The great recession, part two -

The great recession, part two

Why it’s coming, and why Canada won’t escape so easily this time


AP Photo / Richard Drew

On May 6, shortly after 2:30 p.m., stock markets in the West went bonkers. In the span of 17 minutes, major indices shed nine per cent of their value, erasing $1 trillion in wealth. Then, just like that, prices rebounded and it was over. Dubbed the “flash crash,” regulators are still probing what went wrong. Analysts have voiced their suspicions. A computerized trading glitch was to blame, or someone had a “fat finger” and punched in an errant sell order. It had to be some fluke, though, because nothing warranted a drop in prices like that.

Except two weeks later, markets were back to the gutter level of the flash crash. There may be flaws in the way computers now handle most trades, but it’s also true a great many investors that day believed stocks were dramatically overvalued.

The sense of fear and anxiety now infecting the markets is showing up everywhere. In just the last month, Canada’s S&P-TSX Composite Index has shed seven per cent of its value. Exchanges in America and Europe fell even harder, dropping 11 per cent. Those people who blissfully watched their portfolios rebuild from the crash in 2008 have now seen their wealth drop sharply. Meanwhile, commodities like oil and copper are way down on worries the weak economic rebound will shift back into reverse. Not even the massive bailouts in Europe—first a $140-billion rescue deal for Greece, followed by a surprise $1-trillion “shock and awe” aid plan for other troubled nations like Spain and Portugal—were enough to convince investors the growing debt crisis can be contained.

Cue the doctors of doom. Forecasters like Nouriel Roubini at New York University are back in the headlines echoing the same warnings they had for the world three years ago about debt and overspending. “The recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage,” Roubini wrote in an ominous piece entitled Return to the Abyss. “The recent events in Greece, Portugal, Ireland, Italy, and Spain are but the second stage of the global financial crisis.” And now the United Kingdom, Japan and the United States—Canada’s largest trading partner—are at risk.

How did we find ourselves back on the ledge so soon? Most economists believed the recession was, by and large, behind us. The crisis that exploded in 2008 has been downgraded from the Second Great Depression to the Great Recession to just another downturn, in the same way meteorologists scale back their assessments of subsiding storms. That sunny outlook was reflected in the markets. Prior to this correction, stocks had soared 80 per cent in just over a year.

But the recovery may not have been nearly as robust, or genuine, as first thought. In the U.S., jobless claims unexpectedly rose last week. The U.S. Conference Board’s index of leading indicators, which forecasts future economic trends, declined in April for the first time in 13 months. Meanwhile, America appears to be in the grips of deflation, the vicious downward cycle of prices, demand and wages that led to Japan’s “lost decade.” “What you’re seeing around the world is investors and markets having an ‘aha’ moment,” says Daniel Arbess, who manages the Xerion Hedge Fund at Perella Weinberg Partners in New York. “They’re recognizing that the rally in credit and equity markets that’s taken place may turn out to have been somewhat artificial because it was facilitated by cheap money.” Or as Tom Samuels, manager of the Palantir Fund in Houston put it to the Associated Press: “The economic recovery story has started to look like a mirage.”

If that’s the case, the dreaded double-dip could become a reality. Since the first mention of green shoots last year, economists have warned that if governments cut back on the trillions of dollars they’ve spent to stimulate their economies, it might plunge the world back into crisis. Instead, by bailing out car companies, the housing sector and consumers—practically dropping money from helicopters—countries have taken on debt loads that now form the heart of this new crisis. Some economists warn there could be a wave of defaults across the world. At the very least, as countries slash spending and raise taxes to reduce their deficits, the result could be years of stagnant growth.
Canada, which came through the recession remarkably unscathed, is arguably better positioned than most countries to weather a second crisis. But that doesn’t mean we’re immune. If the European sovereign debt crisis mutates into something larger, Canada could slip back into recession. And there are reasons to fear it could be worse this time.

The Plague of Athens was a deadly outbreak in 430 BCE that killed a quarter of the city’s population and hastened the end of the Athenian empire. Now it could just as easily refer to the epidemic of toxic debt spreading out from modern Greece.

