Thursday, April 16, 2009

Why the stimulus is failing

A few weeks ago we profiled a speech given by Peter Schiff on the economy and the current steps being taken by the United States. Schiff concluded with a belief that North America would be best served by embracing the recession. He also issued a caution about what might happen if China stops supporting US Treasury Bill sales.

Debate on the best response to the economic crisis rages on in the US and around the world. The broad consensus is that we are mired in a Great Recession with a presumption that a depression is a distinct possibility.

Our poll-driven politicians, be they American, British or Canadian, hold to a myopic view that is fixated on a resumption of economic growth to address the crisis. Leading that charge is the United States. The American Federal Reserve wants to get credit flowing again to American consumers who are still vastly overextended, especially in mortgage markets. The US Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the “paradox of thrift” brought about by too much saving.

In Canada the Federal & Provincial goverments, along with the Bank of Canada, are working to a similar end.

Put it together and it all smacks of a dangerous sense of déjà vu. We are promoting a false recovery by kick-starting overextended, saving-short Canadian and American consumers to borrow once again by leveraging their major asset… their home.

But the efforts of our governments are coming up short because, it appears, Canadian and American consumer aren’t co-operating.

In the US, the personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium which will probably balance out in the 7.5 percent to 10 percent zone.

This is the essence of the macro disconnect that is now shaping post-crisis policies of governments around the world: The global economy has become overly dependent on one consumer – the North American one.

Yet, like it or not, this source of growth will be severely impaired for years to come through a necessary rebalancing of the North American economy. It isn’t the path the Canadian and American governments want to follow, but it is the path consumers are barrelling headlong down.

And before long this retrenchment by the North American consumer will start to serve as a wake-up call for other nations to fill the void by stimulating their own consumers.

A globalized world is going to move from one consumer to many.

And in the process it is going to put the current symbiotic relationship between the creditor (mainly China) and the debtor (the U.S.) in jeopardy.

Peter Schiff warned that one of these days China was going to start realizing this.

And despite the best efforts of the Canadian, American and British governments, North American consumers are going to ensure China gets that message lound and clear.

Are you prepared for the ramifications of that realization?



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