Sunday, January 20, 2008

Cleaning up behind "Easy Al" (Greenspan)

If the economy was a ship, then Easy Al guided the world's largest economy within spitting distance of the shoals. Now, everybody else has to try and make sure that it doesn't crash into those shores, wrecking secondary havoc elsewhere.

The Bank of Canada is widely expected to lower its interest rate at its next meeting on January 22, in response to the slowing US economy and liquidity issues. Because Canada's largest export market is softening, having our currency float through the roof would hurt many Ontario-based manufacturers who count on this market. So we too are in the position of having to lower our interest rates, even though this is against the other relatively strong fundamentals elsewhere in the country. This, undoubtedly, will cause trouble further down the road, as in the stagflation that money manager and financial columnist Avner Mandelmann says has begun to visit its plague on the US.

While it's unfortunate that this will happen, viewed through the lens of alternative realities, which could include a depression, suffering through 10 years of stagflation seems infinitely better.

For Canada, the picture is different. Public finances are on the soundest footing in a generation, and all attempts should be made to maintain that. Accepting that American troubles are real but different, we should not follow the same asset inflation mistakes made there, by allowing our credit to become too cheap. Policy-makers and central bankers must put their heads together to make humus out of manure, so that Canada can take advantage of this situation, and not blindly follow the Americans down the manure-laden stagflation trail.

Perhaps first among these actions is lowering the cost of credit at a very slow pace, to a far lesser degree than that seen in the US. Secondly, as the cost of credit is lowered once again, perhaps accelerating our own national debt repayments would give us additional flexibility down the road.

We experimented with stagflation in the 1970s - perhaps we can try experimenting with a strong currency for a change.

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JW

The Confused Capitalist

4 comments:

Deborah said...

I hope there are no surprise in our federal budget. I think Harper is an idiot for chipping at why we have economic strength and his plans to put us in a position that we have a deficit again with his tax cuts. If you are making ends meet in a recession tax cuts might be in order, but a surplus budget is highly fickle in a booming economy. It can turn very quickly when the economy turns and there should be a high priority to pay back debt in a booming economy.

Molroney is responsible for our economic strength today as he made the hard decisions that lead to today's surplus.

Harper is an idiot.

GI said...

I don't think it's fair to blame everything on Greenspan. Greenspan himself inherited a big pile of oderous stuff. The US economy has been mismanaged starting the day after the US was first created as an independant state. Along the way there have been many warning signs that things were amiss, like Roosevelt's "New Deal" and Nixon's closing of the gold window and the gold standard. The problems just continue to spiral downhill in an entirely predictable manner. The US someday in the future will cease to be the worlds leading and dominant power just as other dominant states in past history have come and gone. Unfortunately I don't think it will be cause for anyone to celebrate.

Geoff Green said...

It's easy to be critical in hindsight but I just think that Greenspan was just out of touch during his tenure as Fed Chairman. His unrealistically low interest rates at the wrong time and then the increase or rates at just the wrong time went against most economists views.

Jay Walker said...

I guess my point would be is that Greenspan's actions produced entirely predictable results. In fact, I was writing appraisal reports in 2003-2005 period that specifically mentioned that low rates boost asset prices - especially real estat - and that is where the mess lays today.

JW