That country was by no means alone in its profligacy, but after lying for years about the true size of its deficits, it became the first to falter. Across the European Union government balance sheets are crumbling fast. Portugal faces deficits this year equivalent to 8.8 per cent of its GDP, according to the International Monetary Fund. In Spain, the figure is 10.4 per cent, and in Ireland it’s as high as 12.2. Meanwhile, the United Kingdom, which awoke to a shaky new coalition government in early May, is staggering under the weight of deficits equal to 11.4 per cent of its economy. The U.S., at 11 per cent, is just as bad. In all of these countries government debts have swelled to well in excess of 60 per cent of GDP. Based on projections from the Bank for International Settlements, unless drastic changes are made, debt levels will explode to between three and five times the size of their economies over the next 20 to 30 years. “Greece is the canary in the coal mine for other profligate sovereign credit countries,” says David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, just as trouble hit Thailand before the Asian crisis in 1997 and the collapse of New Century Financial in 2007 signalled the financial crisis. “The problems of debt and debt service have obviously not been washed away.”

When the recession hit, governments rushed to shovel out stimulus. Never mind that it was an excess of debt, in the form of toxic mortgages and strained lines of credit, that helped cause the crisis of 2008; they took on trillions of dollars of new leverage in the span of a few months. The onslaught of borrowing came despite structural deficits that spendthrift countries were already running. On top of all that, developed nations are on the hook for gargantuan promises to fund health care and pensions for their aging citizens.

As the recovery gained steam, investors turned a blind eye to bloated national balance sheets as if they no longer mattered. Think of it like a cancer patient who goes to the hospital for treatment, only instead of putting the patient through chemo to treat the disease, doctors simply removed the bad cells from one part of the body and injected them in another, hoping the malignancy would go away. During the financial crisis toxic debt was simply shifted from the household and corporate sectors onto governments. “The debt never went away,” says Arbess. “All that’s happened is a process of serial balance-sheet contamination. In the same way subprime securities infected the financial system, now the infection has moved to sovereign balance sheets.”

One worry is that investors are losing faith in the ability of some reckless nations to pay up, which would drive up borrowing costs and make it nearly impossible for them to refinance their debts. That was the case with Greece in late April, when investors demanded a premium of 12 percentage points to hold Greek over German bonds. The Mediterranean nation was on the verge of defaulting on its debt, most of which is held by European banks. Ultimately the EU and the IMF decided a bailout was the only option.

If investors shun sovereign debt, there are fears it could gum up financial markets and lead to another credit crunch where banks are afraid to lend. In that way the crisis could easily spill into the wider economy. At the very least, many expect the sovereign debt crisis will drive up global interest rates, making debt more expensive. It’s a concern shared by Bank of Canada governor Mark Carney. “Canada’s fiscal position is among the best, [so] we will do better than others,” he said last month. “But we will be pulled up by the rise in global interest rates, and that will have a knock-on effect on investment and growth in this country.”

Now a dark cloud hangs over the global economy in the form of austerity. To avoid a worsening debt crisis, and to bring their finances under control, countries are being forced to dramatically slash spending and raise taxes. While government spending cuts are generally seen as a good thing, they can also cool the economy by pushing down demand. The fear is, austerity measures will drive countries back into recession. Greece’s war on its deficits is likely to do just that. In order to meet the terms of its rescue plan, it has raised the minimum retirement age, jacked its value-added tax to 23 per cent, imposed steep tax hikes on cigarettes and alcohol, and declared widespread public sector layoffs and pay cuts. The goal: to reduce Greece’s deficit-to-GDP level from 13.4 per cent to less than three per cent by 2014, but the moves have been met by protests and riots.

Other countries must inevitably follow suit. “Getting their finances under control is going to require draconian spending cuts and tax increases,” says Rosenberg. “We’re talking about a very big chunk of GDP in these countries being taken out of the system for them to meet their EMU [Economic and Monetary Union of Europe] fiscal targets.” How much? In a new report, the IMF examines the steps industrialized nations must take to contract their fiscal policies in order just to bring their debt levels down to 60 per cent of GDP by 2030. For instance, the agency says the U.K. needs to cut spending and raise taxes by an amount equal to nine per cent of GDP over the next 10 years to meet that goal. Spain requires fiscal tightening of 9.4 per cent. The result will be much slower growth in the next few years. But if markets are worried about Spain and Portugal having to tighten their belts, the fallout from America’s fiscal woes are downright frightening.

