”

What I mean by “polite society” in this context are ideas that aren’t necessarily true, or that you necessarily believe—but that you feel compelled to pretend you have adopted…
    Polite society claims that there are no winners or losers. Yet the Olympics clearly distinguish among winners and losers…
    In polite society, you’re not allowed to view matters individually.... Yet in the Olympics, it’s individuals who are cheered, celebrated and rewarded…
    In polite society, we’re expected to believe the hogwash that nobody is exceptional… Yet the Olympics celebrate exceptionalism, based on who actually performs the best.

With so many ideas embraced by the Olympics “considered shameful if not illegal in polite society,” it’s astonishing they’re allowed at all.

PS:  Obama, of course, still maintains they didn’t win that.

UPDATE: Oh, FFS. Romney has been drinking the water of America’s collectivist president, saying: “You Olympians didn’t get here solely on your own.” [Hat tip Trey P.]

QUOTE OF THE DAY: Spelling is important

“Hey kids, spelling is important. Look! The difference between won and one: New Zealand have just won gold. Australia have just one gold.”

[Hat tip Cat in the Bush]

PS: Even on a medals-per-capita basis Aussies are still going to be cross. But go those Slovenians!

Cocking a snook at the Organising Committee

With the weight of government behind them, the London Olympic Games Organising Committee (LOGOC) has been as officious with advertising Londoners as the International Rugby Board (IRB) was with advertising New Zealanders. So it’s fun to see their soft fascism tweaked. Here’s how some entrepreneurial types cocked a snook:

My favourite is by the bookmakers Paddy Power, whose ad at the top of the page trumpets their sponsorship of an egg and spoon race in London, France.


More stories here at The Drum, who also host a great Fauxlympics: Olympic-based ads that probably shouldn't run, possibly won't run--but would be bloody good if they could run. More here, here and ... gosh, just keep looking around their site for even more.

[Hat tip Julian D.]

Friday, 3 August 2012

FRIDAY MORNING RAMBLE: The ‘we’ve struck gold’ edition


Sorry readers, it’s been a flu-ridden week for your humble writer this week: enlivened only by Olympics medal celebrations.  But here’s a few things that caught your writer’s eye around the net…

Don't come to London for the Olympics, they said. It it will be too busy, they said. They listened, and they didn't—so it's not. Not busy at all, that is; the economic malaise of hosting the Olympics.
Don't come to London - it will be too busy: They didn't, so it isn't – LIBERTY SCOTT

The Wall Street Journal explains ‘ badminton-gate’ with puppets. Yes, really.
Homemade Highlights: Olympic Badminton Scandal – LIVE WSJ

The Olympics have gone smoothly despite -- gasp! -- America's team wearing clothing made in China at the opening ceremony. "I'm so upset," said Senate Majority Leader Harry Reid. "Take all the uniforms, put them in a big pile, and burn them. ... We have people in the textile industry who are desperate for jobs." Here, Reid demonstrates economic cluelessness…
Myths We Live By – John Stossel, TOWN HALL

Thank goodness for The Onion. “Members of the U.S. men's gymnastics team have continued to apologize for their fifth-place finish in Monday’s team finals, mistakenly convinced that they dashed the entire nation's dreams of Olympic glory.”
U.S. Men's Gymnastics Team Thinks It Has Let Entire Nation Down – THE ONION

”Michael Phelps, the American who won his record-breaking nineteenth Olympic medal – his fifteenth gold – in the pool on Tuesday evening is unquestionably the greatest Olympic swimmer of all time. For some of us, however, that should automatically disqualify him from the contest to be named the Greatest Olympian…”
Why Phelps should be disqualified from any ‘Greatest Olympian’ contest – Mick Hume, SPIKED

American gold-medal winners will be shaken down by the Inland Revenue Service on their arrival back home. Because in the now-classic phrase of their president: that gold medal, you didn’t win that.
Go for the Gold! (Pay the IRS.) – WEEKLY STANDARD
Obama 'Invests' in People to Own Them – OBJECTIVIST INDIVIDUALIST

The politics of “You didn’t build that.”
Four Little Words: Why the Obama campaign is suddenly so worried. 
– Kimberly Strassel, WALL STREET JOURNAL
The intellectual roots of “You didn’t build that.”
The Shoulders of Giants: Obama didn't build "You didn't build that." 

Eric Crampton reckons Christchurch’s covered-stadium plan is a poison pill the government is trying to offload on the council.

“Fair tax”? What the hell does “fairness” have to do with tax?
Taxing Language: A Question for the Politicians - Fair: What Do You Mean? – Mark Hubbard, LIFE BEHIND THE IRON DRAPE

Louisa Wall’s bill to legalise gay marriage has whipped up opposition from those arguing the law should recognise the Biblical view of marriage. Be careful what you wish for.
A Biblical View of Marriage – AMERICAN ATHEISTS

And, since you asked for his opinion…
Gay Marriage Is for Suckers – Lindsay Perig0, SOLO

The right to agree with others is not a problem in
any society; it is the right to disagree that is crucial.

            - Ayn Rand

Len Brown has worked out the ideal way to kill Auckland’s inner city: by driving a train set right through the middle of it.
Irresponsible inner city behaviour – Phil McDermott, CITIES MATTER
Tunnel Vision: thin edge of the rail wedge – Phil McDermott, CITIES MATTER

Call the diplomatic “thaw” on Fiji what it is: a long-overdue backdown.”
Backdown on Fiji called a “thaw” – STEPHEN FRANKS

If cronyism didn’t exist, you’d get the sense that John Key would have had to invent it. No, cronyism isn’t the greatest threat to freedom. But it is a threat.  You want to get rid of it, you have to get rid of the mixed economy that is its perfect host.
Cronyism Is Not Today’s Biggest Problem – Don Watkins, LAISSEZ FAIRE
The Economics & History of Cronyism – David R. Henderson, MERCATUS

The insufferably pompous Gore Vidal is dead.
Here’s the late Hitchens on the now-late Vidal. And enjoy a classic piece of gladiatorial television, Norman Mailer versus Vidal and everyone else on the Dick Cavett Show a few years ago.
Vidal Loco – Christopher Hitchens, VANITY FAIR

Just to remind you where Gaza’s ruling Hamas is on history … “Gaza's ruling Hamas has criticized a Palestinian official for visiting a memorial at the Nazi death camp of Auschwitz and paying respects to its 1.5 million victims there, most of them Jews.”
Hamas blasts Palestinian official's Auschwitz trip – Jonathan So, HISTORY NEWS NETWORK

And where’s the coverage? Surely the role of Palestinian Authority President Mahmoud Abbas in the coldblooded slaughter of Israeli athletes at the 1972 Munich Olympics has not been forgotten ?
Where's the Coverage? PA President Mahmoud Abbas' Role in the Munich Massacre – SNAPSHOT

Come on, you knew this already, surely.
As A Teen, Obama Deeply Influenced By Communist Mentor – INVESTORS BUSINESS DAILY

Here’s a really scary thought: New York Times’s Paul Krugman Wants To Be The Next Federal Reserve Chairman…
Paul Krugman Wants to Replace Ben Bernanke as Federal Reserve Chairman – NEWSBUSTERS

Those who have zero respect for Intellectual Property either have zero
intellectual property, or zero respect for what little they do have.

