Bank of Canada

[geoffrey]

A tax increase won't do anything except grow surpluses. Surpluses are spent by governments, so the economy doesn't shrink or slow down.

Only if the surpluses are spent immediately. The gov't could funnel the taxes into a savings account or simply donate the money to other parts of the country that do not have the same problem with inflation. Asking for higher interest rates is the same as asking for a tax on people with debt that is transferred directly to people with liquid assets so I don't see why you have a problem with tax increases but are ok with interest rate hikes. Furthermore, there is no guarantee that higher interest rates would actually do anything about the problem since the price of oil will not change.

What you seem to not understand, and what other posters on this thread absolutely don't understand is that a savings account or long-term investment doesn't work. It cannot be invested in any way, it cannot earn interest, payments, anything. It has to be completely stagnant CASH. As soon as you put in into a savings account, even if they just marched down to say Royal Bank and put it into a 0.0005% interest savings account, that money is back into the economy.

No bank holds money without the ability to invest it for free. It may even be cheaper to commit to that Bond run I spoke of earlier. The other option is ship the hard currency (it must be actual legal tender) to some massive high security place and let it sit there until the economy slows.

Investment is another aspect of the economy, the Alberta government investing surpluses just grows the economy more. There must be a better way... like... increasing interest rates!!

The price of oil won't change, but further exploitation of the resource would be slowed because the costs would be considerably higher. Raising royalties MAY work, but then again, what to do with the extra cash?

It's no longer just oil that's booming in Alberta, all industries are stinking rich oil or not. It's not longer simply an oil problem.

[Riverwind]

What you seem to not understand, and what other posters on this thread absolutely don't understand is that a savings account or long-term investment doesn't work. It cannot be invested in any way, it cannot earn interest, payments, anything. It has to be completely stagnant CASH.

Fine. If doing something with extra cash is such a big problem then ask the feds to set up an NEP II program. I am sure that would slow down the economy.

[geoffrey]

What you seem to not understand, and what other posters on this thread absolutely don't understand is that a savings account or long-term investment doesn't work. It cannot be invested in any way, it cannot earn interest, payments, anything. It has to be completely stagnant CASH.

Fine. If doing something with extra cash is such a big problem then ask the feds to set up an NEP II program. I am sure that would slow down the economy.

Your right, it would. Maybe the BoC has some insight on the possible outcomes of readdressing the fiscal imbalance. A 10 province standard would certainly slow the economy.

But supporting inefficiency is hardly a grand solution to the issue.

[Toro]

Huh? Do you believ taking money out of Alberta is going to "cool the economy"?

Sorry, Jerry Fortin is dead on above. Changing interest rates will do nothing because this is not a monetary problem.

What could Alberta do? Well, it could force companies to leave the oil in the ground. If no one knew that there was oil and gas below the Albertan surface, the Albertan economy would be experiencing no "inflation problems" now.

I usually accuse the Left of confusing symbol and reality but here's an instance where even the non-Left seems confused. Money is symbolic, but it's not real wealth.

And here is an example of August apparently confusing capital flows with fiat money.

Capital flows are what is causing the boom as capital is flowing into Alberta to exploit the large deposits of energy.

Transfering billions of dollars out of Alberta that has flowed into the province because of the oil wealth has the same effect as not allowing companies to take oil out of the ground.

A simplistic illustration

Example 1:

There is an oil deposit worth $100 million in a region. $100 million of capital flows into the region to exploit the resource. The government then charges a tax of $100 million to transfer out of the region. Net gain to region, $0. There is no boom.

Example 2:

There is an oil deposit worth $100 million in a region. It sits in the ground, unexploited. Net gain to the region, $0. There is no boom.

(In fact, there would be a net gain in example 1 because of the multiplier effect, but the government could tax that away too, leaving the region with little gain.)

Of course taking money - capital - out of Alberta and giving it to every other province would be a net loss to Alberta and a gain everywhere else. It has nothing to do with changing interest rates. Why do you think Alberta was so upset over the NEP and why there's talk about limiting equalization?

[August1991]

There is an oil deposit worth $100 million in a region. $100 million of capital flows into the region to exploit the resource. The government then charges a tax of $100 million to transfer out of the region. Net gain to region, $0. There is no boom.

Why would anyone transfer $100 million to Alberta if the Albertan government was simply going to tax it all? Heck, why would anyone do anything in Alberta if the government was simply going to tax it 100%? You don't need complicated references to "capital flows" to understand that.

Capital flows are what is causing the boom as capital is flowing into Alberta to exploit the large deposits of energy.

