Troy Media – By Gwyn Morgan
When the September 15, 2008 Lehman Brothers bankruptcy turned an American mortgage crisis into a global financial meltdown, governments in the U.S. and Europe staved off catastrophic banking failures by providing debt guarantees and injecting equity.
As the crisis subsided, national treasuries fortuitously profited from bank equities purchased at the nadir of the recession. Act one of the governments’ response to the crisis was clearly a winner. Regrettably, Act two has been a gigantic loser.
John Maynard Keynes’ theory that governments should spend their way out of recession proved disastrous when it was implemented during the recessions of the 1970’s and 80’s: Interest rates and inflation skyrocketed while economic growth remained stagnant, a phenomenon that became known as “stagflation”. Given this woeful legacy, it seemed certain that Keynes’ stimulus spending theory had no greater chance of rising from the grave than the late economist himself.
Everyone was a Keynesian
But rise from the grave it did. In a desperate effort to end the 2008 recession as quickly and painlessly as possible, “everyone is a Keynesian” became the rallying cry. In the three-year period ending last week, an orgy of stimulus spending pushed the American national debt clock ahead by more than 40 per cent to U.S. $14.6 trillion. Total gross government debt of the 27 country European Union (as defined under the Maastricht Treaty) jumped by more than a third to €9.8 trillion during 2008/09/10. Yet, after the largest government spending in history, the U.S. and EU economies remain stagnant.
Rather than stimulating economic recovery, this massive government spending has had the opposite effect.
The Obama administration’s fixation on multiple debt-fuelled stimulus injections and “quantitative easing” (i.e. printing money) has taken the country progressively closer to insolvency, causing a nervous private sector to eschew expansion in favour of hunkering down and hoarding cash. Unemployment remains high, consumer confidence low and economic growth anaemic. This, in combination with Obama’s anti-business rhetoric, has hobbled and demoralized the great American entrepreneurial engine that has always lifted the country out of past economic doldrums.
The economic picture is similarly bleak in many EU countries, and now the sovereign debt crisis threatens financial Armageddon. It is now clearly evident that, rather than creating economic recovery, those trillions in stimulus spending have wrought a much longer and even more devastating economic malaise.
Canada is one of the few countries that cut spending and paid down debt in the years prior to the financial crisis. Consequently, it entered the recession with one of the strongest balance sheets in the OECD. But it’s decision to join the stimulus spending band-wagon increased Canada’s national debt by 23 per cent, to some $560 billion since the fiscal year starting April 2008. While this deficit spending is a regrettable departure from years of fiscal prudence, the fact that we entered the recession with fiscal surpluses should make rebalancing the books within three years an attainable objective.
Throughout the financial crisis, Canada’s mortgage portfolios remained sound and our banking system gained international acclaim. Strong demand and prices for our natural resources also helped us weather the storm. Unemployment levels have fallen steadily from their September 2009 high to the current level of 7.2 per cent which, interestingly, is less than the Canadian 15-year historical average of 8.5 per cent. As the current sovereign debt crisis sweeps through the Euro-zone and the United States struggles to maintain financial respectability, Canada is viewed globally as a prudent and safe refuge.
Just say no to more stimulus spending
Given this context, one would have thought that the last words passing any Canadian Parliamentarian’s lips would be “stimulus spending”. Yet, when Finance Minister Jim Flaherty’s appeared before the House of Commons Finance Committee on August 19, there sat NDP Finance Critic Peggy Nash stating “Canada needs a countercyclical measure of more government . . . spending to boost the economy”. The media seemed equally oblivious to the cause of the sovereign debt tsunami breaching European and American shores. In the days following the Minister’s appearance, the most common question posed in media interviews focussed on another round of stimulus spending.
Canada is not immune to the economic struggles of our largest trading partner or the very serious sovereign debt crisis in the Euro-zone, the world’s largest economic unit. The fallout is likely to stress our economic resiliency to the max. But adding more debt to our national balance sheet would reduce that resiliency, putting us on the same regrettable path to financial ruin that Keynesian theories have taken the U.S. and the EU.
Gwyn Morgan is the retired founding CEO of EnCana Corp.