Friday, December 04, 2009

Interesting times Canada and China

It's been an interesting sequence of events with Canada and China the last few days.

- PM Stephen Harper makes his first visit to China in several years. Shortly after US president Obama breezed through that country

- Harper makes a statement on the Canadian economy while he's in China

- China leader publicly criticizes Harper for taking so long between visits

- for the first time, finance minister Flaherty expresses concern about Canada's defecit. Vows to eliminate the $1 billion a week federal budget gap and get back to a balanced budget in a definite time frame

hmmm, so what to make of this. I don't really follow it but how long was Harper's planned visit known. Because it seems kind of sudden. Although for appearances we were a bit stuck as Obama was right to go first - bigger and more important country. So Harper had to wait for Obama. Still was Harper "summoned" to China by top Chinese officials?

Interesting that Harper commented on the Canadian economy from Chinese turf and Flaherty suddenly notices and expresses concern about the horrible defecit. The defecit situation is actually far worse when you consider that pretty much every province is also running a record defecit. Also the federal government took on $75 billion of subprime mortgages off the banks books as a back door bailout. The current and eventual losses on that portfolio will likely be substantial.

The thing about the defecit is this. It's borrowed money. So in order to borrow money you need someone else to lend you money. I was very concerned about the record federal and provincial defecits for that reason. I felt there was a real risk that the bond auctions would fail; that we wouldn't be able to find anyone willing to lend us that much to fund these enormous defecits.

That's where China comes in. I suspect that a lot of the record federal and provincial defecits this year and in the projected next five years was loaned to us by China. Thus if we want China to continue to lend Canada money to fund the federal and provincial defecits then like Obama we have to make nice with our Chinese creditors.

So Harper makes a sudden trip to China. The Chinese publicly chastise Harper to his face when he's there. Harper reassures that Canada's economy is getting better. At the same time Flaherty reassures the Chinese that the money they lent us is safe; he'll be switching to Paul Martin mode real soon now and the defecit will be eliminated within 5 years max at any social cost.

In a way I'm glad. As long as China is on board for a 5 year plan then we can get our nation's finances back on track in an orderly [although still probably painful and unpopular] way. That's a lot better than being cut off by China and having to immediately cut the federal and provincial budgets by about $30-$60 billion.

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