When California Gov. Arnold Schwarzenegger went before reporters in mid-May, there was none of the movie-star bravado he brought to the office seven years ago. Instead, he warned Californians the state faces a US$19.1-billion funding gap this year. Programs like welfare, child care and mental health services would be chopped. But it was the way he framed the cuts that truly startled onlookers. “You see what is happening in Greece, you see what is happening in Ireland, you see what is happening in Spain now,” Schwarzenegger said. “We are left with nothing but tough choices.”

Did the Terminator just say California could be the next Greece?

It’s not quite that dire, yet. California’s debt amounts to a tiny seven per cent of its GDP, while the economy—the eighth largest in the world—is far more diverse. The greenback, meanwhile, enjoys reserve status among world banks, giving the U.S. tremendous clout to fend off the speculators who triggered Greece’s debt crisis. And as Rosenberg points out, America has the world’s largest military and stores of gold under Fort Knox. “The day this gravitates to U.S. shores is probably further off than people think,” he says.

Perhaps. But the laws of economics still apply, even to Washington. In a blunt speech to the Council on Foreign Relations, the chief economist of Citigroup, Willem Buiter, said the U.S. must embark on a dramatic campaign of fiscal tightening, or within three years the country will lose its coveted triple-A credit rating. Last week, for a short time, the state of California even made it onto a list of the top 10 sovereign borrowers most likely to default on their debt, as compiled by CMA Sovereign Risk Monitor. It’s all left markets shaken, and looking for answers to how the crisis will play out. “What we’re seeing now is not so much fear,” says Arbess. “Fear is something that is specific and known, and includes scenarios for which investors can take a position. This is anxiety, an emotional reaction to something much, much larger, which is the eroding confidence in the whole global monetary system. It’s very hard for investors to digest, because it reaches the very foundation of the investment environment and investors have no experience with the potential outcomes.”

Canadians can be forgiven for feeling somewhat disconnected from the panic. The so-called Great Recession left all our banks standing. While unemployment rose to 8.7 per cent, it never matched the previous two recessions. Yet Canadians still have plenty to be concerned about. If Europe goes into the tank, and the U.S. recovery stalls, we won’t escape. At the same time, officials in China have warned that exports to Europe, its second largest market, are weakening. If Chinese factories close en masse, as they did in 2008, it could crush commodity prices and threaten the resource jobs that kept so many Canadians employed through the downturn.

But above all, our own finances have deteriorated badly over the last two years. In his speech, Citigroup’s Buiter singled out Canada as a country that likes to think it’s in good fiscal shape, when in fact our government debt-to-GDP ratio is a staggering 82.5 per cent. The outlook for deficits in Canada is better, but the country “should not be thumping its chest too vigorously,” Buiter said. “Today’s best of breed would have been possible entries for the ugliest dog in the world contest a couple of years ago.”

Meanwhile, Canadian households took advantage of ultra-low interest rates to pile on more mortgages, lines of credit and credit card debt than ever before. Total household debt hit $1.4 trillion last year, according to a new report from the Certified General Accountants Association of Canada. Put another way, Canadians now owe $1.44 of debt for every one dollar of income they earn, making ours the most overextended households among the top 20 developed nations. Canadian families now owe more than Americans, on that basis; even Greek households are more frugal. We’re in far worse shape should the global economy slip back into recession.

It’s happened before. Despite what many think, the Great Depression was not one long, unending misery. In the midst of the ’30s, the U.S. economy staged a remarkable recovery that lasted four years. Along the way, markets also enjoyed several rallies, one of which saw the Dow soar more than 50 per cent. So the Great Depression was in fact two depressions that history has melded into one, and the recovery in between proved too good to be true. The question now: is history about to repeat itself?

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The great recession, part two

  1. Are you telling me you can't solve a debt crisis by borrowing more?

    • Tell that to the IMF. And the European Union. And Obama. Please, somebody tell them.

    • SSSSSHHHHHHHhhhhhhhhhhhh!

      The developed world is not ready to hear you yet, Galileo. Keep that up and they'll be pouring the kerosene on your stake in no time.

  2. Errr…the Bank of Canada is about to hike interest rates because consumer spending is so high. The economy is growing. Please don't tell me we're going to have another made-in-newsroom recession, i.e. one that happens after months of media propaganda falsely claiming we are in a recession, thereby reducing consumer confidence, because that would really suck.

    • I suspect it is high consumer spending combined with the scary amount of personal debt. If there is so much demand for fantasy wealth, the price of fantasy wealth must go up.

