Can you say recession?

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Good news: the loonie is soaring higher. Bad news: it’s because the U.S. is in crisis

COLIN CAMPBELL AND JASON KIRBY

From the moment the United States government came into being in 1789, it was in the red. Saddled with a US$78-million debt from the revolutionary war, a fledgling Congress made it a priority to get out of hock, eventually setting limits on how much money the country could borrow. So much for that. Last week, U.S. Treasury Secretary Henry Paulson sent a stark message to modern-day legislators: on Oct. 1, America’s IOUs will surpass the current debt cap of US$8.9 trillion. Unless Congress jacks up the limit yet again and piles on even more debt, the government of the world’s largest economy will cease to function.

It’s the kind of dire situation you would think might grab headlines, but it has raised barely a ripple. In spendthrift America, this is just par for the course. Since the Bush administration took office in 2000, America’s national debt has ballooned by more than 50 per cent. Congress has already hiked its limit on how much the U.S. can borrow four times in the last five years. Meanwhile, American consumers, spurred on by low interest rates after 2001, racked up huge debt loads of their own. America’s appetite for borrowed money seemed limitless.

Not anymore. As global financial markets seize up, and lenders come calling, alarm bells have begun to ring. Observers are talking seriously about the threat of a punishing recession. America’s addiction to cheap and easy money has put the country’s economy, not to mention the world’s, on shaky ground. “What we’ve done as a society is borrowed a tremendous amount of money,” says Peter Schiff, president of Euro Pacific Capital in Darien, Conn., nicknamed “Dr. Doom” for his dour outlook. “Now the bills are coming due and we don’t have any money to pay it back.” Surveying the threat of a crumbling housing market and rising unemployment, Schiff is brutally blunt. “We’re screwed,” he says. “It’s not just going to be a mild recession. It’ll be the worst one we’ve ever had.”

The sinking reality of America’s dire financial state has sparked a simmering panic in financial markets over the past several weeks, and that has been reflected in the plunging value of the U.S. dollar against virtually all world currencies, including Canada’s.

 

As the Canadian dollar crested above the value of the greenback for the first time in three decades last week, shoppers celebrated by beating a path to cross-border outlet malls. But for a country whose economy is inextricably linked to the financial health of U.S. consumers, the rise above parity is anything but good news. The loonie’s rise is not so much a resounding statement of confidence in the Canadian economy, but a reflection of absolute panic over the financial mess south of the border. Yes, Canada’s abundance of minerals, oil and gas provides some protection against economic turmoil. But any claim that Canada can glide easily through a major U.S. recession, especially if it spreads to other parts of the globe, is seriously off base. Analysts are just beginning to come to grips with what the U.S. reckoning means for us.


Christopher Howard doesn’t exactly look like a working-class hero, but for a few days earlier this month the former British businessman played the part when fears began to sweep through the U.K. that Northern Rock, Britain’s fifth-largest mortgage bank, might fail. Bank failures aren’t supposed to happen in this day and age, yet Northen Rock, caught off guard by the recent global credit crunch, had to be bailed out by an emergency handout from the Bank of England. Upon hearing that news, Howard joined thousands of other customers, desperate to withdraw their savings. When the manager of Howard’s local branch refused to hand over his money, he and his wife staged a sit-in and barricaded the woman in her office. Never mind the one-time hotel owner was pulling out nearly $2 million to put a down payment on a home in Cyprus, he instantly became an icon for folks who feel helplessly caught up in the economic upheaval spreading around the globe.Signs of anxiety are everywhere. American housing starts have fallen to their lowest levels in 12 years, while the number of mortgage foreclosures doubled last month. Economists predict the British economy is at the beginning of a serious downturn thanks to a dismal housing market that will lead to a recession there. Big merger and acquisition deals around the world are either stalled or falling to pieces, as deep mistrust sets in among major financial institutions. No one knows exactly where the bad debt bombs are buried. All around, investor and consumer confidence is in free fall.

Experts admit they are astonished just how fast things turned sour, even with all the warning signs. After the tech bubble burst in 2000, followed by the terrorist attacks in 2001, economists predicted a long and painful recession. The U.S. Federal Reserve, under then-chairman Alan Greenspan, slashed interest rates to one per cent. A deep recession was averted and low rates touched off a sustained housing boom. As quickly as tech investing fell out of style, real estate speculation came back in — anybody could buy a house, with no money down and no credit record to speak of. Shares in Cisco gave way to condos in San Francisco. And as house prices soared, owners tapped their equity to go on a lavish spending spree. Few seemed genuinely concerned that once interest rates started to rise, millions of homeowners would be stretched to the limit. In fact, analysts widely and blithely predicted that inflation was a thing of the past, and interest rates might just stay low forever.

This summer, mortgage defaults began to soar as more and more Americans found themselves suddenly unable to keep up with rising interest payments. Investment funds heavily invested in sketchy mortgages buckled, touching off credit fears in other sectors. One estimate pegs potential losses in the mortgage market at US$200 billion — a sum roughly equivalent to the GDP of Greece. Meanwhile, Standard & Poor’s, the debt rating agency, believes U.S. corporations could default on loans worth US$35 billion by next year. As consumers tighten their belts, it will only exacerbate matters.

Even Uncle Sam is in a pinch. Demand for the dollar is sinking fast. Foreign investors and central banks in Japan and China own a huge chunk of America’s public debt, and the fear is those investors will lose confidence in the U.S. dollar. As the dollar falls, Americans will have to pay more for the imported goods they rely on. Inflation follows.

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2 Responses to “Can you say recession?”

  1. Greece Real Estate September 29, 2007 8:31 pm | Lets Buy In Greece Says:

    […] Can you say recession? As quickly as tech investing fell out of style, real estate speculation came back in ? anybody could buy a house, with no money down and no credit record to speak of. Shares in Cisco gave way to condos in San Francisco. … […]

  2. Lets Buy In Cyprus » Buy Property In Cyprus September 29, 2007 11:01 pm Says:

    […] Can you say recession? As quickly as tech investing fell out of style, real estate speculation came back in ? anybody could buy a house, with no money down and no credit record to speak of. Shares in Cisco gave way to condos in San Francisco. … […]

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