There is lots of speculation about the exit strategy on this recession, the deepest and most devastating since the Great Depression. What “shape” will the economic recovery take is the subject of speculation and “punditation.”
The federal government stimulus spending is all debt financing, as it is in all provinces except Alberta, who had cash reserves. Many thought Alberta should also borrow for funding their pubic infrastructure stimulus spending and use the cash as security. The ideological mantra in Alberta sees public debt as an anathema.
Premier Stelmach, like Prime Minister Harper and Leader of the Official Opposition, Michael Ignatieff have all said unequivocally that they will not raise taxes. That is potentially a vital and valuable tool to fend off inflation. My guess is this political promise will be honoured more in the breach.
The policy fear is which the way the economy will respond as we come out of this recession. The threat of inflation and high interest rates are real concerns given all the new money that governments created and put into the economy for stimulus spending. Again the US economy will set the tone and timing of recovery and the marketplace response…especially in Canada.
We also don’t know what will be the timing and actual impact of the exit of stimulus funding. That will be a force on the economic effects as we emerge out of the recession. There are high level musings that we are technically out of the recession now but that is confusing messaging and cold comfort to those who have lost jobs and still losing them.
The recovery alphabet has no vowels. Here are some of the options:
The “V” is a steep decline and a quick and effective rebound.
The “U” is a steep decline, a linger at the bottom and a big bounce back.
The “L” is the most dreaded “recovery” model. It happened in Japan resulting in what they called the “lost decade.” The bottom falls out and the economy languished along the bottom for an extended time with no growth.
The “W” is a distinct possibility in some countries, including Canada. It may be happening now as we see some indications of positive economic performance since June but is it induced by stimulus spending and when that runs out we decline again until a more authentic economic recovery takes place. This letter has to have serious political implications for election timing. If the recover is merely apparent, Harper will want to go quickly before the “W” becomes a depressing fact for citizens.
The last and most likely recovery model is not a letter at all. It is the Nike Swoosh which is a quick decline and a long slow steady protracted recovery.
My money is on a combination “W” with the swoosh showing up in the last part of the letter. The private sector people I talk to, both big and small operations are in a holding, wait and see pattern. Government stimulus spending is to avoid a depression and to put some liquidity in the economy because the banks were not even lending to each other. But it is not a sustainable policy for the long term.
Stimulus spending by governments on public infrastructure is an economic triage activity. It is not a long term rehabilitation program to re-regulate the wildly irresponsible results of the overly deregulated market place. The G20 meetings last week have seem nations starting to make major moves to respond with some return to a more regulated market economy.
The politicians are spinning the return to recovery story based on stimulus impacts only. The economic and fiscal powers that be are focusing on the exit strategy about how to turn off the stimulus tap, deal with the long term debt it is causing, how ot protect the US dollar and dampen inflationary pressures that will be coming.
I will listen to politicians comments about the “reality” of any economy recover with a skeptical ear. I will watch the signs from the professional and the market place for the facts. One thing for sure, this economic recovery is not going to be easy or obvious given the global interdependence and shifts of influence to China and India for example.
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