The United States has declared a trade war on Canada, and Alberta stands to lose a lot. The three largest industries in this province are under assault to one degree or another.
Oil and gas, our biggest industry, was hit last week when U.S subsidization of the Alaskan pipeline drew a step closer to ratification, potentially robbing Canada of billions of dollars in royalties.
Agriculture, our second biggest industry, has been the subject of a recent hubbub, as the U.S. Congress approved $180 billion worth of agricultural subsidies over 10 years – reversing reductions that started in 1996.
Softwood lumber, part of Alberta’s third-largest industry, forestry, is the target of punitive American tariffs that will seriously impede sales into the United States and which are already leading to layoffs in that sector.
As dismal as this appears for Alberta and Canada as a whole, if we put our heads down and weather this storm, we have the opportunity to gain much.
The temptation is to retaliate, counter-subsidize and spend. This would be a grave mistake.
These are not comforting words to farmers or forestry workers, but we must grit our teeth and induce some deflation – or else. It’s the only way to avoid a severe depression, if it’s not too late already.
Consider the big picture.
The United States is really slitting its own throat. Slitting Canada’s throat in return is stupid. Instead, let’s hold our heads up high.
That’s not to say we aren’t in for some pain. If we encourage farmers to close shop, and forestry companies to dramatically scale back and seek new markets, what is to be gained? Lots, not the least of which is a lean, mean nation.
The United States has been undertaking inflationary policies by vastly increasing its money supply and, more recently, embarking on deficit spending and protectionist measures.
These trends will eventually degrade their currency relative to the Canadian dollar (assuming we don’t follow suit), and ratchet up prices and taxes there, while lowering the prices of U.S. goods here.
So let’s not get even, let’s get angry. We have the strength of our resource-rich country and an educated, hard-working populace on which to depend. We are flexible enough to deal with any potential recession and unemployment – especially in low-debt, common-sense Alberta.
Whether the federal Liberals would help is another matter. Today, we need powerful leadership to rally the populace towards taking temporary austerity measures.
Deflation is not well understood. Depending how you measure it, deflation has not really happened in North America since the 1930s, when a new brand of economist started advocating monetary and fiscal manipulations (Keynesianism).
The world is a very different place than it was in the 1930s, and Keynesian ideals have reached their last gasp. Pioneering economist John Maynard Keynes’ idea of increasing the money supply and injecting fiscal stimuli to prevent negative monetary growth is losing its power, as evidenced by the world’s growing recognition that there is a dangerous price to pay – namely debt addiction.
The long-term outlook for North America is similar to Japan’s current debt-induced economic woes unless new thinking prevails.
What we need today is price declines to scare debtors out of over-borrowing – in other words, induced deflation, a decrease in the money supply.
This would shock debtors, no doubt, but increase the value of our dollar, and likely break this debt dependency.
The only other alternative is eventual hyperinflation, which robs the cash-rich people we need in a thriving, high-risk economy (not that they’d sit idly by while this happened).
Today, Canadians and Americans are accumulating debt as never before (total consumer and government debt is roughly 200 per cent of GDP).
This is dangerous. It makes trade friction harder to endure, and it makes our government and central bank less likely to prescribe the proper medicine. We have to stop the excessive borrowing.
The best way to shake the poor debts from our system is to shock them with price declines, which can be induced when the central bank stops injecting so much new money into our system (and maybe even takes some out).
Deflation need not be as debilitating as it was in the 1930s. Today, we have creditor protections, in the form of bankruptcy laws, that make debt renegotiations possible, should there be a threat of default.
Therefore, the Bank of Canada should implement a temporary, slightly deflationary stance, both to strengthen our currency against the American dollar, and to show the world that we are a fearsome competitor – potential bankruptcies notwithstanding.
Such a bold move would hurt many of us (recession), but prevent worse problems down the road (depression) through a Japanese-style (and soon to be American) morass of excessive debt and currency devolution – the liquidity trap I talked about last week.
Current American/Canadian fiscal and monetary policies can only lead to stagnation and eventual hyperinflation, as major injections of freshly printed money increasingly lose their power to influence prices, and investors lose confidence in the viability of our currency.
While seeing the dangers, I’m still confident of Canadian fortitude.
I know that fewer Canadian farmers (the smarter ones) can handle larger farms, thanks to technological innovations, including database systems, genetically engineered crops and communications developments.
I am convinced that a strengthening of the Canadian dollar would not substantially hurt our exports – because, being the ingenious people that we are, we would innovate our way towards survival.
