One Hundred Years of Canada's Navy

The year 2010 marks one hundred years of Canada's Navy. Unfortunately many voting Canadians have little to no understanding of our naval history and in the role of our navy has played in the past and the role it must play in the future. I admit that I knew very little of our navy, so in celebration of this anniversary I read the book Canada's Navy, 2nd edition: The First Century, by Mark Milner. I won't try to summarize the book but to remind us why we need to invest Canadian tax dollars into this vital service (as well as the army and air force).

The Role of the Canadian Navy:

• To defend Canada
• To protect trade
• To transport, supply and support deployed troops
• To help in protecting against illegal fishing, environmental damage, drug and human smuggling
• To contribute to NATO, UN, and coalition operations

The Politics of the Navy

"The most important lesson from the first century of our naval experience is, therefore, that domestic politics trump everything else. It trumps all the logic, rhetoric, and theory of seapower, the importance of trade, length of coastline, continental shelves and the like, as important and self-affirming to some as these may be." - Mark Milner

If we are to have a navy it must always be kept modern. If ships fall behind in technology or fleet mix they will be obliterated in a conflict with a modern enemy. To maintain a modern navy takes an incredible amount of resources. Sensors, weapons systems, ship design, and training need to be kept up to date.

Thankfully we have moved ahead with the midlife upgrades for our frigates, and we will eventually get our new helicopters to replace the sea kings. The major priority is to acquire new supply ships, unfortunately DND has designed a whole new class of ship the JSS. DND is also still looking at new icebreakers so we can fulfill the mandate of a three ocean navy. On top of these investments we badly need new destroyers. We should also be preparing to acquire new subs. On two occasions we have been close to purchasing our first batch of nuclear powered subs, only to have the programs cancelled. Nuclear subs will allow us to constantly patrol our three coasts. This will come at a huge price. To rotate one sub on each coast without overworking our sailors would require us to acquire up to 12 nuclear powered subs.

The problem with strengthening our navy is that Canadian shipbuilding is pretty much dead. So we will either have to purchase ships from another NATO ally, or invest in shipyards and training of personnel, or some mix of the two. I would propose purchasing nuclear subs from the US, UK or France (if they will allow export of their top of the line subs) since we don't have experience using nuclear power for ships. We can plan for continuous build in one shipyard somewhere in Canada for the JSS, AOPV/ice breaker, and the destroyers.

Personnel issues are also a problem. A glance at the CF recruiting site's in demand jobs lists mostly navy trades. On top of personnel problems, there is an absence of a strong modern enemy. Nazi Germany isn't entering the St. Lawrence sinking ships. Soviets nuclear subs are not hiding among their fishing trawlers in the Grand Banks. The most high profile use of the Canadian navy recently has been anti-piracy work of Somalia to protect international trade. This does justify having navy, but not necessarily an ultra modern navy.

There are global developments that the navy can use to sell the idea of investing in the navy to the public. Russia is acting belligerent in the north and off Labrador. The navy could use this to their advantage by designing the new destroyers with top of the line anti-aircraft capabilities. They can also explain to the public the need to monitor foreign subs in the north and off our coasts, which we cannot really do right now. China has recently built an icebreaker and the navy should use that as a selling point for investing in strong presence in the arctic. Our reliance on trade in the Pacific and Atlantic and the new "ice bridge" from Churchill to Murmansk could also be cited for investing in a stronger fleet. The government has to their credit often cited the opening of the northwest passage as a reason for investing in navy, and the annual operation Nanook has provided the navy with valuable coverage.

Reforming Canadian Universities

Universities in Canada are largely not oriented to labour market needs. For a more prosperous economy this has to change. Universities are subject to vast market distorting subsidies that I believe are a huge drain on the economy. Provincial governments who are the large contributers to University budgets really need to evaluate what kind of graduates our country needs.

In terms of supply we have an overabundance of grievance mongerers, feminists, and "activists", as was evident at the G20 summit in Toronto. These people thrive in the faculties of social "sciences", arts, and humanities, majoring in such useful programs as English or French (even though it's their native language), Sociology, "Womyns" Studies, Art History, and if the university is lucky enough to have the program Social Justice. From the demand point of view there are only so many NGOs, human rights tribunals, unions, and government bureaucratic make-work jobs to keep them all employed. This to me illustrates that there is a market failure. To fix this mismatch between supply and demand provinces must seriously consider removing subsidies not to Universities themselves (for infrastructure or real research) which I think would be terrible for our country, but by completely removing the subsides from tuition to students who major in the faculties of Social Sciences, Arts, and Humanities. Students who take a few classes from these disciplines certainly become more rounded and can improve critical thinking and writing skills, but by only taking classes in these faculties we produce narrow minded graduates. If a high school student really wants to earn a bachelor's degree by reading the Cole's Notes on Shakespeare plays, the soon to be broke Provincial governments and excessively taxed Canadians should not have to foot the bill.

