Tuesday, March 17, 2009

Ray of Light

After posting six consecutive days of gains, a span during which the Toronto Stock Exchange has risen nearly 1000 points, there does appear to be some light at the end of the tunnel. While some economists recently predicted that conditions would get much worse in the next two years, others have been optimistic. I would take care in reminding people that there absolutely does NOT exist any consensus among economists. Forecasts, projections, and proposed solutions are all over the map right now. Find me a “leading” economist who says one thing, and I can find another who says the exact opposite. Economics is not an exact science. It is a collection of theories that endeavors to explain a very complex organism. There are free market, small government Libertarians and there are controlled market, big government Keynesians.

What has driven the recent rebound of global markets? It has nothing to do with the proposed Obama stimulus package, and everything to do with a collection of major banks around the globe announcing that they are in far better condition that previously believed. Canadian banks are actually doing very well considering the staggering loss of equity the markets have sustained in the last 6 months. We are still roughly 1000 points below the highs of early January, and there are still a number of challenges left to face. Namely, the problems at AIG, Generous Motors, Chrysler, and others. Those companies, deemed too big to fail might yet fail, and in the opinion of this economist should be allowed to fail.

There is also the massive spending package set to be implemented in the United States on experimental technologies, billions to global warming programs, and a proposed Universal Health Care system. While all these projects are noble in their intentions, they are not guaranteed to work and are just as likely to have negative financial consequences. The American government is embarking on a series of hypothetical “Manhattan Projects” at a time when their level of debt and deficit are perilously close to crashing the value of the American Dollar. One of the risks of creating large amounts of currency that does not exist for projects that might yield 30 cents on the dollar of value, is that the value of the American dollar could tank leading to rapid inflation and foreign investors dumping the dollar as the monetary standard. Should this happen, American markets would most certainly experience another massive loss of wealth from which it may never recover.

I for one hope the policies succeed even if I disagree with them on an ideological level. Ideologues like Rush Limbaugh and Sean Hannity may want the Obama Administration to fail, dragging down the markets and ushering in a Republican Congress in 2010; but I have a Conservative Government in Canada that I want to remain in power. I am not inspired by the Ignatieff Liberals, and if the Obama policies crash the American Economy even further six months hence, that will drag Canada down with it into the abyss. Given our minority government and the threat of an election at any given moment, and the historical precedence of severe recessions damaging sitting governments regardless of who is responsible, I truly hope that the gains of this past week continue, that the worst of this crisis is over, and that industries across our great country start hiring again.

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