  3. The end of 19th century capitalism?

    • No, just 20th century Keynesian Theory.

  4. The monetary alchemists and their "philosopher's stone" of fiat currency have turned the emerald tablet into a cheap piece of green glass Combined with the "market maker" naked-short-selling thieves and scheming MBAs and quants at investment banks who understand everything about wealth, but where it comes from, we are in all likelyhood well and truly screwed. One more thing you must bear in mind: the money isn't gone, it has only changed ownership. I suspect it would be easy enough to figure out who, what, when, where, and why. That nothing at all has been done to determine this basic information pretty much tells me at least that this is a plan, not an unforseen consequence. The music is about to stop and there aren't nearly enough chairs for all to sit. The mechanisms (and many of the players) for this debacle are well chronicled at numerous Austrian economic and financial websites…the fix without war, well that's a toughie, but is why I support the PM.

  5. I don't buy it.

  6. I think we need a discussion about the root causes of the 2008 financial crisis. In my view, it wasn't about too much or too little government, rather it was about institutions that did not complement one another. Between the fed, FDIC, and government bailouts, investors knew that somebody would save them in times of duress (this is not a bad thing – the alternative of waves of bank failures represent financial apocalypse). Deregulation, in that context, drove firms to take on excessive risks. Without good oversight measures, particularly in credit ratings agencies (which have an incestuous relationship with the firms they rate), Fannie and Freddie Mae (who were not regulated by the SEC) and in accounting for new financial instruments (like credit default swaps). When you couple this with the fact that we live in a period of rapid technological change, the economy is very prone to bubbles.

    What we need are financial institutions that make sense together. Either that means deregulation without bailouts/a lender of last resort, or a financial sector where risk-taking is inhibited, coupled with a strong lender of last resort (in the US, a reversion to the Glass-Steagall system). I lean towards the latter, largely because I believe it is the best way to avoid the most severe recessions. Still, we need to figure out how to save troubled banks without rewarding the decision-makers that caused the problem in the first place. Will these prevent the next crisis? Probably not, since I suspect that there remain many bubbles in the global economy. However, I do believe that the right set of financial reforms can prevent the next bubble, which in turn would be the source of the next great crash.

    • Good points, however, one needs to be willfully blind to the neon signs that all point to Goldman Sachs and the New York Fed, the SEC and The DTCC. I'm sure it is just coincidence that there is a revolving door between all these institutions. While the system they built worked for a while, it didn't take the crooks long to figure out how the game was played…what were the status quoists to do?…rat out their competitors who figured the game out at the risk of losing their own golden-egg laying gooose? Since you seem more literate than most on things economic, can you name one state that has succeeded in all of human history with a fiat money system?

      • I wouldn't condemn fiat money wholesale – the US has done great things in the past 75 or so years. If you look at the incidence of major financial crises in almost any country, it is dramatically lower in the past 75 years, versus the previous time period. Take a look at Reinhart and Rogoff's "This Time is Different" for some good historical data.

        The fed cannot prevent recessions, but it (and stimulus spending) can help spread our economic misery over time. This is important because the banking system has critical breaking points at which banks start to fail. That said, we probably overuse and misapply those tools. I think Greenspan got lulled into a false sense of security because no matter what he did, price stability remained. He neglected his duty to be on the lookout for bubbles.

        That said, bubbles are not all bad. The easy money 90s funded a lot of dubious enterprises, but also built the massive fibre optic infrastructure that makes this conversation possible. A banking system that is too conservative will have great difficulties financing new industries – particularly those that don't fit into the dominant paradigm of the day. Savings-led growth cannot indefinitely spur on improved living standards because capital accumulation exhibits diminishing returns to scale.

        In short, we need to become more conservative, more austere, and more prudent – but there are problems in going too far in that direction as well.

  7. Was this article written prior to the release of the latest growth numbers in Canada – annualized for an astonishing 6%?

    Perhaps the sky is falling media can cool its heels for a day or two.

    • Those figures need to be taken with a heaping grain of salt. You'll note that much of the 6% growth is from rising housing prices, and many economists are telling us that the sort of fallout experienced in the USA is only being delayed in Canada as low-rate mortgages are tied up in the CMHC. Our housing bubble is going to pop at some point, and the Canadian tax payer is directly on the hook for accrued expenses when it does.

