Room to manoeuvre

In response to the financial crisis of the previous decade, policy-makers decided to take all possible steps to avoid a repeat of the Great Depression of the 1930s.

Interest rates were pushed to almost zero, and the government decided to spend lavishly, as they were wont to do, in any event.

The magnitude of these measures is unprecedented.

All but forgotten is the fact that in the 1930s Britain opted for a stand pat position, similar to that government’s response to the 1920s depression. In both instances the economy recovered in two years. In fact, the British economy performed better than that of the United States by a wide margin. The do-nothing tactic worked perfectly.

Yet nowadays, government, prodded by public opinion, felt compelled to “do something.” When the next crisis takes place, as it inevitably will, counter-measures will be much less available. Interest rates fell from about nine per cent before the crisis took hold to almost zero. A few central banks are experimenting with negative rates, but that absurd condition has attracted few adherents.

Then too, governments took this opportunity to spend lavishly, running up huge deficits by offering subsidies to the automobile companies, cutting mortgage rates to historic lows, and basically eliminating down payments.

Lenders did not seem to question the borrowers’ ability to carry big mortgage obligations. That in turn led to an astronomic rise in prices so the average house price in Toronto reached over $1 million, the same as in Vancouver. What then will house prices reach later?

With interest rates at or near the lowest level in history, and government spending comparable to the war level, what are the economic arsenals left for governments to fight off the next economic downturn?

The answer is more of the same, with currency debasement inevitable. Perforce the cost of living will soar. Obviously at some point – at a level no one can predict – this scheme will fail.

Combining all this data provides a worrisome picture.

No one can settle the question of how long these counter-measures will be able to prevail. Governments clearly will face a time when borrowers run out of lenders. With Japan as an example, it may be further away than we believe. Then we will pay for this profligacy.

Clearly, it would have been preferable if we could have let the economic contraction run its course, but politicians do not seem to have the courage to do the right thing.

It is no surprise then that they are held in such low esteem by the thinking public and the voters.



Bruce Whitestone