Germany and their inflation phobia

We are and have been in the middle of a period of economic uncertainty. A lot of experts have warned that a double dip recession is a possibility and the ones that don't believe that, still agree that economic recovery in the industrialized world has been very slow since 2008.

The US was the main focus of the recession that started in 2008, despite the involvement of many other nations in its development. While the US is still a very similar country in terms of economic policies to what it was in 2008, this time around economists have indicated that economic instability for the next recession is likely to come from the EU. Countries like Greece, Spain and Portugal are some of the main problem nations, but there are a lot of other trouble makers as well. However, not all countries in the EU are in trouble, which may be the only reason their economy hasn't collapsed yet. Germany has had a strong economy for many decades, and despite the economic events in recent years, the nation still boasts of fiscal responsibility and economy stability.

Recently, as expected, a lot of the troubled nations have been approaching Germany for loans and other forms of help. Not only that but they have also been asking for help from the European Central Bank. One interesting bit of information about this central bank is the conditions in which it was created. Back when European nations decided a centralized bank would be a good idea, Germans were very hesitant, so in order to go ahead with the creation of the ECB, a clause in the contract said that the ECB could not engage in quantitative easing. This was a main condition in order to keep Germans comfortable with this unification.

The European systemic instability that we have been seeing has led some countries to ask the ECB for help, even though the help they are asking for is prohibited. The other interesting aspect of this story is the reason why Germany is so reluctant to allowing the central bank to print money.

This goes back to the 1920's and it has everything to do with inflation. After WWI the german government was in a lot of debt, so they had to borrow a lot of money from the rest of the world and often that wasn't enough. This led the government to issue an order to their central bank to print as much money as they needed. This obviously led to a massive loss in value of the Deutsche Marks (German currency), which is another way to say high levels of inflation ensued. The following decade of high inflation is thought to have enabled the Nazi party to gain popular support. Social distress caused by hyperinflation in Germany was not very different from the social distress in Italy that allowed for the rise of Fascism in that country. So it isn't hard to understand why Germans are so hesitant to break these rules established during the institution of the ECB. This is aside from the obvious fact that printing money to pay debt seems like a shortsighted solution to anyone with half a brain.

Instability hits the stock market

Interesting development in the stock markets yesterday, as most people know by now the TSX had a historically bad trading day yesterday which resulted in the loss of all gains in 2011, the situation south of the border was much better either. I've been waiting for our next recession for a few months now, but I didn't think we would see another crash for at least another year or two. What happened yesterday showcases that the recovery over the past two years may not be based on the actual stability of markets. Investors are turning away from North America and Europe as the two are now having to deal with serious debt issues. Unfortunately emerging markets like Brazil have also been having some slips as well, meaning even some of these options are starting to look less appealing. I may be thinking a bit negatively but I do believe we should get ready for another recession, I don't believe it will come from the housing market this time but I have no clue where it will come from, perhaps the energy sector? I don't know. But we will be seeing gold prices rising in the next while, the Canadian Dollar will finally drop a bit (which isn't terrible really) and we should see interest rates go down a bit.

Positive sorting or unequal distribution?

Ever since the election 9 days ago I have been considering the conservative majority win. I'm going to leave aside the fact that our democratic system allows for a minority (40%) of people to decide our nation's leader, instead I would like to focus on who this minority has chosen to be Canada's leader for the next 4 years. If it wasn't clear so far, I really did not want the conservatives to be in power.

To start, I think I need to recognize that 60% of voters were supporters of the left as we know the liberals lean somewhat to the left of the political spectrum and the NDP is an even more socialist party. So really I would like to challenge the 40% of voters who did cast a vote to the right on May 2nd. I can't really say anything about why the majority of these folks voted conservative, but I do know a significant portion of them voted on the idea that Harper was good for our economy. People believe he has been doing well handling the recession and his tax cutting tendencies are good for Canada's long term economical growth. Well allow me to explain why Harper's approach does not help the struggling class and in the long term it does not have Canadians in its best interest.