    • This is growth driven partly by consumer debt and artificially low interest rates, not fundamentals. People need to stop asking whether we are growing and start looking at why (or why not). We have a strong banking system, but Canada is not an island.

  8. Maybe the silver lining be the sputtering end to the welfare state which is about to bring Europe to the mat. Now America is close too and Canada ripe for it once commodity prices tank, an inevitability when the Far Eastern economies stop expanding as they must. It is never financial institutions, it is always politics. And democracies have not learned to operate politically in the new infomation flooded internet age, except possibly in the short term under the governance of slick salesmen like Blair in England and Clinton. Pity, but we are indeed in for rough times. I agree that Canada's Harper has the knowledge and correct attitude, but the political sytem there is very perverted by the deux nations syndrome and the possibly related liberal culture of vicious political correctness.

  9. Ah, rating's dropping already. It's going to be a good thread.

    Anyway, I'll pick up on the last statement of this article, because it's quite telling.

    "So the Great Depression was in fact two depressions that history has melded into one, and the recovery in between proved too good to be true. The question now: is history about to repeat itself?"

    The Great Depression was indeed two depressions molded into one. Now, assuming we're in the meager recovery in between. So, what happened during the Great Depression's recovery, focusing on the US where there is the most information? Politicians tried to tackle the debt. They stopped running deficits and started running surpluses despite still-high unemployment. As a result, the US went right back into recession and stayed there until WW2 forced a return to deficit spending that endured for years, pushing unemployment straight down. The end result was debt levels above 100% of GDP – and yet, the US had no trouble paying it off and entered a period which brought arguably the greatest levels of growth and prosperity in the modern era.

    The lesson of the Great Depression is simple – don't let off the gas peddle until you've reached the finish line and brought down unemployment. Only then should you slam on the brakes (and hard). Canada did this as well in the 90's – high debt after the recession lasted until recovery was well on its way, then hard austerity measures and tax increases which returned us to surplus led to a strong economy that didn't rely on a bubble, and allowed us to side-step the 2001 recession.

    Those who don't learn from history are doomed to repeat it. Canada, with lower unemployment that is beginning to come down to reasonable levels and should do so moderately fast, is near the finish line, so we can start looking at that brake pedal (which again, Harper seems to want to do in 2011, exactly when it appears that he should). Other countries are nowhere near that line, and encouraging them to brake prematurely could well lead to a repeat of the double-dip in the Great Depression – but for exactly the opposite reasons cited in the article.

    • The main flaw in your argument Craig, is that the economy isn't simply going through a period of reduced spending and economic activity. Treating increased aggregate demand as the solution to all economic troubles isn't going to work anymore, particularly since the problem with the economy is toxic debt.

      • The problem with the economy isn't toxic debt though – we flushed hidden debt into the open during the collapse (again, Greece being a notable exception). Debt in general is high, naturally, but not in any way uniquely high. US debt has been higher with no issue. British debt has been higher with no issue. Canadian debt has been much higher with no issue. Japan hasn't defaulted despite persistent debt at high levels, neither has Italy. Bond spreads aren't perfect, but certainly aren't in danger situations, Greece being the notable exception once again due to its ridiculous fiscal management and corruption. But even Portugal and Spain, the next weakest Euro countries, have reasonable borrowing costs (though Portugal was looking bad there for a while).

        Private debt is another issue, but that's not going to get resolved with unemployment as high as it is – any way you slice it, people can't pay down debt when they don't have income (nor can they pay taxes). Economic activity and spending are starting to pick up again, but they're not at the levels they need to be for a sustained recovery, because unemployment is still so high, even in Canada. Aggregate demand isn't the solution to all economic troubles, no, but significantly reducing public demand right now to tackle deficits is a very bad idea – the Great Depression demonstrated that.

        • Debt has been higher in the past (e.g. after WWII) but at that time the US had an enormous manufacturing base with which to rebuild wealth. Those jobs are almost all gone now. The "knowledge economy" has no capacity to build wealth. There is nothing the US has now that the world can't live without, with the exception of weaponry.

          • The sheer economic output of the US still had plenty of potential, not much less than we had in the 90's when we also dealt with such high debt. Italy and Japan, not exactly resource- or manufacturing-based economies, have had high public debt (greater than 100% of GDP) for virtually a decade now or more, with no risk of default even now.

