Wednesday, June 1, 2011

The Tories' Bankrupt Brains

"I see, said the blind man to the deaf dog, who wasn't listening anyway" is a phrase that comes to mind reading reports of federal Finance Minister Jim Flaherty's press conference on the economy. Generally speaking we expect governments to do more to solve looming crises than beg somebody else to do it for them. It is a sign of just how ideologically blinded are the Tories that they will ride the HMS Neo-Liberal to the bottom of the economic ocean before they will take any initiative to plug a leak using the instruments of state.

Capacity Utilization
Flaherty's response to flagging consumer demand has absolutely no hope of staving off a looming second dip in the as-yet-unfinished recession of 2008. The decline in consumer spending as we regular folk are saddled with historically high debt - there was a brief dip in debt as a percentage of income before returning to a generally upward trend toward 150% - means that 60% of what normally makes up economic expansion has been taken offline.

And while industrial investment and new machinery is up - in part because the rise in the Canadian dollar has made imported capital goods cheaper - has a number of inbuilt limits in terms of saving the economy. The first is the dead consumer demand to purchase goods of any new production capacity. The second is the fact that capacity utilization - the measure of how much new machinery is being used; is it running flat out or sitting idle part of the time? - is still at the lowest levels in a decade, sitting at 76% and levelling off.

And while manufacturing saw growth in 2010, it is still 15% below where it was at its peak in 2006. And even corporate debt levels, which declined during the recession, only declined by about 4% in relation to income from their peak and are rising once again. With the slowdown in the US and a slowdown looming in China, plus the disaster in Japan, along with inflation of raw materials running at a whopping 22%, this is hardly the moment when corporations are likely to find the dosh to ratchet up capital purchases to anywhere near what is necessary. In fact, when Flaherty says that the corporate sector is "relatively flush" with cash, they could easily reply that, in fact, total corporate debt to equity ratios - at 166% - is considerably higher than total government debt (i.e. federal, provincial, municipal, etc) to GDP, which is running at just over 107%. In other words an economic bailout from the fragmented corporate sector, each trying to gain competitive advantage over the other, just isn't in the cards.

And, as I discussed in my previous post, there is every chance that, in addition to weak economic figures, the government could face pressure to raise interests rates to deal with inflation, originating with the high cost of raw materials. And nothing kills an anemic recovery more effectively than high interest rates. The net result could easily be that the Stephen Harper's hope and dream of forming a majority government may come back to bite him in the ass. They don't have the Liberals to kick around anymore as a hindrance to doing what needs to be done. They will get all the blame if things start to really go south. Unfortunately, for the rest of us, we don't risk unpopularity - it's our livelihoods and ability to pay the bills that are at risk.

Time for business to take the lead: Flaherty - The Globe and Mail
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