It’s the economy

The real threat to Canada — for that matter the rest of the world — in the coming months is the economic stability of the Unites States. The problem is that there are some troubling issues not being addressed and that places this stability in jeopardy.

For decades, the U.S. has been the chief exporter of commerce to fuel the world’s economy. The Yankee dollar now rules, just as the British pound had in its glory days of empire.

Economic issues, not “regime change” are an immediate threat to unbalance the world, although, President George Bush’s attempts to export “democracy” are clearly a worrisome and potentially disastrous distraction.

“It’s the economy, stupid,” Bill Clinton repeatedly said during his first presidential election campaign which resulted in the defeat of Bush’s father. Today, it’s again the economy. In fact, American finances are in tatters.

The projected American fiscal deficit — what the government collects vs. what it spends — for 2005 is $427 billion. That hurts the U.S. economy and that in turn hurts Canada and the world. 

The financial position of the U.S. is in jeopardy because of its massive trade, Medicaid, Medicare and pension fund deficits which are draining the power of the dollar. 

Surprisingly, the only thing the Bush administration seems to be focusing on is the pension deficit, but that is only one piece of the puzzle, though at a $12 trillion deficit, I’d be as worried as Bush. 

The problem is that the federal government will have to find billions of dollars to continue paying benefits, something that is projected to happen in under 15 years. Each year reform is delayed, another US $150 billion to $600 billion is needed for Social Security (comparable to the Canadian 

Pension Plan), according to the U.S.-based think-tank, the Cato Institute.

For a prime example of how to tame government finances on the verge of imploding, Bush need look no further than Canada. Just 10 years ago, the Wall Street Journal gave Canada honorary status as a Third World country, running  the headline Bankrupt Canada. In 1995, the federal deficit was $40 billion. In addition, the Canada Pension Plan was in 

danger of being completely depleted.

Then Finance Minister Paul Martin instituted a regime of severe restraint and three years later the deficit had been tamed and the government’s finances have been in the black ever since. He also increased CPP contributions by 70 per cent with the result that the plan will easily be able to pay out benefits well into the future. 

Confidence has been fully restored in the CPP.

The only promise Bush is making is that he will cut the deficit in half by  2009. It’s one of those half measure promises which invariably aren’t kept because something unforeseen crops up and throws the schedule out of whack — Iraq is such a case.

What makes the promises ring more hollow is that it’s not the first time Bush has said he will slash or eliminate some “government programs, and hold spending growth for other programs.” In his last budget speech, he promised to slash and rein in discretionary spending and then managed to add $47 billion in more spending.

The reality is that last year’s budget only terminated five of 65 programs promised. And, overall spending is projected to rise by 3.6 per cent in 2006.

Under the headline The Fearful Economy, Steve H. Hanke of the Cato Institute, said U.S. business has taken to hoarding cash and stockpiling commodities which creates a bullish market. By hanging onto cash, they are shying away from capital expenditures.

“While the hoarding of cash has dramatically improved the balance sheets of businesses, it has left the economy starved of fuel,” he wrote in Forbes magazine. Hoarding contributes to sluggish job growth and investments flatten out.

In January, 140,000 jobs were created in the U.S., but that is well below expectations, and came after three years of significant job loss.

The International Monetary Fund said the “large U.S. fiscal deficits (state government are also massively in the red) also pose  significant risks for the rest of the world.”

The IMF said increases in U.S. deficits mean higher interest rates for the rest of the world.

“The United States is on course to increase its net external liabilities to around 40 per cent of GDP within the next few years — an unprecedented level of external debt for a large industrialized nation,” said the IMF. “This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.”

For a nation that relies so heavily on trade with the U.S., the faltering American economy is not good news. Our continued prosperity requires that the Americans get their fiscal house in order, just as we have over the past decade.