            There are certainly challenges the US faces that they did not face after WW2, but their debt levels have nothing to do with any risks of default they (or any other countries, for that matter) might have. Once again, bond rates in most countries (which is reflective of the cost of debt for countries) besides Greece are quite low, and those that were in trouble (Portugal, Spain), have come down significantly since the EU announced its plan.

          • "The "knowledge economy" has no capacity to build wealth."

            Hahaha! Hilarious.

            Apple is a knowledge business. Almost all of the value-added processes associated with, say, the iPhone are performed in the US. Sure, the components come from Taiwain, Korea, Japan, etc. and are snapped together in China, but that is actually the low value-added part of the value chain.

            Now, replicate that with other firms like Google, Boeing, Intel, Amazon etc. Making physical products is hardly the only way to build wealth.

        • Yes Greece is corrupt but is that really the reason? Maybe its because Greece does not hold a sovereign currency. Therefore it can't print its way through its troubles.
          All your examples of nations with high Debt have the ability to print more money!
          Greece can't inflate its way out this mess like every other nation. Print more money raise the price of goods, wages etc and keep the populace happy. Of course their buying power and true wealth diminish but who cares! The government stays in power the people are manipulated and satisfied to keep their 22$ per hour job paying 10$ for a loaf of bread.
          So maybe this is good for Greece. At least the cycle of inflation has stopped. Where as in Canada, Britain and the US the scam continues, our true wealth is being printed away!

          • Oh, the fact that Greece does not hold a sovereign currency is definitely a factor in problem, because Germany, France and to a lesser extent the UK would really like to move into recovery mode and Greece really does not. The fact that they can't engage in monetary stimulus to the extent they need is a big problem in stopping their recession. Right now, really their only solution is not inflation, but hard deflation to reduce their relative costs, and more importantly, to mimic currency devaluation which they also can't engage in.

            But, your claims of inflation being the only solution to debt is completely unfounded. Japan has had near-stagnant inflation since the 1990's, and while they never solved their debt (for a variety of reasons), it hasn't come close to resulting in default for that country, even through this worldwide recession. Canada maintained relatively low inflation in the 1990's as well, all while we reduced our public debt by a very large margin.

    • I like the general thesis, but note two problems with it:
      First is that Canada is still primarily dependent upon exports. So if our neighbors stop buying, we'll crash hard into unemployment even if we're doing everything "correctly". To go with your analogy, our employment vehicle is being pushed by theirs. So if we start braking now, then if they start to brake before they reach the finish line, we won't make it either. Better to let ourselves coast and maybe ease up on the gas of lower interest rates rather than braking gov't spending (especially if that gov't spending is being directed toward unemployment, as you suggest)

      The second is that those "greatest levels of growth" you speak about were precipitated by hundreds of thousands of people dying. Personally, I'd rather we avoided that no matter how good it may be for the economy. Also, was the growth in the economy really as great as we think, or was a large chunk of it simply the shifting of resources from those who died to those who remained?

      • Yes, you're right that we're interconnected to the other world economies, and I agree, we can somewhat ease up on the gas and coast for a bit – which is why I'm happy to see the BoC raise their rates, if only slightly, today. Ultimately, the economic policy I think our prosperity depends on in the near-future and likely won't be done appropriately, will be that of other countries. If the US in particular puts debt above jobs in its economic policy, we're going to be hurting.

        As for the greatest levels of growth, I am talking about the period AFTER WW2, not during. And I'm certainly not saying we need a war. I am saying that we need a way to get people working, hopefully at jobs that have low non-labour costs and provide something of value to the country (again, mostly talking about the US). As for the shifting of resources, the US and Canada had all they needed, they just weren't being used, so losing people didn't free up anything that didn't already exist. Furthermore, what Canada and the US lost was primarily young men, who would be approaching their primes for productivity. The loss of those soldiers was not an economic gain in the slightest – which makes it all the more surprising that such a period of strong growth followed that loss.

        • I do realize that you're speaking of after WWII, that's why I said "were precipitated by". To think that the growth after had nothing to do with the war before seems a bit simplistic, no?

          As for the greatest levels of economic growth, that rather depends on what you see economic growth as. I point out the shifting of resources because, as you say, we had all we needed. Thus the resources shifting meant that a good number of people found themselves with an excess of what they needed, which of course can then be used for investment. So the point of what I was saying is, what we saw as a great period of growth might not have been such had there not been that culling of our populations and thus required the resources we had to be divided more thinly.

