Friday, March 20, 2009

Bubble, Toil, and Trouble

Yesterday I compared the global economic recession to a tsunami; today the Globe is using the same word to describe Ben Bernanke's $1 trillion treasury splash:

The story raises a couple of important issues for both the Canadian and NL economies.

On the one hand, the prospect of such a massive injection of liquidity woke up the commodity bulls, who are betting that the US stimulus package will indeed spur demand. Prices for commodities such as copper and oil jumped sharply, and it's likely that grains will follow as well. Gold reached a six-month high, and silver posted its best one-day surge in almost 30 years, which is good news for Canadian mining companies.

On the other hand, the looming liquidity tsunami has brought out the inflation bulls as well. The rally in the price of gold is in large measure due to spreading fears of inflation, as speculators take larger gold positions to hedge against the US currency. It's only a matter of time before the US dollar begins what will surely be its own sustained deleveraging, and, at this point, no one knows how far or how fast this will happen. A sharp decline in the US dollar would be bad news not only for US consumers, who would have to pay more for imported goods, but also Canadian exporters, who could see the Canadian dollar back to parity.

No one has been paying much attention to inflation because everyone has said that we have more important things to worry about in the short-term. But if the gold speculators are right, inflation may become a real problem sooner rather than later. If inflation really takes off -- and given the uncertainties of the past year, who knows? -- then all bets are off for a Carney-style recovery. For Canada, gains made by rising commodity prices could be outweighed by the domestic effects of inflation, which will eat into consumers' purchasing power and undercut consumer confidence. A sustained spike in inflation could force Carney to raise interest rates before the economy has recovered sufficiently, raising the spectre of 70's-style stagflation.

What's certain at this point is that nothing is certain. Congress, the White House, and the Treasury are concocting an American stimulus brew worthy of the three witches in Macbeth. We've already had plenty of economic bubbles, social toil, and political trouble; but no one knows whether this latest brew will create a vaccine against the global meltdown virus. Given the fact that American consumers were already so heavily indebted before the whole crisis began, it will take more than a single rebate cheque to induce them to return to their pre-2008 spending habits, if they ever do.

Which brings us to NL. The Tely has a thoughtful editorial on the politics of economic projections:

"For years, this province's finance ministers have deliberately pegged the price of oil lower than the price turned out to be. The result has been, almost every year, a surplus beyond expectations.

Lowball in March, and look good in October - it's become a tradition.This year, once again, results may not be the same as expectations - but look to the province to be far more cautious about what it's expecting, simply because when it comes to economists' predictions, it seems more like pinning jello to the wall than anything else.

And it will be interesting to see what flavour we get when this province's new budget arrives next week."

Mixing oil and jello is always interesting. What will be even more interesting is the politics of expectations and blame. Will the Blue Shaft act as the sole antagonist, or will there be other actors in this drama? The nurses have been out of the provincial news for quite a while, haven't they?

Nurses Update:

Back in the news:

No comments:

Post a Comment