            - Bosch Fawstin

What’s wrong with plastic bags anyway? The latest war on these incredibly useful bags is fuelled by nothing more than greens’ loathing of modern consumption habits.
Why plastic bags should be free – Tom Bailey, SPIKED

A clarifying breakdown on the core issues surrounding the global warming debate.
How to detect pseudo-science: The case of Bill McKibben and catastrophic global warming – Alex Epstein, CENTER FOR INDUSTRIAL PROGRESS
Ronald Bailey on the Freak Out Over Two New Climate Studies – HIT AND RUN
Spinning more bad news to pretend it answers skeptics. When 400 “equals” zero – JO NOVA

Climate scientist John Christy tells US Senators why carbon dioxide is not a pollutant—and is not the cause of extreme weather.
John Christy’s stellar testimony today – ‘The recent anomalous weather can’t be blamed on carbon dioxide.’ – WATTS UP WITH THAT

Many classic English phrases can be heard only in India…
India: What are some English phrases and terms commonly heard in India but rarely used elsewhere? – QUORA

The belief teacher training takes a year, not a whole career, hurts pupils. It's time to rethink how we teach teachers.
Training does not make the best teachers – SPECTATOR

This is cool: a website to help you teach kids about business.

It’s astonishing, but in today’s modern world otherwise intelligent people still people in goblins and demons. No, seriously.
Demonic activity and exorcism – Lucia Maria, NZ CONSERVATIVE

Yaron Brook calls it “one of the stupidest, most immoral ideas ever.”
The Case for Lying to Yourself – WALL STREET JOURNAL

Sixty minutes on “Mistakes Couples Make about Sex,” starting now…
Mistakes Couples Make about Sex – PHILOSOPHY IN ACTION [podcast]

More classic television, the recording of which was thought to have been lost:
Ayn Rand on Johnny Carson – Diana Hsieh, NOODLE FOOD

Oh, and CNBC marks the Library of Congress’s naming of Atlas Shrugged  as one of the 88 most influential books in America by saying “Read this book”!
Santelli Says Everyone Should Read This Book! – CNBC VIDEO

If Peter Jackson is having title trouble, he might check out other famous trilogies.
The 33 Greatest Movie Trilogies  - EMPIRE

And finally, yes, Alfred Hitchock’s Vertigo starring Jimmy Stewart & Kim Novak (below) was a great film, but is it really good enough to have knocked off Citizen Kane as “best picture of all time”? Crikey, it wasn’t even Hitchcock’s best (surely that was North by Northwest, right?) And just where the hell is The Third Man?
The Top 50 Greatest Films of All Time – BRITISH FILM INSTITUTE


[Hat tip Mark Hubbard, Small Dead Animals, Don Watkins, Geek Press, Oliver Cooper, David Enrich, YALiberty, Craig Ranapia, John Stossel Updates, Ari Armstrong, Martin Kramer, Onion Sports Network]

Thursday, 2 August 2012

Deflation? Don't Count On It...

GUEST POST from Jeff Clark from the Casey Daily Dispatch 

Deflationists and inflationists have been arguing since the crisis hit and stimulus began which outcome will prevail. Each side has data to back up its claims, and the public doesn't see a clear winner. One of those data points is what historically occurs when an overburden of debt finally blows up, an event that's almost certainly dead ahead for us. Deflationists will point to periods in history where deflation resulted. But there's more to the argument, says Jim Puplava of Financial Sense. He emphatically states, "The outcome depends on whether or not the economy is operating under a fiat currency system, because there's never been a deflationary depression when one's been in place."

When I saw this claim, I wanted to hear more, because deflationary forces seem strong at the moment. And which way this goes has direct and significant implications for investments, including gold. Here's my interview with Jim.

Jeff Clark: For those who don't know you, Jim, tell us what you do.

Jim Puplava: Basically I head up three companies. We have our own independent broker-dealer; we have a money management firm; and we have a media company which produces the Financial Sense News Hour online. I head up those three companies and am the CEO.

Jeff: It's been four years since the financial crisis, and we're still debating inflation vs. deflation. I found your claim quite compelling, so tell us what you found in your research.

Jim: Well, why don't we begin with the financial crisis that transpired between 2007 and 2009, something every investor remembers? Now the deflationists would argue that in a crisis as big as that, the resulting downturn in the economy is always deflationary. But if we look at that period, the money supply continued to expand. In my opinion, inflation is associated with monetary policy.

Jeff: We should probably define the terms we're using.

Jim: This is one of the problems we have when talking about deflation. You will often hear, for example, that "housing prices fell by 30%" or the "stock market fell by 40%," supposedly meaning it was deflationary. But that is a specious argument at best, because if we call the crash in real estate and the stock market deflation, then what would the deflationists argue now that housing is starting to turn around? What would they call the S&P going from 666 to 1,373? It's up over 100%... is that deflation?

Let's take the popular definition of inflation - rising prices, which is really a symptom of inflation. During the financial crisis, there were only three months where the CPI was negative. Prior to 2008, the last time you saw a negative CPI was in 1954, when Eisenhower was president! So despite all the claims about deflation, all you would have to do is look at a graph of M1 and M2 and see that the money supply actually expanded during this period.

Investors may not recall that in the middle of the 2007-2009 crisis, Bloomberg sued through the Freedom of Information Act and got access to the Fed's records of exactly what they did. We found out that they either guaranteed, expanded, or backstopped somewhere around $8 to $9 trillion. That can only be done in a fiat money system - something you can't do with a gold-backed system.

Jeff: Like during the Great Depression.

Jim: Even before that. Step back to 1920-1921... If you look at the statistics during that period of time when we were on an actual gold standard, you saw a huge contraction of GDP and in the price of goods. Here are the actual numbers: between the summer of 1920 and 1921, nominal GDP fell by 23.9%; wholesale prices as measured by the PPI dropped by 40.8%; and the CPI fell by 8.3%. It lasted for roughly two years.

I have yet to see anything like this in Japan. I have yet to see anything like this in the United States - despite the credit crisis and all the fallout we've had.

