In early 1940, British Prime Minister Neville Chamberlain stupidly proclaimed that Hitler “missed the bus” by failing to start hostilities when his opponents were less prepared.
Of course, subsequently, Germany conquered Denmark, Norway, and all of western Europe. Similarly, our political leaders “missed the bus” when they failed to recognize our developing economic crisis and nip it in the bud.
As a “remedy” for the weakening economy now besetting the globe, central banks (notably in the United States) acted as if the problem were the lack of availability of liquid assets – that is insufficient capital to lend to other banks and to the public.
Unfortunately, for too long we have been misled by those who stated the crisis was the result of illiquidity, not the root cause, which actually was widespread insolvency (excessive debt). To permit cash-strapped financial institutions to lend money once again, a $700-billion bailout fund was created, to inject funds directly into banks, and to take over some of the mortgages they held.
All but forgotten is that there has been too much lending and borrowing. Beginning under the Ronald Reagan administration we were told that forthwith we should continue as before, forget about savings, and merely go on borrowing and spending. Following the 9/11 attack, President George W. Bush said that we should “go out and shop.”
Furthermore, again the conventional treatment for an economic downturn was to lower interest rates in order to encourage more borrowing by businesses and individuals. Probably, almost the very last thing that our economy needs is more borrowing. Savings rates already have fallen to lows not seen since the 1930s. Car dealers report that sales have collapsed because customers no longer can borrow the funds to purchase any vehicles.
Conditions possibly may be temporarily buoyed by the easing of credit so that borrowing can be resumed; spending may be encouraged by the economic stimulus package. Even now, however, credit-card debt for households in the United States is about $12,500, while in Canada total household debt, according to the most recent data, reached $20,500.
The situation in Canada is much better than in the United States.
Our federal government has been running a budget surplus and the federal debt was being paid down. In the U.S. the federal budget deficit is more than half a trillion dollars and its foreign trade shortfall is increasing by $700-billion a month. We have a favourable balance in our foreign trade with an annual surplus of about $25-billion.
Clearly, the overall debt problem cannot continue. Governments “missed the bus,” regrettably did not identify the rising insolvency crisis and rein in debt. Savings and investment are the essential ingredients for prosperity, but nowadays they are missing.