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A Year of Living Dangerously |
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Written by Jim Knisley
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The official definition of a recession is two consecutive quarters of economic decline or if you prefer two quarters of negative growth.
A more homespun definition is that a recession is when your neighbour is unemployed and a depression is when you’re unemployed.
Right now there is a lot of debate among economists as to whether the U.S. is in a recession now or if it will arrive later this year. In Canada the debate is whether the U.S. will draw Canada down with it.
Canada also has, as always, its regional disparities. It’s hard to
foresee anything that would do more than slightly slow the red hot
growth in Alberta and a revitalized Saskatchewan.
But the eastern half of the country will likely be in for a rough ride.
The industrial base is already struggling, having been hit hard by the
higher loonie, a decline in the North American auto industry and a loss
of U.S. markets. This looks as if it is only going to get worse with U.S. consumers
trying to deal with empty bank accounts, maxed out credit cards and
falling home values. If that happens a lot of Ontario and Quebec
companies are going to get hurt.
Behind all this Main Street stuff are Wall and Bay Streets and the U.S. Federal Reserve and the Bank of Canada.
This is where it gets really unsettled. In the U.S., all the economic
focus is on when and how far the Federal Reserve will go in cutting
interest rates. That there will be cuts isn’t even a question anymore.
The only question down there seems to be how big a package of federal
spending (economic stimulus in the jargon) will accompany the lowered
interest rates. There is also a lot of debate over the form of the stimulus. Should it be enhanced unemployment insurance payments (which
would help those hardest hit by a recession)? Should it be additional
tax cuts (which would benefit the rich more than middle or lower income
earners unless they were well targeted)? Should it go into
infrastructure projects? Should it be paid to companies to retain and
retrain employees?
In Canada, the Bank of Canada will almost certainly cut interest rates
in the near term and it appears the government will proceed with some
small grant and subsidized loan programs.
Meanwhile lurking in the background is the big fear. This is the fear
that higher food and fuel prices will tear into wallets already thinned
by a recession making it worse and at the same time rip into the
overall economy pushing a host of other prices higher.
It would be a combination of inflation and, if not recession,
stagnation. It’s called stagflation and we’ve seen it before. It is the
most intractable of economic problems.
Anything done to restrain inflation (such as higher interest rates)
hurts the economy. Anything done to jump start the economy (such as
lower interest rates and government spending) fuels inflation.
Hopefully that particular wolf will stay away. But even if it does,
this looks to be a very uncertain year; a year when whatever economic
policies adopted in the U.S. and Canada may turn out in hindsight to
have been the wrong thing to do.
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Written by Ron Mitchell on 2008-03-18 12:50:07
U.S.A.did not learn anything from Russia.This is not the first time the U.S.overpaid bankers have blundered |
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