The faculties of Social Sciences, Arts, and Humanities are a haven for narrow thinking left wing professors for good reason. Being a professor in these faculties gives someone the opportunity to lecture a class on their views and forces students to memorize and regurgitate their beliefs in tests. Students will usually leave professors' nonsense unchallenged in class to receive good marks (some classes reserve 10% or more of the final mark for class participation/discussions) and to have the opportunity to move on to masters programs or professional programs which usually require professors' recommendations. Noteworthy are the huge volume of left wing law students (think international law, human rights law, family law) likely former political "science", english or women's studies students.

I'm a recent graduate from a large Ontario University who studied in the faculty of social sciences (management, sp finance, minor econ). Assuming my advice was taken by governments 5 years ago, my grade 12 debate between entering a business/commerce program or an engineering program would have been greatly simplified. I would likely of pursued engineering due to the tuition subsidies that I believe should remain on these programs. (Unfortunately I might have graduated less of a staunch conservative or possibly not political had I studied engineering, having not been exposed to wannabe revolutionaries and commies in abundance even on a relatively conservative University campus.)

An important question is of course will the removal of tuition subsidies from these faculties lead to an oversupply of Engineering / Science / Computer Science grads as more people make the decision to study in the subsidized faculties over the unsubsidized ones? The likely outcome of the removal of the tuition subsidies would be a sharp decrease in the enrollment in the Social Science type faculties and a huge increase in the entrance requirements for Science / Engineering faculties. A similar shock was handled quite well by Universities in Ontario after the removal of OAC, albeit with quite a few years of preparation. This would lead to a gradual expansion of spots in math requiring programs. A wonderful result of the ensuing cost cutting in Social Science type faculties would see many over the top liberal professors laid-off (I shouldn't take pleasure in this but having endured a few classes in such areas as political science I enjoy the idea). The strong demand in the labour market for engineering / computer science graduates would be eased over time as the students increasingly choose these areas of study.

Another benefit of the removal of tuition subsidies to certain faculties would be the potential growth of private Universities in Canada. Our country has a near complete lack of private Universities. The noteworthy exception is Quest University in BC. This appears to be a great addition to the higher education landscape of Canada and can help to shake up the stagnant undergraduate programs

The Real Left-Right Split

When political polls are conducted a typical question involved is what is your level of education. The skew frequently observed is that people who claim higher education are typically Liberal/Socialist NDP or Obama lovers. This helps to contribute to the knuckle dragger conservative image in the public. But think of the percentage of University graduates who come from the social sciences compared to engineering grads. The reason I believe this is important is because the real split that defines left and right thinkers is what I will call mathematical literacy. Think of people who despise math. If they attend university without any Grade 12 math courses they cannot enter the faculties of Science, Engineering, Business, or programs in Social Science such as psychology or economics. Without Grade 12 math courses students may still enter extremely important programs such as Nursing but the majority will naturally end up in English/Sociology type programs. If pollsters separated the higher educated into two groups the ones with degrees that involve the requirement of some first year math and those that require no math, I suspect we would see a stronger liberal skew in the non-math cohort and a conservative skew in the math required group.

Government Funding for the CBC

It is amazing that with today's communication technologies the federal government is still thinks there is a need for a national television and radio broadcaster. Canada is ranked fifth in the world for broadband penetration with 69% of households having access to broadband internet (source). This allows these household to stream video and audio and have access to nearly unlimited data. Even Canadian without access to broadband are able to access the internet via local schools or libraries. Therefore we are able to receive news and entertainment from anyone and any organization online. The technology for Canadians to produce and distribute content around the world has never been so widely available or more affordable.

Yet the federal governments continue to fund the CBC which is increasingly irrelevant to Canadians (interesting to note that the CBC does not publish their ratings). Not only do the feds continue to fund this organization but the funding has increased from 1999 to 2009 at a rate of roughly 2.4% per year. In 2009 the total government funding reached a staggering $1,185,492,000.

Source

As part of the required government cutbacks to eliminate the deficit, the Harper government must eliminate the funding for the CBC/Radio-Canada. They must also transfer ownership of the firm to any willing buyer in the private sector or to simply give every Canadian a share of the firm and have it trade on the TMX exchange. This will eliminate the potential for government patronage positions at the CBC.

The Case Against a High Speed Rail in Canada

The Liberals and socialists from time to time like to propose the construction of a high-speed rail line (with taxpayer money) in the Windsor to Quebec City corridor. The reasons are varied including the supposed benefit to the environment, or to make us more European since we are the only G7 nation without high speed rail. Thankfully for taxpayers this idea only wasted only as much money as the government paid for the salaries of bureaucrats at the Ministry of Transport examining the idea and no doubt countless consultants.