Furthermore, even in the gold standard we had during the '20s and '30s, we had inflation. President Roosevelt devalued the dollar by 60% in March of 1933, and when he re-priced gold from $20 to $35, he stopped deflation dead in its tracks. By the end of the month we were experiencing inflation. We were running single-digit inflation rates the very month he did that in 1933, all the way up to 1937, when FDR and the Federal Reserve reversed course. So as a result of the devaluation we got large doses of inflation.

Jeff: So your point is that even though we had a gold standard during the Great Depression, the government found a way to cause currency dilution, AKA inflation.

Jim: That's right.

Jeff: You brought up Japan; I assume you're using it as an example instead of the smaller countries because it's a major economy?

Jim: Yes, exactly. Even though the US dollar is the world's reserve currency, we have three major currencies where most trade is conducted - the dollar, euro, and Japanese yen. Argentina's economy is insignificant in terms of global GDP, for example, and they're constantly printing money, so a lot of people don't like to refer to small countries like these.

I'd like to address Japan, though, because of its unique situation. And I think a graph will best make the point. The following is Japan's CPI, year over year, going back to 1982. There were brief periods of deflation, about 1% or 2%, and you can see that most of this occurred between 2000 and 2004 and in the credit crisis following 2009 to 2010.

In that period of falling prices, the CPI was only down 1-2%. If we take a look at Japan's monetary base, however, there was only one period where it actually contracted, and that was between 2005 and 2010. But the period that the deflationists like to talk about - 1989 going forward - Japan's monetary base expanded every year. Government spending expanded viscerally.

Jeff: And now their debt is among the highest in the world.

Jim: Japanese debt today is roughly 208% of GDP, one of the highest debt ratios in the developed world. But there's something else that makes Japan unique...

If a government expands its spending in order to rectify weakness in the economy, there are couple ways governments can finance that. They can print money - which is what the Fed has been doing - or they can finance it through the bond market with existing savings. One of the very measures that allows Japan to escape a rather severe deflation compared to what we experienced in the early 1920s following World War I or in the '30s during the Great Depression was the Japanese savings rate. Going back to when the crisis began in Japan, the savings rate was 18%. In other words, Japan has been able to finance its deficits internally. Ninety percent of their debt has been financed and held by domestic savings. If the Fed or US politicians financed government spending with existing savings - in other words, took the savings of Americans and financed the deficit - that would not be inflationary. Inflation comes when we get debt monetization, and fortunately for Japan, they were able t o finance 90% of their debt expansion internally through domestic savings.

The second factor that contributes to what happened to Japan was the carry trade. As a leading export nation, Japan exported a lot of its money to the rest of the world, and it gave rise to the carry trade, in which we were able to borrow in Japan at some of the lowest interest rates in the world. So if Japan instituted capital controls, where the excess reserves of the monetary base were not allowed to leave the country, that money would have been confined within Japan itself, and then you would have had more money chasing fewer goods and services.

Jeff: What about Japan's demographics?

Jim: Yes, this is going to play very heavily on Japan. As their population has aged, the savings rate has declined from 18% to roughly 2%. If we look at total Japanese debt, 67% of that debt is rolling over in the next five years. More alarming is the fact that they have 900 trillion yen in sovereign debt outstanding, and the bulk of that is set to mature in the next two and a half years. And more importantly, the majority of this debt is now starting to be sold. A large percentage of this sovereign debt, as I've pointed out, is owned by Japan's own citizens, and for the first time in nine years, Japan's Government Pension Investment Fund, which is the world's largest pension fund, sold 443.2-billion of Japanese government bonds in its fiscal 2009-2010 year, as rising benefit payouts to pension reserves required a liquidation of debt. This is a major concern in our opinion for Japan, because as the Japan Investment Fund owns 12% of the country's outstanding domestic bonds, they are going to be selling an additional couple of hundred billion over the next two years.

So as Japan goes forward, there are only two things they can do to finance that debt. One, they could go into the world bond market, though they could be subject to bond vigilantes where the interest rate spread could be high; or two, monetize it. Because their debt to GDP ratio is 208% and still rising, the only way they're going to be able to keep interest rates down in that country is to monetize that debt in the same way our Fed is doing it through its monetary base and Operation Twist.

My point here, Jeff, is that the same demographics that will force inflation on Japan are the same demographics that are going to force inflation in the United States.

Jeff: Especially when you look at our unfunded liabilities...

Jim: Precisely. Lawrence Kotlikoff, author of The Clash of Generations and former senior economist on President Bush's Council of Economic Advisors, has a new book out, and he says US government liabilities are growing close to $11 trillion a year. At the end of last year, it stood at $222 trillion. And by the way, these numbers come from the Treasury and CBO [Congressional Budget Office]. These aren't numbers I'm making up, so I rest my case with the deflationists. History has shown deflation can end overnight.

Jeff: So you're saying history shows that when debt blows up in a fiat currency system, inflation has always been the result.

Jim: Exactly. That's the case even in severe downturns. Look at what occurred in Japan between 1989 and 1991... their stock market lost 70% of its value and real estate prices fell 40-50%. Yet you would be hard pressed to find deflation of more than 1% or 2% for brief periods of time.

Jeff: Let me challenge you on a couple points. Some will point to the "lost decade" in Japan as deflationary and say that the government's stimulus efforts didn't work.

Jim: During the Lost Decade of 1990-1999, inflation rates in Japan were 3% to 4%. One of the few times where they allowed the monetary base to shrink significantly was the period between 2005 and 2009, and the result was 1% to 2% deflation.

Jeff: I can hear some deflationists say, "Gee, if the CPI only goes up 3% when debt blows up, I'll take that."

Jim: They'll take that, but if you look at the dire warnings deflationists give, we have seen nothing of that sort in any major economy. Even in our economy, if we look at the credit crisis of 2007-2009, which had its origination here in the US, the monetary base didn't contract - it expanded. What people have to understand is that when money is created, central banks can't control it. And what happens with that money is that it finds an outlet. It has to go somewhere - it can go into housing, it can go into commodities, it can go into stocks. The big warning the deflationists will give is that the world is going to collapse and that we're going to see a repeat of the Great Depression. I would challenge them to prove that, because if we're on a fiat currency, inflation has always been the result.

Jeff: Another challenge: we're in deflation now because the economy is going nowhere, stocks are going nowhere, even commodities are going nowhere...

Jim: This is one chapter in a long book that has to play out. What we've got right now is the private sector deleveraging and the public sector leveraging up, and these two forces are fighting against each other and the result right now is stagflation.

Jeff: How long does this stagflation continue?