No. The boom is the result of real resources flowing into the Albertan economy. Wages in Alberta are rising to attract people to work. The real estate boom is the result of many people moving into the province to offer their labour services. Albertans are moving about the province and are working longer hours. There is alot of physical capital also moving into and about the province to build the houses and provide the plant and equipment.

Now then, if no one knew about the oil & gas, this boom wouldn't occur. Similarly, if the Albertan government taxed oil production (raised royalties), this would have the same effect.

At the bottom, I have the impression that Geoffrey is upset by the speed at which Albertan firms are exploiting this resource. Clearly, the Albertan government could slow this down and this would have for effect to save the oil for the future. In general though, private firms are better placed to decide extraction rates.

What you seem to not understand, and what other posters on this thread absolutely don't understand is that a savings account or long-term investment doesn't work. It cannot be invested in any way, it cannot earn interest, payments, anything. It has to be completely stagnant CASH. As soon as you put in into a savings account, even if they just marched down to say Royal Bank and put it into a 0.0005% interest savings account, that money is back into the economy.

Geoffrey, you seem to have a fetish for cash (similar to the fetish other posters have about government deficits).

Do you believe that if Albertans bury the money in the ground, then that will slow the economy down? By the same logic, maybe we should bury bottles of cash in Haiti and then Haiti will become rich.

For better or worse, life just doesn't work that way. Money is a symbol of wealth but it's not wealth itself. Money no more makes the world go round than green lights make cars go. (I know that viewpoint is extreme but before considering the subtleties of traffic lights, it might be wise to consider first how internal combustion engines work.)

[Toro]

Why would anyone transfer $100 million to Alberta if the Albertan government was simply going to tax it all? Heck, why would anyone do anything in Alberta if the government was simply going to tax it 100%? You don't need complicated references to "capital flows" to understand that.

That's not the point, August. The point was to demonstrate the effects of such a policy. It has the same effect. You said taking money out of the economy wouldn't slow it. It would.

Capital flows are what is causing the boom as capital is flowing into Alberta to exploit the large deposits of energy.

No. The boom is the result of real resources flowing into the Albertan economy. Wages in Alberta are rising to attract people to work. The real estate boom is the result of many people moving into the province to offer their labour services. Albertans are moving about the province and are working longer hours. There is alot of physical capital also moving into and about the province to build the houses and provide the plant and equipment.

Wages rising, real estate booming, people working longer hours, physical capital coming into the province are all occurring because capital is coming into Alberta because of oil. All of these are function of capital flows arising from the demand for what Alberta has - energy. If oil was $20 a barrel, money wouldn't be flowing into province to a.) invest in the tar sands, and b.) to buy the stuff, and you wouldn't have rising wages, real estate, etc.

[August1991]

Wages rising, real estate booming, people working longer hours, physical capital coming into the province are all occurring because capital is coming into Alberta because of oil. All of these are function of capital flows arising from the demand for what Alberta has - energy. If oil was $20 a barrel, money wouldn't be flowing into province to a.) invest in the tar sands, and b.) to buy the stuff, and you wouldn't have rising wages, real estate, etc.

Toro, I am going to reduce this down to the simplest level possible - without money at all.

About five years ago, you had to produce about 1000 barrels of oil to be able to get a new car. Nowadays, to get the same car, you only need to produce about 300 barrels of oil. In such circumstances, I can understand why many people want to go to Alberta and produce oil - and why many Albertans are switching into the oil business and why Albertan businesses are pumping oil wherever they can find it. If you want a new car, Alberta is the best place to be. And what would we see? Alot of oil going out of Alberta and alot of cars coming in.

Money (capital as you rightly call it) has nothing to do with the basic scenario I described above. It is true that in this scenario above, if we added money, we would see capital flows in and out of Alberta but these flows merely reflect and don't motivate what is going on in fact.

All this is relevant because jacking around with the money supply is not going to change the scenario except in subtle ways that are far from obvious - and certainly don't concern "capital flows".

For example, it might be possible to jack around with the money supply in such a manner that Albertans became confused and began to believe it required 1000 barrels of oil to get a new car. I don't think this confusion would last long but it could be done.

[Toro]

Toro, I am going to reduce this down to the simplest level possible - without money at all.

About five years ago, you had to produce about 1000 barrels of oil to be able to get a new car. Nowadays, to get the same car, you only need to produce about 300 barrels of oil. In such circumstances, I can understand why many people want to go to Alberta and produce oil - and why many Albertans are switching into the oil business and why Albertan businesses are pumping oil wherever they can find it. If you want a new car, Alberta is the best place to be. And what would we see? Alot of oil going out of Alberta and alot of cars coming in.

