In this age of spin, rare are the voices that speak with candour. Certainly, the federal government’s vast apparatus can’t be counted on to speak the truth, not with the Harper party’s partisan manipulation of every utterance. Nor can anyone count on the opposition parties, whose game it is to embarrass the government.
In the circumstances of omnipresent spin (to which business, labour and other interest groups add their voices), one man in Ottawa has become indispensible for straight talk: Bank of Canada Governor Mark Carney. This week, Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time.
If Canadians download it from the bank’s website, their understanding will deepen of what lies ahead, for Canada and the world. But their mood won’t improve, for Mr. Carney’s analysis is sombre.
Mr. Carney believes, and he’s profoundly correct, that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaimed, “is now decisively over.”
What he calls the “debt super cycle” occurred everywhere, albeit at different times – in Japan, in many European countries and in the United States. Canada was part of the cycle, too, until the Chrétien government put an end to the country’s rising debts in the mid-1990s.
Debt fuelled consumer spending, not productive investments. Excessive private debt (collapsed banks, for example) wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, meant the overall debt burden was less sustainable.
Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin. The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”
The best and easiest way to reduce debt is to increase growth, but Mr. Carney says growth will be hard to find, let alone sustain, when so many countries are deleveraging. Governments can’t continue to borrow for much longer, except perhaps for the U.S. because of its reserve currency status. The “rupture,” therefore, has begun.
Western countries can’t recover unless big developing countries (read: China and India) increase domestic demand, but those countries are refusing to allow their currencies to adjust (read: China). So, says Mr. Carney, “both sides are doubling down on losing strategies.” When countries do what Western ones have done and borrow abroad (read: the U.S.) to fund internal consumption, their situations become unsustainable.
Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.” Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.
Today is not like the past, when Canadian governments made hard decisions. Times now are “trying” (Mr. Carney’s word), given worldwide deleveraging and an aging population that will impose more costs on governments while decreasing their revenues.
“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging,” he says. “We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”
He suggests that, to eliminate Canadians’ net financial debt over two years, the country could increase exports by three percentage points; but that’s unlikely, given the world economy. Government outlays could rise by four points; but that’s impossible while deleveraging. His preferred option – raising business investment by seven percentage points – would seem to be improbable, given slow growth prospects.
The spin doctors of Ottawa tell us how splendidly Canada has done. One man tells the truth.