If building a high speed rail was truly a good business venture we would expect to see entrepreneurs promote the idea to investors and try to raise capital in the equity and bond markets to fund the project. There has been no talk of this among business people because there is no solid economic incentive for this project. Consider Via Rail, the federal government's monopoly passenger rail service. This "corporation" is far from being profitable, it is a consistent burden on all taxpayers. Take a look at the "corporation's" financial statements, under the line "Operating Loss Before Funding from the Government of Canada and Corporate Taxes" and "Operating funding from the Government of Canada" for the past few years (in thousands):

2009: 284,203 226,280

2008: 256,832 214,223

2007: 204,465 200,596

2006: 190,657 169,001

2005: 202,392 169,001

2004: 208,513 177,444

2003: 228,560 181,115

Source: http://www.viarail.ca/en/about-via-rail/our-company/annual-report

As we can see, even with a near monopoly (personal cars, bus lines, and airlines are close substitutes) rail service in Canada is not a very profitable enterprise. There are many reasons that Via Rail is consistently a losing enterprise:

1. Via managers know that if they lose money the government will bail them out. This gives does not give managers the incentive to cut costs, they may simply cave into union demands since managers are not compensated out of profits.
2. Bilingualism: Anyone who has been a passenger on Via knows that customer service is not a priority when hiring employees, knowledge of French seems to be the only requirement.
3. Unions: Like any unionized workforce poor employees remain on the payroll. For this company salaries are likely even more elevated than they should be because there is no worry about bankruptcy.
4. Too many useless passenger rail lines (Gaspe, Pukatawagan, Jonquiere, Senneterre, White River).

Air Canada was successfully privatized, it is about time we take the money losing Via Rail off the public purse.

Book Review: Uranium: War, Energy, and the Rock that Shaped the World by Tom Zoellner

This is a fascinating book that explains the history and the people behind the rise of nuclear science. Zoellner takes a close look at the major producing uranium mines around the world. Notably the massive uranium mine Shinkolobwe in the Congo which supplied much of the American stockpile and the primary mine for the USSR at St. Joachimsthal, in Czechoslovakia.

The author focused mostly on the quest for the bomb for the USA, USSR, Israel, and Pakistan. The book takes a close look at the massive state industrial buildup to mine, process, and construct nuclear weapons. Fortunately, the process of enriching uranium is huge undertaking.

There are many troubling aspects this book revealed to me. Primarily that the construction of a nuclear bomb is very simple if one can find a grapefruit sized amount of "enriched" U-235. There exist some common smuggling routes for enriched uranium from the former USSR, through Georgia for example. Even if the borders are equipped with detectors, shielding the uranium in lead will, prevent the radiation from setting off the alarm. Worrying as well is that the A. Q. Khan Network that spread stolen blueprints for nuclear technology from his former employer a subcontractor for Urenco (which was Europe's only facility for enriching uranium for power) has passed that information on to Pakistan, North Korea, Iran and others.

The problem with waste must be addressed. The spent fuel must be secured for 10,000 years. Most nuclear power plants have their waste in pools of heavy water still inside the plants, a very short term solution. President Bush had a plan to build a huge multibillion dollar dump for spent nuclear fuel, but thanks to Obama and Harry Reid (D - Nevada) the desert storage facility was cancelled. The legacy of nuclear power and weapons have lead to many areas that will remain contaminated for centuries.

The importance of securing enriched uranium and preventing Iran and other nations form acquiring a nuclear weapon should be top priority. The US and its allies seem to be the only countries trying to secure enriched uranium, unfortunately it presently does not have any interest in stopping Iran from acquiring a bomb.

Nuclear power has its shortcomings but the major problem is that it is uneconomic. Private insurers require huge premiums making the plants unaffordable. This leads to government insurance and an indirect subsidy to the industry. The question of diversifying our energy sources with government subsidies for the preferred power of the day is useless. Governments should allow private enterprise to choose their preferred power source. Coal and natural gas should continue to play a major part in North America's energy mix, we will move to nuclear and others when technology improves and there is proper disposal plans. Market price signals should dictate our energy mix, not a confused government web of subsidies like Ontario has unveiled.

Time for Cuts! - Department of Canadian Heritage

To restore fiscal sanity to the Government of Canada big cuts are required. Whole Agencies need to have their government funding removed, and if they have the potential to be a going concern, they should be privatized. Up first on my list of cuts are many agencies tied to the Department of Canadian Heritage.

Background for the Department of Canadian Heritage

Mission: "Canadian Heritage is responsible for national policies and programs that promote Canadian content, foster cultural participation, active citizenship and participation in Canada's civic life, and strengthen connections among Canadians."

