Category Archives: philosophy

Post-Party Depression

Who amongst the political cognoscenti does not deplore the following:

  • Falling rates of voter participation
  • The economics of fund raising
  • The rising number of potential candidates declining to run
  • The falling quality of elected members, and
  • The lack of “democracy” in our leader-centred parliaments?

All of these can be consolidated under the rubric of Canadian politics having moved to a “post-party” position. The breakdown of parties as the lead players in the system is the source of the “depression” being felt in the media and amongst party leadership (elected and back-room).

Why People Don’t Vote

The twentieth century was once described as a “short century“: 1914-1991 (originally 1989 for the fall of the Berlin Wall; updated for the fall of the Soviet Union). This was the period of the common man, of the mass, of the mass state (state capitalist [communist], social democrat, corporatist, etc.). Media outlets were few (relative to today), and required — as did almost everything else — large amounts of capital to be mobilized to allow them to even exist.

Whether one takes 1989 or 1991 as the date, one of the first events of the post-short-century period is the rise of the Internet, and, in particular, the World Wide Web. Suddenly any person could become a publisher: pennies replaced mounds of dollars as the cost of expressing oneself. Coupled with this is the ease with which the Web made everything fit nicely into one category: miscellaneous. No longer were institutions needed to organize ideas: any slice of opinion could be created and attract its followers.

In the mass age, to vote was to vote for a party. What had, heading into Confederation, been primarily a vote for a member (to act as a representative in a distant capital) had long since transitioned into, first, a vote for a party — a platform and ideology and a cabinet team — and, starting with Trudeau, a transition to a vote purely for a leader who would become Prime Minister. As we entered the 1990s, party big-tents began to break down: how else can one describe the splintering off of compromise over federalism leading to the Bloc Québécois, or the splintering off of compromise over neo-liberal populism that was Reform?

But the fracturing of the Progressive Conservatives was just the beginning of a realignment playing itself out in a Canadian context, but not at all unique to Canada.

What Reform (in particular; the BQ’s raison d’être being different) shows is a fundamental unwillingness, even in the late 1980s, to doing the work necessary to compromise on policy that is the essence of a big-tent party. Instead, Reform “took its ball and went home”, maximizing its vote by concentrating it. To be fair, as Reform moved from populist non-ideological movement to full-blown “neo-conservative” party, and thence watered down its social conservative and fiscal conservative roots in the transitions through the Canadian Alliance to the Conservative Party of Canada, it, too, has had to adopt the policies and practices of a big-tent party.

Conservatives who now look at the outcome and talk of replacing Mr. Harper, deploring the deficit and the budget, etc., are considered to be the “splittists” for daring to appeal, for instance, to the Party’s actual statement of principles. Many are walking away. But for every ten that do, only a handful will end up shifting to another party. Most will simply become “unpartied” — and likely will not vote.

For parties are not required and have become an anachronism. As BlueGreenBlogger noted, we don’t need mass media (the means by which mass parties “get their message out”). As I would note, we can now deal exclusively in issues. That will inevitably produce a sum of positions that matches no party’s set of policy compromises.

No Fibre, No Support

This, of course, is something overlooked by those who believe that, first and foremost, we must be “on side” with the leader and the party. Commentator Bec at Blue Like You, for instance, exemplifies this point.

If one does subscribe to twentieth century politics, as laid out in the opening to this post, then this position follows naturally: principle should not stand in the face of need. That need might be for continued power, it might be for future power, it might even be for someone or something to believe in. For someone to challenge a change of views — and I do not believe that anyone should be forced to maintain a position in the face of new information — on the ground of principle is to indicate where consistency is to be expected. What is it Edmund Burke said?

[I]t ought to be the happiness and glory of a representative to live in the strictest union, the closest correspondence, and the most unreserved communication with his constituents. Their wishes ought to have great weight with him; their opinion, high respect; their business, unremitted attention. It is his duty to sacrifice his repose, his pleasures, his satisfactions, to theirs; and above all, ever, and in all cases, to prefer their interest to his own. But his unbiassed opinion, his mature judgement, his enlightened conscience, he ought not to sacrifice to you, to any man, or to any set of men living. These he does not derive from your pleasure; no, nor from the law and the constitution. They are a trust from Providence, for the abuse of which he is deeply answerable. Your representative owes you, not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion.

