Wednesday, September 3, 2008

The cat's outta the bag

In what seems to be a "whoops, did he just say that out loud?" moment, the British Chancellor of the Exchequer, Alistair Darling, told the Guardian newspaper last week that the British economy is facing it's worst downturn in 60 years. Of course for those who have been paying attention, this doesn't come as news, but in today's world where every word is carefully measured by the market, his statements came as a bit of as surprise. A politician telling it like it is. The fact is the west, and by that I generally mean North America and Europe (oh, and Australia and New Zealand), is facing an almost definite restructuring on all fronts. Politically, militarily, demographically and economically changes are coming and we don't know where they'll lead us.

Watching the circus that is the US presidential race, I can't help asking myself, "who would want to become president now?" There's a big mess left for him to clean up. Two losing wars, a record deficit, credit crisis, an aging population, worthless dollar, housing collapse and of course the accompanying loss of international respect that goes along with eight years of the Dubya presidency. If you tell the truth, like our Chancellor did, your currency goes in the toilet. So, maybe you should just lie, like Canada's finance minister, Jim Flaherty, and tell everyone that things are OK. It's not so easy though when it's so obvious that everything is going wrong and the world has looked to you for the better part of the last century to guide them through trouble. I mean ten trillion dollars. That's $10,000,000,000,000. The US deficit will be greater than that when the next president is sworn in. No matter how you look at it, Russia has just scored a victory in the Caucusus, at least revealing that the US no longer needs to be heeded. Heck, the Chinese even won the medal count at the Olympics. Does this all spell doom for liberal democracy? Is authoritarianism the way forward?

More importantly, are we headed to disaster as Mr. Darling told us? Well, the cheap easy money of the low interest cycle that just passed caused housing prices to double in the States and triple in Britain, pop. With losses from sub-prime loans in the US expected to rise above $1 trillion, a wave of bank failures is under way in America. Northern Rock in Britain and the full fall out from Fanny Mae and Freddy Mac and their $5.2 trillion have yet to hit the fan. The FDIC says the number of banks said to be in trouble increased to 117 last quarter. In Europe, Spain is the only economy maintaining positive growth (0.2%) while their unemployment hit a ten-year high on Sept. 1st. Meanwhile in the States housing starts dropped to their lowest point since the first Gulf War in 1991 and inflation reports caused the word stagflation to be bandied about again.

Britain has suspended the stamp duty on new home purchases under £175,000 and are looking at a range of other buyer incentives in order to kick-start the industry while their unemployment hits a 16-year high. Instead of letting the market sort itself out, we now live in a world where government are there to bail out the giant corporate failures. What incentive do they have to minimize their risks? Keep flooding the market with cheap money to create the illusion of growth as the US economy did this summer with the stimulus cheques. In predictable fashion, these efforts work for a while but do nothing to fix the long term problem. The US Federal Reserve's mandate is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Today this has somehow come to mean maintaining growth at all costs. The past business cycle in the US from 2000-2007 saw worker productivity rise but middle-class income fall, a pretty good indication that even in good times, things weren't getting better for the majority. Sometimes in life you need to deal with some short-term pain in order to ensure long-term gain, unfortunately we in the west seem to have lost our stomach for it in this world of instant gratification but eventually, the bill will have to be paid.