Source: http://www.pch.gc.ca/index_e.cfm

Minister: James Moore

Annual Budget: (Sorry can't find it)

Likely Opposition to Cuts: STRONG/VERY STRONG

Agencies to Have Funding Removed:

• Canada Council for the Arts
• Canadian Broadcasting Corporation/Radio-Canada
• Canadian Artists and Producers Professional Relations Tribunal (are you kidding me??)
• National Film Board of Canada
• Telefilm Canada

The mission of this department is flat out ridiculous, for the following reasons:

1. "Promote Canadian content": Making us listen to Nickelback every hour on the radio doesn't make us better Canadians. It makes me want to buy satellite radio or listen to internet radio (until that gets regulated).
2. "Foster cultural participation": Funding every possible ethnic festival/parade/party across Canada, will only further divide us along racial/religious lines.
3. "Strengthen connections among Canadians": Not sure how bureaucrats sitting in Ottawa will get me to talk to other Canadians.

Not only does this department have an impossible mission, but it redistributes taxpayers money to a lunatic fringe of artists and organizations that does not represent most Canadians. What are the CBC's ratings in Canada? How often do we watch Canadian films? Has all the money funneled to these organizations improved the quality or relevance of Canadian 'artists'?

When the conservatives introduces cuts to some of these programs the vested interests who rely on government subsidies to survive were protesting loudly, and it possibly cost the Harper government a majority. This is what happens when an agency like the ones listed above are created. Even minor cuts lead to special interests groups to blow it out of proportion. Opposition parties will ally with these groups to make a mountain out of a mole hill. This incrementalist approach to cuts by the Conservatives is quite possibly nearly as painful politically as ending these programs. When these programs are totally cut, the dependents will, after a few months of venting their spleens, have to move on and get real jobs, jobs where they actually contribute value to the economy, not suck resources from it.

Of course, if these programs are fully cut, and the opposition Liberals convince the electorate that these programs are somehow useful, then get elected, they might increase funding to these groups or create even stupider agencies/programs. Then taxpayers will be worse off in the long run. I don't envy Minister James Moore who has to continue funding these ridiculous agencies.

The CBC is the only organization in this group that could continue as a going concern after its funding is cut. It would require massive cuts to different language programming, regional offices would have to be closed, and probably all their radio stations would have to be shut down (does anyone listen to them?). After difficult cuts the organization could actually function maybe as profitably/unprofitably as Global or CTV. Although it would have to compete for the leftist viewing base with Aljazeera Canada. A good way to transfer ownership of this company from the Canadian Government to individual Canadians would be to give each Canadian holding a Social Insurance Number (SIN) one share in the CBC, with the help of TMX Group (Toronto Stock Exchange) we could register online for ownership of our share and begin to trade on the TMX. If this method were indeed a successful way to privatize companies, we could use the same method for privatizing other government agencies as well.

Exports of Goods and Services

Source: Statistics Canada, CANSIM using CHASS, v498728 Canada; Current prices (Dollars); Seasonally adjusted at annual rates; Exports of goods and services.

This recession was a major shock to the Canadian economy, and we can see that quarterly exports of goods and services dropped nearly $200 Billion. The constant annual growth rate of exports from the end of 1971 to the end of 2009 increased by 8.58% (including the huge drop in exports during the recession). If we exclude the recession the constant annual growth rate of exports from the end of 1971 to the end of 2006 grew at a rate of 9.9%. We can also notice the effect of the Free Trade Agreement (FTA of 1989) after a couple years of lag time where businesses realigned to compete in a bigger market, exports took off at a faster pace. We can also notice the increased volatility of quarterly exports starting around the beginning of 2000 until today.

Imports of Goods and Services

Source: Statistics Canada, CANSIM using CHASS, v498745 Canada; Current prices (Dollars); Seasonally adjusted at annual rates; Imports of goods and services.

Canada's dollar value of imports of goods and services grew from $20.88 Billion at the end of 1971 to $470.628 Billion at the end of 2009, a constant annual growth rate of 8.78%. This growth rate of imports would have been higher if Canada was not in a recession at the end of 2009.

Unemployment Rate

Source: Statistics Canada, CANSIM using CHASS, v2064894 Canada; Unemployment rate (Rate); Both sexes; 15 years and over; Unadjusted.

The unemployment rate ranged from a high of 14.1% in March 1983 and a low of 5.3 in October 2007. It is important to note that the unemployment rate does not include discouraged workers, who do not work and who are no longer actively searching for work.

Unemployed Persons

Source: Statistics Canada, CANSIM using CHASS, v2064839 Canada; Unemployment (Persons); Both sexes; 15 years and over; Unadjusted.

Employment Rate

Source: Statistics Canada, CANSIM using CHASS, v2064896 Canada; Employment rate (Rate); Both sexes; 15 years and over; Unadjusted.

Definition: The percentage of employed persons to the working-age population.

