Recession Doesn't Really Describe It

There are two schools on the press coverage of the recession so far. The first school says that the media are being overly negative. The media, they claim, is scaring people away from spending money causing the economic downturn to be worse than it is. Personally I can't agree with this assessment. The economy is what it is and the 'if nobody says the ship is sinking, then it won't' philosophy doesn't appeal to me.

The second school says that the media has been overly optimistic from the start. The financial 'experts' and economists (right down to our own Prime Minister) tried to downplay the problems in the economy, claim that it would miss us, that it wouldn't be that bad. They've claimed repeatedly that the end is in sight. I said earlier this week that I'd tell you what I really thought and that's what I'm about to do.

I believe that what we are currently seeing is not a recession, or a depression but a radical realignment of global economic power. I said on Hugh McGuire's blog back in December of 2007:

"I think Chris is being overly optimistic.
The staggering personal debt of the average American is one part of it. Then you add in the the staggering Federal debt

http://www.brillig.com/debt_clock/

which comes to more than 30k per person.

Medicare, medicaid and social security accounted for 39% of Federal Spending in 2000 (before the boomers started to retire). Combine that with the interest on that staggering debt and the military expenditures and soon the US Federal Government will be able to do no discretionary spending whatsoever. (don’t forget even if the US manages to get out of places like Iraq there is still the cost of caring for the thousands of wounded, many of whom are permanently disabled). At the same time the budget must be cut dramatically to avoid further escalation of debt and a larger percentage of the budget having to go to interest payments.

Now if you combine all of that with

- A country with a educational system that is basically not functioning, no health care system, collapsing national infrastructure and a wholly unhealthy environment

- A country designed around cars heading into an age where personal automobiles will be incredibly expensive to own and operate

- A country with an economy built on nothing (at least there are no major industries left that can’t easily be done anywhere).

- A country with rapidly diminishing natural resources in a world where (due to dwindling supplies and soaring demand) all natural resources, especially the non renewable variety are going to increase in price (that will unquestionably cause serious inflation). One point of special concern would be water - large parts of the US are now facing water shortages and there is no relief available for most of them without draining the great lakes.

- A country that (because of it’s debt) is under the diplomatic thumb of countries like China and Saudi Arabia (who hold vast amounts of that debt).

- A country that in 8 short years has spent most of it’s international good will and lost much of it’s diplomatic clout

- Lastly a country that will be hard hit by the effects of climate change because most of its major financial centers and most of its population are along the coasts.

On top of all of this you have a population that is largely in denial - that wants to get out of Iraq but beyond that doesn’t want serious change, and won’t consider electing anyone who even tells them there are serious problems - much less proposes solutions.

Put all of this together and I believe you have a recipe for collapse - not ‘the great depression’ but a more permanent and lasting collapse - essentially the same kind of collapse that the fall of the USSR brought to Russia."

I was wrong about one thing. The US did elect someone who promised change, but the promise was vague and given their current financial circumstances there will be severe restrictions on what he can accomplish.

The current mess is not the fault of George Bush, it is not the fault of 'the Democratic Congress' it is the fault of the average American, of 'Joe Six Pack' and it is the fault of unregulated free market capitalism.

It was the American voter who let the government run up massive deficits, who demanded more and more from government while at the same time demanding tax cuts. It was the American voter who let just about every industry be deregulated over the last 25 years or so and it was the average American who spent beyond their means, took mortgages they couldn't afford, racked up credit card debts and spent themselves into a hole that neither individuals, nor the government could dig themselves out of and ultimately the house of cards collapsed.

The current US national debt is nearly 11 Trillion dollars and growing by the day. That means that if the US Government cut all other spending to zero it would still take more than a decade to pay off the debt. To make matters worse they have accumulated all of this debt without making any serious investment in the environment, health care, education, arts and culture, or infrastructure (the things that ultimately fuel a strong economy.) Of course the US is not about to cut all other spending to zero, in fact their expenses are going up. Between social security for the retiring boomers, bailouts, the military (and their perpetual wars) etc., etc., they have no choice in the foreseeable future except to go even deeper into debt. All of this debt means that an increasing percentage of the US federal budget goes into interst on the debt. For fiscal year 2009 the US will pay almost 150 billion dollars in interest. To make matters worse, with the baby boomers about to retire there is no extra money in the 'Social Security Trust Fund'. Any surpluses in the fund, from the years when the baby boomers where all working full time was loaned to the US government. So it's just another part of the massive pile of debt. It is unclear what they US Federal Government will do when all the money 'loaned' to it by the Social Security Trust Fund comes due.

Beyond federal debt there is individual debt which is also going through the roof and was actually the fuse that exploded the economy in the first place. This is where things get really scary. If you watch US television most of the ads seem to be for either protection from creditors or ways that you can acquire more credit or get quick cash - from reverse mortgages to selling your gold by mail to places that will finance you even if you have bad credit the whole US economy seems to depend on people who are already broke going even further into debt. To the extent that this works it will not get the US out of its decline, only speed up and deepen the economic decent.

The reality is that China and India are on the rise, Russia is bouncing back (to a degree) from the shockwaves caused by the fall of communism and in a world of finite resources the 6 billion people who do not live in North America or Europe are demanding more.

So, to an extent both of the camps I mentioned in the beginning have a point. This is not the end of the world, and it is much much worse than economists and business experts are saying.

Canada has to plan for a future where the US is not the dominant global player; Where US imports may never reach previous levels again. We have to figure out what kind of country we want to live in, what kind of international ties are important, and what we can reasonably expect and afford from our economy in a post US world.

If I'm wrong about this and the US does bounce back, Canada will be remarkably well off but we cannot, given its current financial state, plan on the US recovering to previous levels for a very long time (if ever.)