I take this to mean that no politician and no party should abandon principles for any reason of expediency. Following the herd into “what to do” falls into this camp. In other words, the Harper who leads a Conservative Party that stands for these principles:

  • A balance between fiscal accountability, progressive social policy and individual rights and responsibilities;
  • The Conservative Party will operate in a manner accountable and responsive to its members;
  • A belief in the equality of all Canadians;
  • A belief that the best guarantors of the prosperity and well-being of the people of Canada are: (1)The freedom of individual Canadians to pursue their enlightened and legitimate self-interest within a competitive economy; (2) The freedom of individual Canadians to enjoy the fruits of their labour to the greatest possible extent; and (3) The right to own property;
  • A belief that a responsible government must be fiscally prudent and should be limited to those responsibilities which cannot be discharged reasonably by the individual or others;
  • A belief that the purpose of Canada as a nation state and its government, guided by reflective and prudent leadership, is to create a climate wherein individual initiative is rewarded, excellence is pursued, security and privacy of the individual is provided and prosperity is guaranteed by a free competitive market economy;
  • A belief that good and responsible government is attentive to the people it represents and has representatives who at all times conduct themselves in an ethical manner and display integrity, honesty and concern for the best interest of all.

has no business deciding to:

  • Overthrow fiscal accountability with a slush fund approach to spending.
  • Ignore those members who want to maintain the principle of fiscal responsibility.
  • Makes some Canadians (e.g. auto sector) “more equal” than others.
  • Take over decisions from individual Canadians by burdening them with debt repayment for multiple generations.
  • Overthrow fiscal prudence by massive deficit financing (and approving of the destruction of the Canadian currency by the Bank of Canada).
  • Massively meddle in the economy, deciding which old economy forces will be winners (at the expense of their peers, other businesses in trouble, and the creation of a twenty-first century economy for Canada.
  • Creates a situation where the ethical probity of his Government, Ministers and Members will now be able to be called into question.

while demanding the loyalty of Conservatives with more moral fibre than him.

But, for a party supporter like Gerry Nicholls, whether on his blog or in the press, or for a commentator who is not a party member like <a href=””Andrew Coyne, whether reporting on the budget or the abandonment of principle in our politics, just as with me, principle is the core of moral fibre. I know in my own case that I have respect for those who truly believe in other principles and are consistent in their application, even when I think them wrong.

But Coyne is right. Canadians who adhere to the principle of fiscal conservatism are on the outside looking in. For myself, I am not searching for another party, a new party or any party.

This is one of my issues. As I’ve often said, I embrace the independent member. One who plays to my issues will get my vote. Otherwise, I have joined those who ignore the system.

So Why Not a New Party?

The short answer to “why not a new party” is: I don’t want party discipline in the mix.

A Burkean representative is not a trained seal, applauding on command and voting against their principles and conscience because the leader’s whip says so. Given our undersized Federal Parliament and Provincial Legislatures, however, it takes a member of rare fortitude to stand against his/her party: the backbenchers are too few to make a difference, given the number of shadow assignments, parliamentary secretaryships, ministerial appointments, committee chairs, etc. on offer. (Then, too, such a member is seldom kept in the caucus, nor renominated by their party.) These are institutional issues. A candidate who runs as an Independent, however, is likely to keep that independence in practice.

As Australia is showing — where the number of independents in their State Houses and in their Commonwealth setting continues to rise — principle can be returned once it must be demonstrated to win support.

Issue Circles

The other major reason for avoiding parties (like the plague) from now on is that inevitably one is forced to choose between principles as the big-tent is formed. Suppose, for instance, one believed that it is long overdue that we should raise more tax from unwanted production of externalities (this is broader than a carbon tax but along the same line) and instead raise less in other ways. Suppose, as well, that fiscal responsibility, accountability and no deficit spending were another set of principles being held to. The second group would lead one to the Conservatives, but not the first. Which is to be abandoned?

Why have to make the decision? Why not work with two issue groups: one that presses for environmental change, and one that presses for responsible finances?

This is, of course, how many who are entering the voting stream see matters. They are quite committed to their principles — and they see no reason to engage in traditional politics to get their way. Indeed, wisely, they often decide to have nothing to do with “the system”, seeing newer parties (such as the Greens) as the moral equivalent to the older parties. Extra-parliamentary pressure is their avenue for policy change, as opposed to selecting “a winning leader” or a policy convention.

