George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario
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Do you know what keeps me awake at night? It is the fact that the Canadian economy did not "reset" during the 2008-09 recession.
Recessions occur because economic or financial activities get out of touch with fundamentals. Inflation, wages, inventories, business investment or stock prices get out of touch with the underlying fundamentals of demand and supply, and a recession results that is supposed to correct the imbalances.
Market participants delude themselves if they think that economic and financial events are "different this time," believing that the relationship of these events to fundamentals has been altered either by technology, financial innovation, government intervention or the rise of emerging economies and so on. They are actually never different.
Markets and the economy gyrate from one extreme position to the next, driven by the cycle of overoptimism and overpessimism to which consumers, investors, corporate managers and other market participants are susceptible. Asset prices and the economy always revert to intrinsic value - a value that is driven by fundamentals.
A recession is supposed to reset economic and financial activities, make them consistent with fundamentals and bring them to a level from which recovery starts all over again. This has always been the case - but not this time.
The massive stimulus that the Canadian federal and provincial governments have injected into the economy may have prevented the economy from resetting. And we may have overspent to make that happen.
Toronto-Dominion Bank recently reported that Canada ranked first among G7 countries in the amount of fiscal stimulus as a percentage of gross domestic product flowing in 2009 and 2010. Could a large part of the stimulus package been unnecessary?
