Saturday, June 4, 2011

We all blame the Great Recession on the Banks but is that really justified?

We learned that high oil prices affect economic growth. If Oil today would rise above $125 as posted earlier, then we're likely to experience an economic slowdown. So what caused the economic boom of the 1990s? High Tech? Easy Credit and overconfident bankers?

No, a lot can be attributed to an abundance of resources. This may include not only an abundance of commodities but also an abundance of people (labour) and an abundance of productivity growth. In the 1970s commodity prices were high; I remember not only the oil price shocks and high gold prices but also the high price of coffee. Inflation was high, government deficits grew and grew, interest rates soared and the economy was sluggish, unemployment was relatively high. In the end, to find work, I emigrated overseas to a commodities paradise: Calgary, Alberta. But Canada's federal government tried to control inflation and disperse prosperity more evenly. With the bulk of Canada's political power in the East where they all eyed enviously the 'gold paved roads of Calgary', the National Energy Program was unleashed. That combined with inflation fighter Paul Volker in the U.S., oil companies such as Dome which paid nearly 20% interest on its over extended debt laden portfolio and the onset of the 1982 Recession spelled the end of the commodity boom.

Calgary's resource economy collapsed but once inflation reached more reasonable levels, Ontario's industry and industries in the U.S. started to prosper. Commodity prices and inflation continue to fall and manufacturing boomed. With energy prices low, and plenty of baby boomers in the work force, manufacturing boomed and so did housing and banking and High Tech. Productivity did not only increase due to low energy prices, but also due to the rise of computers. Inflation kept falling and with India and China adding to cheap labour, prosperity occurred everywhere while commodity based industries suffered – not only oil but also mining, agriculture and to a lesser degree forestry. Ever falling inflation lowered budget deficits which in turn lowered inflation and thus interest rates fell to unheard of levels. Real Estate and stock markets boomed especially in industrial economies like Europe, the U.S. and Asia. But with all this growth the demand for resources increased, yet nobody invested in those money losers!

Around 2000 the inevitable happened, commodity prices started to rise. At first nobody cared and manufacturing grew along with a recovering resource industry. So did real estate and in Western Canada, in particular in Alberta, real estate prices started to catch up with the rest of Canada. But the resource industry could not keep up with energy demand and the demand for other commodities and prices skyrocketed. Being used to low inflation and ever falling interest rates, the banking industry became increasingly creative in inventing fixed income instruments, derivatives and other financial products. Being used to an ever increasing wealth and prosperity, the financial industry threw caution out of the window encouraged by investors demanding every increasing corporate profits. Then we hit the wall, suddenly we realized how short on resources we were. Commodity prices shot up beyond what was sustainable and manufacturing and many other sectors could no longer afford expansion and profits disappeared. No new loan demand, a declining real estate market during uncertain 2007 and then the excesses of the financial industry came home with a vengeance. The Great Recession had arrived.

Now we are in a new era of high commodity prices. We become suddenly green, while in the previous era of cheap energy we couldn't wait to buy ever larger SUVs and houses. Once again we are experiencing large budget deficits and countries not being able to pay their debts. The story is starting to repeat. To speak of Robert Jordan's Wheel of Time where Ages come and pass! But our ages are short and we can learn from our mistakes of the past. Hopefully we can control the damage not only here but also in Europe. I am an optimist and although inflation and energy prices will continue to rise and economic growth may be a bit less vigorous, we will continue to prosper.

I think that the Great Recession was not only caused by the greed of corrupt bankers, although they did get out of line. However, the Great Recession is clearly part of a bigger picture. I do believe in the limitations of our resources but I also think we will be able to overcome these issues by building a more sustainable economy and eventually we unavoidably will branch out to the next frontier: the new wild west of space. For now we will have to deal with high energy prices and we will need other forms of energy to keep energy prices reasonable enabling our economy to grow.

Yes, our resources are limitless but their cost will increase. We will not only have to control the size of the human population but we also will have to develop a new form of economic growth. Our material needs will stabilize – how much bread can one eat? Profits and productivity will have to come from an economy no-longer based on population growth and ever increasing material demands. A whole new form of thinking, a new economic paradigm, will be required and this includes also how we will look at 'work' and 'labour'. May we live long and prosper. And, yep we can't just blame the bankers [or the oil people] for all our troubles, in fact we will have to start with ourselves.

No comments:

Post a Comment