Jim: I think this stagflationary economy continues for the next couple years. Martin Armstrong, former head of Princeton Economics, also believes that will be the critical period when the fertilizer hits the fan. Of course a lot can change and accelerate that - the outcome of the November US elections, for example. I've taken a look at the president's budget... According to the CBO, he will expand spending by $700 billion over the next four years, assuming he is re-elected, and that's assuming his economic assumptions are correct. In other words, we can raise taxes by half a trillion dollars and it doesn't impact the economy, even though the CBO and the Fed acknowledge this would subtract 4% from GDP. So there are some wild cards out there that are unpredictable. The results of the November election could favor a postponement, or we could get an acceleration of that time frame.

And let me make a prediction: Right now the world is focused on Europe, and we're seeing all the fallout from that. I think the next crisis jumps from Europe to Japan, and then eventually from Japan to the United States. Right now the US has the "best-looking house in a bad neighborhood." A lot of gold investors have been disappointed with the price of gold or gold stocks, but they have no further to look than what's happened to the dollar. The US has been a big beneficiary of the flight of capital escaping Europe, so we've seen commodity prices go down. This fall in commodity prices has led to a lower CPI, and as a result we're also experiencing lower import prices, so the United States continues to be the beneficiary of the crisis. We will continue to be a beneficiary of this, however, only as long as we maintain some form of credibility in the bond market, the idea being that the US will eventually get its own financial house in order and will bring its deficits under manageable conditions.

Jeff: Are you saying we won't have a negative CPI again?

Jim: I'm saying that if we did, it won't stay there long because we're operating under a fiat currency, giving the government essentially free rein to print as much money as it wants.

Jeff: If you're right, then when the crisis moves to Japan, gold and commodities could still be weak because investors would still go to Treasuries.

Jim: We're in a period of a rising dollar, and that dollar is competing directly against gold. I also think it will depend on whether or not the US gets hit with the fiscal cliff in January and the economy weakens. If that happens, I think the Fed could embark on another massive round of quantitative easing, which would change the picture for the gold market. Right now, though, the Fed doesn't have to do anything.

One of the reasons I think gold investors got disappointed last fall is that the Fed didn't embark on quantitative easing. Instead it announced Operation Twist, which was really not expanding the monetary base, and the result was interest rates came down from 2.5% to 1.5%. So it wasn't necessary for the Fed to do QE. The market was doing the Fed's job for it.

Jeff: Is it your premise that this money finds its way into the economy and leads to inflation, meaning higher prices?

Jim: Absolutely. Our unfunded liabilities are simply too big. I had to laugh when the president gave a speech last week talking about this tax on the wealthy, which was going to generate, according to the CBO, $65 billion in tax revenue. The government is spending $10.4 billion per day, so that revenue would basically run the government for a little over a week.

Jeff: The extent of our unfunded liabilities would imply much higher price inflation, which in turn would lead to much higher gold prices.

Jim: Absolutely. I'm very bullish on gold. I think we're just going through a long consolidation period. Right now gold is competing with falling commodity prices and a rising dollar…

Jeff:  Thanks for sharing your insights.

Jim: You're welcome, Jeff. Thanks for having me.

Jeff Clark is is the editor of BIG GOLD, a Casey Research publication that pinpoints the safest ways to capitalize on the gold bull market.

Wednesday, 1 August 2012

GUEST POST: Who pays for the Christchurch grandomania?

The release of the government’s CGI-powered plan for the ruined centre of Christchurch has got many people talking excitedly about living in a CGI city, but (apart from this story, for which kudos to the John Campbell Show) little attention to the 840 property owners who are to have their land taken for the forthcoming fantasy land.

I asked a thoughtful Christchurch friend to respond….

As a loyal Christchurch resident for most of my life, here’s my view on what was presented the other day.

The plan is misguided. Not just misguided, but expensive and well beyond our means.  Not just expensive and well beyond our means, this “plan” is economically suicidal.

Where do they think the money will come from in a ruined city to pay the bill for the grandomania? How on earth could it ever be repaid. Is Christchurch to be on welfare for life?

This “plan” will be devastating to ratepayers in Christchurch, and to taxpayers nationwide. In short, it is a disaster.

But it gets worse.

What about those unnoticed and unrepresented souls who have been and will be paying the greatest price for this “plan”?  I mean those land and building owners whose property will be taken from them to pay for a dream conceived in a bureaucrat’s office. Land and building owners, in many cases, who will now have done to them by government and council what the earthquake couldn’t manage: enforced confiscation, with the value of their “compensation” to be determined by the Gauleiters carrying out The Plan.

What does this do to the property rights land owners thought they once enjoyed? They’ve gone. Completely and utterly.

And what does the dismissive attitude by so many people to the wholesale destruction of property rights say about who we have become? I’ll leave that for you to answer.

Because rather than respecting property rights as one of the single biggest achievements of civil society, in this plan and the talk around it, property rights are treated as just a minor inconvenience for those in power to trample on. This is just the culmination of virtually every stage in the recovery process which have deteriorated the institutional integrity of the country.

Where is the outcry?

There is a word for a system of government that rides roughshod over property owners in the name of the greater good.  It was a system great men went to war to destroy. Now, it’s accepted for the price of a new stadium and a few trees.

That public sentiment accepts this—is unconcerned that this blatant fascism is now the new normal—is scary. It’s frightening. People casually look at the plan and debate whether they like it or not. Whether the “frame” should be one block further north or south; whether there should be more cycle paths or trams. What the public discourse totally ignores is the owners of the land on which these pretty pictures are based—and what it totally avoids is that this is going to be the biggest forced confiscation of private property* since the Maori Wars.

Have we learned nothing?

I never thought my fellow citizens would embrace outright fascism, but they have willingly done so on every occasion since the earthquake. This casual embrace of fascism is frightening. Anyone that is against their idealistic plan for a new order is just “not getting behind recovery.”  They’re not a good Cantab. They’re not working towards the “greater good.”

This is sick.

And take a look at who gets to define this “greater good”? They are far from uninterested outsiders. Two of the biggest players in the  plan, with their mugs all over the report, are Ngai Tahu and the Christchurch City Council. These  are not passive players in the game. They are very the two biggest landowners in the city, with significant pull already in setting the rules of the game.  Forget Graham Henry’s theories about Wayne Barnes, this is a fixed match. And on the losing team will be 840 private property owners and the long-suffering taxpayer.

And how ironic that Ngai Tahu, whose current fortune was built on restitution for alleged confiscations of the past, are now up to their meres in having carried out for their benefit a broad-based confiscation of the present.

Pastor Niemoller’s warning has never sounded so ominous in New Zealand:

First they came for the Socialists, and I did not speak out--
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out--
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out--
Because I was not a Jew.