Money (capital as you rightly call it) has nothing to do with the basic scenario I described above. It is true that in this scenario above, if we added money, we would see capital flows in and out of Alberta but these flows merely reflect and don't motivate what is going on in fact.

All this is relevant because jacking around with the money supply is not going to change the scenario except in subtle ways that are far from obvious - and certainly don't concern "capital flows".

For example, it might be possible to jack around with the money supply in such a manner that Albertans became confused and began to believe it required 1000 barrels of oil to get a new car. I don't think this confusion would last long but it could be done.

What you are describing is Alberta's terms of trade. When demand rises more for an entity's exports relative to an entity's imports, the terms of trade for that entity improves, and the entity is in a relatively better position, i.e. the relative wealth of the entity has improved. In this case, the terms of trade for Alberta has improved because demand for oil relative to cars. Alberta's wealth is rising.

Economic wealth is the accumulated total of measureable, transferable utility over time. Wealth is a function of production, and production is a function of technological advancement. Capital is the embodiment of wealth, since production and technological advancement is embodied in capital. Capital can be physical capital such as a lathe machine or a blade server or your house, or it can be intellectual capital such as understanding accounting law or genomics. Financial capital is representation of this physical or intellectual capital into easily portable and tradeable units. Financial capital is necessary to store value and facilitate exchange.

When an entity's terms of trade improves, capital will flow into the jurisdiction because relative returns improve, be it the returns to capital or the returns to labour. When Alberta's terms of trade improves from 1000 bbls/car to 300, capital flows into Alberta. Financial capital comes into Alberta to invest. Intellectual capital comes into Alberta to work. When that happens, the demand for everything in Alberta rises, especially for fixed goods that are inelastic in the short-run such as housing. You have a boom. This process continues until the relative returns to capital and labour between the jurisidictions eventually equals. Thus, high levels of investment capital flows into Alberta until the marginal return on that capital is equal to the global return on capital. Labour capital stops coming into Alberta when labour is no better off in Alberta than it is elsewhere, either because wages have stopped growing or the cost of living is too high. At that point, capital flowing into Alberta is equal to capital flowing out of Alberta.

In the example you give of Alberta's improving terms of trade for oil relative to cars, capital flows into Alberta both causes the improvement in the terms of trade as incremental capital is expended for oil and thus transfered to Albertans, and responds to the improvement in the terms of trade as capital flows into the province to exploit the differential in returns.

This what I am refering to when I say "capital flows". Capital is flowing into Alberta because the terms of trade have improved, which is causing a boom, and causing the price of goods such as housing and the price of labour to skyrocket. The government can alleviate this boom by removing capital from the jurisdiction. It can do so through equalization and/or taxation. (Whether or not that's desireable from a political standpoint is another question.)

Notice how I haven't said anything about "money" yet. I have referred to "capital" and "wealth". Capital, and thus wealth, are different from the supply of money, though both are effected by it. "Money" is representative but not equal to "wealth". At any given point of time, the stock of wealth is fixed. In a closed economy, the stock of wealth does not change if the static quantity of money is at X or 2X, though in an open economy, the relative wealth of an economy can change when the supply of money is changing from X to 2X.

The supply of money is effected by the rate of interest. The rate of interest is effected (but not controlled) by the policies of the central bank. If the BoC were to increase the rate from 3% to, say, 10%, it would slow the economy down in Alberta because it would slow borrowing. The cost of credit would rise, and the demand for housing, cars and other goods would all fall. Thus economic activity would slow, if not contract. However, it wouldn't stop the flows of capital from other parts of the world into Alberta because oil is set in the global market, or at least it wouldn't until the clearing price of oil in the local currency began curtailing demand. What it would do is slow investment in the tar sands because the value of the Canadian dollar would skyrocket, and make returns in the country less atractive than in other parts of the world. Oil would continue to flow out of Alberta but the returns on assets in Alberta would fall because the returns in Canadian dollars would fall since the price of oil is set globally. However, if the BoC raised the rate to 10%, it would crush the economy everywhere else because many parts of Canada do not benefit or are hurt by the rising price of oil, and thus they would become even more uncompetitive because not only would their cost of borrowing rise but their products have become uncompetitive on world markets.

That's why raising interest rates solely to alleviate the boom in Alberta is a bad policy because it would hurt the rest of Canada, but the governments could effect the boom by pulling capital out of Alberta through equalization and spreading it elsewhere. Higher taxes in Edmonton would also have the same effect if the capital was invested outside of Alberta.

