Invasion of the Moneylenders – Part 7 – To Shoot a Moose

By Peter Ewart

    This is the 7th in a series by Peter Ewart, You can read the others,  by clicking here 

In the great forests of central and northern British Columbia, moose hunting is a time honored tradition in the Fall.  Aiming to bag some big game for the freezer, hunters venture out in the bush with their rifles, 4 wheel drives, and thermoses of hot coffee. 

When going after moose, hunters strive for a clean shot to bring down these magnificent antlered giants quickly. But it often happens that, after taking a slug or two, the moose will stagger slightly and then disappear into the bush.  After waiting a bit, the hunter patiently follows the drops of blood in the fresh snow.  If it has received a heart or lung shot, the wounded moose will eventually end up dropping to the ground, sooner rather than later, in a steaming heap of fur, hoof, antler, and blood.

So goes the U.S. economy as a result of the subprime mortgage scandal and overall financial crisis.  By carrying out various unethical, semi-legal, and, as some are alleging in the U.S., illegal practices, including flogging toxic securities to investors, withholding vital information from clients, and falsifying documents, financial institutions have shot a bullet into the guts of the American economic system that, in the years to come, promises to wreak huge damage, not only to the U.S. economy, but also to economies around the world.  One of the main establishment newspapers in Britain, The Telegraph, calls it a crisis of “epochal proportions” (1).

And it is not the only storm cloud looming on the horizon.  Problems in the municipal bond market and credit card receivables are expected to emerge in the coming year.  As one analyst predicts, “eventually, the mushrooming damage from the collapsing credit markets will cause a world stock detonation” (2).  Many new ventures in mining, manufacturing and other sectors are also being put on hold because bank loans have dried up. In addition, a classical crisis of overproduction is gathering in parts of North America in some non-financial sectors like forestry, auto manufacturing, and housing construction. 

For example, throughout Northern Canada, sawmills and pulp mills are closing in the worst downturn in half a century or more.  For the auto industry in the eastern U.S., as well as Ontario and Quebec, the situation is no better.  Massive layoffs and shutdowns are idling thousands.  Indeed, the CEO of Chrysler Corporation has stated that the company is for all intents and purposes “operationally bankrupt” (3).  As for the housing market, Moody’s Economy.com says that “the United States is deep in the worst housing slump since the Great Depression” which is “not going to get better any time soon” (4).

The U.S. website “The Daily Reckoning” wryly comments that “the words to watch for next year are: solvency, crash, tariff, liquidated, foreclosure, zero-bound, Obama, exit-strategy, [and] unfunded liability” (5).

That being said however, the situation is paradoxical.  In some parts of North America, the economy, at least on the surface appears to be doing quite well.  In these regions, unemployment is low, and new construction, often fueled by government spending (like the 2010 Olympics in Vancouver / Whistler), is still booming.  But just as a gut shot moose will sometimes charge off into the brush at full clip or even resume feeding on shrubs as if nothing has happened, the North American economy is living on borrowed time.

The situation is not being helped by politicians and financial analysts who have persisted over the last several years in presenting a mindlessly optimistic picture of the economy or who have downplayed the dangerous economic waters we are entering.  As Hans Black, chairman of Interinvest Consulting Corporation in Montreal, says:  “I don’t think politicians, certainly not in Canada, have fully grasped the severity of what is going on.  We are at a very serious juncture, and there’s a serious risk of unraveling” (6).

So far, the main response of central banks to the credit crisis has been to flood the market with more money and lower interest rates.  But these measures are having little effect so far.  “The central banks of the world have created a monster, whose name is debt,” says Anthony Cherniawski of The Market Oracle.  “The ammunition they use to contain the monster is more debt, so the monster grows every time these so-called cash infusions are made” (7).  Furthermore, the more interest rates are cut, as the U.S. Federal Reserve has done recently, the more the plague of inflation will spread. 

Thus, our economic possibilities get reduced to either a recession or a bout of prolonged stagflation.   Increasingly, the debate amongst financial analysts is not whether a downturn is coming, but rather how severe it will be.  One economist quoted in The Telegraph fears that we could be facing a situation that would “make 1929 look like a walk in the park” (8). 

Towards the end of their book “Empire of Debt”, William Bonner and Addison Wiggin look to the future, aptly titling a chapter with the phrase, “Something wicked this way comes” (which also is the title of a Ray Bradbury horror novel). 

“Well,” some politicians might respond, “What will be, will be.”  To them, it is better to be optimistic than pessimistic.  After all, what’s the harm in looking at the bright side of things? 

But there is real harm.  If municipal, provincial, federal or state governments believe that the economy will continue to develop and improve, they will tailor their economic and fiscal policies to address that positive reality.  On the other hand, if the outlook is not good, they will (or at least should) adjust their policies to deal with that negative reality. 

To put it another way, if a government is “zigging” when it should be “zagging”, the results can be disastrous for the populace.  And unfortunately many governments in North America and other countries under the sway of finance capital have been doing just that. 

According to Bonner and Wiggin, “the force of a correction is equal and opposite to the deception and delusion that preceded it” (9).  By that formula, we are in for a bad one.

Notes

1. Evans-Pritchard, Ambrose.  “Crisis May Make 1929 Look a ‘Walk in the Park.”  The Telegraph Dec. 23, 2007.
2. Laird, Chris.  Prudentsquirrel.com.
3. “Chrysler CEO: We’re ‘Operationally’ Bankrupt.”  CNNMoney.com. Dec. 21, 2007.
4. Christie, Les.  “Pain Street USA: ’80 Housing Outlook.”  CNNMoney.com. Dec. 21, 2007.
5. “Optimism in the Face of Inflation.”  The Daily Reckoning.  Dec. 26, 2007.
6. Black, Hans.  Qtd. in “Harper Rejects Debt Bailout, Putting Pressure on Canadian Banks.” By Theophilos Argitis and David Scanlan.  Bloomberg.com Dec. 21, 2007.
7. Cherniawski, Anthony.  “Real Estate Pro’s head for the Exit as Bush Asks Banks to ‘Come Clean’ on Losses.” The Market Oracle.  Dec. 22, 2007.
8. Spencer, Peter.  Qtd. in “Crisis May Make 1929 Look a ‘Walk in the Park.”  By Ambrose Evans-Pritchard.  The Telegraph.  Dec. 23, 2007.
9. Bonner, William, and Addison Wiggin.  Empire of Debt: The Rise of an Epic Financial Crisis.  Hoboken, New Jersey: John Wiley & Sons, 2006.

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