Then they came for me--and there was no one left to speak.


* Under the guise of ‘negotiation,' but confiscation no less—at prices determined by the confiscator.

Tuesday, 31 July 2012

Privatise rail

I see complaints from the chattering classes that plans to sell TranzScenic or to partner with another company “would be privatisation by stealth.”

Who are they kidding?

The true value of KiwiFail has already been found on the open market: zero.  Even the Finance Minister knows this. It is a company that absorbs more value than it produces, generating insufficient business even to pay for its capital; a “business” only able to survive by sucking off the state tit.

That said, there are around seven lines in the KiwiRail portfolio that could turn a profit, according to Liberty Scott, lines with real value that could be sold off.

Let’s hope they will be.  Soon.

Is there a Darryl Kerrigan in Christchurch? [updated]

After the release yesterday of the government’s CGI fantasy for Christchurch, comes the plan to acquire the land on which the governments’ slick CGI creations are planned. Because virtually all of that land is privately owned, you know. (Something planners always overlook.)

So Gerry Brownlee is now getting out the big stick:

Earthquake Recovery Minister Gerry Brownlee expects most of the land needed for rebuilding central Christchurch will be obtained by negotiation, but some could be compulsorily acquired.

A “negotiation” with a big stick at the door.  The sort of “negotiation” that Al Capone used to undertake with his “clients.”  A negotiation not with one hand tied behind your back, but with it twisted up your back until it hurts.

The sort of compulsory acquisition that Daryl Kerrigan from the hilarious film The Castle would understand.

Naturally, in such a forced negotiation—especially if the land is simply taken—the big, big question is: what are land owners going to be paid for their land.   Brownlee again:

Most of the land in the affected area has very low value and it won't have any value until there is a plan to put things back into that part of Christchurch that creates that value.

So that answers that. “It’s

So much for property rights.

Time for a screening of The Castle in Hagley Park.

UPDATE:  Bill English has revealed this morning he intends to “help pay for the rebuild” by buying land cheap from property owners (“most of the land in the affected area has very low value”) and selling dear later on.

“It’s worked for us with Red Zone land,” says English, unconcerned with how it’s worked for Red Zone property owners.

Government buying land cheap and selling dear to finance their double dealings has a long history in New Zealand. You might recall it was the foundation of Wakefield’s original plan to colonise the place—a setup at a stroke fleecing both iwi and colonists, one quickly enshrined in the second half of the Treaty of Waitangi’s Second Clause banning land being bought and sold by anyone but the government.

A colony built on a government land shark. And we know how well that worked.

No customers please, we’re Telecom

Telecom were once the country’s largest company. They’ve been nobbled several times by big government, but their slow slide has also been due to manifest incompetence.

Take the way they’ve chosen to end their CDMA Network—a directive to 600,000 subscribers that as of tomorrow their expensive phones will no longer work, so get on and sign up for a new plan on their XT network.

Why would you stick with a company that treated you like that?

It’s not the first time. They’ve done it before. It’s an exact parallel to their decision a decade ago to end their 025 network—handled exactly the same, and then as now a direct invitation for all those customers to stampede (as I did) towards Telecom’s competitors. 

Who, naturally, are waiting with open arms.

Sometimes, you have to wonder whether there’s a brain upstairs at Telecom at all.  Or any interest in looking after their customers.

Monday, 30 July 2012

Is it any wonder investment is leaving Christchurch? [updated]

A new "plan" for the rebuilding of central Christchurch is to be announced at 6pm today.

This will be (hold on, let me count) the sixth different plan for rebuilding the central city to be announced by govt or local govt since the first earthquake.

No wonder property owners haven't got on and started rebuilding themselves.

First, they were barred from their own property. Then, with the release of each plan, they've been told their property will be confiscated if the planners deem it necessary.

The radio story announcing the new plan was accompanied by the hand wringing of Mayor Parker, bewailing the flight of investment capital out of Christchurch. Is it any wonder?

It’s still not too late to turn Christchurch into an Enterprise Zone. It could be done overnight.

No, we won’t know how Christchurch would look if that were to happen. There’d be no grand plan about which to trumpet—no great monuments for politicians to unveil; but there’d be rebuilding, you can be sure of that; the rebuilding would start, carried out by people using their own property, their own money, and expecting to turn a profit on it.

In other words: rebuilding the way this city and every great city* was built in the first place.

A simple fact forgotten by those who harbour a fetish for grand plans and a wish to keep Christchurch on welfare.

UPDATE: The citizens of Christchurch deserve more respect than to have  inflicted on them more infantile boosterism, says Hugh Pavletich, Coordinator of Cantabrians Unite.

Later today an announcement will be made on the proposed central public projects. All these proposed projects will likely be loss makers, requiring on going ratepayer / taxpayer subsidies.
National and international research also illustrates the wider economic and social benefits are minimal ...- at best. Indeed - comprehensive and robust research often illustrates there are wide economic and social costs.
The focus should be on how best to provide these loss making services in whole or in part, at the lowest possible ongoing cost to ratepayers and taxpayers.
It is to be hoped the media makes a point of communicating with people both nationally and internationally, with credibility and expertise in these public projects.
In very general terms, if at the outset the development cost estimates are in the order of $800 million and because these projects appear to be rushed, it will be likely there will be substantial costs blowouts. The promoters need to be asked ( based on reputable international evidence and research ) what provision at this stage have they made for likely cost blowouts.
By rushing in to these projects, the promoters will be forced to pay excessive land costs. Going forward, central area land values are expected to fall dramatically. The public deserves to be fully informed of the additional land costs involved with these proposed rushed projects.
Even based on the initial costs estimates of around $800 million, when the ongoing costs of capital and operating losses (including insurances, maintenance, depreciation, staffing etc. etc.) are factored in, it seems likely these could be in the order of at least some 10% or $80 million a year of ongoing losses.
With a little over 150,000 households, this is in the order of $533 per household - more if there are cost blowouts.
While of course the commercial / industrial sector pay a substantial proportion of the Local Authority rates - the losses are still a cost to us all as citizens. The commercial / industrial sector will simply pass on these increased rates costs in the prices they charge for the goods and services they provide. Business is simply an intermediary.
And in the broader sense - have we got our priorities right - with people first - housing second - and business third.
Quality decisions can only be made if the citizens of Christchurch are provided with honest and credible information.
The citizens of Christchurch most certainly deserve to be treated with respect. They deserve much better than to be inflicted with infantile boosterism.