          • There was no real resource-crunch after WW2 or during. Perhaps now, but not then. America still had plenty of coal, oil and other natural resources (how do you think it fueled its war engine through the war, and during its manufacturing boom afterwards?) It did have a food problem in the early 30's, but by their entry into WW2, that was largely solved, so there was no issue there either. Indeed, the baby boom after the war required a lot of food (and got it), as did those soldiers before they died. Furthermore, the entire US population lost in WW2 was 0.32 percent, a horrible figure from a human perspective, but a meaningless figure from a resource perspective.

            Once again though, what was lost was young men at the peak of their potential productivity. There was certainly enough resources to provide for them (or there would be a lot of baby boomers that wouldn't be here) – if they could be obtained. But of course, young men at the peak of their productivity, especially those physically capable of going to war, are some of the most capable people of obtaining such resources. So again, the loss of those soldiers was certainly not an economic boon, I would argue it was a great loss.

            I would ask you, before going further, to provide some sort of indication of a lack of resources in the US or even Canada during the recovery phase of WW2, because I have read nothing that would indicate that was the case.

          • I never postulated any lack of resources, please stop claiming I have.
            I postulated a concentration of resources leading to an abundance of capital which could thus be used for investment purposes rather than satisfying needs.

          • The lack of resources is inherent in your argument. If none are lacking, then additional workers to obtain and utilize those resources creates more capital to be invested or consumed then they themselves require to satisfy their needs.

            Resource concentration only factors into the equation when there is a hard limit of available, exploitable resources (so more workers cannot add significantly to the available resources), or the extra workers are not adequately productive to cover their needs. As the people lost were largely healthy, young men, their potential productivity should not be in question and so the only possible way their deaths would have an economic advantage is in a resource shortage.

  10. just cut my damned taxes!!!!!!!!!!

    • Well reasoned argument. Thank you. It would be just dandy if everyone else paid their taxes and gave you a break, eh Mark?

  11. Me thinks they confuse 'heating up' with "having a pulse"!

  12. Greece will leave the Euro soon

  13. The gold standard is perhaps one of the few instruments that could drive worse results than the status quo, just as it did in the Great Depression. Because the fed circa 1929 focused on maintaining the gold price of the US dollar (a gold standard system is implicitly a system of fixed exchange rates internationally) the US was hit with the worst wave of bank failures in its history. All downturns are not automatically self-fixing, and some may require intervention. The problem is that bank failures and suspensions cause the money supply to evaporate, which in turn causes more bank failures.

    Through debt and pump priming we can't eliminate economic pain (a common misconception), but we can spread it out and dilute it. Consider stimulus programs. With a stimulus you can take a recession that would mean, say, -10% growth (and possibly worse if you had waves of bank failures), but instead are saddled with a large increase in debt (although there may be scenarios where stimulus spending is debt-reducing, since an economy with less than full employment will tend to experience declining revenues. However, you could pay off that debt over the course of 20 years of austerity measures – without pushing the banking sector towards its breaking point.

  14. "The zen of ignoring the stock market"
    Stock market reports aren't just useless. They're damaging.
    STEVE MAICH | May 14, 2008 |

    We have incredibly short memories, don't we now?

    • "Who the f–k knows? Markets go up and down. People decided to sell some stock."

      In a nutshell. Why is this numbers game the basis of our economy?

  15. A second downturn is inevitable, only because the banks continue to dictate how economies are to be managed. If a country is borrowing for investing, that is not an issue. Harper blew it when he used the money to build skating rinks, parks, swimming pools instead of buying transit cars, building new research labs etc.
    It is time the banks are made to pay their dues. We need a couple of sovereign defaults. When the banking system freezes up, the government can step in and get rid of the useless banks that have failed miserably to help the economy.

  16. The gulf oil spill will be be the world economy's death spiral!

    • The price of oil will jump like the price of shrimp.

    • Not for petroleum exporting economies like ours.

  17. If the best we can do to solve the economic crisis, which is a crisis of excessive credit growth (private and public), is to increase credit still more by yet more and more loans, then the jig is up. The question is not whether this is going to end badly, but when. Maybe its time to stock up on firewood, plant a garden, and bolt the doors.

  18. Everything that goes up must go down: so just because we have these recessions doesn't mean the system doesn't work in fact it strives on them to make growth possible after them (nothing can grow indefinitely).
    People need to stop thinking that a recession means something is wrong. That's just like thinking getting sick or death is wrong: they arent, they're facts of life and learning how to deal with them is the real challenge, not avoiding them.

