How would you like, and how would the Canadian economy handle, a dollar worth at least $1.10 U.S., or gasoline prices at $1.50 a litre, or sharply higher food prices? How would you, and the Canadian economy, like the return of inflation, and the return of other than rock-bottom interest rates to combat it?
Some Canadians would love these changes. Oil companies would get even richer. So would the treasuries of oil-producing provinces. Importers would prosper, since a sharply higher dollar would make their imports cheaper. Canadians travelling south would revel in their new purchasing power, thereby worsening our already huge tourism deficit.
Indebted consumers wouldn't enjoy higher interest rates. Manufacturing exporters would get hammered by a $1.10 dollar. Ontario and Quebec would lose; their deficit-laden budgets would be further weakened. Canada's already lousy competitiveness would get worse. Unemployment would like rise.
What's happening in the world is already casting a shadow over the rosiest forecasts for the Canadian economy. What might happen next would darken that shadow.
Three epochal developments are crashing together to make the world so uncertain that confident predictions should be thrown out the nearest window.
We've known for a while about the rise of China and, to a lesser extent, India, particularly about the huge current account surpluses and manipulated currency of China. Those surpluses have destabilized the world economy.
We've also known about the intellectual, cultural and political turmoil within that has been the most consequential, if least understood, story of our time. With the focus on al-Qaeda and terrorism on the one hand, and the Jerusalem-based media preoccupation with the Palestinian-Israeli dispute on the other, it was easy to miss what was happening in the rest of that world, perhaps because we assumed things would carry on as before in the kingships, theocracies and thugocracies that characterized so many Islamic countries.
Now those assumptions are as dust, as we await the next rebellion against an autocratic regime. While waiting, oil prices rise as the political premium for uncertainty grows. A few months ago, the World Bank predicted $85-a-barrel oil in 2011, but the price has already blown past that number. In the short term, higher prices lessen purchasing power for most consumers and countries. They'll certainly slow down growth in the developed world, just as higher food prices will bite consumers with particular force in poorer countries.
We've also observed the inability of the United States to govern itself properly, in the sense of paying its bills and balancing obligations and revenues. Already the world's largest borrower by far, the U.S. political system seems ready to borrow trillions of additional dollars, presumably on the assumption that the world will continue to lend it ever-increasing sums at rock-bottom rates with no impact on its credit rating.
But what would happen if a major ratings agency downgraded U.S. debt, or a big lender began to diversify away from U.S. debt, or the U.S. dollar plunged? This is a country accustomed to making the rules, then breaking them with impunity. But what happens if that impunity is removed, and the very forces of globalization that the Americans have trumpeted turn against the chief trumpeter.
In this circumstance, Canada could get sucked down by the world's panicky reaction to U.S. mismanagement, in which case little would cushion our economy. Or Canada could be seen as a comparatively safe haven, with upward buying pressure on the Canadian dollar pushing it to levels beyond anything in our lifetimes.
With so much uncertainty, the best option for Canada is to get deficits down much faster than federal and provincial governments are now intending, refocus as much spending as possible on improving competitiveness rather than politically attractive subsidies and useless tax expenditures, and diversifying our economy like mad outside North America. The resulting life jacket would be thin, but it might provide a little insurance against the storms ahead.