The employment rate has been in a range from roughly 55-65% since 1976.

This number could be raised if there were increased incentives to work (less welfare) and lower barriers to entry (less unionization). An increase in the employment rate in the private sector will be necessary if we are to begin paying of our federal debt in a big way.

Employed Persons

Source: Statistics Canada, CANSIM using CHASS, v2064890 Canada; Employment (Persons); Both sexes; 15 years and over; Unadjusted.

The seasonality of employment in Canada is very evident. The impact of recessions are also visible in the decreases in employment (early 1980's, early 1990's, and 2008). The quality of the employment must be looked at specifically the percentage that is employed by the public sector which is supported by the private sector.

This increase in employed persons (taxpayers) is needed to fund the massive federal debt. The federal debt per employed person will need to be examined, preferably the federal debt per private sector worker.

Participation Rate

Source: Statistics Canada, CANSIM using CHASS, v2064895 Canada; Participation rate (Rate); Both sexes; 15 years and over; Unadjusted.

The seasonal variation in the monthly participation rate data is visible with a volatility of nearly 4%. The participation rate has varied from 60% to 69% since 1976. We can expect to see the participation rate decrease as the population ages.

Persons in Labour Force

Source: Statistics Canada, CANSIM using CHASS, v2064889 Canada; Labour force (Persons); Both sexes; 15 years and over; Unadjusted.

Despite Canada's growing labour force from 1976 until 2009 the federal debt has been increasing at a much faster rate (to be shown later). Every potential worker must eventually pay for an increased debt burden, including interest payments, and all the future unfunded liabilities, such as defined benefit plans for the public service.

We also can see that Canada has a very seasonal economy relying on seasonal workers. This is due to industries such as tourism, fishing etc.

Deutsche Mark per Canadian Dollar

Source: Statistics Canada, CANSIM using CHASS, v37454 Canada; German mark, noon spot rate average *Terminated*

The global fixed exchange rates until the early 1970's explain the lack of volatility between the Deutsche Mark and the Canadian dollar. After allowing the free-floating of currencies, the German mark rose fairly consistently relative to the Canadian dollar. This reflects the German export economy. Although not rich in natural resources Germany focused on high value-added products and until recently Germany was the largest exporter in the world based on market value. The transition to the Euro terminated the use of the German mark in 2001. This is a potentially disastrous policy move, as can be demonstrated by recent events. The Euro covers a huge area that does not have very strong labour mobility. This can be attributed for instance to language barriers. Unemployed Greek speakers cannot easily move to France for work, in the way Newfoundlanders or even Quebecers can move to Alberta. Troubled national economies in Europe, like the entire south of the continent (Ireland, Portugal, Spain, Italy and Greece) with terrible employment rates, will slowly disintegrate under the pressure brought on from the "generous welfare benefits" and the low revenues from huge unemployment and demographic decline. These nations cannot simply rely on their currency devaluing as the economic problems become obvious to the world, which would in turn boost exports (from lower costs for international buyers) and lower imports (due to higher costs for citizens). This market mechanism cannot work under the Euro. Instead we have the relatively better off national economies like Germany providing loans below market rates to Greece only to allow them to continue to run massive deficits. We'll see if the 'austerity measures' that are required as condition for the loans are implemented. This will only burden the slightly better off European economies with more liabilities, thereby bringing the entire continent closer to a much more massive economic collapse.

Canada's Economic Position Relative to Japan as Illustrated by the Monthly Average Noon Spot Rate

Source: Statistics Canada, CANSIM using CHASS, v37456 Canada; Japanese yen, noon spot rate, average

This graph truly illustrates three distinct phases. The first phase, shows when the yen and all other currencies (including the Canadian dollar) were pegged to the US dollar until the 1970s. As expected we see not much fluctuation in the spot rate between yen and Canadian dollar. The second phase demonstrates the "Japanese Economic Miracle" until the early 1990's. The relative strength of the yen took off from the Canadian dollar as foreign nations were selling their currencies to buy yen in order to import japanese products, such as cars and electronics. During this phase the high value of the yen enabled the Japanese to purchase assets globally. The third phase illustrates "the lost decade" where the Japanese economy has largely stalled (nearing two full lost decades). The economic fundamentals of the Japanese economy show many threats and weaknesses and also many opportunities and strengths. On the negative side, the demographic position of Japan is terrible. The population is aging and the social safety net that Japan made famous will need to support a huge percentage of elderly. Yet the working age population is tiny due to a persistent low birth rate. The country is also closed to immigration. The country has amassed a massive debt to GDP ratio over 200% that appears it can never pay off. Also, the region has not gotten over the atrocities the Imperial military committed against China, Korea and others. This may make Japanese products less attractive in these markets.