    • Interesting analogy, but let's remember that even when we get sick, we take action, whether its drugs, or extra rest, or a different diet, to make us feel better. In extreme cases we do these things to prevent our premature deaths.

      Similarly, the whole idea is not necessarily to completely avoid recessions (though that's part of it – most of us would rather not get sick, even though that's a part of life), but rather that when we do get recessions, which are a natural part of the economy, that they're mild enough that we can learn from them (develop a resistance, in your analogy), but not enough to take down the economy for too long, or to cause lasting damage.

    • I agree, we tend to panic at mention of the 'R' word. But there's a pretty good argument to be made that had the US allowed the recession to take its course in 2001 instead of panicking with massive stimulus and ultra-low interest rates, they perhaps could have avoided the much more severe collapse 6 years later. Juicing the economy with bailouts, stimulus funds and low interest rates just enables the irresponsibility and reckless borrowing to continue a little while longer. Regular recessions are a normal part of the business cycle, and when periods of growth last too long, as they did in the boom years of the 1990s and the 1920s, very severe downturns must follow. People become too reckless, borrow too much, leverage too much, and the whole thing implodes. And no, regulations will not save us from such behaviour.

      • The erroneous economic management that led to the 2008 US bubble (though interest rates and federal spending I would argue were only parts of the problem, and not the critical ones either) didn't occur during the recession itself, or really during the recovery, but well after the fact. Low interest rates in 2001 or 2002 were fine – those in 2003 and 2004 were what helped spur the bubble, as did the rest of decade of deficits following 2001, long past any benefit to the economy could have been seen.

        It should be noted that while Canada also had a boom in the 90's, we didn't have a recession in 2001 (though our interest rates dipped then as well to prevent it). The difference between Canada and the US then? We reduced spending during the boom years, while the US didn't. The Great Depression replayed much the same situation when it finally ended at led to the growth of the late 40's and 50's – lots of spending during the recession and recovery phase, then a sharp switch to austerity measures whereby the government paid down debts and reduced spending.

        Bailouts are a double-edged sword at best, I'd agree with that, but stimulus funds and low interest rates don't enable irresponsibility if (and it's a big, important if that only rarely gets followed) upon recovery, countries raise interest rates and pay down public debt, whether by raising taxes or cutting spending (often, and preferably, both), to pay for the costs of mediating the previous recession. Right now, only a few countries have truly recovered, or are on the verge. Canada's sitting on the edge – the start of a slow rise in interest rates is warranted, as is starting to find ways to run a balanced budget (not this fiscal year, but next). But if we move too quickly, or too aggressively, it very well could head-off our current trend of lowering unemployment and send us right back into recession.

        • With our sky-high debt levels, I seriously worry about whether or not low interest rates are what we need right now. Even more worrisome is what would happen if we raised them. That's the problem. Once debt levels get too high, the central bank becomes boxed in. Raise rates? Flatten the economy and send bankrupcties soaring. Keep rates low? Encourage more debt-fueled consumption which will only exacerbate things when they finally do blow up. We're in a much tougher spot than is general believed, which is what this article is getting at.

          • Oh, I absolutely agree, I'd just like everyone to keep in mind that the tough spot comes from both sides – it's not just a simple matter of fiscal or monetary tightening and our problems would be solved.

            The good thing is, for Canada at least, we've had public debt levels higher than this, and in recent history – the 90's levels of public debt were significantly above what we've got now, so we should be able to handle it. Other countries have (much) less room for error, but many of them have handled debt levels of this type before as well.

  19. "Ultimately, Canada's taking the right tact."

    You mean taking the right tack, which means choosing the best direction to follow.
    It's a nautical expression.

    Although, taking the right tact does present some interesting connotations.
    Won't think about it too much.
    I might 'loose' my mind. ;)

    • My mistake, thanks for the correction.

  20. I don't pretend to have any abilities to predict the economy. Nor do I believe in the abilities of others to do so, regardless of their credentials. But, personal debt levels scare me. They scare me because I simply can't see how current debt levels are sustainable. And if they aren't sustainable, then something very bad must happen. Whether that is 20 years from now or tomorrow, I don't know. I hope I'm wrong.

  21. My country is too much debt and no one talks about this.