What's New: Canada and Afaghanistan Natural Resources Saskatchewan Politics Affordable Housing Green News Sections: Canada and Afghanistan Natural Resources Saskatchewan: Roots of Discontent and Protest The Other Mexico Political Economy Saskatchewan Politics and Political Economy Green Politics Food and Agriculture Other Publications Course Outlines Saskatchewan Links Home Page  John W. Warnock 2156 Retallack St. Regina, SK S4T 2K4 warnockj@hotmail.com     "During times of universal deceit, telling the truth becomes a revolutionary act." George Orwell Nineteen Eighty Four

What's New in Political Economy   Creating a Failed State: The US and Canada in Afghanistan. by John W. Warnock. Halifax and Winnipeg: Fernwood Publishing, 2008. $21.95 The Financial/Economic Crisis January 24, 2010      Not to worry. That is the message we get every day from our political leaders, the economists, the financial media, and everyone in a position of authority. The economy is in recovery. The Great Recession is over.      There are some lagging problems. Unemployment remains very high and is not falling. In the United States, house prices continue to fall, foreclosures are still increasing, and new housing starts are lagging. Commercial p;ropertyh values are in free fall. Retail sales are stagnant. Personal and business lending is tanking. All North American governments are in debt as revenues have been falling. But the stock markets continue to rise, so what else really matters?      However, if anyone mentions that it is time for the governments to stop printing money, the captains of industry and finance quickly proclaim that it is much too early to do that. Mark Carney, head of the Bank of Canada, says it is no time to raise interest rates from their level of one quarter of one percent; the result could be a collapse of the housing market and the onset of a real recession in Canada.      While some economists worry about the threat of inflation, it seems to me that the biggest threat remains the real possibiliy of a prolonged period of deflation, as in Japan. Despite the collapse of manufacturing in Canada, the economy has sruggled along thanks to the major stimulous provided by the federal and provincial governments. George Athanassakos of the University of Western Ontario pointed out a week ago that among the G-7 countries, Canada ranked first in fiscal stimulus as a percentage of gross domestic product. Massive debt by consumers and businesses is what caused the financial bubble that broke in 2008; more spending and debt is supposed to get us out of this mess. Makes sense, eh?      The Canadian Centre for Policy Alternatives pointed out recently that at the beginning of the 2008 recession around sixty percent of Canadian households were in a net debt position. This indebtedness has risen since, reaching an all time high. For every $100 of personal disposable income, each Canadian now carries $145 in debt. In 1990 it was $88.60. Is there a housing bubble in Canada?      No one in any position of authority in Canada is willing to suggest that there might be a housing bubble. But if you look at the charts, as in the Case-Shiller Index and the Teranet survey of six major Canadian cities, you will see that between 2000 and 2008 house prices in Canada balooned almost as much as in the United States. But while there has been a correction in the market in the USA, there has been none in Canada. Can it be that Canada is the only industrialized country where house prices are not out of line?      Yale economist Robert Shiller, and a few other brave souls, have pointed out that over the long run the price of houses has remained closely tied to household income. The economy requires affordable housing, at least for the vast majority. Historically, house prices in the United States have ranged between two and three times total household income. It has been similar in Canada.      This is the basis for the annual Demographia International Housing Affordability Survey. Housing is judged to be affordable when the median price of houses sold is 3.0 or less times the median household income. Quite a few Canadian cities rank among the most unaffordable housing markets in the world: Vancouver at 8.4, Victoria at 7.4, and Kelowna at 6.8. Regina, where the most recent real estate report has the average price of a house sold at $246,000, and with a median household income of $60,000, would have a ratio of 4.1, at the bottom of the "seriously unaffordable" category under the Demographia rating. For Regina, this only tells part of the story. There are fewer apartments to rent today than ten years ago, and there are fewer social housing units than ten years ago.      What of Canada as a whole? In July 2009 the median price of a house sold was reported to be $326,613. Statistics Canada reported the median household income at $44,000. That is a ratio of 7.4. Don't worry. Mark Carney and Tim Flaherty insist there is no housing bubble in Canada.      Why has the price of Canadian housing remained high when there has been a collapse in the USA? The Bank of Canada has kept interets rates, and thus mortgage rates, at an all time low. In 2006 the Conservative government of Stephen Harper introduced no money down 40 year mortgages, reduced in 2008 to 5/35. The Central Mortage and Housing Corporation has been provinding 100% insurance for all the Canadian "subprime" mortgages (those with less than 20% downpayment). The banks have been allowed to dump their risky mortgages on the CMHC, moving them off their books. This makes the banks look really good compared to those in the United States. In turn, CMHC has securitized them into Mortgage Backed Securities and sold them as bonds with 100% insurance from the government of Canada (the taxpayers, of course). CMHC can now hold $600 billion in government-insured mortages. There is no moral hazard in the Canadian mortgage market. November 21, 2009        We are now nearing the end of November and the stock markets are maintaining their pollyanna view of the state of the world economy. In Canada the real estate market has surged again, particularly in the large urban centres. While all the basic economic numbers are weak, to say the least, the public seems to have bought the argument that the Great Recession is now over. The next hurdle will be the Christmas buying season. A poor year for the retail sector will certainly bring another downturn in the stock markets and the economy in general.      While all the people in responsible positions keep up the green shoots hype, this past week there were a number of significant developments:      * The G-20 refused to declare the end of the Great Recession and urged governments to keep spending on their stimuous packages and maintain interest rates near zero.      *In the U.S. housing market, mortgage delenquencies reached an all time high, new residential housing construction was down, mortgage bankruptcies surged higher, and commercial real estate was beginning to collapse. Some economists noted that there will be major defaults in 2010 and 2011 as the Alt-A and ARM mortgages come due.      * The U.S. Federal Deposit Insurance Corporation needs even more cash from the federal government as banks keep on failing.      * Almost all new mortgages in the United States are being insured by Freddie, Fannie and the FHA. They are sitting on a pile of toxic assets and fearful of collapse.      