Friday, December 26, 2008

More Bad News Predictions for 2009 and Beyond

Canada is still weathering the storm pretty well, but that's probably because the US downturn hasn't fully hit us yet. It will. There have been small US economic downturns that didn't hit Canada, but there is no way that a major recession in the US is going to leave Canada unscathed. Our economy is just too dependent on the US: not just exports (US exports comprise 25% of our GDP), but also US corporations operating in Canada that lay off Canadians when their US operations suffer; consumer confidence affected by the US (consumer spending is 55% of GDP); and tightening credit conditions. If the US dollar falls relative to the Canadian dollar, we will be in even more trouble.

A typical recession in Canada starts a bit after a US recession and is much longer. The US bottoms out and bounces back pretty quickly, while we continue to have high unemployment for a couple of years. The Report on Business and its ilk downplay the importance of this post-recession hardship because they're more concerned with the stock market, but working Canadians feel the pinch for a long time.

At this point, a recession with two or three years of layoffs is the "Good News" scenario. The US government is throwing trillions at the economy because they are in very great danger of a much worse situation than a recession. We are all teetering on the brink of a cliff and there may be no precedent for what happens next. Whole industries may shut down. We could be facing massive failures of banks, investment companies, manufacturers, retailers - even states and provinces. Every investment not protected by deposit insurance could be in jeopardy. We could enter a period of high inflation that would not only erode wealth, but undermine the efficieny of every aspect of the economy.

The economic downturn in China is particularly troubling. Just one small effect: if Chinese demand for oil declines, the Alberta oil industry could conceivably collapse. Similar shocks to other sectors that are affected by Chinese demand could be felt all over the world. The Chinese economy is vulnerable because it is still a very poor country with huge exports: it doesn't have domestic demand to cushion its vulnerability to global conditions. If it falters, it could fall hard.

The impending collapse of countries on the periphery of Europe will send shock waves around the world as they default on loans, and it's not clear (despite overwhelming evidence) that global economic leaders are preparing for it. World governments and economic organizations seem to be too much in reaction mode, and aren't being proactive enough.

If this great depression occurs - and at this point it's still just a possibility, not a certainty - then who knows what horrible political movements may grow. Hitler had his roots in the great depression of the 1930s. What might be the equivalent in a 2009 depression? Who might be the next great fascist state? Russia... China... the USA?

If we go into a depression and if it results in another world war, how will that affect the environment? Wars cause enormous environmental damage, with all the burning and sinking of ships and aramament manufacture and so on, while the environment is increasingly shaky. We could hasten the melting of the global ice caps, resulting in flooding of coastal areas and the displacement of hundreds of millions of people, just when international organizations that deal with disasters are too broke to operate in the way they were designed.

It would be comforting to know that there were people thinking about what may come and planning for it as best they could. In the short term we need to figure out what to do when the IMF runs out of money. But we also need to rethink everything we do in light of possible global economic collapse. It might not be a likely scenario, but there is a growing possibility that we're in for dark times ahead.



WesternGrit said...

The answer is quite simple. It starts with one nation deciding to forgive all major loans. No more debt. Restart the financial system. New currencies. Same banks. Same governments. New policies, and new direction.

Of course, that's just a dream answer, to a dream scenario. Still good to have a close look at what MIGHT come...

janfromthebruce said...

Hi Yappa, you made some opening statements with no reference or link to back up these assertions.
For example, A typical recession in Canada starts a bit after a US recession and is much longer. Is this true and why? I do know that the late eighties and early 90s recession was longer in Canada and that was due to our monetary policy of trying to get the rate of inflation to 1%. Monetary policy lost its twin focus of inflation and employment, and thus Canada stayed in recession alot longer than need be. It also ended up being what we call "a jobless recovery". Remember real incomes when adjusted for inflation also shows that in Canada, medium incomes have remained mired in 1980s.
As for the US throwing all its got at the economy - one needs to pick that a part - which part of the economy? What I have seen so far, is money thrown at banks, financial institutions, and corporate bailouts - meanwhile on main street chaos is playing out - the same folks who will be paying for the bailout of the rich and stupid.
Anyway, making sweeping generalizations of historical facts needs some links or references.

Yappa said...

Hi janfromthebruce -

Thanks for the comment. The issue of citations is interesting. I use them occassionally, mostly when I'm taking an idea from another writer or I have found a site that has supplmentatal information that I think will be of interest to readers. As to using a citation as "proof", in most cases I don't think that works. The fact that you can find someone who said something doesn't make it true, especially in economics where every conceivable position seems to be represented somewhere.

Also, this isn't a scholarly paper or even a newspaper article - it's not even as structured as an op-ed piece. I have advanced economics training and a lifetime of reading and watching, and I try to write fresh, personal ideas. I research what I write, but I choose some facts/ideas and dismiss others based on my own understanding.

I'm not saying I'm always right. The best part of blogging is that people write comments that disagree, and I frequently change or modify my views.

So on to your substantive points... I don't blame the government for putting inflation beyond all else. When we abandoned the gold standard we effectively adopted a commitment to not let the purchasing power of money be eroded. It's awful that central banks put inflation ahead of employment but it's so fundamental to our system that I don't see how to change it. It wasn't a capricious policy in 1992, for sure.

"Jobless recovery" is exactly what I described ("we continued to have high unemployment") but I reject that term. It's like a doctor saying that a patient had a "non-health recovery".

There are lots of explanations for why the 1990 recession dragged on so long in Canada. Another is the instability caused by Quebec. My memory of the time is that it just took us longer for the economy to pick up again. My memory about the 1980 recession is hazier - it too went on and on, with sluggish employment prospects as late as 1985, and I believe the US recovered faster.

Your complaint about my comment about the US throwing trillions at the economy is unfair. I didn't claim that the US was throwing money at the whole economy or that they were doing it effectively, so there isn't anything controversial in what I wrote. I agree with you that there are a lot of questions about the way they're handing over money to financial institutions (I've posted about it before).