Times are about to get a lot tougher
By Bruce A Stewart
Everyone loves good economic news. Everyone really loves news that their financial assets are up.
Canadians have had a larger share of this in the past four years than most parts of the world.
Now the world is about to give Canada a world-class downturn in expectations.
We may still be doing better than most, but it won’t feel like it.
Let’s explain. Imagine if Ottawa controlled the Canadian dollar but didn’t tax us: the provinces handled all the money. Imagine if Alberta was the only province with a positive balance of trade. Imagine if all the rest were net importers, and holding things together by extensive deficit spending. Meanwhile unemployment in the rest of Canada (the non-Alberta part) was up — with Ontario and Québec having youth unemployment at up to 50%, and general unemployment at 20% or more.
That’s the European Union. Slide Germany into Alberta’s place, Spain and Greece into Ontario & Québec’s.
Now, when you told the ones with all those unemployed to keep tightening the austerity thumbscrews or else, what would you expect their citizens to do on election day?
Bingo. Greece elected enough anti-austerity politicians to block the squeeze, even if forming a government will be hard. Spain’s desperately trying to bail out its banks before the whole sector collapses and makes things even worse. France elected only its second Socialist Président since de Gaulle formed the Fifth Republic back in the 1950s.
The Dutch — who are fiscally prudent (Europe’s Saskatchewan) — have had their government fall: the Dutch people think the German model isn’t right for them, either.
So you can be sure the Euro is in trouble. Europe has now formally gone back into recession, making it all worse. The EU won’t make it through 2012 without some sort of default crisis and possible ejection of one or more members from the currency union. Meanwhile, there are calls to unwind the Single European Act, the removal of border posts, etc.
Now let’s look south. America’s about to hit its debt ceiling again — probably before the summer is out, but certainly before election day. What are the odds a Republican-controlled House will give a Democratic president an increase to keep food stamps, unemployment payments, disability payments, etc. flowing? If you said anything other than “we got you now!”, you’re not paying attention to US politics.
The Federal Reserve, with its zero interest rate policy and quantitative easing, has helped hold housing prices and the stock market up much higher than real economic activity in the US should support. Yes, too high, even with the collapse in housing prices there. There’s a lot more room to fall.
JP Morgan Chase’s little $2 billion fiasco this past week shows — along with MF Global and others — that the “don’t prosecute fraud” approach taught the bankers nothing. Risk in the system is significantly higher now than when Lehman Brothers went down. All those mark-to-myth credit default swaps are still out there, too.
Oh, and the Fed has helped bail out Europe already, and is on the hook to do it again — and, yes, the Federal Reserve itself can go bankrupt, which is where it’s headed.
Before the US election day, the crisis will come to our southern neighbours.
We are about to take part in a global whirlwind. Capital will get very tight. Our markets will get hit, even as collateral damage. Watch out for wild currency swings and suppliers and customers to suddenly want to “change their business relationships”, even if they survive this.
We were blessed with four years (2008-2012) to prepare. Our governments (except for Saskatchewan, with Manitoba and Nova Scotia working hard on it) haven’t.
By the winter of 2013, our economy and this country are going to be in a very different discussion about global economic woes – and politics.
Bruce Stewart is a consultant, educator and philosopher with a passion for public affairs currently located in Toronto. He is well known across the Internet for his blogs on management (Getting Value from IT) and social affairs (Just a Jump to the Left, then a Step to the Right) and for his daily stream of commentary on Facebook, Twitter and Google+. You can reach him at firstname.lastname@example.org.