Category: Economics

How much spare change should you keep behind the couch? You need a little bit in case if you want to head out to the grocery store to pick up some beer and popcorn, but too much of it and it will be wasting away earning a zero yield, which can be more efficiently thrown into the short term treasury bill market where you can skim off a rich 25 basis points. Depending on how much you actually have in the couch, that could translate into an extra beer!

Sarcasm aside, in the case of the US government, they raised a ton of money during the COVID-19 crisis as illustrated by the following chart:

In recent history, the US treasury normally keeps $200-$400 billion in cash available for day-to-day operations (noting that the annual US deficit in recent years typically hovers around the trillion dollar range), but they raised about 5 times this much during Covid-19.

However, now that the worst of things presumably are over, they have begun to bleed away this excess cash balance, approximately half of it. This can be attributed to some factors, but I would estimate the stimulus spending bill has accelerated the distribution of this cash, coupled with the necessity of keeping a high float due to the even further elevated deficit the government is incurring (estimated $3.3 trillion in 2020).

I don’t know what to make of the implication of the US government bleeding off the cash balances, but I will also note that the Government of Canada appears to have a similar trajectory:

Balances held by auction participants have presumably been zeroed because participants could get higher yields on their capital from other areas.

My understanding is that with the BoC still engaging in a very healthy amount of quantitative easing (‘at least’ $4 billion a week) interest rates will continue to be suppressed. I will note that the 10-year yield has almost reached to the range of the pre-Covid yields and the financial overlords are probably trying to manage some fine balance between the level of QE vs. what is truly going on in the economy. However, the current course of action (accumulation of massive amounts of debt and monetary suppression of interest rates) will come at a cost of economic growth being lower than what it could be – it is sort of like strapping additional weights on the ankles of a marathon runner.

Michael Burry linked to the following paper – Dying of Money: Lessons of the Great German and American Inflations. He is trying to make an analogy to present times with past times and some of it is reasonably convincing:

Stock market speculation, which adds nothing to the wealth of any nation, is the inflationary activity preeminent, and it was the craze of America in the 1960’s as it had been of Germany in 1921. A buoyantly rising stock market marks the opening stages of every monetary inflation. A sharply rising stock market proves to be an unfailing indicator of monetary inflation happening now, price inflation coming later, and a cheap boom probably occurring in the meantime. The stock market boom like the prosperity is founded on nothing but the inflation, and it collapses whenever the inflation stops either temporarily or permanently. American investment in the 1960’s, with its instant fortunes, its swamping volumes of turnover, and its absurdly high prices for incredibly useless ventures, underwent a species of insanity that was quite typical of inflationary booms. In 1968, the last year of full bloom of the inflationary prosperity, the volume of trading on registered stock exchanges alone was $200 billion, or more than four times what it had been in 1960. The income of the securities industry increased from $1.2 billion to $4 billion. The exchanges were compelled by the overwhelming volume of trading to close for part of the week, as the German Bourse had done in 1921. Capital gains of individuals reached $36 billion, more than three times the levels prior to 1962, and more than the income generated by the entire American gas and electric utility industry and agricultural industry combined.

There are many other damning paragraphs in this book worthy of note, but I will leave it at this.

Canada’s political environment is really easy to model – whatever is in the best interests of Ontario and Quebec tends to become national policy, irrespective to the impact it has on jurisdictions west of Ontario.

Let’s look at the proposed national carbon tax, which will take the carbon tax from $30/tonne CO2-equivalent in 2020 to $170 in 2030:

2019 – $20/tonne
2020 – $30/tonne (+10)
2021 – $40/tonne (+10)
2022 – $50/tonne (+10)
2023 – $65/tonne (+15)
2024 – $80/tonne (+15)
….
2030 – $170/ton

To put this into context, at CAD$40/ton, a gigajoule of natural gas has a carbon tax of CAD$1.99/GJ applied to it. At CAD$170/ton, that is CAD$8.44/GJ. The AECO market price for natural gas at the moment (note, it is December when there is peak demand) is CAD$2.53/GJ. The projected carbon tax at the end of the decade will be over three times the commodity cost. Needless to say, this puts Canadian companies that rely on natural gas consumption at significant cost disadvantages over jurisdictions that do not impose such taxes (the United States, for one).

Let’s take a look at electricity generation, for example.

On the electricity generation side, we see that 99% of Quebec’s electric generation comes from non-carbon taxed sources – Hydro (94%) and Wind (5%). Ontario’s non-carbon taxed electricity (91%) is Nuclear (57%), Hydro (24%), Wind (8%) and Solar (2%).

Electricity generation is about a third of energy consumption. A really good illustration is provided by the Lawrence Livermore Labs (this was linked to from one of Peyto’s president’s reports):

You can find detailed Canadian data here, albeit not in such a convenient manner.

One issue is that it takes a lot of energy to extract energy (and resources such as iron ore, copper and pretty much anything else in the ground), and of course this puts Alberta, Saskatchewan and British Columbia at a significant disadvantage with this cost regime.

The political aim with this carbon tax continues to be levying a tax that purports to be country-wide, but the impact is concentrated on a regional basis which conveniently happens to be in areas where there is the least support for the ruling party in government.

For those of you that claim there is a corresponding payment to individuals, while this might be true at first, it is performed to get initial acceptance while the proverbial frog boils in the pot. The rebate will be whittled away and eliminated over the coming years in the name of equality. This will come in the form of income testing these “climate action incentive” payments. Eventually the threshold will be lowered to the maximal vote-buying point and any pretense of the tax being “revenue-neutral” will be eliminated, similar to what happened in British Columbia when they dispensed of the notion in 2017. I wrote about the myth of carbon tax revenue neutrality for another publication back in December 2018.

As an example, in British Columbia, it is estimated in the 2020/2021 fiscal year that the carbon tax will raise about $2 billion in revenues, or about $400 per British Columbian. About $300 million in total is estimated to be directly paid back to people (initially called the “Climate Action Dividend” but renamed “Climate Action Tax Credit” as the word “dividend” appears to be dirty with the current BC NDP government) – normally this Climate Action Tax Credit is $174.50/person that earns less than $35,748 (or family income of $41,708), but this was topped up to $218 due to COVID-19. For relation, the median family income in BC is around $90,000.

In terms of the net carbon tax revenue, the $1.7 billion the BC government collects is free for them to do whatever they want. Nationally, it will work the same way, at least for the provinces that do not levy their own carbon taxes.

The decision to raise carbon taxes across Canada does not cost the ruling Liberal party much politically, but will allow them to raise disproportionately high revenues from those areas and enable the redistribution to their vote-friendly base, namely Ontario and Quebec. Such is the nature of politics and power.