For those in parties, the drying up of donations, the evaporation of votes, the lack of ground workers for campaigns, the failure to acquire a candidate of choice — these are the causes for their depression. For those of us who found supporting their parties steadily less viable, however, our depression lifts when we finally say “enough is enough”.

Postscript: The Media

Previously I have lamented the media’s focus on horse races and process rather than issues. The good news about giving up on parties and leaders is that the traditional media loses any further relevance as well. (Blogs, Facebook Groups, Tweets, and the like, on the other hand, bring together people around individual issues.) In other words, the inadequacies and poor service of our media in Canada is something that will end soon: dead due to a lack of interest.

If you choose to continue to sop up political media by the (Imperial) gallon or the dekalitre, or see value in being a party supporter, go right ahead. I just find it so much easier to sleep at night not caring any more about the polls, the latest twist in the wind, and the latest betrayal of principle.


Are We Up to the Challenge?

So, with the oath of office taken and the speech given, the 44th American President, Barack Obama, moves into his own private hell. Such is the lot of leaders in our world, as rather than accept responsibility for ourselves we pile all our hopes and fears on their shoulders, and expect immediate results, to boot.

The speech, actually, was quite good, and said things that needed to be said. Whether they will be heard is a separate question. Western society is quite infantile: one friend of mine referred to it recently as “a teen-age girl, all emotional, demanding, whingy, self-centred”. Funny: sounds like a teen-age boy, too.

Highly insightful, as well, although such phraseology has no doubt given tellement offense. But speaking the truth in public has fallen from favour. Indignant, easily-bruised egos and those who use any comment to push their agenda have made it so, alas. So, too, the failure of most people to recognise the difference between opinion and statements with backing. Today that lack of understanding and confidence makes everything opinion — and therefore off the table (save only for call-in programmes and gatherings of the faithful).

Enough said. It takes real self-discipline and responsibility to accept that change begins with ourselves. It is not something we can believe in; it is something we have an obligation to attempt on our own. Doing so is a sign of maturation: the move from adolescence to adulthood. So, too, is recognising that the world is, and we work within its limits; wishing that that be otherwise is fantasy.

It is time for us all to stop indulging in fantasy. That will be hard. Today Obama called on his fellow citizens (and, by extension, all of those who engaged in Obamamania and stopped their day to celebrate him today) to step beyond infantile wishing into the hard work of adult behaviour. Let us do so.

To Be Re-Elected, Be Tories, Conservatives

Does that title surprise you? If you subsist on a diet of the media in Canada, it probably does. From headlines writers to pundits, the terms “Conservative” and “Tory” are used interchangeably. Yet they should not be. Indeed, if the Conservative Party in power does not (and soon) find its Tory roots and bring them to the fore, it will likely, at the next election, be replaced by the Liberals, to spend another long set of years in the wilderness.

I do not base this on any estimate of who might walk away with the prize (if that is what it is) of Liberal leader in the current race. Yes, the Liberal Party tends to focus on “who can beat our opponent” rather than “what should we stand for and why”. I base it, instead, on a different calculation: if the Conservatives insist on acting as though they are Liberals, then Canadians will choose to elect the real thing rather than a substitute.

So why would the Conservative Party act like Liberals? In large measure it is because Conservatives such as Stephen Harper are actually neo-Liberals. In other words, they, like classic liberals, eschew history and tradition in favour of using the levers of power to make — perhaps even force — change, with no real thought for the future even as the past is demolished to make way for “the new”. Pragmatic incrementalism, after all, may seem benign, but it says “the job isn’t worth doing” quite as much as anything else. Or, in the tenets of Liberals, “let’s try this, and then we’ll try something else” — or “throw a whole bunch of stuff out there and see what sticks”.

All of this is the stuff of process and power: it is not the stuff of reasoned reform or stewardship.

Toryism in Canada has long — since Baldwin and LaFontaine and the introduction of Responsible Government — been about a bond between the generations, respectful of the traditions received from the past and taking careful stewardship for the future. Tories are in favour of low taxes, so as to make it possible for private citizens to act freely, with as little distortion in their decision-making as possible, yet Tories also favour building a national infrastructure, to make action easier in the future. Tories despise deficits, as these burden future generations with the task of repaying the debts without benefit to themselves, yet will use debt prudently and in small amounts to achieve long-term goals. Whether provincially (education and health care come to mind) or federally (the national commonweal takes precedence), the notion of a people at peace with each other and defended from external injury, and with fairness in space and time, is the essence of a society of liberty, well governed, balancing the needs of the many with the needs of the one.

