I’ve have a saying I repeat often when I’m asked to speak.  “We got here with our eyes wide open.”  So with oil pushing $103/barrel and gold futures jumping to $992/ounce and the American dollar crashing with our loonie soaring I think you know what I mean.  It’s not like this was a surprise.  Watching the train wreck, which is the American economy, hasn’t been for the feint of heart.

In the United States the sub-prime mortgage problem has devastated the monetary plans of the US Federal Reserve.  For some of you that might be like saying, the paint is drying slowly.  However, with the US Federal Reserve having radically cut interest rates in an attempt to save the stock market and keep money flowing, it was a real clue things might have got a bit out of control.  With the greenback retreating and gold increasing, its represents another clue that the US economy is headed into a recession.

For those of you who are interested in economic jargon, a recession is two successive quarters of negative economic growth.  That means that the economy is actually shrinking.  Jobs are lost, capital within the economy dries up and consumer confidence swoons.  Yesterday even American billionaire Warren Buffet chimed in and said the U.S economy is in recession.

That’s not good news for us.  Many of us especially here in Ontario can almost feel the economic chill in our spine.  Statistics Canada recently reported on Canada’s December economic numbers.  They said that our exports decreased significantly (2.2%) over the final three months of 2007. Our GDP contracted in December, mostly but not exclusively because of the auto sector.  Last December there was a huge 27% decrease in car manufacturing.  Reverberations of this are being felt all over the central Canadian heartland of Ontario and Quebec.

For me the probable great US recession of 2008 is spooky at best.  I say this because the sub-prime mortgage problem stinks to “high heaven.”  I can’t say it any other way.  To me the American sub-prime mortgage fiasco is the quintessential example of capitalism gone mad.  It is one thing to “live within your own means.”  However, it is another when billionaire banks, mortgage companies and foreign banks pile on into a scheme to invest in bad paper in a speculative fury to make a quick buck.  With the economy turning around and housing prices plummeting, huge amounts of capital have been lost.  It’s become so big that even the US Federal Reserve is having a hard time controlling the fall out.

For instance in January the US Federal Reserve in a surprise move cut their key lending rate to 3.5% from 4.25%.  That was a huge move making a cut before the market opened in an unscheduled meeting.  I’ve talked about that before in this column.  However, what I haven’t mused about is how these low rates are taking away a very important economic weapon.  My question is with rates so low will the US Federal reserve and by default the US federal government lose the effect of cutting rates for economic stimulus.  In other words, with interest rates so low, at a certain point, it doesn’t matter anymore.

I think that’s a big deal. In effect the sub-prime mess and the moves by the US Federal Reserve to fight back is reminiscent of Brian Mulroney’s “roll the dice” comment.  With the Chinese and other foreigners holding huge gobs of American debt, the Americans are effectively ceding control of their economy to people outside their shores.  With the greenback in free fall, the big risk is for foreign holders of US debt to become even wearier of its lost value.  Something is amiss here and to think we got there because a bunch or filthy rich guys just weren’t rich enough.

Unfortunately for the people of southwestern Ontario, we’re going to catch the brunt of this.  I cannot see a way out, unless the US greenback catches some wind or some large economic stimulus coming from government.  With Alberta spewing out money in overdrive, I cannot see our federal government getting into that business.  Effectively with the tax breaks of the last few years, even our federal government has lost a bit of its power to manage its own economy.

Above all of this are the global shifts currently going on.  We’ve all heard about China and India and how they are affecting our economy.  However, add Brazil, Indonesia and Russia to that list.  These countries are growing richer by the month.  It would be good for everybody to grow richer together.  However, its pretty obvious especially in light of the sub-prime mess in the US, some of our wealth is going to end up in those countries.

Yes, we got here with “our eyes wide open.”  Nonetheless, maybe now its time to close our eyes and hold on tight.  It might be one heck of a ride.