In this world of instant gratification, it’s almost like we wake up every day expecting things to be better. I find people thinking that way with regard to our economy. Some of you may have lost a lot of money in the equities markets lately. Some others may be very used to the volatile gyrations in the commodity market. Regardless of where you have your money, these are volatile times. If you’re expecting it to be over soon, think again.
Nobody wants the economic landscape to even out more than me. I am getting very tired of European debt problems compounded by problems in the United States. We can talk about China all we want but the United States and Western Europe still represent a very rich part of the global economy. If we want fast and furious economic growth to boost employment and our standard of living, we have to get Europe and the United States going again. However, it’s not happening. I’m sure Pres. Barack Obama is pulling his hair out.
The problem is you can’t solve economic problems with 140 characters like we do on Twitter each day. It is much deeper than that. Typically, we use interest rates as the lever combined with fiscal stimulus to manage our economy. The problem is that interest rates remain at record lows in the United States and Europe and economic growth is not being stimulated. In the United States as well as most of the Western world we have had huge gobs of government spending to get us out of the problems caused in 2008. However, we find ourselves still on the verge of an economic calamity because nobody is spending money and creating jobs in the United States. Add Europe’s debt woes to the equation and volatility reigns.
So it is what it is, almost like 2 big bullies in a sandbox full of water and going nowhere. For the rest of us in countries like Canada it’s almost like we’re on the sidelines cheering the big boys on. However, the other day when I read that Bank of Canada governor Mark Carney was actually considering cutting interest rates versus raising them, I did a double take. For the last year there has been all kinds of economic buzz that Carney would raise interest rates to fend off inflation. So when there were a few hiccups earlier this year in the equities market that all changed and Canadians were told that there would be no more interest rates hikes for at least a few months. Then we heard that hikes may be on the way and now we are hearing that they might actually be cut. This is an obvious clue that the Bank of Canada considers the problems in the global economy to be at the knifepoint.
To compound Carney’s problems, the US Federal Reserve has said that they will not raise interest rates until at least 2013. That is on top of the zero US jobs growth and the contraction in the Canadian economy over the last quarter. Typically financially induced recessions are long and slow, this according to the Toronto Dominion Bank former chief economist, Don Drummond. So it makes it very difficult. What do you do if you’re the Bank of Canada governor Mark Carney?
Well, it was only 2 weeks ago that he went before a House of Commons Finance committee and said Canada’s economic growth would be a little bit slower than normal but he didn’t see a recession coming. He also said that about Europe and the United States. However, then we learned that the Canadian domestic economy shrank at an annualized rate .4% in the 2nd quarter as exports fell the most in almost 2 years. Trying to kick-start this economy has surely turned into a challenge.
The result of all this uncertainty has been tremendous volatility on world financial markets. For instance how do you get a good rate of return in the equities markets these days? There have been huge losses wiping out all the gains over the last year and at the same time there’ve been huge gains getting part of that back. When you transfer over to the commodities market you see the same types of things with noncommercial money coming into agricultural commodities, where investors are trying to take advantage of low grain stocks. We also have the price of gold going over $1900 an ounce as I write.
The answer of course is blowing in the wind. I’d like to say I have the perfect economic formula. However, there are so many uniquely bad economic problems now, I hardly know what to say. Let’s just hold on tight. Sometimes that works.