An affordable Auckland even further away

Aucklanders were sold the Super-Sized City on the basis of promised "efficiencies" and putative cost savings. With the arrival in their letter boxes this week of their rates bills, Aucklanders will for the first time see for themselves how effective these "cost savings" have been.

Fact is, there have been no savings. The costs have all been the other way.

For some Aucklanders, their rates increase will be more than ten percent—and with the promises doled out in the Super-Sized Council's super-sized Ten Year Plan, it's clear this will be a year-on-year increase.

Ten percent this year.

Ten percent next year.

Ten percent the year after, and every year thereafter for the foreseeable future...

For this disaster, there are several people to thank:

  • Mayor Brown for having an ego the size of the super-sized city, with plans to match.
  • Rodney Hide, for pushing through the farce.
  • John Key, for making him.

Aucklanders should vent their rage in whatever way they can.

If Auckland is ever to be an affordable city, one place to start is with the size of their rates bill. A simple fact of which those responsible for this super-sized debacle are still wholly ignorant.

Thursday, 26 July 2012

Lions eat Black Swans

There was a period there after the crashes of 20o7 when everyone started talking about “Black Swan events.” These were random events happening out of the blue that take everyone by surprise.

It was suddenly all the rage to talk about Black Swans. According to the hype, we were now living through one of these Black Swan events . (Even ACT's Heather Roy got caught up in the hype, before one came up and nipped her in the arse.)

But guess what, people. The crash, the recession, the credit crisis … none of these were Black Swans. A Black Swan event is something truly random and unable to be foreseen.  And plenty of people did foresee the crash; they just weren’t listened to.  Then, or now.

Commentator John Mauldin reckons a more apt analogy is Lions in the Grass—dangers apparently unseen but which with sufficient foresight can be foreseen.

It is natural to the human condition to focus on the apparent dangers in front of us. That is part of our evolutionary heritage from the time when humans were first dodging lions and chasing antelopes on the African savannah. But we soon learned that if we were to survive it was not enough to walk away from and around the lions we could see. We also had to make sure we didn’t walk into a lion hidden in the grass. It is the hidden lions that can spring on us suddenly and take an arm or a leg.

imageWhile most may not spot them, a hunter or an antelope grows adept at spotting the lions hidden in the grass. * So too do those trained in more rational economics than is doled out at most universities.

As Frederic Bastiat noted, it is the skilled economist who looks for the effects that are hidden, the surprises that are unseen. It should be a habit to look at the potential second- and third-order consequences of what we can see happening before our eyes. That way, we not only avoid the lurking lions, we also turn what would hunt us and do us harm into the hunted. Sometimes, the dangers themselves can be turned into a very nice trophy indeed, if you can see and respond in time…

Everyone now knows that there are lions roaming all over Europe… but the lion that lies hidden in the
European grass is France…

France is the imminently sick man of Europe, even without Hollande at the helm—and arms and legs (ad fortunes) are going to be lost betting against it, reckons Mauldin.

Mauldin has another analogy too. One he reserves for disasters so imminent only folk with “the economic understanding that God gave a goose” could fail to see them. And he reserves this analogy for Japan.

Japan is a bug in search of a windshield – but it keeps dodging. Japan has a debt-to-GDP ratio that is approaching 230% (at a rate of increase of 8-10% a year!). The savings rate is declining rapidly and will soon go negative. At that point, the thought is, Japan will need to seek out foreign investors to buy its bonds. And who will buy a Japanese bond at 1% for ten years? If rates rise only 2%, then Japan would be spending almost 80% of tax revenues on just the interest on its bonds. I would submit that that is not a workable business model.

The question with Japan is not, “will this bug hit the windshield?” That disaster is unavoidable. The real question now is “what happens when it does?”  This (to really mix metaphors now) is the real Lion in the Grass.

Because at this point you need more than just economic nous—you need historical knowledge.

What will happen when Japan melts down—a resource-poor country in a world in which borders are being closed and resources are more difficult to buy?  Will it hunker down and accept the fate it has delivered itself. Or will it do, or try to do, what it’s done before?  Historian Scott Powell puts the question:

As its economy falters and its demographic situation becomes desperate in the 21st century, how will its bankrupt government and people react? A distinct possibility exists that Japan will return to being one of America’s [and NZ’s]greatest enemies.

These are questions that can only be answered with knowledge of what’s gone before. Which is why I’d encourage you to look at signing up to Scott Powell’s online Japanese History course—for which Mauldin’s newsletter quoted above is assigned reading.

* * * * 

* Can you see the “hidden lion” in the photograph above? Give up?  Then head to John Mauldin’s newsletter for the answer.

The Shift to a New Global Currency Alters International Relations

The present economic depression has been going five years, with no sign of abating. We now that in times of worldwide economic depression, one thing to suffer is worldwide free trade—and without being able to freely trade for energy and resources, some nation states will be worse off than others.
Which is why they’re making a grab for resources now…

imageGUEST POST by Marin Katusa of the Casey Daily Dispatch 

Last week I wrote about how Israel's newfound natural gas wealth is catalyzing a shift in Middle-Eastern relations. It was a topic that generated much discussion in our office - we knew that the Mediterranean Sea resource is highly significant for the Jewish state, which has long struggled with energy insecurity, but the deeper we delved into the issue the more we realized that Israel's new resource is already having wide global implications. In particular, we were very intrigued to realize just how cozy Russia and Israel are becoming - this being the same Russia that usually supports Iran and Syria, Israel's sworn enemies.

The article generated a fair bit of feedback from our readers as well, including several good questions. In answering the questions and in continuing to discuss the issues among ourselves, we placed Russia's advances on Israel as but one part of a shifting global web, wherein old allegiances are being dropped in favor of new friends with benefits. Those benefits are energy resources, and the race to control them is changing the way the world turns.

Dozens of countries are slowly altering their international allegiances because of energy considerations. Here I will shine a light on a few of the more significant transitions and how they might impact US and EU energy security.

Russia's Strategic Steps Toward Israel

I discussed this at some length last week, so rather than repeat myself I will just summarize the situation in order to address some questions that arose following that Dispatch. The gist of it is this: The Middle East has long been informally divided into two camps, with US allies such as Saudi Arabia, Egypt, and Qatar making up the camp that can get along with Israel, while Iran and Syria lead the group that cannot befriend the Jewish state. In a holdover from the Cold War, Russia has long backed the anti-Israel group, providing arms to Syria and support to the increasingly isolated Islamic Republic.

Now Israel, long the oil- and gas-poor brother in the squabbling Middle-Eastern family, has delineated trillions of cubic feet of offshore natural gas. It is hard to overstate the significance of this discovery. Instead of having to rely on a strained peace with Egypt for its natural gas, Israel now has far more natural gas than it can use - the country will be self-sufficient in terms of gas to generate electricity and will be able to fill its coffers with export revenues.

