Sunday, November 13, 2011

Economic Storm Clouds Brewing

It is only a matter of time before Greece defaults on its debts.  Italy is on the brink of its own debt crisis.  The United States has not recovered from the Great Recession of 2008 and appears to be heading for a second one.  The projected economic growth rate for China is expected to decrease by as much as 2.5 percentage points next year, which would still give it very positive economic growth but which could be the pin that finally pops the extremely inflated real estate bubble in that country.

Any one of these events on their own could dump the world economy into the crapper.  The fact that more than one of these events could happen within the next 6-12 months would be distasterous for the world economy, including Canada's.  Although, we should be really worried about China.  That is the country that is buying most of our natural resources, which is the sector of the economy that is keeping up Canada's economic growth.  If China runs into a serious bout of economic trouble the economic recession that has been hammering Canada's industrial sector will come to its resources sector and the whole of the Canadian economy will go into a deep and probably prolonged recession.

What are we to do?

Do not count on central banks.  Interest rates in the Western world are at or near zero so the central banks' ability to stimulate the economy by loweing interest rates is very limited. 

That would leave only governments to take up the slack with fiscal measures to stimulate the economy.  However, do not count on them.  Any measures they take will probably just make things worse. Governments are completely unable to stop or reduce the duration of recessions.  Unfortunately, most people do not realize that so they demand governments to act and when they do the situation invariably gets worse, which leads to demands for more action which leads increasingly desperate governments to take action, any action, that gives the appearance that they are dealing with the recession when in fact they are usually screwing things up more.   At any rate, we should be watching what governments do after the next recession.  They may not be able to stop or reduce the duration of a recession but they can make the recovery from one more even across their societies by what they do after the economy begins to bounce back. 

Do not count on businesses either.  They will demand that governments hand them billions of dollars to stay afloat "to save jobs" but they will retrench and lay people off by the 10s of thousands.  As well, as they did in 2008 they will stay on the sidelines waiting for someone else to make the investments that will be necessary to finally pull the economy out of any recession.

So really, you can only count on yourself. Scary thought is it not?


Blogger Red Tory said...

That's a rather dire assessment of things with an even more bleak and remarkably unhelpful prescription: "Every man for himself!"

What exactly does that mean in practical terms?

November 13, 2011 10:48 PM  
Blogger Koby said...

"Any measures they take will probably just make things worse. Governments are completely unable to stop or reduce the duration of recessions."

That is simply not true. There is amble evidence that the various stimulus packages lessened the severity and even the duration of the great recession. Moreover, what is happening in Continental Europe and the UK is evidence that the opposite, viz., austerity is hurting growth.

Finally there is more political consensus on this than you might think. It is just that right tends to favour tax cuts and left fiscal spending.

November 14, 2011 3:53 AM  
Blogger ottlib said...

It is certainly dire Red because all of the economic situations I mentioned in my post can happen within the next year and in its already weakened state that would be a big blow to the world economy, which will effect the Canadian economy.

As for the prescription, I was badly victimized by the recession of the early '90s. Nothing the various levels of governments did helped with the situation. All I could do was take was necessary steps to keep my head above water and endure. I was setback a better part of a decade because of that recession meaning I will have to work at least 5 years longer than I had planned before that recession before I can retire.

I am not alone. I know many others of my friends and families had the same experience.

I suspect if we are hit with a similar economic recession it will be the same.

November 16, 2011 4:52 PM  
Blogger ottlib said...

Koby, tell the people of the United States, much of Europe and the industrial heartland of Canada that the recession is over and see what kind of looks you receive.

Certainly, the 2008 recession was a deep but short one if you go by the economics definition of a recession. However, it has not been short if you look at the reality on the ground. That is particularly evident in the US much to the deep chagrin of the Obama administration, which is in real danger of being a one term administration because of the economic situation in America.

The Canadian economy has been buoyed by the resources sector because China was virtually unaffected by 2008 recession. However, if China does run into some trouble, which is very possible this year, all of that will change and Canada will be in trouble.

Which is always the danger for an economy that depends on resource extraction and sales for economic growth. Over a century of history has demonstrated that so you would think we would have learned by now.

November 16, 2011 5:02 PM  

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