Economy Hot & Unemployment 30 Yr. Low

[Toro]

It is worth noting that the tar sands will likely never be a hugely profitable source of revenue since it takes so much energy to turn them into crude. As the price of natural gas goes up so does the extraction cost for tar sands oil. There will likely come a time when BC or NWT will make more money selling the natural gas directly to the US instead of using it to turn Alberta tar sands into oil. In short, people in Alberta should be careful about projections that include revenue from tar sands oil. People on this board who are more familar with the oil patch may be able to correct details I got wrong but I am pretty sure the statement I made is basically correct.

Oil above $40 makes the Tar Sands viable. Nat gas and other energy sources are included in that price. BC, NWT and producers in Alberta will sell to whomever offers the highest price. Thus, the producers in the tar sands will bid up the price of energy to the point where marginal price meets marginal cost. As long as oil stays above $40, its really not an issue.

[PocketRocket]

No question that we are rich in various natural resources and they fuel our economy, as they have for decades.

But I have to agree with those who have denied that the current goverment is directly responsible for the current economic boom.

At least in large part.

If a goverment could control the economic booms or busts of a nation, then recessions or depressions would not happen.

No, government, like the rest of us, can merely ride the economic wave driven by world markets, and take advantage of opportunities that come our way.

Government CAN, however, do major damage to an economy through over-meddling with the laws of supply and demand which are the natural forces that drive any marketplace, regional or global.

[mirror]

Go West, young man. I wonder what the population is going to be in Alberta 10 years from now.

A New Player in the Canadian Sandbox

I actually think the Chinese interest in Canada's oil is one of the best things that has happened. It should be a greater and greater lever with the US when we have these trade wars with them such as softwood lumber and cattle. I wonder what's going on with the Devil's Lake project now.

[Riverwind]

Oil above $40 makes the Tar Sands viable.  Nat gas and other energy sources are included in that price.  BC, NWT and producers in Alberta will sell to whomever offers the highest price.  Thus, the producers in the tar sands will bid up the price of energy to the point where marginal price meets marginal cost.  As long as oil stays above $40, its really not an issue.

That analysis assumes that the price of natural gas and oil go up and down together. If demand for natural gas goes up faster than oil because it is a cleaner burning fuel that can be used to power all of those fuel cell cars then you could have a situation where tar sands oil is no longer profitable even if oil is $100/barrel. My understanding is the physics of tar sands extraction require one unit of energy input per each unit of energy produced. By contrast, a typical oil well requires one unit of energy per 100 units produced.

[Toro]

Generally, the price ratio between the nat gas price to oil about 6:1. Thus, if nat gas is $8, then the price per barrel oil equivalent is $48.

Billions of dollars are pouring into the Tar Sands. That doesn't mean they're correct, but the guys doing the investing know the math.

[Yaro]

Thanks. From a pracitical standpoint, the trade-weighted value of the dollar is a good measure of the value of currencies, but it doesn't have much application in currency markets in the near-term. Investment flows do however, which are a function of many of the things I posted earlier.

I agree, however I have always been wary of too much investment inflow as it tends to drive instability.

I don't have the figures in front of me, but its not just the Chinese who have funded the enormous deficits in the US. Its the Japanese as well, and even more so. The Japanese are sitting on something like $600-$700 billion in dollar reserves, most of which has been accumulated this decade, while China's is somewhere between $200-$300 billion. Of course, both have a vested interest in keeping the dollar propped up so they wouldn't dump the dollar specifically.

This is technically true but in reality rather deceptive, while the Japanese are the single biggest holders of direct holders of US exchange reserves the Chinese have a far more diverse interest in the US markets as a whole. When we consider the combination of the trade gap and the pegged Yuan along with the massive foreign ownership issues in the US that never seem to come up (almost 125 billion now). There is also the fact that the US's biggest creditor there own banks holding a value of 2.3 trillion and the US government putting nearly twice as much money into circulation and it begins to look like the worlds reserve holder is trying to devalue there way out of debt not something anyone holding there dollar is anxious to see.

While it is true that both have a vested interest in propping up the dollar there is a great deal of speculation that as early as next month China will revalue the Yuan, and if that is a complete revaluation the inflation in North America (the US in particular) will be huge and China who will no doubt have to start looking domestically to make up much of the shortfall for consumer consumption would have no real reason to try to encourage the US's currency as they will simply be an entity which while compete for those all important international oil markets.

There are only three possibly global reserve currencies at this time - the dollar, the euro and the yen. At this time, only the dollar is a viable currency as a reserve currency - though the Fed has done a good job to undermine this the last few years. There is little growth in the Eurozone and it remains to be seen if the euro can last since its own members are undermining its existence running high deficits and voting against further integration. The Japanese are still mired in a deflationary funk. Of those three, only America provides growth. 50, 100 years from now, one should expect the yuen to also be a major force in world currency markets.

I agree that this has been the case for some time but the USD has lost ground since 1960 to both the Yen and the Euro (and previously the Mark) and both of these currencies can at this time be considered considerably harder then the USD.

It should also be noted that the European economy is offset with the American one for growth and so the last year or so has very much been a peak for the USD where as the Euro has been in more moderate period and has been considered somewhat softer thanks to the reasons you outlined.

I was speaking over longer periods of time, decades as opposed to years. Movements in currency prices in individual years are often transitory. A strong currency over the long-term is indicative of a strong economy, and vice-versa.