Everyone in Canada of importance says we do not have to follow developments in the United States. Things are different this time. September 12, 2009      All of the important political pundits, government officials, the mass media and the business press have declared that the Great Recession is over and we are now entering the recovery. Green shoots are seen everywhere. The stock market has led the way, with a recovery of around 48% since hitting bottom. The $12 trillion of U.S. taxpayers' money thrown into the markets by the federal government and the Federal Reserve has been a success.      Canada has fared very well compared to the other industrialized economies. Indeed, while U.S. housing prices have fallen and homeowners have lost over $4 trillion in equity, house prices in most of Canada have remained high, near the peak of the bubble. With record low mortgage interest rates, and schemes for no money down mortgages again insured by CMHC, first time buyers are plunging into the market.      It is only the economists and political economists outside the mainstream who are still not convinced that we are in a recovery. Many of these dissenters whose blogs I read still believe we are in a long term bear market and the future will more likely be a period of stagnation if not deflation and/or depression.      Canada, of course, is deeply integrated into the U.S. economy. What happens in the United States inevitably has a major impact on the Canadian economy. Despite all the optimism we hear and read in the mainstream media, outsiders like myself are still very skeptical. For example, how can house prices collapse all across the industrialized world and not in Canada?      It is important to remember that the betting on the stock markets has little to do with the real or productive economy. Consumer spending now accounts for almost 70% of U.S. gross domestic product. Thus we should pay attention to the fact that while U.S. consumer confidence has risen in recent weeks due to the media/political hype, household income is declining as hours of work and pay decline, retail sales are still stagnant, unemployment is still rising, and bank lending is still declining.  U.S. house prices are still falling, and U.S. (and Canadian) household debt remains very high at 125% of disposable income.      In the United States (and Canada) government revenues are falling. Federal, state and municipal governments face large deficits and the need to borrow money and raise taxes. U.S. state and municipal governments are radically cutting jobs. Interest rates will have to increase as governments around the world seek to borrow money to fund their services.      We are now approaching October, traditionally the worst months for the stock markets. Another major decline on Wall Street would quickly convince consumers that we are not on the road to recovery.      Then there is the elephant in the room. The mountain of debt created in the economy since 2000 remains as high as ever. The major change has been to shift this debt from the private sector to the public sector, where it is to be covered by the taxpayers. Economists used to call this a "moral hazard." We see it in the Canadian housing market today, where realtors and lenders are giving people mortgages when they could not possibly afford them if interest rates rise above the 3% level. CMHC (the taxpayers) are insuring these very risky loans. Few want to be reminded of the fact that mortgage rates in Canada averaged 8% over the past twenty years.      One of Canada's best known economists is David Rosenberg, former chief economist at Bank of America/Merrill Lynch. He points out that the current rally in the New York stock markets parallels the bear market rally that began on November 12, 1929 and rose 47% over the next five months. Of course, the stock markets then began a long downward trend, characterized by a number of other bear market rallies. Could we be seeing a repeat?      If you are interested in looking at this in more detail, I would recommend: Barry Eichengreen and Kevin H. O'Rourke, "A Tale of Two Depressions," published on VOX on July 4, 2009.  http://www.voxeu.org June/July, 2009      All eyes  these days are on the stock markets. There is presently a Bear Market Rally, but this is in the middle of what is now called the Great Recession, a world wide phenomenon. The political, business and media elite are all praying for a bottom. Endless talking heads wonder how much of the taxpayers' money (and those of future generations) will have to be thrown at the banks and other financial institutions before they will start lending. But housing prices are still falling, unemployment is still rising, and there is still negative economic growth. But to read the headlines in the business media these days, one would get the impression that the bottom has been reached and that we are well on the road to recovery. Everyone in authority is assuming that we can just return to the debt-financed boom from 2001-2007.      However, most of the large financial insititution are in deep trouble. Locked away in their vaults, hidden from the public, are all those strange derivatives which appear to have little or no market value. When some of them were put up for auction in the Lehman Brothers' collapse where they got 9.5 cents on the dollar. The Bank for International Settlement in its third quarter 2008 report estimated that there were $79 trillion worth of derivatives held by financial institutions around the world. This Ponzi scheme has collapsed, and the financial experts in Japan warn that there is little likelihood of any real recovery until the "toxic assets" are purged. In January 2009 the Organization for Economic Co-operation and Developed proclaimed that a world economic recovery would likely be drawn out far longer than necessary because the governments of the industrialized capitalist states, beginning with Great Britain and the United States, failed to clear out the bad assets in the banks before throwing capital from the taxpayers at them. Today, we are told that all this has been resolved. Accounting rules have been changed to allow the U.S. banks to carry mortgage assets at their original value rather than the present market value. Barrack Obama's economic team      Meanwhile, President Barrack Obama installed his economic and political team. They are overwhelmingly from the old Clinton administration. His 17-member economic advisory group all have a deep involvement in building the financial bubble that has now broken. His Secretary of the Treasury is Timothy Geithner, recently head of the Federal Reserve Bank of NYC. He was intimately involved in all the Bush administration bank bailouts. It was the Clinton administration, and the Labour government of Tony Blair, the "New Democrats", that deregulated the financial markets, refused to provide any regulatory structure for the derivative markets, and brought on the storm. Yet we are told that they know how to fix the problem. Throw trillions of tax payers' dollars at the largest financial institutions and bail out the automotive sector.      