The US Has Sneezed, Canada Will Catch the Cold

by admin on July 12, 2010

The tea party movement may not be the sort of people that you’d invite around for a barbecue.  You know the types, the cantankerous ones, the ones who always go on about politics, the ones who will be that bit less tolerant of people with “alternative lifestyles”.  One of the big problems that the tea party has is their biggest strength.  They are a spontaneous democratic movement arising from the people, and the people can sometimes look ugly.

However they do have a point.  The federal government in America is controlled by people who are frankly unsympathetic to swashbuckling capitalism and for the first time in living memory political power in Washington is far to the left of political power in Ottawa.  Canadians are far more tolerant of taxes and government regulation than the Americans, but it’s doubtful that even Canadians would tolerate Obama’s high spending for long – at least if there was not a crisis.

It is also not that clear what will happen if the Republicans to sweep to control the legislature ; and they will almost certainly get the House of Representatives, even if the Senate will be an enormous achievement.  Everyone seems to be assuming that Barrack Obama will be as gracious, wily and pragmatic as Bill Clinton when he faced the Contract with America crowd in 1994, but Bill Clinton was the governor of a conservative southern state for ten years and knew the way conservatives worked and how to manage them when they disagreed.  Barrack Obama has fought his way through the Chicago political machine, where there are not quite as many Republicans and conservatives about. 

And America is in trouble, big trouble.  There are millions of home owners with mortgages that are higher than their house values.  There are city governments filing for bankruptcy, and state governments who are only not filing for bankruptcy because they legally can not do so.  And as for the Federal government, it is the only large country in the OECD that is not talking about radical measures to bring down spending.

In short there is a lot of debt and there are only three ways of dealing with this sort of overhang of debt.  The first is to pay it down, and spend less than you earn.  The second is to default and walk away.  The third is to inflate and essentially tax anyone who holds your money.  All three of them will have problems for Canada.

Paying down the debt will radically cut consumption in Canada’s largest export market.  Unlike many other countries it is not so easy for Canada to simply shift focus to other markets (although it has been trying, particularly towards China) as Canada’s exports tend to be bulky and they sometimes have to get halfway across the world.

Defaulting, which is going to be done by individuals, companies and local governments, will sharply reduce the amount of credit that Americans have to buy goods, once again reducing consumption in Canada’s largest market.

The final option is inflation.  This may become a problem for the Loonie as a resource based currency next to a currency whose main prerogative is to inflate away debt will mean that the Loonie will shoot up if America inflates herself out of trouble.  This will mean that, without any effort, American imports will be cheaper and Canadian exports will be more expensive.

Whichever way you look at it, Canada is going to bear the brunt of America’s predicament.

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