I wince every time I think of Peter Lynch’s put-down that if you spent five minutes with an economist you’d be wasting three. But in the summer of 2009, the truth is that no one, no matter how expert (and not even the World Bank), can forecast the future with any real conviction. The stock markets may be forward-looking barometers, but the economic data which they interpret with varying degrees of accuracy at the best of times are of happenings measured weeks or months previously. At this time there is just too much thin ice around for anyone to be foolish enough to stick their neck out too far.
Adding to the unease is a questionable economic recovery to date due solely to government stimulus spending and pump-priming on a pedal-to-the-metal scale as never before.
In other words, a recovery that is heavily induced rather than organic. When and by how much economies will grow of their own volition once they are taken off government life support remains very much open to question.
In turn, this begs the question as to how governments are going to exit their rescue strategies and face up to the twin challenges of the exploding budget deficits and soaring national debts they will have left them with. At some point central banks, too, must start tightening the system by raising interest rates, but then what?
Going into deficit is one thing, even when well-intentioned and necessary. Getting out of the extra deep holes that have been dug this time around will be another. It will be all the more difficult if self-supporting economic recovery is as anaemic as it looks like being in most of the OECD countries.
The BRIC block (Brazil, Russian, India, China) is another matter, as also should be Developing Asia in general. China’s infrastructure stimulus seems to be working well as growth forecasts for the world’s new economic powerhouse are hiked above 7%. The pattern is similar in India, but alas not in our artificially-supported world.
On his recent trip to China, U.S. Treasury Secretary Timothy Geithner was grilled by sceptical audiences on his government’s exit plan. He didn’t elaborate other than to answer there would be a plan , but the time wasn’t yet right. The subject of exit strategies was also raised at the latest G8 finance ministers meeting. After heated discussion, the International Monetary Fund was asked to research strategies to slim budget deficits and reduce government presence in the financial sector in a way that wouldn’t re-ignite a contagious made-in-America crisis that had spread worldwide.
Here in Canada, Prime Minister Harper says tax increases or reductions in program spending won’t be necessary to return to fiscal balance by 2013-14. In which case there would need to be strong and protracted GDP growth. However, many are openly questioning the rosiness of predictions that have been badly discredited since the assurances of last November’s Economic Statement morphed into a projected budget deficit of $34 billion, now further raised to a record $50 billion. Toronto Dominion Bank economists, in particular, maintain that the government’s forecasts are so far off that its cumulative five-year budget deficit projection could in fact turn out to be double the $85 billion forecast.
THEN AND NOW
Given the staggering levels of a U.S. deficit that could climb to the $2 trillion level, or 13% of GDP, it is probably best to assume the U.S. will remain in the red as far as the eye can see. Assuming he remains in office until 2017, Barack Obama could retire as a president who has only known deficits – and massive deficits at that! Similarly in Canada, a safe assumption would be that the red ink continues to flow at both the national and provincial levels until at least the Harper government’s 2013-14 cross-over target date, but probably well beyond that.
What a change in the fiscal “weather” over the past year, and in Canada in a matter of months!
What a far cry, too, from Ronald Reagan’s inaugural declaration that “Government is not the solution to the problem, government is the problem”, and his purported belief that the nine most terrifying words in the English language are: “I’m from the government and I’ve come to help”. This time a government that has come to help is also wielding a big stick, as banks, financial institutions and the automotive industry can feelingly attest to. Just ask AIG, Citigroup and General Motors, who are now also heavily government owned and controlled.
Obamanomics vs. Reaganomics?
Big government is a new fact of life investors will also have no choice but to adapt to. Jeffrey Immelt, the Chief Executive of hard-pressed General Electric, couldn’t have put it more expressively: “The government has moved in next door and it ain’t leaving”.
Our guest blogger is Michael Graham
You can reach Michael at:
Michael Graham Investment Services Inc.
Tel: 416 360-7530 Fax: 416 360-5566