A great many Americans are going to be deeply disappointed with the Obama administration. In the economic and financial areas it has been just more of the same. After all, Obama and the Democrats in the Congress strongly supported the original $1 trillion bailout of the U.S. banks in the fall of 2008 while George W. Bush was still president. The $800 billion fiscal stimulous emphasizes tax cuts and spending on building roads and bridges. This approach will be ineffective. History shows that whenever there has been a financial bubble, the highly leveraged debt has to be cleared. Households, well overextended by their debt, and facing rising unemployment, will try to pay down debts and start saving once again. This will further depress the economy.      On the positive side, the financial and economic crisis may force the new Obama administration to cut back on U.S. military adventurism around the world. But it is not encouraging to see that the new president has surrounded himself with a pack of war hawks, beginning with Joe Biden, Hillary Clinton and Robert Gates. The war in Afghanistan is being increased and has been taken into Pakistan. President Obama asked the Congress for the largest military budget in world history. The U.S. will maintain a very large military contengency at their permanent bases in Iraq. It is amazing to me how many people still hope that the new president will bring significant change from the Bush administration. Understanding the Great Financial Crisis by John W. Warnock    Act Up in Saskatchewan December 18, 2009     According to our political and business leaders, as well as the main stream media, the Great Financial Crisis of 2009 is ending. Green shoots of recovery are seen everywhere. But by now we all know that the key to preventing a depression has been the bailout of the large financial institutions by taxpayers. The U.S. government will run a deficit of $1.4 trillion this fiscal year. Stephen Harper’s government will have a deficit of around $55 billion.     But what is going to happen in 2010? How are governments going to pay for all this debt that they have created? Will there be rampant inflation? Governments can’t just print money – except in Zimbabwe.     Economists and other defenders of the status quo insist that the crisis was caused by bad investment decisions by individuals, corporations and financial institutions. This was particularly true in the housing market. They insist that there is nothing really wrong with the free market and free trade economy. But others want to know why the British and American governments were so committed to defending the big banks and doing so little for main street. This requires a deeper look at the cause of the financial and economic crisis. Deregulation and privatization     How could the financial crisis happen? The usual answer is that since the election of Margaret Thatcher in 1979 and Ronald Reagan in 1980 all governments have been following policies of privatization and deregulation. Tony Blair and Bill Clinton pushed this change of policy. They deregulated the banking industry and refused to introduce any government regulation of the new complex derivative markets. It was these pyramid or Ponzi schemes, built on highly leveraged debt (up to 50 to 1), which brought the system down. Moderate reformers now say we need to re-establish government regulation. Financial euphoria and bubbles     A number of political economists, like Canada’s John Kenneth Galbraith, have pointing out that “financial euphoria” or “irrational exuberance” by investors has been a consistent theme of capitalism since the founding of the first stock market in The Netherlands and “tulipomania” in 1630. The recent housing bubble in the United States was just one of hundreds of examples. Land speculation has been particularly common in the United States.     Galbraith and his followers stress that the bubbles all have a common root, speculators trying to capture windfall profits. In recent years the process has often been accompanied by some new financial instrument, like the junk bond used for leveraged buyouts, hedge funds or the inscrutable derivatives of the most recent bubble. The key is that they are all highly leveraged. In 1929 anyone could gamble in the stock market casino with 10% down and the rest borrowed, paying 7 to 12 percent interest. The housing bubble     The recent bubble in the U.S. housing market is a classic example. Robert Shiller, the Yale economist whose name is attached to the Case-Shiller Index on housing, points out that the 85% increase in the average price of a U.S. house over the boom period from 1997 to 2006 was far out of line with historic prices and well beyond the ability of mainstream Americans to finance. As with all financial bubbles, this balloon has to deflate back to the real world of affordable prices. In December 2009 the U.S. market was about half way there.     This adjustment has yet to happen in Canada. Historic low interest policies pursued by the Canadian government, and the decision by the Central Mortgage and Housing Corporation to guarantee all mortgages, and to sell mortgage bonds with 100% taxpayer backing, have helped keep the Canadian housing market at a high bubble status. Is it possible for Canada to be the only industrialized country where the housing bubble does not burst? The broader picture of Monthly Review     But this crisis is not just a result of human greed, lack of government regulation, or the corruption of the people in the system. It is not just another business cycle.     During the recent boom the financial institutions made enormous profits. The financial system as a whole has grown significantly in relationship to the real or productive economy. As Paul Sweezy of Monthly Review projected in Monopoly Capital (1966),  mature capitalism sees a dramatic increase in the role of finance, insurance and real estate (FIRE), a process called “financialization.” The mature capitalist economy     John Bellamy Foster and Fred Magdoff, in The Great Financial Crisis (2009), provide us with the analysis of the Monthly Review school of political economy.  When capitalist economies reach a mature stage, stagnation sets in. Capital accumulation is further accelerated as taxes on corporations and the rich are reduced. But at the same time profitable investment outlets for this capital are diminished.     In the expansion phase of capitalist economies, industry and urban economies are rapidly developed. But once modern industrialization has occurred, the economy is left with only the need to basically replace what has been built.     Mature capitalist societies are characterized by large corporations, monopoly and oligopoly, and the concentration and centralization of capital. Competition is not in the area of price but in the sales effort, the creation of the throw away economy, conspicuous consumption. Karl Marx called this “commodity fetishism.”     Since the end of World War II the United States has to a large degree been able to offset this tendency towards stagnation by massive government spending in the military area, financed by large government deficits. But this has also reached a peak. The push since the 1980s for international free markets and free trade has been an attempt by big capital to find new investment opportunities in less developed countries.     