Our Tory roots, philosophically, go back to Aristotle, Aquinas, Hooker and the like, and differ from Tories of old in that we shed the notion of an élite (by birth, money or merit) with a claim on our governance. Liberals, paradoxically, believe that one’s “betters” ought to be in charge: it is the essence of managerial thinking.

If the Harper Government were a Tory Government, we would not bail out old industries: this penalizes everyone today and (if done by deficit spending) tomorrow and limits the opportunity to build new work in their place. (Gordon Campbell, Premier of BC and a definite neo-Liberal, nevertheless told the Legislature and the province last week these Tory truths: living proof that you can get to the right place even on the wrong road, but just not consistently.)

A Tory Government, faced with the current economic situation, would be pruning unnecessary programs — even whole departments — to focus resources on a few initiatives that would build for the future, not just prop up today.

A Tory Government, faced with the slowdown the globe is experiencing, would be putting citizens’ resources back under their control, through reduced taxation. It is through innovation and new initiatives that we will pull ourselves up and prosper, not by sucking the country dry for old, stale ideas and industries.

Do you think I am an idealist? It has been years since “Conservatives” swamped “Tories” in this country: Tories were an endangered species even when Bob Stanfield led the Progressive Conservatives. Still, Toryism in Canada offers hope on firm foundations, a hope that would see the Government likely to be returned when this Parliament draws to an end.

Conservatism — whether the arch “red meat” type favoured in some parts of this country, or the pragmatic “better quality of Liberal” type favoured in other parts (and on offer from the Prime Minister) — will fail. Gresham’s Law will hold: just as bad money drives out good, so, too, real Liberals will drive out ersatz ones.

I shall not be surprised to be disappointed as the next few weeks unfold. Still, one can hope.

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Unite the Left? It’ll Never Happen

There’s a regular wave of people chattering about uniting the Left these days. You find them even on the so-called Right, where the myth is that if the left would just unite, everyone could have BC-style politics, where left and right face off with nothing else (more or less) in the game. This, of course, doesn’t explain the endless stream of new parties being formed in BC, but it’s a nice myth for all of that. After all, a Conservative facing a united left — almost always painted with the NDP’s colours, since Conservatives think the left would unite with the Liberals going away — would (much like BC) definitely have a regular ride to success as a result.

On the so-called Left, however, the calls for unity tend to come from the Liberals. Oddly enough, their mental map of the landscape shows their colours nailed to the mast, and those noxious NDPers gone from the scene, merged into their party. (This, of course, is a model that promises endless Liberal power, at least in their mind, although after the 2008 election the model now stretches to “the Greens should fold and join in” and even the occasional “the Bloc should fold and join in” to get the numbers to work.)

But a merger on the Left just isn’t going to happen. Instead, all the parties not currently in Government are going to have to fight it out for dominance, much as the Reform/Canadian Alliance and the Progressive Conservatives needed to fight it out. A merger, after all, can only come when several things are bloody obvious:

We can’t win in the current circumstances.
They can’t win in the current circumstances.
We’re what block them from winning (and vice versa).

and the biggie:

We’re prepared to change our views to reach an accommodation.

Well, as long as the Liberals have dreams that they can win in the current circumstances (and they do) and that they don’t see themselves as being the roadblock to their other prospective merger partners winning (they don’t; they see them as exclusively a roadblock to Liberal achievement of winning), a merger won’t take place. Put bluntly, they have no respect for the NDP, the Greens and the Bloc. Would you merge with someone who was obvious about their lack of respect for you, your views and your traditions? Thought not.

Then, too, two of the potential merger partners aren’t even necessarily “Leftist” parties (save only that both the Bloc and the Greens believe in the use of state power to smash current social order, which is the traditional definition of a Leftist). Both the Bloc and the Greens contain political views that run the gamut from the traditional left-right divide in Canada. As with Social Credit and the Progressives before them, they are brought together around a very few issues — and don’t try to bring everyone together beyond that.

