Montreal, June 15, 2009 • No 268

 

Harry Valentine is a
free-marketeer living in Eastern Ontario.
 

 

 THE EMPEROR'S DERRIΘRE

Real Signals or the Illusion
of Economic Recovery?
 

by Harry Valentine
 

          The 'libertarian' economist who presently serves as Canada's Prime Minister delivered an economic report on June 11th in which he suggested that the Canadian economy was beginning to show signs of a turn-around. He then mentioned a range of very spectacular public works projects that could only be achieved through a federal deficit and that were intended to stimulate real economic recovery. However, the accuracy of such a prediction is highly questionable, if only for the simple reason that for up to a decade during the 1990s, Japan provided the precedent for publicly-funded efforts to stimulate a stagnant economy. Japan's economy underwent a series of little booms, but none of them re-ignited the stellar economic performance of the 1980s. Like Canada, Japan was heavily dependent on the American market to buy its products.

 

          While Canada's spectacular public works program may in fact stimulate economic activity over the short term, the results over the long term are uncertain. While government economists remain convinced that the short-term economic stimulation would inevitably lead to prosperity and economic stability over the long term, there is no proof of this. The Canadian economy is heavily dependent on American markets. Canadian protectionism, courtesy of the provincial governments, has brought on a retaliatory response in the form of a 'buy-USA' policy whenever American public funds are concerned.

Foreign Currency Alarm

          The American Federal Reserve has literally been printing new paper currency 'like a drunken sailor' and such action has raised alarm bells on foreign currency markets. China holds almost US$2 trillion in US currency and nearly US$800 billion in various US treasury bills and US bonds. China, Russia and a few other Asian nations have begun to voice concern over ultra-low American interest rates and the rate of expansion of US paper currency. Such expansion (or inflation of the amount of currency) is causing the US dollar to decline in value against several other foreign currencies.

          The Bank of Canada has attempted to reduce the value of the Canadian dollar against the American dollar by lowering interest rates to 0.25%, but to limited avail. At present, the American dollar is still the world's reserve currency. However, there have been rumblings from Asia to replace the American dollar with some other form of currency. So far, the American Fed seems willing to push currency markets to the limit by continuing to use the printing presses to inflate the supply of American paper currency.
 

"The American Federal Reserve has literally been printing new paper currency 'like a drunken sailor' and such action has raised alarm bells on foreign currency markets."


          The prevailing attitude among top officials at the Fed seems to be that world currency markets are not ready to begin to dump the US dollar. Prior to the invasion of Iraq, Saddam Hussein refused to accept American currency as payment for Iraqi oil but accepted Euros. Such action is believed by some to have contributed to the American decision to invade Iraq, given that no chemical stockpiles or weapons of mass destruction have thus far been discovered in that country. There is, however, the remote risk of some money markets dumping the American dollar and causing it to decline drastically in value against many other currencies, perhaps even against the Canadian dollar.
 

Recovery or Mirage?

          What, then, can we make of the Rt. Hon former libertarian's proclamation of economic recovery in view of Canada's dependency on the US market and the decline of the US dollar against other currencies, including the Canadian dollar? It may only be valid over the short term in a stagnant economy. We will agree with him that there may in fact be a small economic bubble or 'micro-boom' that is giving off signals that mimic those of economic recovery.

          The American economy is literally a mess and would need to rapidly create many high-paying jobs in order to generate customers who will buy new cars from a Fiat-Chrysler consortium and from the New General Motors (aka, Government Motors). The Government stimulus packages in the US and Canada may in fact create many new high-paying jobs, over the short term. Many of these wage earners may actually buy new cars from the new GM and Fiat-Chrysler over that short term. But deficit-ridden stimulus packages provide no guarantee whatsoever for economic recovery over the long term.

          While the American Fed steadfastly refuses to shut off the printing presses and raise interest rates, world currency markets may compel it to do exactly that should those currency markets begin to dump the American dollar. Shutting off the printing presses and raising interest rates will definitely precipitate a major economic upheaval across the USA and Canada. It will also provide an opportunity to liquidate the massive malinvestment in the American (and Canadian) economy, eventually allowing markets to generate genuine signals instead of the misleading and distorted signals generated by ultra-low interest rates.