Foster and Magdoff argue that the current bubbles could have been deflated by the U.S. Federal Reserve Board. But both Alan Greenspan and and his colleague Ben Bernanke were against doing this as it could have brought down the whole U.S. system. Following the New Economy (or dot com) bubble and collapse in 2000, interest rates were steadily reduced and the bubble was transferred to the housing market. For the defenders of monopoly capitalism, there did not appear to be any acceptable alternative. Where are we going now?     One of the central arguments of Foster and Magdoff is that the crisis of mature capitalism cannot be contained by new systems of regulation. Indeed, they point out that in all the economic and financial crisis over the last thirty years, the response of governments was further deregulation. The last hope for saving the present system has been the use of the central banks as the lenders of last resort, pouring taxpayers’ money into the system to try to prevent a depression.     The Great Recession is a turning point. Despite the hope of the U.S. and Canadian political and economic establishments, we cannot go back to 2007 with its highly leveraged corporate, financial and household debt. For many basic industries, like steel and automobiles, there is world overcapacity. Thus the future for the mature capitalist economies is most likely to follow that of Japan after the collapse of their financial and real estate bubbles in 1989: long term deflation if not depression. As this trend develops on a world wide basis, it will be time for people to once again mobilize, as they did in the 1930s, to create a different political economy. John W. Warnock is a Regina political economist. NOTE: The following is an extract from John W. Warnock, Saskatchewan: The Roots of Discontent and Protest. Montreal: Black Rose Books, 2004. Political economy and economics The limitations of mainstream economics       The discipline of economics assumes that our economy is a “market economy” of individuals competing with each other for goods, services and employment. But there is no indication whatsoever that there are any differences between these individuals, between men and women, whites and Aboriginal people, those who come from poor families and those from well off families, people born and raised in Canada and immigrants, those who are physically fit and those who are disabled, etc. There is no indication that the structure of our society gives some people advantages that others do not have. Women work very hard on Saskatchewan farms, so why is farm ownership overwhelmingly in the hands of men? How is this dictated by the free market?     Economics today makes no mention of wealth and power. Indeed, William Scarth’s text, Economics: the Essentials, used widely at the University of Regina, does not once use the terms “wealth” or “power.” Mark Lovewell’s text, Understanding Economics, also used at the University of Regina, does not mention “power” and uses “wealth” only to point out that different households have different amounts of accumulated savings. When you compare these two books to John Porter’s Vertical Mosaic; an Analysis of Social Class and Power in Canada you would think they were describing different planets. Porter’s book is soundly based on empirical data. It clearly demonstrates that some people have wealth and power and others do not. Canada is a very unequal society. (Scarth, 2000; Lovewell, 2002; Porter, 1965)     Economics as it is taught today has no history. Its time frame is limited to the present. There is no discussion of the Great Depression or how Canada was organized during World War II. There is no discussion of colonialism and imperialism. For example, in 1530 the Aztecs, Maya and other peoples of Mesoamerica were among the most advanced civilizations in the world. Their standard of living was well above that of the average European. Today what remains of these indigenous nations are among the poorest people in the Western hemisphere. In Mexico today the gross income and wealth inequalities are also reflected in an informal but dominant pigmentocracy: the descendants of the Spanish with their white skin are people of privilege and power. Those at the bottom of the social and economic hierarchy are the indigenous populations with their dark skin. How did this happen?  What did it have to do with the free market economy?     All the economic texts start with a given: we have limited resources and endless wants. Douglas Dowd opened his latest book with the following observation:     “As the twentieth century ended, two sets of economic facts stood in stark and disturbing contrast. First, for the first time in history, existing resources and technology taken together had made it possible for all 6 billion of the earth’s inhabitants -- now or within a generation -- to be at least adequately fed, housed, clothed, educated and their health cared for. And second, instead, well over half of that population was malnourished (with numerless millions starving), ill-housed, ill-clothed, ill-educated, in precarious health, and stricken by infant mortality rates and average life-spans belonging to the era of the     early industrial revolution -- when there were no more than 2 billion people.” (Dowd, 2000)       There is, of course, a fundamental problem with the unequal distribution of income and wealth. Many people experience “scarce resources” because they have very low incomes while others do not know what to do with all their money. But Dowd was also pointing out that there is no real scarcity. Scarcity, he argues, is primarily created by the irrational system of capitalism. There is tremendous waste in the system of production and distribution. And it is massive advertising and sales campaigns which create endless “wants.” To survive, capitalism must constantly grow, it cannot exist in a steady state economy. It is a given that capitalism cannot create a society based on equality. It is also a given that it cannot create a society based on sustainable development. (See O’Connor, 1994) Economic Man     Economics starts with the premise that there is and always has been “Economic Man.” It assumes that the core of our being as humans is the pursuit of self interest. This is what economic theorists today call “rational choice theory.” If so, then this must have existed for all human beings around the world and across time. But is this theory based on empirical knowledge or is it just an ideological supposition?     Human beings have always lived in communities. Contrary to what the early liberals proposed in their defence of capitalism, there was never a time in history when human beings lived like Robinson Caruso. They cannot develop without the support of other human beings. Children who are raised in feral conditions often cannot even learn to speak when placed in a community situation. Our knowledge and values are absorbed from our communities. All human beings as individuals are a product of their community. In fact, individualism as we know it was not possible before the capitalist industrial and urban revolution. Only in a society with a complex division of labour is individualism possible.     