On the positive note, Japan is in the fastest growing region in the world economically, which will help it's exports. It is also an economy that has tremendous technological knowledge and innovation potential which can be sold abroad.

Canada's Economic Position Relative to the United Kingdom as Illustrated by the Monthly Average Noon Spot Rate

Source: Statistics Canada, CANSIM using CHASS, v37430 Canada; United Kingdom pound sterling, noon spot rate, average

This chart demonstrates the reaction of global investors to the 'graceful' decline of the UK after the second world war, as its colonies were gaining independence. This effect was magnified by Canada's booming post war economy, not having suffered the massive decrease in the capital stock brought on from Nazi Luftwaffe bombs.

The current fiscal position of the UK is no significantly better off than their 'European Union' sisters affectionally known as the "PIIGS" (Portugal, Ireland, Italy, Greece, and Spain). The massive welfare economy of Britain, and its appearance from abroad of a disintegrating society, illustrated by muslim street protests professing its ascendance into an Islamic country are certainly not an image that will excite international investors looking to dump their money.

It appears that Canada's economic and fiscal mess is not as bad as our cousins across the Atlantic.

Canada's Economic Position Relative to the US as Illustrated by the Monthly Average Noon Spot Rate

Source: Statistics Canada, CANSIM using CHASS, v37426 Canada; United States dollar, noon spot rate, average

This is an interesting chart to illustrate how international investors view Canada's economy relative to the United States since 1950. The relative stability between the two currencies from 1950 to approximately the early 1970's can be explained by the gold standard where Canada (and many others) pegged their currency to the United States greenback, which was in turn pegged to the value of gold. Under such a system Canada could not pursue an independent monetary policy (see trillema).

Since the end of the currency peg, the Canadian dollar has depreciated relative to the US$ for many reasons that will have to be further examined. Possible reasons include Canada's lower productivity growth compared to the US, or perhaps Canada's poor taxation policies and larger government.

The relative weakness of the Canadian economy (or strength of the US economy) peaked around 2001-2002. This could be attributed to the massive asset bubble in the US for technology stocks, where global investors were selling local currencies to buy the greenback to purchase technology stocks, forcing the US dollar upwards.

The relative strength of the Canadian economy was visible after 2003 as the government debt problem was seen as being under control. This was compounded by the massive US government debt being piled up to fight wars in Afghanistan and the invasion of Iraq.

At this point in time the two currencies are pretty well at par, similar to when the Bretton Woods agreement was enacted.

Federal Government Surplus / Deficit (1989-2009)

This chart shows how Canada's Federal Government under PM Chretien pursued the necessary strategy of cutting expenditures to return federal finances to a slight surplus. The generation of revenues and the cutting of expenses will be looked into further, program by program, to determine how this has affected provinces and federal services especially the military. Despite the problems the cuts generated it was necessary to pursue to avoid near bankruptcy (see Greece 2010). We can also see that the surpluses that were considered 'massive' in the media were hardly enough to offset the previous decade's prolific spending and deficits.

The period under PM Harper when the world was hit by a massive recession, and Keynesian economics was brought back into favor among Western democracies will also need to be examined. In a period of a few years the decrease in tax revenues and a massive increase in spending sent the federal government back into huge deficits, that will likely erase all the gains from the surplus years.

The analysis of federal finances must take into account the cyclical economy (business cycles). Politicians are all to eager to take responsibility for strong finances through the crest of the business cycle, and to eager to assign blame for poor finances on the weak global/national economy. Proper analysis must look into how the government grew spending on poor programs, or how previous governments helped to grow the economy in the long-run (signing free trade agreements, eliminated inter-provincial trade barriers etc.).

Gross Canadian Federal Debt, 1867-2008

Source: Statistics Canada, CANSIM using CHASS, v151537 Canada; Gross federal government debt

This chart shows a lot about how Canada has evolved as a nation. I will use this chart as a starting point to analyze Canada's economic, political, military and economic history. An required next step would be to analyze other economic data such as GDP, population, labour force, trade, Consumer Price Index, and Government Revenues and Spending. A proper analysis will also require comparisons with other nations, comparisons between provinces, and a deeper look into the different eras and the corresponding role of the federal government played, and how that has affected individual freedoms. This will also require an understanding of history and politics.

A preliminary look at the federal gross debt time series, we can separate Canada's economic history into a few eras:

1. Early Nationhood (1867-1914) Characterized by little federal debt and a federal government that was not intrusive in people's lives.

2. World Wars (1914-1945) Increased government spending (and debt) to finance two world wars, growing role of the federal government including increased taxation and new forms of taxation (supposedly temporary).

3. Peace 'Dividend' (1945-1993) Emergence of the welfare state, growing federal spending (and debt), more taxation.

4. Belt Tightening (1993-2008) Cutting services and federal transfer payments to provinces, repaying some debt.

5. New Keynesian (2008-present) Massive growth in federal spending, some tax cuts.

6. Fiscal Conservatism ?

These eras will be examined in closer detail, especially the period from 1945-1993.

