Events will shake federal and provincial governments alike
By Bruce A Stewart
It’s actually not clear whether former Prime Minister Harold Macmillan of Great Britain said, when asked what blows governments off course, “events, my dear boy, events”, but it doesn’t matter.
It’s deathly true for all that — as our Premiers and Prime Minister are about to discover.
Welcome to the whirlwind.
The failure of Washington to enforce the laws on the books when it comes to the actions of those on Wall Street led last year to the Occupy movement and may yet work itself out in American politics this year. From courts approving of document fakery, to approving of the alienation of supposedly segregated customer accounts, to changing accounting laws to approve “mark to fantasy” accounting, not only haven’t existing laws been used to lead to prosecutions or investigations, but five years of bailouts and outright gifts of taxpayer money have been used to say “there, there, now, it’s all right, Papa Sugar will look after you.”
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Why? Is it simply because they’re all such fantastic campaign donors?
No. It’s because in that ocean of ill-formed interlocking credit default swaps and collateralized debt obligations that makes up the toxic assets of the “too big to fail” banks is a ton of exposure internationally as well.
You could pull the string from the American end by enforcing banking law, and bring down the world. Or you could pull the string from the European end by Greece, Spain, Portugal, Ireland, Belgium or Italy being booted from the Eurozone or repudiating debt and, bingo, down come the Americans with the Europeans.
Or perhaps it’s the shipping companies, which overextended themselves with new construction in 2008 thinking that China would treble or quadruple its exports. Instead China’s been struggling to stimulate its economy and shipping needs are down. All of a sudden, the shipping companies are going out of business. So much for globalization, eh?
Then you can add drought — environmentalists that demanded biofuels, mostly ethanol production a few years ago have now reversed course and said “no” to it, but there isn’t a politician anywhere who’s got the moxie to cut the farmers off their billions in subsidies now. Not even in a drought piled on four years of global food production problems. Nope, corn for gas tanks matters more.
Besides, we’ve been outright lying to ourselves about global fuel production since about 2005, when we started adding in things like ethanol and calling it “oil production”.
Producers have no pricing power; consumers are tapped out and aren’t buying (the only thing driving consumer credit these days is student loans). Canada’s overinflated housing market is starting its long painful journey back to reality. If it weren’t for endless rounds of quantitative easing the stock markets would have already sunk the way the Nikkei did in 1990 (it’s still down 75%, and Japan has never recovered).
Pull the pin on any element of the financial system and capital — whose formation has been impaired by endless low interest rates for years — evaporates. There goes the money for resource expansion: if capital’s in short supply, shale plays dry up, oil sands leases go unexploited, pipelines don’t get built.
While there’s been a small recovery in oil prices — they did get low enough earlier this summer to put projects in jeopardy for being uneconomic — demand is weak. Royalty projections, in other words, remain at risk, too.
Meanwhile, aside from Saskatchewan, the country is in debt up to its eyeballs — and since markets will move interest rates up from the one per cent average of today to five per cent in the blink of an eye once the unravelling begins, that’ll break the Ontario and Québec governments budgets totally (debt service will start to compete with health care, having already stomped out education at today’s rates) and cripple the rest.
It’s going to be hellish: no one will be able to blame the opposition parties for any of it — and all the governments will have to go into survival mode, often breaking their “brand” as politicians while doing so. Pity they hadn’t used the last few years to prepare.
Buckle up: this autumn promises to be rocky.