Did the Terminator just say California could be the next Greece?
It’s not quite that dire, yet. California’s debt amounts to a tiny seven per cent of its GDP, while the economy—the eighth largest in the world—is far more diverse. The greenback, meanwhile, enjoys reserve status among world banks, giving the U.S. tremendous clout to fend off the speculators who triggered Greece’s debt crisis. And as Rosenberg points out, America has the world’s largest military and stores of gold under Fort Knox. “The day this gravitates to U.S. shores is probably further off than people think,” he says.
Perhaps. But the laws of economics still apply, even to Washington. In a blunt speech to the Council on Foreign Relations, the chief economist of Citigroup, Willem Buiter, said the U.S. must embark on a dramatic campaign of fiscal tightening, or within three years the country will lose its coveted triple-A credit rating. Last week, for a short time, the state of California even made it onto a list of the top 10 sovereign borrowers most likely to default on their debt, as compiled by CMA Sovereign Risk Monitor. It’s all left markets shaken, and looking for answers to how the crisis will play out. “What we’re seeing now is not so much fear,” says Arbess. “Fear is something that is specific and known, and includes scenarios for which investors can take a position. This is anxiety, an emotional reaction to something much, much larger, which is the eroding confidence in the whole global monetary system. It’s very hard for investors to digest, because it reaches the very foundation of the investment environment and investors have no experience with the potential outcomes.”
Canadians can be forgiven for feeling somewhat disconnected from the panic. The so-called Great Recession left all our banks standing. While unemployment rose to 8.7 per cent, it never matched the previous two recessions. Yet Canadians still have plenty to be concerned about. If Europe goes into the tank, and the U.S. recovery stalls, we won’t escape. At the same time, officials in China have warned that exports to Europe, its second largest market, are weakening. If Chinese factories close en masse, as they did in 2008, it could crush commodity prices and threaten the resource jobs that kept so many Canadians employed through the downturn.
But above all, our own finances have deteriorated badly over the last two years. In his speech, Citigroup’s Buiter singled out Canada as a country that likes to think it’s in good fiscal shape, when in fact our government debt-to-GDP ratio is a staggering 82.5 per cent. The outlook for deficits in Canada is better, but the country “should not be thumping its chest too vigorously,” Buiter said. “Today’s best of breed would have been possible entries for the ugliest dog in the world contest a couple of years ago.”
Meanwhile, Canadian households took advantage of ultra-low interest rates to pile on more mortgages, lines of credit and credit card debt than ever before. Total household debt hit $1.4 trillion last year, according to a new report from the Certified General Accountants Association of Canada. Put another way, Canadians now owe $1.44 of debt for every one dollar of income they earn, making ours the most overextended households among the top 20 developed nations. Canadian families now owe more than Americans, on that basis; even Greek households are more frugal. We’re in far worse shape should the global economy slip back into recession.
It’s happened before. Despite what many think, the Great Depression was not one long, unending misery. In the midst of the ’30s, the U.S. economy staged a remarkable recovery that lasted four years. Along the way, markets also enjoyed several rallies, one of which saw the Dow soar more than 50 per cent. So the Great Depression was in fact two depressions that history has melded into one, and the recovery in between proved too good to be true. The question now: is history about to repeat itself?