NDPers, too, are not Liberals in waiting. As with the Canadian Tory (not all Conservatives are Tories) an NDPer has a view of society as something organic and pulsing with life. It has a history and a future: we in our time are stewards of that future, and inheritors of that tradition. Tories tread more cautiously than NDPers in changing traditions, but both think of the future differently than do Liberals (and some of the old Reform members of the Conservative party): they think about what it will mean to future generations to take action. Liberals do not. Everything is “right here, right now”; creating a new problem for the future merely creates a new opportunity for the party.

This is why NDP governments are often the most fiscally conservative of all. Their strain is “purer” than the Conservative one, and Liberals don’t care enough about the farther future to worry.

You could put the Liberals and the NDP together — it would be much like today’s Conservative Party, which couples Red Tories, Blue Tories and neoconservatives (who are right-wing liberals) together. But NDP voices would be a deep minority in a merger with the Liberals (whereas Red and Blue Tories together counter-balance neocons in the Conservative caucus and conventions). That is why the NDP plays for the Liberals to quit, give up the ghost, split — and they’ll take the part of the party closer to the NDP and (just as after the CCF turned into the NDP) slowly imbue the longer-term view into its new members.

That, of course, would send the Bluer Liberals and the Red Tories who went Liberals off to the Conservatives if they didn’t want to be a minor party rump. This they would do, and relatively quickly: the raison d’être of the Liberal Party is holding and using power, not a philosophic framework held in the form of political ideology — the sort of thing that can sustain generational long ventures without “success”. Hence the Liberals need to hang together, and so they will, repulsing anything that would bring something other than the quest for aggrandisement to the party (except in the form of individuals switching to it).

That it would be good for the country to rationalise its party mix is undeniable. But the reality is it won’t happen. For better or worse we are where we are: a five party state.

Common Sense about Deficits and Spending

Well, it didn’t even take as long as I might have thought for the political consensus to change. All of a sudden, deficits are back in fashion in Canada. I suppose for those of us who want this country to be more like ones they deem “successful” the idea of piling debt upon debt and never making hard choices would be validated, in some perverse way, by the fact that these other nations haven’t fallen into even deeper trouble — yet. For those of us who would prefer Canada to chart a common-sensical course of its own, however (as we had been doing since the mid-1990s, spending less than we took in in taxes and paying down the accumulated inheritance from the previous generation shoved onto our shoulders to bear) this development is one of the most gloomy in a year that has had no shortfall in mood swings, financial fallout and decay.

Paul Martin, of course, has been talking to any outlet that would print his musings in the past forty-eight hours about how poorly the Harper Government has done — because they’re not sitting on that slush fund formerly known as “massive Federal surpluses”. There is a minor consideration here: had the Conservatives not consciously set out to balance the Federal books there would be a huge surplus available to throw into relief measures without the possibility of a deficit. Of course, Martin himself never saw these surpluses as feedstock for a rainy-day fund (i.e. not to be spent) — and that’s the major consideration. Martin, like Chrétien before him, was an over-taxer who saw to it that slush money was available to throw around.

At least Harper has ensured that the slush capability is gone. Far better, of course, would have been to lower taxes and let Canadians keep their hard-earned gelt — to balance the Federal budget by reducing intake to match outflow — than by sloshing around money at an even faster rate than either of his Liberal predecessors (and they were outright masters, never seeing a “priority” that didn’t need funding).

The Keynesian proposition was that it was the proper role of government to provide a counter-weight to the economic trend: if the economy slowed and hardship rose, the government should use deficits (if it did not have an accumulated rainy-day fund for the purpose) to create new activity and thereby relieve the hardship. Once the next upswing took hold, however, the government was to retire the debt it has accumulated and restock its rainy-day provisions for a future downturn.

Well, it only took the first downturn to move into the post-Keynesian consensus: “there’s no need to pay off the debt because we owe it to ourselves”. This is the source of the notion, expressed by Gordon Campbell (no lightweight in the wasteful spending department himself) of BC about how deficits create the desire for “a little more deficit, please” — and the Mulroney Government’s discovery that once an entitlement or handout is created, taking them back is the devil’s own job.

