I have been trying to make sense out of the flurry of announcements about the fiscal aid that the U.S. government is giving Wall Street. The rescue package has now reached $7.5 trillion (half the country’s annual GDP) in the form of guarantees, loans and equityinvestments.
This is impressive and provides a stark contrast with the early days of the Depression when governments around the world threw up tariff walls and refused to invest a nickel in economic revival.
Today, the Canadian Finance Minister, Jim Flaherty, issued a financial statement that seemed to harken back to the policies of the 1930s. It was more about cutting spending and holding the line than stimulating the economy. Public servants will be held to 1.5% increases in wages, and will lose the right to strike. The government is cutting spending b y $6 billion and is aiming at balanced budgets over the next five years. What kind of unreal world is this man living in?
Economists from Thorstein Veblen to John Maynard Keynes and John Galbraith have taught that governments must prime the pump in bad times in order to hasten the return of good times.
This worked as long as productive capability was limited. Now, we’ve got a new kind of problem. For many years, North America has had the technological capability to produce goods at a rate faster than purchasing power (via wages primarily) could be created to consume them.
To keep the factories humming, we’ve had to convince consumers to take on a mountain load of debt. The assumption of debt was morally indefensible to our grand-parents, and barely acceptable to our parents. The powers that control media and culture set out to change all this after World War II. First it was buying on time. When that wasn’t enough, credit cards were invented.
Credit used to be restricted to those with good jobs and decent incomes. Driven by economic necessity, and justified by the proposition that everyone is entitled to their share of the American dream, the largest single purchase most people make in their lives was put within reach of just about everybody in the United States. Mortgage providers got the green light to open the floodgates; it was all in a good cause, building the mountain of debt ever higher.
Since then, crooked dealings, avarice and plain stupidity on the part of both consumers and the leaders of the financial industry have put the global economy in a black hole.
Now, the focus is on the “credit crunch.” They’re going to solve that with printing press funny money. But it won’t really solve anything because people have reached the ultimate limit of their ability, or willingness, to assume debt.
Canada will suffer the same consequences as the U.S. – not because of a credit crunch here but because of a new debt averse attitude that is setting in. People just aren’t buying the big, expensive, debt-laden durable goods, be they houses, cars, computers, refrigerators or big screen TVs.
This scenario is likely to last at least for the next two years. Most consumers will focus on trying to reduce their debts, rather than increase them.
Much of this was predicted, but few paid any attention. John Talbott, a former investment banker and now a visiting academic at UCLA, wrote a book in 2003 predicting what we’re now going through. That work, The Coming Crash in the Housing Market, zeroed in on the profligate mortgage policies of agencies like Fannie Mae and Freddie Mac.
He has a new tome coming out next month that is sure to hit the best-seller lists.
Contagion (John Wiley & Sons) makes clear the role of debt in creating the fantasy economy that has replaced the real economy. He agues that the only economic growth of the past 10 years has come from government spending (via deficits in the case of the U.S.) and personal debt. He goes on to offer advice on how homeowners and investors can best weather the storm.
So the economic strategists can merrily spin their webs. Washington is running the printing presses overtime to put new money out there. Ottawa is doing the opposite, cutting spending and hoping to stay out of deficit. Neither strategy is likely to have much effect. It’s the Debt, stupid, and until the Debt goes away — or we wipe it out through inflation — don’t expect things to get much better.
Filed under: Politics | Tagged: Bailouts, Debt, Flaherty financial update, Global recession