Israel's transition from a nation constantly in need of resources to one that could well play a major role in the global gas trade is earning it new respect. Greece and Cyprus are discussing paths for potential pipelines to Europe. Turkish leaders are likely kicking themselves for having destroyed what was a close friendship with Israel in recent years; now Turkey will have to sit on the sidelines and watch as Israel, Greece, and Cyprus work together to develop these gas riches. Egypt's Islamists, finally in power after decades of having to abide their nation's peace accord with Israel, have been stripped of the opportunity to cut off Israel's gas supplies - the Jewish state doesn't need Egyptian gas anymore. Syria and Lebanon, among others, are considering how to stake their claims on the gas bounty, which sits in waters laced with international boundaries.

And then there's Russia. Vladimir Putin's third official international trip after retaking the Russian presidency in May was to Israel. The two nations now share $3 billion in annual trade and considerable immigration. Arching over all those ties is the fact that, in the wake of the Arab Spring, Russia and Israel share an interest in preventing the rising tide of radical Islam.

The Russia just described sure doesn't sound like a very good friend to Iran, does it? But why the shift - is Russia that concerned about radical Islam? No, Putin has never cared much about religion; his decisions are always far more strategic than that. The reason is simple: Israeli gas.

That brings us to the most common question we were asked following last week's energy Dispatch: Why does Russia, a natural gas giant in its own right, want Israeli gas? To our questioners, you are absolutely right: Russia does not need any more gas for itself. Russia is home to one-quarter of the world's known natural gas resources, roughly 1,600 trillion cubic feet (TCF) according to the EIA. And that doesn't count potential reserves of unconventional gas. We think that all told, Russia may control as much as one-third of the world's natural gas.

Russia has gas. What Putin desperately wants is to maintain his country's stranglehold over European natural gas supplies.

Putin loves using control over resources to enhance Russia's power, and natural gas is a key part of his scheme - we dedicated an entire issue of the Casey Energy Report to this topic recently. It was only a few years ago that Russia cut off gas supplies to Europe for a few days in the middle of winter in order to punish Ukraine for siphoning fuel from Russian lines. Europe relies on Russia for 34% of its natural gas; Putin wants to increase that reliance. To that end, he has spent years building new pipelines to Europe that avoid transiting troublesome countries (i.e., Ukraine). As if controlling Europe weren't enough, Putin is also developing Russia's ability to sell gas to Asia by jumping into the liquefied natural gas (LNG) scene with new facilities in the Far East. And he's several steps ahead of the United States in this LNG game.

How does Israel factor in? Israeli gas could join the world market in two ways: through a pipeline to Europe running under the Mediterranean Sea (with a stopover in Cyprus); and/or as LNG, which would be sold to Europe and beyond. Both would turn the Jewish state into an unexpected competitor in Putin's plan to continue controlling European natural gas supplies. Since he can't prevent Israeli gas from flowing, Putin is trying to control where it flows and siphon off some of the profits.

That control is so important, it seems that Putin is considering coming out as a full-fledged friend of Israel. Such a move would almost certainly sever those long-time ties between Russia and Iran, but when the currency in question is energy then alliances formed over decades can change overnight. If Russia does take that strategic step away from Iran and toward Israel, it will rock the ever-delicate Sunni-Shiite balance in the Middle East... to what end is anyone's guess. As for whether Israel will reciprocate Russia's advances: never forget that Israel is a pragmatist nation, its very survival dependent on making strategic decisions. We would not be surprised to see the Jewish state playing both sides of the ex-Cold War game, if that's what makes sense for them.

Africa's New Best Friend: China

Late last week the news broke that China will lend $20 billion to African governments over the next three years. The funds will be directed at infrastructure and agriculture projects, but to anyone who views the world with an eye out for strategic resource relationships, the growing friendship between China and Africa is all about energy and minerals.

Specifically, China is cultivating the relationship very carefully in order to cement its role as Africa's best friend and top ally. Caring for Africa's needs puts China in a perfect place to negotiate resource deals with countries across the African continent - after all, aren't sharing and caring the first rules of friendship?

This isn't a new tactic - Chinese involvement in Africa has increased dramatically over the past decade. Today annual trade between the African continent and the People's Republic is worth more than $166 billion, a threefold increase since 2006. What is new in the relationship is China's new breadth and depth of caring. Until recently, most Chinese aid to Africa went to projects that were clearly designed to primarily benefit China's extractive industries on the continent, not Africa's people. To boot, Chinese laborers were brought to work on the projects, reducing the number of jobs available for Africans. The result: China was accused - by Africans and by international observers alike - of being dastardly self-serving in its African endeavors.

This has become particularly problematic in Angola, which has received more Chinese money than any other African nation. Angola is rich in oil, diamonds, gold, and copper, but a devastating 27-year civil war destroyed most of the country's infrastructure. China has been helping Angola rebuild by providing infrastructure-related loans in exchange for oil; bilateral trade between the countries topped $25 billion in 2010. But the projects, such as rebuilding the 840-mile Benguela Railway, are all designed to make it faster and easier for China to access Angola's resource wealth, and Chinese laborers are now a common sight in Angola. With jobs and resources ending up in Chinese hands, Angolans in recent years have started questioning whether China has their interests in mind at all.

Lopsided relationships like this are nothing new for Africa. From colonialism to aid dependency, Africa has been in a lopsided relationship with Europe for decades. However, it seems the continent has learned from the past and now wants to try to craft a deeper relationship with China... one that would hopefully result in a more sustainable partnership.

"Africa's past economic experience with Europe dictates a need to be cautious when entering into partnerships with other economies," said South African President Jacob Zuma at the recent Forum on China-Africa Cooperation in Beijing. He continued to say that China has demonstrated its commitment to Africa with investment and development aid and that Africans are generally pleased that they are treated as "equals" in the relationship. However, he cautioned that the trade balance "... is unsustainable in the long term."

It was seemingly in response to that worry that Chinese President Hu Jintao promised $20 billion in loans aimed at projects specifically not related to mining or oil. Instead, the money is earmarked for agriculture, manufacturing, education, safe drinking water, protected lands, and the development of small businesses.

Has the Chinese leadership suddenly taken to caring for the health, welfare, and economic prospects for the people of Africa? It might be nice to think so, but the truth is much more strategic: China realized that it needs to improve its standing in the hearts and minds of Africans if it wants to continue securing access to African oil, gas, and minerals. And it did so with a bang - the $20 billion pledged for the next three years is twice what China pledged for the last three-year period.