Give a grudging credit (a somewhat tarnished penny would be about right) to Chrétien and Martin for having finally faced up to the reality of a generation’s worth of indisciplined spending by balancing the budget and then beginning to retire the accumulate debt. It’s not much credit precisely because their hands were being forced: the country’s credit rating was at risk, and interest payments on the debt were more than 33% of Federal spending. (Indeed, Mulroney and Wilson managed operating budgets that were balanced — what a business calls EBIT [earnings before interest and taxes] — but ran deficits to cover the interest payments, causing them to grow annually as a percentage of spending.) Doing something that needs doing earns credit; doing it before you’re forced to is the real accomplishment.

Now a Federal deficit waits in the wings, as tax receipts are projected to fall. But the problem isn’t that income will drop below outflows. The problem is that outflows were not reduced while we had the chance. Now, as with Chrétien & Martin, we’re going to have to do it while times are tough.

The reality of this country is that taxes are too high, because we will not make hard choices.

I can recall saying, earlier in the year, that I’d cut off the whole Department of Sport and Amateur Fitness. An outcry ensued bemoaning my hard-heartedness towards the dreams of athletes, and the joy the country would feel as Canadians mounted the podium to receive their medals. Well, in a choice between panem and circenses, I choose bread over circuses. I know amateur athletes, and I know how hard they work and how little support they get today. But this is not a priority and I am willing to make hard choices about that, to say rather than “too little spread too thinly” to make a difference, “none” would be better. If times were better (or about to be so: as I’ve previously written, there are structural reasons they won’t be) I’d be more willing to spend “well and focused”. But we must choose, not try to have it all and defer the costs into a future even less able to pay for than we have been for the lavish waste of Trudeau and his followers.

Common sense would say that, if times are going to be structurally hard — especially if they are deflationary — cash is king, but only if it is in the hands of Canadians. Now we could tax it away, only to send it back as entitlements — but that comes at an average cost of 20% “lost” paying for the bureaucracies that do this under best circumstances (as I have previously written about). Far better to reduce tax receipts and leave the cash in the hands of Canadians with no losses due to it passing through Ottawa.

That, in turn, would require that programme spending be cut, so that outflows would once again match inflows (at a new, permanently lower level). In other words, we would choose what was better done by central redisbursement (with all its friction costs), and what was better done locally, as a matter of local choice.

But common sense comes at a steep price. It requires politicians that not only have the courage of their convictions to push an unpopular change through the din and clatter of every two bit agitator, opposition member, interest group, media “personality”, etc. claiming that the end of the world is nigh and that those taking action are heartless bastards who don’t give a damn about anyone but themselves; it requires that we learn to change our expectations. Governments aren’t in the growth business, and they’re not mummy coming to kiss every little mishap better. They aren’t here to pay for things we won’t pay for ourselves, and to support causes we think other people ought to support.

They’re in the business of peace, bien-être and good (i.e. prudent) government, and nothing else, when the chips are down. The result of that is order, including a society where subsidiarity lets decisions take place close to the action — and the closest place to the action is in each of our homes, not in some Palais des fonctionnaires off in a capital somewhere.

Common sense has been in very short supply. Call it Conservativism if you like; I call it Toryism — another capacity in very short supply. But I hope, as Harper’s 1,000th day in office approaches, he and his team can find it, and the courage to pursue it.

Reality in the Economy

The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution … Bankers are more dangerous than standing armies … (and) if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their property until their children will wake up homeless on the continent their Fathers conquered.
—Thomas Jefferson

The vast majority of Canadians are woefully unprepared for the world that is emerging around them. This is not simply because the savings rate in the country has fallen, year by year, nor is it because their financial assets have been shredded and diminished by the market meltdown taking place over the last five weeks.

Simply put, it is because they have never known an era where the value of money was not destroyed a little bit at a time. (We call this inflation.) As a result, the deflation which is now spreading is alien to them, and the moves they will make are likely to be exactly the wrong ones.

Worse still, even as deflation spreads, inflation continues to work its way through the system in a blow-off, so, unless you check your presumptions at the door, leave all ideology behind, and learn to actually look at the facts on the ground, you’ll miss what is happening.

Deflation: Killer of Debt

Our money supply need not be inflated by the Bank of Canada rolling the printing presses (despite the endless shots of sheets of currency coming off the press that the CBC — Newsworld and The National — have been using this week). Furthermore, since we are not running a deficit, and have not for years, we are not “printing” via the issuance of debt instruments of value greater than tax receipts (as are all our major trading partners).

