"Recession" has become the buzzword of the day. The front pages of newspapers have graphs on them showing share prices plunging downward. Ever so many things suggest that rich world economies, driven by richest of them all, the US, are rapidly declining into a recession . The US government, trying to thwart the inevitable, is putting $1.5 billion in tax cuts into the hands of consumers. Interest rates will be lowered. But will these measures do any good? Not likely. This time we may really be spiraling downward toward a crash landing.
There are things in the background that will make it difficult for the US to avoid a crash landing. The national debt, financed largely by the dollar holdings of countries such as China and Japan, has reached an astronomical $9 trillion. Reflecting the fact that Americans don't make many things any more, but rely on others to make them, the US trade deficit stood at $63 billion in November 2007. Reflecting the fact that American consumers want things even if they don't make them and may not really be able to pay for them, consumer debt is now approximately $2.5 trillion. The country is not in good financial shape. Huge military expenditures are in the background as well. One source estimates such expenditures at some $650 billion, approximately twice the level at which expenditures were at in the year 2000. The source suggests that the US accounts for about 43% of global military spending. Of course, such spending is necessary given the rogue states that the US military must reign in, Iran for example, whose military expenditures amount to about 1% of global expenditures. One wonders who the real beneficiaries of US military spending are. Is it the "free world" or is it the military industrial complex? To the extent that it's the latter, it isn't going to give up its share of the American pie easily. And what about foreground factors? What everyone has focused on is the subprime debacle, issuing mortgages to risky borrowers and then packaging them into securities traded on the market. The problem is that the borrowers think they can repay the mortgages but they really can't. Not only that, the interest rate on the mortgage is initially low, but rises with the passage of time. Ever so many houses financed by subprime mortgages have now gone into foreclosure and can only be resold at a loss if they can be resold at all. We've all seen pictures of neighborhoods in Cleveland or Chicago with their streets of boarded up houses. But there are deeper foreground factors, including the belief that Americans, whether they have money or not, whether they have saved anything or not, are entitled to own homes and other expensive life-style assets almost as a birthright. And how would they do this? Why, by accessing cheap money. In an article on Alan Greenspan, former Chair of the Federal Reserve Board, in today's Globe and Mail, Barrie McKenna puts it this way: He, along with George W. Bush, was an outspoken advocate for dramatically increased home ownership. And millions of Americans bought homes for the first time during the Greenspan years, fuelling a massive building boom. Many of those homes are now in foreclosure, housing starts have collapsed and prices are falling in most markets. In a remarkable February, 2004, speech to a gathering of credit union executives, Mr. Greenspan lavished praise on now toxic adjustable-rate mortgage products. The apparent message to home buyers: They'd be crazy not to take the easy money. By some combination of luck and circumstance, we live in Canada and not in the US. Yet despite what Mr. McGuinty says, we are far from immune to what goes on across our southern border. As the reaction of the TSX has demonstrated, the huge wave of uncertainty that has washed over the US economy is washing over us as well. I'll take a little time to think about how it might affect us and try to say something about it tomorrow. Ed
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