I agree, however I do not believe the relationship runs both ways. While a strong dollar is ideally a sign of a strong economy, a strong dollar is not always a good thing for an economy.

A country that is further along in debt issues should have a stronger currency. And actually, though Canada has done a very good job with its fiscal accounts, government debt to GDP is about same in Canada and the US at around 65%, so the two countries are about the same. At the current rate, Canada will do better than the US going forward but Canada was worse off because the figure went as high as 100% in the mid-90s whereas it never went higher than 75% in the US. You can find these figures on the OECD web site.

I have personally never been a fan of measuring a countries wealth through GDP, it’s a manipulative indicator. GDP is as much a function of economic freedom as it is of actual wealth and tends to ignore some important distribution notes which affect an economies overall efficiencies. While the much higher GDP of the US (supported by there higher economic freedom) suggests that there economy could withstand more debt I would argue the opposite and suggest that the stability offered by the Canadian system should create far more investor confidence.

I much prefer the measure of per capita debt and in that Canadians now owe 16k CSD while Americans owe more then 26k USD, a very substantial difference.

Most of what we are debating though is personal opinion as to optimal direction for the Canadian economy, I think we can both agree however that we could have done much much worse then we have over the last 15 years.

[Toro]

This is technically true but in reality rather deceptive, while the Japanese are the single biggest holders of direct holders of US exchange reserves the Chinese have a far more diverse interest in the US markets as a whole. When we consider the combination of the trade gap and the pegged Yuan along with the massive foreign ownership issues in the US that never seem to come up (almost 125 billion now). There is also the fact that the US's biggest creditor there own banks holding a value of 2.3 trillion and the US government putting nearly twice as much money into circulation and it begins to look like the worlds reserve holder is trying to devalue there way out of debt not something anyone holding there dollar is anxious to see.

I'm honestly not entirely sure what you mean here, except for the last statement about the US trying to devalue its currency. In that, I definitely agree, though I think this is a side issue. The Federal Reserve's policy over the past five years has been to mitigate the after-effects of the stock market bubble, of which the Fed is at least partly responsible. When the market slowly crashed from 2000-02, the Fed decreased the reserve rate to 1% and monetary aggregates were growing as high as 20% in an effort to avoid a serious economic downturn, which in turn, lead to a debasing of the greenback. The Fed mostly succeeded, but we don't know what the effects of the Fed's policies will be. What appears to be happening is that the stock market bubble has been replaced by a housing/fixed income/commodities boom/bubble, of which we have yet to feel the effects of it popping, which in fact, it may have already begun doing.

While it is true that both have a vested interest in propping up the dollar there is a great deal of speculation that as early as next month China will revalue the Yuan, and if that is a complete revaluation the inflation in North America (the US in particular) will be huge and China who will no doubt have to start looking domestically to make up much of the shortfall for consumer consumption would have no real reason to try to encourage the US's currency as they will simply be an entity which while compete for those all important international oil markets.

Yes, absolutely. America has relied on consumption, which rose to 71% of the economy, the highest of all-time, and above the 67% mark over the past few decades. At best, what the Fed's policy has done was borrow from the future to the present, thus slowing future growth. At worse, it merely prolonged and exacerbated the inevitable.

I agree that this has been the case for some time but the USD has lost ground since 1960 to both the Yen and the Euro (and previously the Mark) and both of these currencies can at this time be considered considerably harder then the USD.

It should also be noted that the European economy is offset with the American one for growth and so the last year or so has very much been a peak for the USD where as the Euro has been in more moderate period and has been considered somewhat softer thanks to the reasons you outlined.

When central banks look for a reserve currency, there are three things they look for - liquidity, stability and growth. Only America provides all three. It may be that the yen has gotten stronger than the dollar but JGBs have yielded next to nothing, the banking system has been a mess, the country has been in a deflationary funk and there is no growth. As for the Euro, the mark may have been a strong currency, but its hard to argue it is now, not with serial devaluers such as Italy, Portugal and Greece putting a strain on its value. Half the countries in the eurozone are in technical violation of their own standards, including France and Germany. Plus, you are hearing grumblings from some countries such as Italy that they want to leave the euro. And finally, with Germany and France growing 1-2% per year and the populations screaming loudly against market reforms, Europe will remain low growth for some time. That's why America can get away with what its been doing over the last 5 years. The world wants another reserve currency, but we may be a few decades away before another currency challenges the greenback. Despite America's prolifigate ways, that may not be until China begins to challenge the US, which may not happen for another 50-100 years, if ever.

Most of what we are debating though is personal opinion as to optimal direction for the Canadian economy, I think we can both agree however that we could have done much much worse then we have over the last 15 years.

I think Canada gets a lot of credit for its performance over the past 10 years. Canada had a serious debt problem in the mid-90s and have dealt with it. Over the next 10 years, I expect Canada to at least equal, if not outperform the US economy because I think we are in the middle of a commodities bull market (that may be at the beginning of a correction) and the fact that the Canadian economy doesn't have the imbalances America has right now, particularly the combination of the trade and fiscal deficits. Beyond that, however, Canada has some structural issues, particularly concerning productivity, that will have to be addressed if Canada wants to keep up with the Americans.

Many in Canada like to think themselves as more European that American. I don't believe that to be the case. Canada fits more in the Anglo-American model than in the European model, with Canada leaning slightly more to the "Anglo" side than to the "American" side.