Instead, inflation in the Canadian economy is created through the hidden magic of fractional reserve banking. In other words, that “so-called” friendly monolith found on all four corners of most major intersections in the downtowns of Canadian cities and towns are the agents of monetary destruction.

Here’s how: debt is used in the economy to jump-start activity, to allow asset growth to occur in advance of actually having the money to capitalise the start. Whether this is to allow you to buy a house, or whether it is to allow a business to begin and grow, debt is the accelerator.

When banks must maintain full reserves to pay off depositors, only a limited amount of lending can ever take place (loans of a duration less than the time depositors have committed their funds to the bank). Acceleration of debt creation occurs when fractional reserves are allowed: the bank must maintain only a percentage of its maturing deposits against its loan portfolio. Gearing ratios in fractional reserve banking today (depending on jurisdiction and strength of the institution) from 5-6% to as high as 11-12% (as is common in the USA and why it is in such trouble now).

Send too much debt into the market, and too much money chases productive economic activity. This in turn causes prices to drift upward — “too much money chasing too many real estate opportunities and not enough housing stock”, for instance, something we have lived through this decade — and for risk to be taken on and not acknowledged (high leverage mortgages, investments in marginal business plans, etc.). The resulting day of reckoning does help reduce the floating money supply and deflate things slightly, but in general this is not a universal situation. When it is, recession (if mild) or depression (if not) is the result, and deflation emerges into sight (cash becomes more valuable; prices drop to find buyers, etc.) for a while.

Central Banks Must Increase Debt

So, really, the only lever the Central Bank has is to increase debt, which it does through interest rate adjustments (as an indicator: for the actual interest rate the economy is using, see the treasury bill discount rate and the inter-bank lending rate — central banks cannot impose an interest rate despite all the rhetoric) and, less frequently but with more impact, by changing reserve requirements.

The reason a central bank — any central bank — wants more debt is because debt already taken out becomes a drag on the economy. A portion of earnings must now go into loan servicing (and, one hopes, repayment), plus, with a loan issued, a lender has restricted room to create new loans (and hence, new money). Today it takes between $5.00 and $6.00 in new debt to generate $1.00 in economic activity — activity which must provide for living expenses, continuity of on-going operations (both family and business), debt servicing, etc. In other words the crisis in Federal and Provincial Finances that led to revulsion at the thought of running a deficit was an early warning signal of the degree to which ordinary people and businesses are “tied down” now.

This is why Governor Carney of the Bank of Canada keeps dropping interest rates — he gets the effect of sinking the Canadian Dollar (and, eventually, even more takeovers of Canadian companies as they become “cheap”).

But eventually banks start to realise the combined risk their loan portfolio represents: typically, this comes as lay-offs begin and as more and more repayments default to interest only or monthly minima as inflation outpaces income growth. At first they raise their loan loss provisions, eating into earnings. When this becomes an unpalatable number — for the earnings per share of their stock is also an issue — they restrict further lending. This is why prior interest rate cuts in 2008 did not lead to looser credit, why the banks had to be jaw-boned into “passing on” the Bank of Canada’s changes, and why credit remains very tight.

Lag Times in Inflation

Price signals tend to lag policy changes by 9-18 months. As a result, even while the underlying economy is deflating (making existing debt more expensive in terms of the ability to service it) prices continue to escalate. Products and services which are easily avoided or substituted see this end sooner than those which are more difficult to move away from: this is why energy and food could accelerate, and why house prices crested but stubbornly fall only slowly. It is why financial assets (which, for many Canadians, are held in unit trusts, mutual funds and pension funds rather than directly) have remained invested in the market only to suffer the effects of rapid decline recently as other forced liquidations have moved the markets downward for lack of new buying.

This suggests that responding to the opportunity to take on new debt at this time is likely to be a very expensive, potentially ruinous move. The unwilllingness to borrow, of course, means that the inflation multiplier is also broken for a “lack of customers”.

Therefore, for a number of years to come, prices will fall, markets will fall, asset values will not recover, debt will be harder to service — and cash will be king.

An Interesting Knock-On Effect

Oddly enough, this supports another emergent situation: the end of cheap energy and easy-to-produce commodities. Our debt-based system depended on growing supplies of cheap, easy-to-extract and refine commodities to maintain its growth: take that away merely by requiring more expensive production and tightened (not reduced) supply and growth as we have known it becomes impossible. Environmentalists are right (but not always for the reasons they advance) in saying the environment controls the economy. A better way to put it is “nature always bats last”. Take the cheap stuff and consume it, and it gets harder to carry on.

