30 days after 9/11, I was in Seattle listening to Leonard Sweet talk at Soularize. He was saying before others that 9/11 would change everything and he was right in many ways but I think people will look back at the credit meltdown in 2008 and the response of world governments in 2009 as a big or bigger world changing event. 9/11 may have defined the Bush presidency but the meltdown of the American banking system will be felt for decades. The world spent trillions of dollars it didn’t have to minimize the impact of the banks implosion and we are going to be struggling with the consequences for years to come. According to the OECD, the world’s deficits are approaching 4% of the global GDP (meanwhile the U.S. deficit is around 11%).
Canada is already looking at five years of leaner government spending to help pay for the massive deficit we rang up in 2009.
“The government’s approach will be clear. We won’t be raising taxes, but we will be constraining growth, making sure that growth is very much contained in the future, and that the tax base of the country can gradually recover,” Mr. Harper said in a year-end interview for CTV’s A Conversation with the Prime Minister , taped for a Boxing Day broadcast.
“And within four to five years, if we follow that path, we should be back to a balanced budget.”
Mr. Harper’s view that his government will be able to chip away at deficits by squeezing the growth of public spending has been questioned by economists and by former officials with the Finance Department.
Former deputy ministers Scott Clark and David Dodge have already stepped forward to challenge the government’s plans for eliminating the deficit, which is projected to reach $56-billion this fiscal year. Mr. Clark has said that Ottawa will have to raise the GST, which Mr. Harper cut in 2006.
“I don’t think it’s very likely that they can balance the budget without some very severe spending restraint,” said Bank of Montreal deputy chief economist Douglas Porter.
2016 is to be the year that we are out of the woods but I won’t hold my breath. I foresee a higher GST and higher interest rates before this is all said and done. While Michael Ignatieff has a different approach to fighting the deficit, which he doesn’t want to share, but he seems more comfortable spending instead of cutting.
“If I’m prime minister, I’m going to be looking at the unemployment numbers first and deficit second,” Mr. Ignatieff said during the interview at Stornoway, the official Opposition leader’s residence. “We’re going to have a jobless recovery or we’re going to have a recovery where there’s still a lot of people looking for jobs.”
According to MSNBC, the impact of the United States deficit and stimulus package could be felt for decades. It isn’t just a national issue, it’s trickled down to the states and provinces. The State of California is looking more and more like it is going to default on it’s loan. It’s debt is already a kind of trend setter in that it has been the first state debt to be reduced to junk status.
In addition to debt problems in California and North America, Morgan Stanley fears that the U.K. is headed towards a sovereign debt crisis in 2010. Actually Moody’s is predicting that more than the U.K. is going to have problems in the years ahead.
Moody’s warned on Tuesday that sovereign debt could be sold off sharply next year, which could lead to a wider downturn in financial markets, if central banks don’t implement what they term ‘perfect exit strategies,’ from the support they’ve been giving financial markets.
“In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.
Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc – the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.
High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.
The Financial Times points out that the U.K., Dubai, Greece, and California is in good company. Japan has some sovereign debt problems of their own.
Yet Japan’s fiscal problems are even more pressing. A debt trap appears when the rate of interest paid on government debt is higher than the economy’s growth rate and the public revenues are insufficient to cover its financing charges. When this happens the fiscal position becomes unstable and the debt spirals upwards. This has been the case in Japan for several years. A bad situation has been made even worse by the global financial crisis.
Japan’s national debt is fast approaching 200 per cent of GDP. The debt mountain is the result of prolonged economic weakness and successive fiscal deficits since the bubble economy collapsed in 1990. These problems are compounded by the fact that Japan’s population is now shrinking. The economy’s trend growth rate has fallen and tax receipts are shrinking, while welfare payments for pensioners are rising. Japan’s debt trap, it seems, is structural rather than cyclical.
If you believe the stories out of Copenhagen, it has even lead to a reshuffling of the world order. As China owns more and more United States debt, it is increasingly calling the shots.
Since the fall of the Soviet Union in 1991, there has been one superpower, the U.S. Now there are two, as became abundantly clear in the chaotic closing day of the climate- change conference.
At that, Barack Obama was snubbed by the Chinese premier, Wen Jiabao. And then the U.S. was snookered by the Chinese.
As the New York Times reported Sunday in a riveting piece from the back corridor of the conference: "Twice during the day, Mr. Wen sent an underling to represent him at the meetings with Mr. Obama. To make things worse, each time it was a lower level official."
The first time, Wen sent his deputy foreign minister to a meeting of major heads of government, including most G8 countries (though not, apparently, Canada). Later on, the Times reported, "after a constructive one-on-one" between Obama and Wen, the Chinese premier sent his climate-change negotiator to another heads-of-government meeting that included the U.S. president.
There’s more. The White House set up an evening meeting with the presidents of South Africa and Brazil, as well as the Indian prime minister and the Chinese premier, and when senior staff arrived, as the Times recounted it, they "were startled to find the Chinese premier already meeting with the leaders of the other three countries" – without the president of the United States, the guy who called the meeting in the first place. According to the Times, Obama rushed to the meeting and called out from the doorway: "Mr. Premier are you ready to see me? Are you ready?"
You don’t see that in the newspaper every day, about the leader of the most powerful nation on Earth going cap in hand to his own meeting. It wouldn’t have happened on Ronald Reagan’s watch. His dignity, let alone his sense of the American president’s role on the world stage, wouldn’t have permitted it.
Welcome to the New New World Order.