Fixing Our Own Problems First

Living next door to the United States as Canadians do, we are innundated with daily doses of American media. A significant percentage of us have relatives on the other side of the border, or own property there, or have spent part of our own lives living there. Then, too, much of what interests us for our own savings and investments tends to be American in nature: American companies on the stock market, for instance. We are, as a people, invested in outcomes in the USA almost to the same depth as we are to Canadian ones.

That’s why it’s not surprising to find most Canadians feeling that there’s nothing wrong with helping our neighbours out as they continue their descent into an economic collapse of their own making. (Too harsh, that? What else would you call no commitment to ending deficit spending and ever-ratcheting-upward debt, no concern for the health of their currency [odd, given the dependence of the United States on imported energy: slipping US dollar exchange rates means it costs Americans more even if the world price of oil and natural gas is stable], financiers who have once again taken on too much risk and a Federal Reserve policy of saving their bacon at the expense of Main Street, USA?) Indeed, as the combination of the US Department of Homeland Security’s incessant border actions impede business as organized under NAFTA, destroying the effectiveness of just-in-time industry supply chains, and as the insolvency crisis around mortgages continues to drain the American economy of consumers with cash, American businesses are consolidating, to the detriment of Canadian plants and suppliers. Canada ends up with clear differences across the country: sectors in trouble (lumber everywhere, manufacturing in Ontario and Québec), and sectors that are booming.

But we have our own issues. We, too, have been playing the “house equity ATM” game these past few years — after all, if we hadn’t been, local radio wouldn’t be full of advertising for second mortgages, home equity lines of credit, and borrowing from equity built up, especially in the country’s hot real estate markets. Meanwhile affordability has gone to hell in a handbasket: less than 30% of Vancouver-area residents qualify to enter the housing market, even with 95% mortgages CMHC-backed, and the target being a 400 sq. ft. overpriced postage stamp of a condo as houses are out of the question. At a time when fuel is (as it is here) over $1.20 per litre, the suburbs sprawl ever further out, with even longer commutes, to try and trade off land costs and create “affordable” housing. There’s a financial trap: too much money, still, to live too far away, with all the hours spent stuck on the road, in mounting traffic jams (the worst roads are inevitably in the suburban areas outside our cities), and all the life that is lost — not to mention the health care problems to come from all that sedentary, stressful driving time and worries about making ends meet!

Australia saw this coming back in 2004. They — like us, like the UK and Spain, like the Irish, and like the Americans — had a housing bubble and a growth in consumer debt. They decided to get ahead of the inevitable “popping” of the bubble (with consequences clearly on display south of the border). Interest rates were run up, to dry up the speculative building and house-trading. Even today Australian rates are more than double ours — and nearly quadruple where American rates are now after the US Federal Reserve’s 75 basis point rate cut today. This was a little less than anticipated, yet, judging by the futures and stock market action this morning, a continuation of the “preserve Wall Street, to hell with everyone else and the US dollar” approach taken to date.

Yes, Australian prices have fallen. Those on the frothiest edge of the speculative bubble paid the price for being the “last one in” — something that must happen when every set of conditions turns. But they have come down in an orderly fashion — that country is not filled with whole neighbourhoods in foreclosure or for sale at distressed (40% or more down from purchase prices of two years ago) asks with no bids. The Australians have had to tighten their belts for a year or two. But the country is growing, and prosperous; the danger was averted.

We in Canada can (just) still do this. The Bank of Canada ought to be doing the same for us: raising interest rates, signalling to lenders to think more about risk. Borrowers would pay more; real estate would begin to decline in an orderly fashion. Likely, the Canadian dollar would rise as well. The whole combination would likely bring screams of anguish from Southern Ontario (which has had both a housing bubble and a plethora of employers who figured the Canadian dollar would perpetually be the poor cousin of the US one). We would need, as a country, to begin to add high-value-add manufacturing to our mix, instead of competing on price. All this is a long-term benefit to Canada, worth the price of two or three years of pain.

The alternative, after all, will be to be a Japan, with a nearly two-decade long depression — exactly where America is headed. A deflationary depression, with all the levers of monetary policy jammed at zero and unable to do anything, debts galore, a declining currency and escalating costs for food, fuel, etc. due to imports and diversion of foodstocks to make fuel with the ethanol programme. Add a little of the usual American protectionism and the outcome will be America’s withdrawl from much of the world exactly as did Britain a century earlier: unable to afford to stay. This is where the world is headed — thirty or forty years of great power transition. Two world wars signalled the last one.

What Canada must do is take its medicine. Yes, it’s hard: it’ll bring pressure on the government, and will make people like Garth Turner, MP froth at the mouth. So be it. The alternative is to do what we have done so far in 2008: sink ourselves and our future so as not to “deviate too much from the United States”.

America is a dying empire. We need to step up to our own future — energy state that we are — and decouple from the US. We do that by straightening out our own house. Ideally we would go all the way and return to a gold standard. If not that, at least show some backbone — be Swiss, be European, be Australian.

There is no greater gift to the future — no better sign of stewardship — than that a dollar retains its value. When it doesn’t, saving makes no sense. Do we want to be Americans, with a negative savings rate, drawing down capital to keep spending? Or do we want to again practise thrift and a sense of longer-term interest?

The choice is now. Let us hope those in charge in Ottawa get the point, and do what we need, not what we, in our desires, may (at this moment) want.

3 responses to “Fixing Our Own Problems First

  1. I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin

  2. See also Karl Denninger’s “Market Ticker” for a sensible American’s view of just how bad things are south of the border — and (if you’re paying attention in Canada) how close to this line we are ourselves.

  3. Pingback: Investments on The Finance World For News and Information Around The World On Finance » Blog Archive » Fixing Our Own Problems First

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