Furthermore, it is clear that people put a high priority on values other than pursuing their own self interest at all times. Human beings have a close and primary commitment to their families. Most people seem to place a very high priority on their sexual relationships. Many people make commitments of loyalty and support to friends. The evidence suggests to me that people prefer to live in communities of like people who share as a minimum their mother language. Many flee to other countries out of desperation, but they lament the loss of their homeland. In these important relationships people place values of love, commitment and solidarity above the values of Economic Man.     Economist Karl Polanyi has had considerable influence on Canadian political economists. His research was on economic systems in pre-capitalist societies, and he relied primarily on the work of anthropologists. He reminded us some time ago that “prior to our time no economy has ever existed that, even in principle, was controlled by markets.” Gain and profit made on exchange “never before played an important part in human economy.” The market for goods existed in all pre-capitalist economic systems. But it was quite marginal to the existence of human society. Market mentality did not exist. The primary concern of early peoples was family, kin, community and nation. Value systems stressed security and the preservation of the group. Reciprocity, sharing and redistribution were the norm, and trading was based on barter of roughly equivalent goods, not gain. The “market economy” and its value system did not exist. Nor did Economic Man.  (Dalton, 1968) The concept of economics     The term “economics” has a Greek origin. It was defined as “the art of household management.”  Aristotle’s Politics deals with economic questions. For him, economics went from household, to village, to city, and to state. If we move to the modern period, James Steuart wrote in 1761 that “economy is the art of providing for all the wants of a family, with prudence and frugality.” He went on to add that “what economy is in a family, political economy is in a state.” Adam Smith, in The Wealth of Nations, argued that “political economy is a branch of the science of a statesman or legislator.” Following Turgot, Smith argued that political economy was the study of  “the nature and causes of the wealth of nations.” From the very beginning of social science in Europe what we now call “economics” was known as “political economy,” a recognition that it was much more than just individuals buying and selling in the private market. Political economy was the process of production and distribution of wealth within the boundaries of national, territorial states, some even with elected governments. (Chattopadhyay, 1974)     James Caporaso and David Levine argue that political economy emerged in the eighteenth century “to help people understand and cope with a dramatic change in the system of want satisfaction, both in the nature of wants and in the manner of production and distribution of goods for satisfying them.” The term “economics,” as used by the Greeks, focused primarily on the household. Political economy emerges as an analysis of “the management of the economic affairs of the state.” In pre-state societies, economic links were to family and kinship. This changed with the development of the modern territorial state. As they note, “the boundaries of want satisfaction are now political,” and responsibility resides in the public authority. (Caporaso and Levine, 1992)     In addition, political economy is identified with the rise of capitalism as the dominant mode of production. Capitalism first replaces feudalism in Europe and then spreads around the world conquering and replacing other ancient modes of production. From the beginning the focus of political economy was on the rise of capitalism. As it is taught in universities in Great Britain and continental Europe, political economy includes economics, politics, history, sociology and anthropology. It is an integrated approach to studying human social problems. Following the British tradition, Canadian universities originally had departments of political economy which included economics, politics, sociology, anthropology and sometimes history. It set forth an alternative approach to social analysis, one that is much more productive. Bailing Out the Banksters: How Much Is Enough? By John W. Warnock Act Up in Saskatchewan March 13, 2009     According to the Wall Street Journal we are now in an Obama Bear Market, as the equity markets have fallen by 20% since the new president took office. Bloomberg, the source of all real news for investors, recently calculated that since last October the Bush and Obama administrations and the U.S. Federal Reserve have pledged $8.5 trillion in various bailout programs for banks and corporations as well as the commitments to government economic stimulus. Yet there is no sign yet of any bottom to the decline in markets nor is there any indication that investors and the public have any confidence in the state of the banks. The market price for homes continues to fall. The news in the real economy continues to be uniformly bad. The Great Recession marches on.     All of this is of great concern to Canadians. In spite of polyanna propaganda from our government and business leaders, we all know how deeply we are tied to the United States. Under the so-called “free trade agreements,” Canada has become the northern colony in Fortress North America, even more dependent on trade with one country. Foreign ownership and control of our largest corporations has increased. We have become more dependent on exporting unprocessed raw commodities. By boosting our reliance on trade, our business and government leaders have made us more vulnerable to global financial and economic shocks. Financial euphoria is a recurring phenomenon     The present world financial and economic crisis is generally blamed on the development of bubbles in the U.S. financial markets, housing, and natural resource commodities. But this is nothing new.     John Kenneth Galbraith, the renowned Canadian economist and Harvard professor, warned us that speculation in commodities, land, other property, markets and get-rich-quick schemes have been with us since the earliest formation of the modern stock market in Amsterdam. In the early 17th century there was tulipomania in1630, John Law’s Banque Royale bubble in France which collapsed in 1720, and the pyramid scheme associated with London’s South Sea Company, which also collapsed in 1720.     In all the bubble schemes there is the formation of some new financial innovation which is used to create a mountain of debt backed by limited real assets. Galbraith wrote extensively on the Florida land bubble in the 1920s and the U.S. housing bubble in 1923-26. The stock market bubble which broke in 1929 was built on leverage, where investors could purchase stocks on a 10% margin while paying an interest rate of around 12 percent. Goldman Sachs was there as a key promoter. Bubbles in recent history     The collapse of the stock market in 1987 was the result of the introduction of the junk bond used for leveraged buyouts of other corporations. The New Economy stock market crash in 2000 was the result of the wild speculation in the fabulous new dot com companies. The crash of 2007-8 was due to the shift in speculation from the stock market into the North American housing market and the development of the new mortgage-based securities and credit default swaps. These derivatives were all based on heavily leveraged debt. The common pattern     As Galbraith points out, there are common characteristics of all of these flights of irrational financial euphoria. There is first of all a promise that investors will be able to make money without having to do any work in the real economy. They are also promised  a rate of return which exceeds the normal return on investment in productive enterprises. It is quite normal for these pyramid-type investments to be promoted by prominent businessmen, financial institutions, the mass media, and respected economics professors.     