With that in mind, we should be winding down our current financial system and moving toward one which allows for more of a steady-state environment, where growth comes slowly but from real production and advancement rather than from a “natural subsidy” (a robbing of the future to pay for the present no different in kind from running a deficit and leaving the cleanup to the next generation). Our policy makers do not always understand this: it means that firms must be allowed to die and be replaced with new kinds of work, for instance. All money thrown at companies to “keep them going” is lost money — debts that will never be repaid. Our Finance Minister got one thing right earlier this year in eliminating the 0% down/40 year mortgage (a debt creation engine designed to take on high risk, non-performing loans), just as he did in taxing income trusts. Other moves, though, have not been well-grounded. It is because the understanding of how reality works in the economy isn’t there; neither is the philosophical thinking to work out the interrelationships.

Now you are started on this journey. May it help you preserve yourselves and prosper. This transition will not be pleasant: there will be much pain. But working out the deflation and reinventing the system is what is needed. Nothing less will do.

We can start by closing down the Bank of Canada, before it impoverishes us all into decades of penury and recovery. More at a future date on what to do without it.

Cabinet Making: Pick Talent, not Balance

Dear Prime Minister:

Congratulations on your winning Government for a second term. As you ponder your caucus and your cabinet choices, I should very much like you to break with a long-standing tradition in the interests of the needs of the country at this time. Pick Talent and then worry about Balance.

External economic conditions are turbulent and will remain so. World energy supply is constrained and the cost of extraction and preparation for use continues to climb: the price may be suppressed temporarily through some reductions in demand and the currency turbulence, but this is temporary. At the end of the day, the environment (in the form of resource accessibility and fully-burdened costs of bringing these into use) controls the economy, not the other way around. Incessant growth, in other words, has reached an end of the road: we will need a new economic model — not based on the manipulation of financial instruments — if growth is to be resumed at any level.

For this reason, you will need your best people leading the Departments. Ministers must all master their domains. They will need to stay in place long enough to do so. You will need them to make hard choices about the purposes of those Departments going forward — and whether programmes (or even, in some cases, the Department itself) should continue to exist. At the same time we will need, as a nation, to invest as heavily and as urgently in a 21st century infrastructure that supports local, self-sufficient and vibrant communities suited to the new energy equation. They will have to champion the right actions — often across Departments — and champion against the ne’er-do-wells that inhibit change in the Finance Department and the Treasury Board, as well as in their own domains that these take place and in adequate measure.

Now it may likely be that the right woman or man for the job is not an MP from the appropriate province. Do not let that inhibit you. Your caucus represents every part of the country except Newfoundland & Labrador, and reaching out to keep that newest province in your sights is not difficult. So a Ministerial appointment should in no way turn on balancing regions and provinces, so that “everyone gets their share”. By all means invite people over for pie if you want to ensure everyone gets a slice. Make sure your Cabinet table is small, and filled with “the right stuff” — even if where they come from unbalances the “representation”.

I would not presume to judge your talent pool for you. Only you know who you can work with, for these will be dynamic women and men with strong voices — this second term needs those voices both for what they can accomplish, and to broaden the Conservative Party’s appeal. So, again, find those whose voices augment, strengthen and amplify your direction, and don’t worry about which riding they represent.

Were you to do this, I, for one, would sleep very soundly at night, knowing that any errors in judgement brought about by precipitate action (and we will need some of this, as, for instance, the current Finance Minister has acted today, and time will tell whether this was a positive or negative action) — the issues facing Canada must be dealt with. Years of study are also no longer an option. Ministers will act, correct their course, and act again. This requires leaders with strong ethical formation and the willingness to stand their ground in the face of the media, the Opposition, the interest groups and the braying hordes. But Canada will be far better for it.

May you bring this Dominion through the years ahead, for although your predecessor, Sir Wilfrid Laurier, was premature in declaring the twentieth century to be Canada’s century, we are, indeed, capable of claiming a strong share of the twenty-first. Those foundations will be set in this term. I trust you to make the hard decisions and do what is right for our country.

I have the honour to remain, your humble servant.