A Melman Minute — February 22, 2008

We have never believed that a proper role of a website such as ours is to offer advice on how to vote. Therefore, you will not be seeing recommendations on these pages regarding which party to vote for in either Canada or the United States. That is obviously a highly personal matter for each reader.

However, there are times when the existing political systems intrude so deeply into the productive economic systems that comments relating to those influences on economic performance, efficiency and profitability most definitely are in order. This is one of those times for us.

First, the Federal Reserve Board acknowledged yesterday that they are being hit by a ‘double whammy’ of late. The economy definitely appears to be contracting and yet the specter of inflation is clearly evident in the readings of their most recent economic ‘tea leaves’. In a recent Globe and Mail article authored by Barrie McKenna in Washington, D.C., we are informed that the Fed used the dreaded word, “stagflation” to describe the current economic mix.

Figures for inflation in January were now a full 4.4% above those of a year earlier, the highest rate of published inflation numbers in several years. At the same time, Fourth Quarter GDP growth in America came in perilously close to zero. In fact, many observers opine that the U.S. economy has now actually entered a period of true recession. McKenna quotes the Fed’s own minutes of their January 29-30 closed door meeting by noting, “With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risk to growth would remain even after this action (two dramatic reductions of interest rates within days of each other).”

Accordingly, the Fed has raised its outlook for inflation in the coming year, lowered its estimate for economic growth, and acknowledged that the unemployment rate would likely rise to the highest number in several years.

Given that perceived reality, one would normally expect governments to get out of the way of efficient production to the greatest extent possible, thereby allowing corporations and small businesses to increase their efficiencies, expand their businesses and take on more employees at higher wages. But we offer two dramatic examples that such concepts do not appear to be part of government regulators’ thinking at this time.

Reuters News Service carried a story yesterday regarding the Canadian/USA border detailing how the growing complexity of border procedures and regulations is adding costs and complications to cross-border businesses, not to mention the incredible waste of time and growing levels of aggravation for millions of tourists and casual cross-border visitors.

A joint report from the Canadian Chamber of Commerce and the U.S. Chamber of Commerce notes that this build-up of complex regulations coupled with rising fees threatens to become a situation with, “…risk becoming an unmanageable burden.”

Among their complaints is that there is not round-the-clock staffing at many border crossings and sometimes agricultural inspection stations - with clearance from those stations being an absolute requirement for cross-border agricultural shipments - sometimes remaining unmanned for entire days.

In a separate but related story, the British Columbia provincial government just released their 2008 projected budget. In an effort to become known as a “green” province, the budget calls for the addition of a set of taxation regulations that seems to take complexity of government regulation to an entirely new level.

A new area of taxation called a “carbon tax” will be launched beginning July, 2008 which will add to the cost of every refined petroleum product, specifically including gasoline. The tax, instead of being made as simple as possible, will come in at an initial rate of about 2%, but will grow incrementally to over 7% within a few years. However, in order to be fair to taxpayers, the monies collected will be returned to some taxpayers in the form of a C$100 check to be mailed out. Then there is an area of regulation imposing penalties on producers of carbon, except there are minute details yet to be worked out whether the use of carbon products in some refining processes, for example, actually constitutes consumption of carbon products. Some car drivers of hybrids will be rewarded, but, a low-income person driving an older vehicle will be penalized.

In fact, many studies are yet to be completed regarding how the regulations are to be implemented, but they will come into effect within a few months and the government now assures the public that they will be ‘sorted out’ over time.

We would simply ask: “How is business supposed to function efficiently and plan ahead with any degree of confidence when they don’t have the foggiest idea of the specifics of this new area of government involvement, particularly when it is apparent that the basis of the entire body of regulations is to pander to public sentiment?

We have clearly entered a world where the government, on the one hand, is stimulating like mad, and, on the other hand, continues to burden industry and commerce with regulatory ever-growing regulatory burdens. One wag once coined the saying that “lunatics in an insane asylum couldn’t come up with a worse solution.” When commenting on the present condition of government impositions on business and industry, in our opinion, observers might use that saying with a high level of confidence.

The uncertainty is playing itself out in the marketplace of late and the chart of the Dow Jones Industrial Averages is worth a good look. As can be seen, in the last month (which included the two Fed rate cuts), the markets rallied strongly at first, but then entered a narrow trading range. Today’s markets seem to be breaking below the support levels of that range - but we have seen so many whipsaws of late that we will allow the markets themselves to indicate their future direction.

Commodities in general are slightly lower today on a moderate increase in margin requirements with the metals slightly lower on balance and with crude slightly higher. Securities markets opened slightly higher but have since encountered heavy selling with the TSX off about 20 points and the Dow lower by 70 after two hours of trading.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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