World Economy

There was a nice article by Time regarding one of the underlying causes of the current economic recession (other than the subprime mortgage problem, the banking problem...the financial industry problem) and that is the world trade imbalance. In summary, too many countries adopted an economic strategy that was heavily reliant on exports. As a result, when the U.S. economy tanked, their economies tanked as well. See here for the article.

It’s evident that this recession is much more than a short term problem. It’s more than injecting liquidity into the financial markets. It’s much more than enacting tighter regulation of the financial industry. As the article points out, it also means re-jiggering much of the economic thinking of the past 30 or 40 years. The Chinese apparently have come to realize that reliance on exports to grow their economy is not a long term sustainable strategy and that they will have to pursue policies that encourage their own people to spend. Like wise the US will have to pursue policies that encourage more savings and less spending among the populace. It’s no secret that Americans have been terrible at saving their money. That has to change.

As the U.S. is waking up from the awful, wasteful, profligate spending spree of the past 25 years and start adopting policies (more savings, going green, higher fuel efficiency standards for cars, and less spending), the world is going to realize that they cannot depend on exports to the US to grow their own economy. I think that this transition is going to take decades.

I’m interested to see how this transition affects three areas:

(1) China: the conventional wisdom has been that the Chinese economy needs to grow at 8%. Anything below that means layoffs and unemployment. Millions have already been laid off from factories that make products for export to the U.S. and other countries. The increasing number of unemployed people is going to pose very difficult challenges to Hu Jintao and the Chinese Communist Party. Pretty ironic that just a few months ago, the world was marvelling at the show China put on during the Beijing Olympics. It seems such a distant memory.

(2) Oil from the Middle East: the past week has seen moves by the Obama administration that is unprecedented, unusual and necessary. I’m speaking of President Obama’s decision with regard to GM and Chrysler. In particular, what he was telling them “your proposed restructuring plans are not enough” and conditioned further government aid on revised restructuring plans from GM within the next 60 days and for Chrysler to complete merger talks with Fiat within the next 30 days. In a stunning and bold move, Obama proceeded to sack Rick Wagoner, the CEO of GM. The message is loud and clear: mediocre performance and failure are not options. GM had lost $80 billion under Wagoner. Abysmal performance indeed. Implicit in all of this is the administration’s desire for the Detroit manufacturers to produce more fuel efficient green vehicles.

This leads to the question of how that will affect the oil markets. Probably not much in the short term. However, if the auto industry can improve their mileage efficiency, say, 3 or 4% per year, the numbers will surely add up over the long term. That is bound to have some effect on the oil markets.

As Thomas Friedman of the NY Times and many others have pointed out, major oil producing countries such as Russia, Nigeria, Venezuela, Iran, and Middle Eastern countries are (a) corrupt; (b) authoritarian; (c) anti Western or some variation thereof. These countries are so awash in petro dollars that they don’t feel the need to impose taxes on their citizens. That means that they are not responsive to their citizens. Most often they funnel the money to state or internal security organizations.

What would be the long term effect of reducing the U.S. reliance on oil through the pursuit of green technologies ? That is going to be interesting to watch.

(3) Canada: The Canadian economy is heavily dependent on the U.S. economy and the effects of the recession in the U.S. is being felt up here, particularly in the auto industry here in Ontario. The ironic aspect of the global downturn is that Canada and the US may become more interdependent than ever. As has been noted, Canadian banks now occupy the list of the 15 largest banks in North America, due to the spectacular flameout of the financial industry in the U.S. Indeed, the Canadian banking industry has been rated as the soundest in the world by Time Magazine recently. PM Harper has been hailing the soundness of the Canadian financial industry in interviews with US news outlets (CNN and Fox). As a result, Canadian banks such as TD (Toronto Dominion) and RBC (Royal Bank of Canada) are poised to move into the U.S. and acquire or merge with U.S. banks.

At the same time, as noted above, the auto industry is hurting up here. A good example is the GM plant in Oshawa and its uncertain future in light of Obama’s recent moves. The Canadians are moving in the same direction as Obama as far as conditioning further government help on a sound restructuring plan. In any case, many GM plants manufacture vehicles for export to the U.S. and naturally, they have been hurt by falling demand in the US, starting last summer. I think that it’s safe to say that the manufacturing sector of Ontario is going to suffer a long term decline as it did in Michigan and in Ohio.

To be continued in next entry.