There are always warnings from a few quarters. But these are not welcomed; they are denounced, and ignored. Galbraith, writing in 1990, concluded that it took about 20 years for the general public and investors to forget the last disaster. But this obviously has not been the case in recent years, with the collapse of the market in 1987, again in 2000, and now in 2007. As with the current housing bubble, it is always assumed that the market for the product will go up and stay up indefinitely. Historically, the financial bubble has not petered out with a whimper but collapsed with a bang. The desire to hide the real causes     When the collapse happens, the realities of the capitalist market will be ignored. There is an attempt to blame it all on a few dishonest individuals, bad management of the business institutions in question, or a failure of government to step in and protect the unwary investors.            Today, all governments, business leaders and the mass media are trying desperately to maintain the general debt bubble. In this they have all agreed to keep the public from learning just how insolvent the banks are. Indeed, there is even great pressure to change established accounting rules so that financial institutions can carry their trillions of dollars of  “toxic assets” at their face value rather than at the price they could bring in the market.       What is the real cause of the present financial and economic downturn? Few can find the answer as there is no discussion of the issues of overproduction and excess capacity on a world scale, the impact of the dramatic increase in the inequality of income and wealth both within countries and between countries, the fact that for most workers real wages have not increased over the past fifteen years, and that the increase in household debt is largely due to these factors. A few have pointed to the decline in the real economy of the production of goods and services in North America and the rapid rise of the role of the unproductive sectors of finance, insurance and real estate. But none of our governments or political leaders want to take on the issue. In the world of Anglo-American capitalism, our political leaders warn of the “dangers of a return to over regulation.”     In the meantime, investors have fled the markets seeking to protect their remaining capital in U.S. government bonds. There is a serious bubble building in this market. At the same time the U.S. government is printing money as fast as they can. If investors, including major Asian countries, lose confidence in the ability of the U.S. government to manage this crisis, the bursting bubble of the U.S. government bond market will certainly bring on a world depression. When this happens  the general public will be demanding new solutions. John W. Warnock is retired from teaching political economy and sociology at the University of Regina.     U.S. Election: Polyarchy, Not Democracy November 2008.      The mass media insisted that U.S. citizens only had a choice between Barrack Obama and John McCain in the election on November 4, 2008. The candidates from the other parties were completely ignored. While Obama, the candidate of the Democratic Party, claimed he is for change, what do we see? The Democrats strongly supported George W. Bush's war in Iraq and promise to send even more U.S. armed forces to Afghanistan. The Democrats in the Congress have supported all the "War on Terror" legislation which subverts historic civil rights..      Now in the financial crisis, it is the Democrats who pushed through the legislation to bail out Wall Street, over the opposition of a majority of the Republicans in the House of Representatives. Obama went to Washington to lobby Democrat Members of Congress to support the bail out. During the campaign, Obama accepted more money from Walll Street banks than McCain, had the support of far more corporate CEOs, and was endorsed right at the beginning of the nomination process  by the Wall Street Journal. Overwhelmingly, his important designated appointments are from people who had key positions in Bill Clinton's administration. How can we make sense of this?      Joseph Schumpeter, the Austrian economist who taught at Harvard University  for many years, put it very clearly in his widely read book, Capitalism, Socialism and Democracy. Democracy was historically seen as government "of, by and for the people," with rule from the bottom up. Instead, what we find in the United States is polyarchy, where citizens are given a opportunity every four years to choose among two candidates who both represent the political/economic elite. Citizens can only select which of the representatives of the two parties will rule over them. The leaders of the two parties are selected by the economic and political elite who control the system. Schumpeter argued that the ideal of democracy was in direct contrast to the reality of actually existing liberal democracies, the current institutional form. The state of democracy in the advanced countries mirrors that of capitalism in practice, rule through a command system, from the top down. Schumpeter preferred elite rule and opposed popular, participatory democracy.  In the USA today, Schumpeter rules. The Canadian Election -- October 14, 2008 Canadians went to the polls on October 14, 2008. The result was what everyone predicted. Prime Minister Stephen Harper and the Conservative Party received the most votes (38%) and the most seats (143) but did not win a majority. The three opposition parties have 12 more seats than the continuing minority Conservative government. The biggest loser was the Liberal Party. Their leader, Stephane Dion, is expected to resign shortly and a new leadership contest will be launched. One of the major contenders is Bob Rae, former NDP premier of Ontario. If he is selected leader, as many pundits predict, it is expected that he would work closely with the NDP and the Bloc Quebecois in the House of Commons. Many people believe that a coalition of some sort would be worked out, and they could then replace the Conservatives as the government of Canada. Given that the centre-left opposition parties received 62% of the vote, this outcome would be widely supported outside the circles of power. But the business interest in the Liberal Party will oppose such a political course. They will be supporting Michael Ignatieff or John Manley. Following the trends in other advanced capitalist countries, the turnout for the election was low, only 59% of those on the federal voters' list. In fact, it was the lowest in Canada's history. Many Canadians are not on the official voters' list. In Saskatchewan the Conservatives won 53% of the vote and 13 of the 14 seats. Voter turnout continued to fall in this province, down to 59%. The New Democratic Party saw its vote continue to slide, falling to 107,289. The vote for the NDP in federal elections peaked in 1988 at 232,000. The vote for the NDP has also been steadily  falling in the provincial elections. In 1991 the NDP received 275,780 votes, or 51% of the total cast. In 2007, when the NDP lost the election, they received only 168,704, or 37% of the votes cast. Voter turnout has also been steadily falling in the provincial elections; only 57% of eligible voters (18 and older) turned out in 2007. Lorne Calvert has stepped down as leader of the provincial NDP and a leadership convention is to be called. One wonders why the NDP refuses to ask the important questions:  "What has happened to our base of electoral support? Why has our party membership dropped from 40,000 in 1991 to 8,000 in 2008? Why has the voter participation rate fallen so low in ridings where we have been historically strong?"   