Tag Archives: economy

The Land of the Free: It’s Now Canada

As the Atlantic Monthly shows, Canada has the freest economy in North America.

Canada’s economic freedom trails the world average only in government spending. Elaborate social and welfare state programs swell overall government expenditures. Government spending has also increased slightly due to implementation of a significant stimulus package. However, good fiscal management and federal budget surpluses have enabled the economy to undertake stimulus measures without undermining fiscal soundness and long-term economic competitiveness.

Wow, I guess we can break out the “communist American” jokes now.  Personally I get a kick out of study that links free economy to low spending and I think it was used more as a partisan attack on President Obama but still I think it makes a point when it is talking about the long term impact of the American budget deficit.  Obama and Clinton liked to speak of American spending as a looming national security issue before the election and now they have the stimulus package to pay for.  Canada may not be the “land of the free” quite year but wait until interest rates start to climb.  Then it will get interesting.

Great Depression 2.0

How close did we come to a depression?  Pretty close according to Newsweek.

"Depression" is a term of art. It’s more than a serious economic downturn. What distinguishes a depression from a harsh recession is paralyzing fear—fear of the unknown so great that it causes consumers, businesses, and investors to retreat and panic. They hoard cash and desperately curtail spending. They sell stocks and other assets. A devastating loss of confidence inspires behavior that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory resupply, cheap prices) that usually prevent a recession from becoming deep and prolonged: a depression.

We came pretty close to that last year.

Thus traumatized, the economy might have gone into a free fall ending in depression. Indeed, it did go into free fall. The anniversary of Lehman Brothers’ bankruptcy in September inspired much commentary that saving the investment bank wouldn’t have averted crisis. True. But allowing Lehman to fail almost certainly made the crisis worse. By creating more unknowns—which companies would be rescued, how much were "toxic" securities worth?—it converted normal anxieties into abnormal fears that triggered panic.

As credit markets froze, stock prices collapsed. By year-end, the Dow Jones industrial average was down 23 percent from its pre-Lehman level and 34 percent from a year earlier. Financial panic poisoned popular psychology. In September, the Conference Board’s Consumer Confidence Index was 61.4. By February, it was 25.3. Shoppers recoiled from buying cars, appliances, and other big-ticket items. Spending on such "durables" dropped at a 12 percent annual rate in 2008’s third quarter and at a 20 percent rate in the fourth. With a slight lag, businesses canned investment projects; that spending fell at a 20 percent rate in the fourth quarter and a 39 percent rate in 2009’s first quarter.

So why didn’t the economy keep tail spinning out of control?

That these huge declines didn’t lead to depression mainly reflects, as Romer argues, countervailing government actions. Private markets for goods, services, labor, and securities do mostly self-correct, but panic feeds on itself and disarms these stabilizing tendencies. In this situation, only government can protect the economy as a whole, because most individuals and companies are involved in self-defeating behavior of self-protection.

Government’s failure to perform this role in the early 1930s transformed recession into depression. Scholars will debate which interventions this time—the Federal Reserve’s support of a failing credit system, the TARP, guarantees of bank debt, Obama’s "stimulus" plan and bank "stress test"—counted most in preventing a recurrence. Regardless, all these complex measures had the same psychological purpose: to reassure people that the free fall would stop and, thereby, curb the fear that would perpetuate a free fall. Confidence had to be restored so that the economy’s normal recovery mechanisms could operate. That seems to have happened. By September, the Consumer Confidence Index had rebounded to 53.1. Housing prices had stopped falling. By the Case-Shiller index, they’ve increased for three months.

What’s at Stake?

Several people sent me this link about what is at stake with the United States running $1 trillion deficits.

The non-partisan Congressional Budget Office has also said the U.S. budget deficit will swell to a record $1.186 trillion in fiscal-year 2009 and come in at $703 billion in the 2010 fiscal year, which begins October 1, 2009.

The actual budget gaps for both years may be significantly wider as Washington prepares to jolt the economy with stimulus spending that could total $775 billion over two years.

The following are several scenarios that could result from runaway budget deficits:

FALLING U.S. CREDIT RATINGS:

United States EconomyA string of trillion-dollar deficits could undermine investors’ faith that the U.S. government always pays its debts and put in danger the country’s triple-A credit ratings. This could lead foreign investors to shun U.S. Treasuries, the bonds the government sells on the open market to finance its borrowing. Treasuries are currently expensive by historic standards since the financial and economic turmoil of the past year has boosted their global appeal as a safe-haven investment. Serious danger to U.S. credit ratings could send the debt market downward and burst what some are calling a bond-market bubble.

SKY-HIGH INTEREST RATES:

A loss of faith in U.S. government bonds would send interest rates throughout the economy soaring since Treasuries serve as the benchmark for loans in the private sector. A rout in that market would dramatically lift the cost of borrowing for buying homes, cars and paying for university education. If it happens any time soon, this in turn would jeopardize the Federal Reserve’s efforts to stabilize the ailing economy.

Note: This is why I locked in mortgage…

DUMP THE DOLLAR:

A crisis of confidence in U.S. debt would devastate the dollar. The world’s reserve currency, the greenback is used globally by countries and companies to pay for a wide range of basic commodities, most notably oil. If investors dumped U.S. debt, they could do the same with the dollar. A dollar crisis might end its status as the preeminent currency of world commerce, deeply undermining its value and further raising the cost of borrowing for the United States.

SOARING INFLATION:

A plummeting dollar and sky-rocketing interest rates could push the inflation rate through the roof. The United States imports far more than it exports and would be hard pressed to pay for oil and manufactured goods it buys from abroad with the greenback’s value withering. Currently, though, rapidly falling prices, or deflation, appears to be a much more imminent problem than the more distant prospect of inflation.

FALLING GLOBAL STATUS:

A dollar and debt crisis would undoubtedly undermine the global standing of the United States, much of which is based on the fact that it is the world’s largest economy. If the United States lost the international reserve currency and the faith of global investors, little else might be left and the beacon of free-market capitalism might also dim.

Shipping costs crimping globalization

The New York Times has a good article about how shipping costs are changing production patterns.  I think the article misses the point that this could mean that many of the goods that we take for granted as being cheap are going to cost us more and more over time.  It isn’t just the shipping costs oil effects but almost everything we manufacture today.  While there is a small trend towards localization again, that also means that North American wages are going to have to be factored in.

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

If I was a low end importer of goods like Dollarama or even Wal-Mart, I would be worried right now.