The Role of Leverage in the Asset Bubble in Housing in the USA

The Role of Leverage in the Asset Bubble in Housing in the USA

The hypothesis is that in the major metropolitain areas studied in this paper, Atlanta, Boston, Los Angeles, and Miami, the size of each bubble as measured by the Case-Schiller (CS) index would be larger for cities that experienced the largest increase in leverage, as measured by the US census’ American Housing Survey (AHS) in Mortgage Characteristics of Owner Occupied Units and their median outstanding principle. The results were different than expected; in the cities with the smallest housing bubble, Atlanta and Boston, the growth in the CS index was similar to the growth in total outstanding principle and the current total loan as a percent of value was essentially unchanged, whereas in the cities with the largest housing bubble, Los Angeles and Miami, the growth in total principle outsanding was significantly less than the growth in the index and the current total loan as a percent of value fell.

The expectation that the rise in asset prices was related to an increase in leverage is due to the behavioural aspect of finance where people will buy an asset with the expectation that they can sell it in the future at a higher price, known as ‘the castle-in-the-air theory’. (Malkiel, pg. 30)[1] If this belief is paired with greater access to liquidity (mortgage financing) people who would otherwise not be able to enter the market will be able to purchase the asset by putting little or no of their money as a down payment. Prices will rise due to the increase in demand for the asset likely out pacing the increase in supply spurred on from higher prices.

Leverage also increases investors risk because with a certain percentage rise (or fall) of the asset there is a greater total rise (or fall) in the investors’ return even after deducting interest costs. In the housing market this means that the higher the loan to value ratio (current total loan as percent of value) the more risk there is of homeowners defaulting if the value of housing prices drops. (MacGee, pg. 1)[2]

The asset bubble in housing was noticeably different in the 20 major metropolitan areas of the US, as shown on page 2.[3] The differences in the four cities compared to the 20 city composite index are illustrated on page 6. This is interesting considering that all US cities had the same monetary policy of low interest rates, and federal regulations allowed for easier access to mortgage financing across the US. (MacGee)

In Atlanta, the median total principal amount grew at a rate of 6.10% from 1996 to 2004, whereas the CS index in the same period grew at 5% (page 7), the current total loan as percent of value was flat at -0.02%.[4]

In Boston, the median total outstanding principal amount grew at a rate of 9.66% from 1998 to 2007, while the CS index grew in that period a similar 8.10% (page 7), and the current total loan as percent of value decreased at a rate of 1.36%.[5]

In Los Angeles, median total outstanding principal grew 5.60% from 1999 to 2003, the CS index grew 13.18% (page 8), and current total loan as percent of value decreased at a rate of 13.18%.[6]

In Miami, the median total outstanding principal grew 10.26% from 2002 to 2007, the CS index grew an amazing 14.44% (page 8), and current total loan as a percent of value decreased by 4.66%.[7]

The values from the CS index and the AHS are summarized in Table 1.

Table 1

Medians	Atlanta		Boston		Los Angeles		Miami
Total Outstanding Principal Amount	1996	70,341	1998	79,667	1999	117,295	2002	75,342
	2004	113,004	2007	182,740	2003	145,884	2007	122,764
	Growth rate	6.10%	Growth rate	9.66%	Growth rate	5.60%	Growth rate	10.26%
Case-Schiller Index Growth	1996	82.17	1998	83.97	1999	96.12	2002	132.58
	2004	121.45	2007	169.28	2003	157.18	2007	260.25
	Growth rate	5.00%	Growth rate	8.10%	Growth rate	13.18%	Growth rate	14.44%
Current Total Loan as Percent of Value	1996	67.5	1998	45.8	1999	61.1	2002	56.5
	2004	67.4	2007	40.5	2003	47.2	2007	44.5
	Growth rate	-0.02%	Growth rate	-1.36%	Growth rate	-6.25	Growth rate	-4.66%

These bizarre results may be caused by a few different factors. The US Census Bureau conducts the American Housing Survey (AHS) and they measures mortgage characteristics. For the four cities the median term of the primary mortgage at origination was 30 years[8]. There could be problems in the AHS data used to measure leverage, because some people who responded simply may not have known how much outstanding principle they had. Especially because the AHS includes the total number of households in each surveyed area that have 1, 2, and 3 or more mortgages, and there was a considerable number of households with 2 mortgages or 3 or more mortgages. They might have only reported information for the first mortgage. The AHS survey is conducted in different years (with no regularity) for different metropolitan areas. This makes comparisons difficult both between cities and to observe changes between years. For the 4 cities compared the survey was conducted since 1974 at intervals of between 3 to 9 years for Boston, 3 to 8 years for Atlanta, 3 to 6 years for LA, and 3 to 7 years for Miami.[9] Due to this irregularity growth in mortgages outstanding could not be compared between the cities because the time periods were different, but trends were still noticeable in the time period leading to the peak in the housing bubble (peak in July 2006 in CS index). High quality yearly mortgage data separated by metropolitan areas would be preferable to improve this research. The CS index is based on census and Fiserv data[10] and is likely very accurate.