[margrace]

What you seem to not understand, and what other posters on this thread absolutely don't understand is that a savings account or long-term investment doesn't work. It cannot be invested in any way, it cannot earn interest, payments, anything. It has to be completely stagnant CASH.

Fine. If doing something with extra cash is such a big problem then ask the feds to set up an NEP II program. I am sure that would slow down the economy.

Your right, it would. Maybe the BoC has some insight on the possible outcomes of readdressing the fiscal imbalance. A 10 province standard would certainly slow the economy.

But supporting inefficiency is hardly a grand solution to the issue.

Don't worry as soon as Harper gets full power we won't have any surplas, all our money will go to supporting Wee Georgies war.

[Jerry J. Fortin]

Without developing a military industrial complex in Canada that would be folly. We would be better off just writing checks to the foreign defence contractors and keeping our sons and daughters alive.

[August1991]

What you are describing is Alberta's terms of trade.

Exactly. Now you get it.

Economic wealth is the accumulated total of measureable, transferable utility over time. Wealth is a function of production, and production is a function of technological advancement. Capital is the embodiment of wealth, since production and technological advancement is embodied in capital. Capital can be physical capital such as a lathe machine or a blade server or your house, or it can be intellectual capital such as understanding accounting law or genomics. Financial capital is representation of this physical or intellectual capital into easily portable and tradeable units. Financial capital is necessary to store value and facilitate exchange.

The word "capital" has such a troubled history and is prone to so much confusion. You have well described the difference between "real capital" and "financial capital". Unfortunately, Toro you then go on to confuse the two:

Notice how I haven't said anything about "money" yet. I have referred to "capital" and "wealth".

Sorry, you've been talking about "money" all along - at least, when you refer to financial capital. Although when you talk about "capital", it's not always clear whether you are referring to "financial capital" or "physical capital". So, call me confused.

The supply of money is effected by the rate of interest.

Is that the nominal or real interest rate? Because given your previous discussion about returns on "physical capital", I'm not so sure money is easily "effected" by returns on "physical capital".

----

Look, Toro, let's forget this arcane (and irrelevant) discussion about capital and so on.

The main point (as you rightly noted) is that Alberta's terms of trade have drastically changed. The Bank of Canada could play around with the exchange rate and possibly change perceptions of the terms of trade. The Albertan government could impose taxes to alter the terms of trade. Both would slow down the Albertan economy.

Given the OP, those are the possible options.

[Toro]

Sorry, you've been talking about "money" all along - at least, when you refer to financial capital. Although when you talk about "capital", it's not always clear whether you are referring to "financial capital" or "physical capital". So, call me confused.

If I own a refiner and then I sell it, I have converted my physical capital into financial capital. I will sell it, receive currency, then invest that currency in paper assets such as bank deposits, bonds, stocks, etc. If I then want to buy an oil sands project in Alberta, I transfer my financial capital into Alberta, convert into Canadian currency, then exchange the currency for my physical plant in Alberta. The role of currency, or "money", is to facilitate the exchange. Financial capital is physical and intellectual capital transfered to paper (or electrons.) The supply of money will effect the value of financial assets.

[August1991]

Uh, Toro, I'm not confused by the difference between a financial asset and a real asset. I was confused by your use of the word "capital" for both, without it being obvious which of the two you meant.

... I transfer my financial capital into Alberta...

Is it really necessary to transfer financial capital to Alberta? If I don't, will that change anything? (IOW, does it matter whether I keep my wallet in my purse or in my pocket?)

The supply of money will effect the value of financial assets.

But will the supply of money "effect" the value of the underlying real asset? And if so, how? (These questions strike as more interesting.)

[Charles Anthony]

But will the supply of money "effect" the value of the underlying real asset?

Indirectly, the management of the money supply can affect the real value of an asset.

The real value of an asset is a reflection of what other people are willing to pay. If the management of the money supply makes trade more difficult, the real value of assets will be affected.

To illustrate, if I was uncertain about the price of bread tomorrow, I might be reluctant to buy a comic book from somebody in Alberta through eBay for fear that I can not afford my daily bread. As a result, the auctioneer/seller of the comic book has one less interested buyer -- he can not command as high a price. Similarly, the real value of the comic book is altered if I am willing to pay a fortune for the comic book but I die of a heart-attack before placing my bid. If Albertans have a reputation for not delivering, the real value of the comic book in the hands of an Albertan is affected. All of these things affect real values.

And if so, how?

In extreme situations (i.e. unpredicatable monetary inflation or deflation -- something we rarely see any more), the entire economy can be stagnated.