I think any Canadian would agree that what Canada needs during these tough economic periods is a plan that grows the strength and resilience of our economy. Our economy is not just banks and corporations, it is based on people and natural wealth. How we produce and distribute our natural wealth is key to the future strength of Canada's economy. Having said all this let me bring up a very strong period of economic growth. Between 1997 and 2007, Canada saw very healthy economic growth, up until the most recent recession. During this period the top 1% of the population got 1/3 of the gains of this prosperous period. This is not unexpected as we can find that historically prosperous periods often benefit mostly the wealthy, this is somewhat natural and it is usually balanced by a recession that reduces this gap to some extent. However, the last time we've seen this level of growth was in the 60's, back then the top 1% only got 8% of the share, so we're looking at a much more concentrated distribution of resources. Statistics say that in this decade the richest 1% doubled their share of the total income in Canada and the richest 0.1% tripled their share of the national income. Now the bottom third of the population only got 8% of the economic growth of the decade in question. This is very much an uneven distribution of gains, and they present a much deeper problem then the fact that the rich are getting richer a lot faster than the rest of us.

In order to really show how this unequal distribution affects everyone negatively, we might as well look at the middle class, since we Canadians like to claim it as our strongest class. The median income is the income where half the population makes more than that and half makes less than that. In 1976 this median was around 46k (adjusting for inflation) and in 2008 it was 48k. So during this entire 30 odd years, the average household has become more educated and in a lot of cases now, both parents need to work. So in this entire period of economic growth, we have not seen much in terms of progress in the middle class. To accompany this trend we have also seen jobless benefits and social insurance get watered down.

Since the beginning of this most recent recession, unlike what is seen historically, measures to get the economy back to it's feet have not affect the top earners. The fact that social assistance for the unemployed has been stripped down, people lose their jobs and grab what they can to stay afloat, including much lower paying jobs and self employment. This causes the % unemployment numbers to deflate despite the reality of the situation, which is people are earning much less than before. Not only this but there has been a lot of downward pressure on wages, pensions and benefits as if the middle class is what caused the recession. This isn't as apparent in Canada, but in the US there have been plenty of high profile debates on these issues, such as the teachers unions in Wisconsin. I don't understand how these kinds of measures are seen by the population as acceptable. I don't understand why more people are not completely outraged by what right leaning politicians see as valid measures to help the economy.

Maybe I'm too harsh on conservatives and republicans, but what do people on the right say about what drives this increase in social gaps? A lot of them like to point out marriage inequality, basically the rich marry the rich, and poor marry the poor and this is a social phenomenon that creates more inequality. This is often called positive sorting, and it is just a nice way to justify a problem they don't like to address. It's a way to avoid the real cause which is that during prosperous periods the rich gets richer and during recessions the poor gets fired. Statistics also show that the average household with children now works 200 hours more a year then they did a decade ago. The biggest increase in working time is at the bottom earners. This makes sense because if your new job doesn't pay enough to keep things afloat, then the parents have to work more. So despite the increased amount of hours worked at the bottom, the increase in wages happened at the top where there were no increase in hours worked during the same period.

What many people see as the strength of the conservative party is their measures to ensure economic success in Canada. What are some of these measures then? Well a very common right winged approach is to lower taxes. This is a great way to be popular among the general canadian, who is dumb enough to think that these lower taxes will help them. Apparently a couple of hundred dollars in their pocket will help them solve their financial troubles. I wonder if someone unemployed sees it that way too. To complicate the matter even further, there are these corporate tax cuts that have been occurring since 2007. Now where is the rationale for those?

The idea behind corporate tax cuts are to give to those who have more and they will give to those who need it. Tories say that cutting corporate taxes increases profit meaning more jobs may be created and not only that but foreign investors become interested in our country as a potential investment opportunity. It sounds good, but the reality is not quite as colorful. It turns out the CEOs of large companies are not as giving as conservatives might expect. The average income in 2009 of the top CEOs was 6.7mil, which makes them worth 155 times the average worker, while before the recession the top CEOs were worth 104 times the average worker. I may be reading too much into these numbers, but something about cutting taxes to the rich doesn't seem to be helping the general population. This trend of social gap increase during good times and decrease during recessions is not the case anymore. The top earners are getting benfits during tough times while the average family is keeping their salary in the best cases. Not only that but government deficit is growing at an alarming rate.

So people need to wake up, Harper's measures are not there to help the middle and the lower class. People voting for Harper need to be aware of this because tax cuts don't help the working class and if that's how they buy your vote, I have to tell you, you've been fooled. I worry for future generations, families are already working close to their full capacity. It is almost a necessity nowadays to have 2 working parents, and this obviously has implications on families, if this situation gets worst, how will it be possible for future generations to survive? How will this working class be able to buy a home, or save money for their children's education or even for their own retirement? This is serious, if we keep going in the direction our right wing politicians want we will see Canada become more and more segregated into rich and poor.