The magnitude of the housing bubble in the four cities does not seem to be linked to the increase in leverage according to the limited data provided by the AHS. An alternative that would improve this research is to collect mortgage information from all the lending institutions in a metropolitan area, monthly or quarterly, which would provide better more accurate information than the AHS which relies on people knowing their principle outstanding on all their mortgages published at varying intervals.

References

“American Housing Survey for the Atlanta Metropolitan Area in 1996”. U.S. Department of Commerce. Bureau of the Census. Nov 1997. Pg 59-60.

“American Housing Survey for the Atlanta Metropolitan Area: 2004”. U.S. Department of Commerce. Bureau of the Census. Oct 2005. Pg. 76-77.

“American Housing Survey for the Boston Metropolitan Area 1998”. U.S. Department of Commerce. Bureau of the Census. Nov 2000. Pg. 70.

“American Housing Survey for the Boston Metropolitan Area: 2007”. U.S. Department of Commerce. Bureau of the Census. Feb 2009. Pg. 80-1.

“American Housing Survey for the Los Angeles-Long Beach Metropolitan Area 1999”. U.S. Department of Commerce. Bureau of the Census. March 2001. Pg. 71.

“American Housing Survey for the Los Angeles-Long Beach Metropolitan Area: 2003”. U.S. Department of Commerce. Bureau of the Census. Dec 2004. Pg. 76-7.

“American Housing Survey for the Miami-Ft. Lauderdale Metropolitan Area: 2002”. U.S. Department of Commerce. Bureau of the Census. July 2003. Pg. 74-5.

“American Housing Survey for the Miami-Ft. Lauderdale Metropolitan Area: 2007”. U.S. Department of Commerce. Bureau of the Census. Feb 2009. Pg. 80-1.

Gjerstad, Steven and Smith, Vernon L. “Monetary Policy, Credit Extension, and Housing Bubbles: 2008 and 1929”. Critical Review. 21:2, Pg. 269-300.

“Index Methodology”. S&P/Case-Shiller Home Price Indices. Nov 2009. real estate > S&P/Case-Schiller Home Price Indices > Methodology>.

MacGee, James. “Why Didn’t Canada’s Housing Market Go Bust?”. Federal Reserve Bank of Cleveland. Sept. 2009 .

Malkiel, Burton. A Random Walk Down Wall Street. New York: W. W. Norton & Company, 2007.

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[1] Malkiel, Burton. A Random Walk Down Wall Street. New York: W. W. Norton & Company, 2007. Pg. 30

[2] http://www.clevelandfed.org/research/commentary/2009/0909.pdf

[3] Source for all Case-Schiller data used in this report: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_022445.xls

[4] American Housing Survey for the Atlanta Metropolitan Area in 1996, pg. 60; American Housing Survey for the Atlanta Metropolitan Area: 2004, pg. 75-6

[5] American Housing Survey for the Boston Metropolitan Area 1998, pg. 70; American Housing Survey for the Boston Metropolitan Area: 2007, pg 80-1

[6] American Housing Survey for the Los Angeles-Long Beach Metropolitan Area 1999, pg 71; American Housing Survey for the Los Angeles-Long Beach Metropolitan Area: 2003, pg 76-7

[7] American Housing Survey for the Miami-Ft. Lauderdale Metropolitan Area: 2002, pg 74-5; American Housing Survey for the Miami-Ft. Lauderdale Metropolitan Area: 2007, pg 80-1

[8] AHS Atlanta 1996, 2004; Boston 1998, 2007; Los Angeles 1999, 2003; Miami 2002, 2007

[9] http://www.census.gov/hhes/www/housing/ahs/metrodates.html

[10] Fiserv uses census data for the number of single family housing units in each metropolitan region. Fiserv calculates the average and aggregate value of single family homes. The value of each unit is based on the sale date and price of a single family home, which is compared to historical records of the same home (if this data is available) which gives two points to compare for a yield rate. The yield rates are aggregated using their proprietary algorithm. Fiserv uses a number of techniques to maintain data integrity. To avoid upward bias data is excluded if there have been improvements or additions to the home since the previous sale. If there it appears that the transaction was not arms length (same family name, or the name of a property developer) it is excluded. The index is normalized to January 2000.

Source: “Index Methodology” S&P/Case-Shiller Home Price Indeces. Pg 6-18