Saskatchewan NDP Suffers Major Defeat November 8, 2007    Saskatchewan wet to the polls on November 7, 2007. The Saskatchewan Party won 37 seats and the NDP only 21. In the popular vote, the Saskatchewan Party won the support of 51% of those who voted and the NDP only 37%. In the 2003 election the NDP won 44% of the vote and a majority of two seats. The Liberal Party did not win a seat and saw its percentage of the vote fall from 14% to 9%.  The Green Party of Saskatchewan fielded 48 seats, winning around two percent of the vote.      In the last two provincial elections the turnout of eligible voters had fallen dramatically, from the traditional 80% range to  only 57% in 2003. In this election it rose to 60%. This is not well known in the province as Elections Saskatchewan reports figures of those who are actually enumerated. In recent years the province has done a very poor job of enumerating voters, especially in the inner cities. Thus the turnout was 75% of enumerated voters. But in some ridings, like Regina Elphinstone Centre, less than half of the eligible voters (those 18 years and older) are enumerated.      Why did the NDP suffer a major defeat? They had been in office since 1991. Over that period of time they  systematically shifted their political direction to the right of centre. This alienated their traditional supporters. For example, in 1991 they won a majority of the seats in the rural areas. But over the years in office they introduced a range of austerity policies which have hurt people in rural Saskatchewan. In addition, they have consistently supported agribusiness interests against the farmers which traditionally supported them. The chickens finally came home to roost. They lost every rural seat.       The NDP government also became the partners of the large transnational corporations which totally dominate the resource extraction industries. They cut royalties and taxes while sales and profits were rising dramatically. In contrast, the Conservative government of Newfoundland raised royalties and won a landslide victory. In Alberta the Conservative government is also going to raise royalties, a move which public opinion polls show is popular. If Lorne Calvert's NDP government had done the same in Saskatchewan, they would also have won a significant victory. They were urged to do so by their party members. But in the end the NDP government determined that their first priority was to support the interests of big international capital. Richard Heinberg: “How Will You Heat Your Homes in Saskatchewan?” By John W. Warnock November 30, 2006 http://www.actupinsask.org     Last night 350 people braved the cold in Regina and went to hear Richard Heinberg, one of North America’s top experts on the oil and gas industry. He presented data showing the disappearance of oil and natural gas on a world wide basis and in particular in North America. He pointed out that the best geological research in Canada predicts a fairly rapid decline in natural gas production in the Western Canada Sedimentary Basin. He asked: “What are people in Saskatchewan going to do as the supply of natural gas declines and prices start to dramatically increase?”     He is dead right on this. In October Natural Resources Canada released its new study: Canada’s Energy Outlook: The Reference Case 2006.  While predicting the demand for natural gas to steadily increase by around 1.2% per year, they expect that conventional natural gas production will peak in 2006 and then start to decline. The extraction of coal bed methane gas will increase, but it cannot begin to replace the loss of conventional natural gas.     Shipments of natural gas to Eastern Canada will have to decline, hopefully replaced by imports of liquified natural gas (LNG).  The Mackenzie Valley Pipeline will be built and this gas will be available for customers on the prairies. But Natural Resources Canada ignores the fact that all of this gas is expected to be used to expand the extraction of tar sands oil, to be exported to the United States.     So what are Canadians going to do? Natural Resources Canada projects that net exports of natural gas to the United States will decline from 3,700 billion cubic feet in 2005 to 1,300 billion cubic feet by 2020. As Heinberg reminded us last night, there is the unpleasant fact of the proportionality sharing clause in the North American Free Trade Agreement (NAFTA). This states that Canada cannot reduce its exports to the United States below the average of the most recent three years. We are dreamers, he suggested, if we believe that the U.S. government will be willing give this up. The production treadmill     If you ask anyone in the NDP government, or the opposition parties, they will say that the oil and gas industries are booming in Saskatchewan. We have never had it better. We have good reserves of heavy oil. Bids for exploration and development are rising. Many more natural gas wells are being drilled. But what does this really mean?     Between 1995 and 2003 natural gas production in Saskatchewan reached a production plateau, averaging about 285 billion cubic feet per year. But over that period the number of new gas wells drilled rose from 268 in 1995 to 2314 in 2003.     This follows the pattern of peak oil and gas seen in the United States and elsewhere. As we run out of natural gas, many more wells have to be drilled just to maintain existing production. New wells produce for a much shorter period, now with 50% of total production occurring in the first year. In Saskatchewan regulations used to specify that only one well could be drilled on every section of land. Now in the Hatton district in the Southwest corner of the province, the norm is between four and eight wells per section, and in special cases permission is given to drill twelve.     This is not an oil and gas boom, it is a sign of a collapsing industry. The rapid increase in the drilling of such marginal wells is only made possible by the existence of monopoly or excess profits, which have occurred over the past three years. Oil and gas corporations are awash in retained earnings and have relatively few places to invest to rebuild their reserves. Of course we are all paying for this through the tripling of oil and gas prices over the past three years.     Heinberg stressed that we need to press hard on this issue. Around 80% of us have natural gas heating. Natural Resources Canada projects that between 2005 and 2020 the production of natural gas in Saskatchewan will decline by 75%. This fact seems to have escaped all of our local politicians as well as those people in charge of Sask Energy and Sask Power. What are the alternatives?     