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At Issue
Bajan Economics: Does the Bank of Canada Know Something?
Tuesday, February 7, 2006
Under this rock, it's pretty hard to write. But bear with me for a week. Let's leave politics behind. Give those guys some running room. I'm sure John cut a swath off them this week. I'm sure I'll get my chance in following weeks.
What's ahead for the federal government I don't know. Figuring out the economy is my forte here at cktimes.ca. That will surely twist the new finance minister in knots over the next few months. The question is, are their economic storm signals ahead? What are the tea leaves saying?
We might have gotten a few clues last week from one of my favourites in Ottawa, Bank of Canada governor David Dodge. He was in the Barbados last week talking to an international business group in Bridgetown. This is what he had to say quoting from Bloomberg News.
"Bank of Canada Governor David Dodge said the global economy might stall or suffer recessions unless global imbalances such as the record U.S. current-account deficit are corrected. "The need for urgent action has increased. "Imbalances are persisting, and if they aren't resolved in an orderly way, we face the threat of great disruption." He said this includes "periods of outright recession."
I found that a bit shocking from David Dodge. I will admit Dodge gets quite a bit of play here at cktimes.ca. However, in Canada he's mundane and somewhat boring in his salty declarations on the economy. Why did he describe the world economy in such apocalyptic language in Barbados and not Ottawa? It almost makes me
think it was on purpose with a new government coming into power.
Putting it in context Dodge is worried about the effects of China and by default the US Trade deficit. He specifically signaled out China as not being willing to let the value of the Yuan (Chinese currency unit) float. This essentially makes Chinese goods super cheap on the global market forcing trade imbalances, which invariably
unleash political pressure for greater protectionism. It could send the economy loopy leading to recession.
China being China means that burgeoning US trade deficit is getting that much bigger. Quoting again from Bloomberg News.
"The U.S. current-account deficit reached a record $592.3 billion in the first nine months of last year. The deficit isn't sustainable and means that at some point households and companies will have to start saving more, Dodge said.
"Should that occur suddenly, we could see global economic growth slow sharply, unless there was corresponding growth in domestic demand outside the United States," Dodge said. If that is accompanied by more protectionism, "a period of very slow growth could, perhaps, be punctuated by periods of outright recession."
These words from Bank of Canada David Dodge are almost spooky. They are almost unbelievable in our current state of economic growth, low unemployment and low inflation in Canada. It's almost like "he knows something." Obviously from his perch at the Bank of Canada, "he does!"
I have said it many times. This large US current-account deficit will eventually force the Americans to raise interest rates even further than they have. Rising interest rates slows growth. I don't mean an interest rate of 7%. What I'm talking about is an interest rate of 13%. That drives economic growth into the ground. Dodge might not be mentioning it, but it is certainly part of his thought process.
You might say was our friend David Dodge smoking some of that famous Bajan ganja? Bajan is an English-based Creole language spoken in Barbados. I once met a "Bajan" in graduate school. Couldn't understand a thing he said. It almost makes me think Dodge got mixed up when he started speaking. Maybe we got the Bajan translation.
Or maybe it was the weather. I've often been told the Barbados is one of the most beautiful places in the Eastern Caribbean. I've never been there but I'd surely love to go. With an average temperature this time of year of 83 degrees, how could Dodge not be disoriented?
We might laugh. We might be just envious of 83 degrees in February. However, the unofficial economic forecast our friend David Dodge is musing about might be the real economic story by the end of 2006. Remember, "He knows something." Nobody wants to go back into the topsy turvey world of recession, high interest rates and high inflation. Being under this rock is bad enough.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