With a show of renewed friendship and caring, China will now go about seeking new resource deals to add to the plethora of extractive deals it has signed with African countries in recent years. In Nigeria, China is spending $23 billion to build three oil refineries and a fuel complex; the two countries are also building one of Africa's largest free-trade zones near Lagos, a $5-billion, 16,000-hectare project. In Sudan, where Darfur-related sanctions bar American companies from investing, China has invested billions in oil ventures and buys 90% of the country's oil exports. A billion dollars in bilateral trade between China and Mauritania revolve around oil; the magnitude of China's investment in the country has carried Sino-Mauritanian relations through two military coups in the last decade. In Botswana the expansion of the Morupule coal-fired power station is being funded through an $825-million Chinese loan, but that is only one of 28 infrastructure projects that China is b acking in the country.

China has money, Africa has resources, and both have tainted views of many other global powers. It's a match made in heaven.

Asia Stakes a Claim on Canada

They came only a month apart: two multibillion-dollar offers from Asian energy giants to buy up Canadian oil and gas companies. The first was in late June, when Malaysian state energy company Petronas offered $5.5 billion in cash for Canadian natural gas producer Progress Energy Resources. The offer represented a 77% premium over Progress' closing price the day before the deal was announced and is the biggest deal to date for Petronas. Why did the Malaysian firm play such a huge hand? Because Progress has 1.9 trillion cubic feet of proved and probable gas reserves in British Columbia's Montney shale region, a massive resource that Petronas hopes to export to Asia asLNG.

News of the second deal broke just yesterday; the dollar size of the deal sent it reeling across business headlines around the world. China National Offshore Oil Company (CNOOC) is buying Canadian oil and gas producer Nexen (T.NXY) for $15 billion in cash. It is the largest investment China has ever made into Canada - its previous Canadian investments total $23 billion - and the offer represents a 66% premium to Nexen's 20-day volume-weighted average share price.

CNOOC wants Nexen for its diverse project portfolio - the company has operations in Colombia, Yemen, the North Sea, and the United States - but it is the company's Canadian projects that hold the vast reserves that China seeks. Nexen is only a mid-sized player in the Canadian oil sands, but it has 900 million barrels in proven oil reserves plus another 5.6 billion barrels of less-certain contingent resources. In addition, Nexen is on the cusp of producing from its significant shale gas reserves in BC. Between those two forays - oil sands and shale gas - Nexen has major exposure to two of the world's most rapidly growing, major energy sources.

New, fast-growing supplies are exactly what Asian energy giants need. In the race to secure oil and gas resources for the future, importers have to look beyond historic suppliers to new frontiers. Big oil reserves in historic producing countries are generally either state-owned and therefore closed to investment - examples include Saudi Arabia, Iran, Mexico, and Venezuela - or have already been staked out and carved up among domestic and international partners who aren't likely to give up an inch of their claim.

That means nations looking to buy up international oil and gas reserves have to look at newer regions - the oil sands, the Arctic, the shale fields of North America, the sub-salt oil riches off Brazil's coast, and the like. The risks and costs may be higher, but at least these regions still offer the opportunity to stake a claim on a massive resource. When it comes to the oil sands and the shale fields of British Columbia and Alberta, the fact that these massive resources are in western Canada - pretty darn close to the Pacific Ocean - makes the opportunity almost picture-perfect.

That is precisely why Asian energy giants are moving on Canadian oil and gas companies... though to be fair, they were invited to do so. Led by Prime Minister Stephen Harper, the Canadian government has been actively courting Asian investment for its energy riches; these two multibillion-dollar deals are the first fruits of that labor.

The growing, energy-based relationship between Asia and Canada represents a seismic shift for Canada, which until now relied on the United States market to buy almost all of its oil and gas. Today, southbound oil pipelines are almost at capacity and political theater is slowing the approval process for new lines to a snail's pace, just as production in the oil sands is set to ramp up. Similarly, shale gas discoveries across western Canada have delineated vast new reserves that are begging for new buyers.

Canada needs to diversify its export list if it wants to capitalize on its unconventional energy resource wealth. Asian nations, led by China, are racing to put down payments on the oil and gas deposits that will fuel their futures. Sure, Canada and Asia are in the honeymoon stage of a new relationship, with multibillion-dollar deals keeping things new and exciting. When CNOOC, Petronas, PetroChina, Mitsubishi, Korea Gas, and the other Asian energy firms pressing Canada to permit oil and gas pipelines to the west coast come up against regulatory roadblocks and popular opposition, the new relationship will get a real test.

For now, however, it looks like the United States is losing a race that it has always led - the competition for Canadian energy resources (it's especially losing out to China, whose purchases of North-American energy resources include a stake in a Texas oil shale project). Interestingly, this is happening a few short years after the army of oil refineries along the Gulf Coast spent billions upgrading their facilities to process heavy oil in preparation for an onslaught of Canadian oil sands bitumen. If Asia beats out the US for access to Canadian oil, US refiners will be left paying a premium for heavy oil from other suppliers - not an ideal situation.

It's also interesting that this is happening just as the US seems to be at risk of finding itself distanced from two of its strongest Middle Eastern energy allies - Egypt under its new Islamist government and Israel, which might move gently away from the US in order to secure strategic ties to Russia. Is a hegemonic outlook still clouding US views on the security of its relationships and energy supplies, leaving the nation complacent while its competitors race to lock up new resources and secure new friends?

It's a very interesting thought, but the details of that discussion are best saved for another day. The point for today is that increasing desperation from resource-needy nations to secure oil and gas for their futures is putting the world's complex web of relations under incredible pressure. Longstanding allegiances are being tested, and any nation that assumes its historic friends and suppliers will simply stay by its side risks losing precious supply streams. Lubricated with money and the potential for future profits, new friendships are being forged that could alter the global balance of power.

Energy security underlies every country's abilities for today and prospects for tomorrow. Without secure access to the resources that power buildings, move vehicles, connect people, and enable growth, a country's economy will stagnate and its global influence dwindle. From that perspective it is easier to understand why Russia is considering a 180-degree shift in its Middle-Eastern relations, why China is willing to spend tens of billions of dollars on schools, wells, and hospitals in Africa, and why Asia is offering fat premiums to take over Canadian energy producers in a down market.

Energy is the new global currency, and its influence is starting to change the rules of the global diplomatic game. China is playing, Russia is working its hand, and countries with resources from the Black Sea to the Horn of Africa are placing their bets. As for the United States, it seems to be a couple of steps behind and had better figure out a game plan before new allegiances solidify and the US finds itself alone.

Marin Katusa is the chief investment strategist, Energy Division, of Casey Research, publishers of the Casey Energy Speculator and Casey Energy Confidential Alert Service.