There are good alternatives, which Heinberg outlined. We know them from the studies done by the Saskatchewan Energy Development and Conservation Authority, before it was abolished by the NDP government in 1995. It starts with serious conservation programs, the promotion of energy efficiency, and the introduction of demand management programs. We have excellent wind and solar potential. Biomass in the North can provide heat and electricity. Burning coal for electricity can be reduced through the progressive introduction of switchgrass and fast growing trees, which are planted on marginal land and do not take away from the production of food. Geothermal heating can be greatly expanded. Electricity can be used to support transportation by public transit and trains. Automobiles can be built that are much more efficient. But all of these options take time to develop. When the crunch comes, as it certainly will, we can have rationing, as we had in World War II. But given the current political climate, most likely we will get rationing according to ability to pay.     Peak oil and gas is occurring right as we are beginning to experience the cost of fossil fuel development: greenhouse gas emissions and climate change. Heinberg stressed that we will have to reduce our general consumption levels and start to produce food for local consumption. The looming crisis requires a decentralization of energy production to local communities, not new centralized “clean coal” megaprojects. North American integration, pushed hard by President Ronald Reagan and Prime Minister Brian Mulroney, is the wrong approach in a period of uncertain climate. What would happen in Saskatchewan if we had an ice storm in the winter and much of the province had no electricity for days?     As we found out in the last municipal election, there is little concern over these very important developing issues. Business as usual prevails in all the corridors of power. We continue to build larger houses for smaller families. Urban sprawl, dependent on automobiles, marches on. The giant box stores and chains, so admired by our local politicians, promise us that everything we need can be supplied from China or Vietnam. As Heinberg argued, it is time to start thinking about the future we are giving our children and grandchildren. John W. Warnock is the author of Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public, available on line at the Canadian Centre for Policy Alternatives. Canada's Incontinent Energy Policy Briarpatch Magazine, Volume 35, No. 1 February 2006, pp. 14-16. by John W. Warnock Extract:     Oil is a natural resource in a category all its own. Ever since the invention of the internal combustion engine, oil has been - quite literally - the fuel that fires economic growth. Transportation, agriculture, manufacturing, large cities - none could exist in their current form without oil. Indeed, the entire global economy as it is currently constituted would simply grind to a halt withlout it.     The global struggle to control the resource began as soon as the British Empire switched it fleets from coal to oil, signaling a profound shift in the imperial powers' strategic priorities. The United States had plenty of domestic oil reserves, but Great Britain, France and the other European powers needed secure supplies from the major oil fields in North Africa, the Middle East, Asia and Latin America. In the struggle among the imperial powers, and between the advanced capitalist states and the colonized Third World (where most of the world's reserves were and still are located), First World governments and the largest oil companies worked closely together to gain and maintain control of strategic reserves so as to ensure a ready supply of cheap and secure oil. Recent wars in Afghanistan and Iraq - which are widely condeded to have been wars over control of oil - are merely the last moves in this grand game.     With global reserves nearing peak production, and world-wide demand continuing to grow at an alarming rate, the stakes of this game have risen significantly in recent years, and Canada's role in America's energy wars has become increasingly evident. Canadian policy has stressed ownership and control of the oil and gas industry by large corporations that have enjoyed very high profits. Rather than developing this strategic industry in a sustainable way to benefit present and future generations of Canadians, federal and provincial governments have chosen to support the policy goals of the U.S. government by steadily increasing our exports to the United States. As a result, Canadians now face the grim prospect of higher and higher fossil fuel costs, with virtually no infrastructure of sustainable energy alternatives. *          *          *          *          *          *          *          *          *          *          *          *          *          *          *          * The current situation     So how do things stand today? Canada produces around 3.2 million barrels of oil per day. We export around 1.65 million barrels per day to the United States. Since Canadians consume 2.3 million barrels per day, the balance has to be imported. According to the U.S. Energy Information Agency, Canada has the lowest royalties and taxes on oil of any producing area in the world. Thus, when there are huge windfall profits from high oil price rises unrelated to costs of production, as has occurred in the past year, the oil corporations take almost all of the increase.     Meanwhile, conventional oil is drying up on the Canadian prairies. Production peaked in 1971 and has steadily declined since then. In 1994 producing wells delivered on average around 30 barrels per day; this fell to 18 barrels by 2003. New fields are smaller. Fewer wells are being drilled. As they say in the industry, "the fruit on the bottom of the tree has been picked." Our cheaper oil has been exported and we will now have to depend on more expensive, harder-to-extract oil - which, incidentally, we are also bound by NAFTA to export. *          *          *          *          *          *          *          *          *          *          *          *          *          *          *          *     Canadian oil and gas policy has served, and continues to serve, the interests of the oil companies and the U.S. government. It has propped up the U.S. economy by keeping U.S. oil and gas prices artifically low.. It has brought enormous returns to the owners and shareholders of the private corporations. As a capital intensive industry, it has brought well-paying jobs to some areas of Canada as well as significant revenues to the government of Alberta and, to a lesser extent, other provinces. But as prices for oil and gas continue to rise, and supplies dwindle, Canadians will come to realize that oil and gas integration has left them out in the cold; short-term gains for some have come at the expense of long term pain for the great majority. John W. Warnock, a Regina political economist, is preparing a report on the oil and gas industry in Saskatchewan for the Canadian Centre for Policy Alternatives. For the complete text of this article see:  http://briarpatchmagazine.com/news/?p=109