WHITHER (wither?) YOUR MONEY?

Politicians need to take charge of monetary policy to avert bruising impact of economic slowdown

Commentary from Larry Solway

  Remember Butch Cassidy and The Sundance Kid with their immortal: "Who are these guys anyway?" as they tried to shelter from a hail of hostile gunfire. So as we sit huddled in fear, watching our dreams of being a big-time Capitalist money-bags go down the drain; as we watch "tech" stocks go into the dumper; as we quiver over the tanking of once-proud Nortel; as we read the daily pronouncements (and they change every day too) of the whiz-bang kids who have never lived through a real recession; as we look for comfort from investment gurus who tell us either to sit tight the sky is not falling, or go to cash and wait on the sidelines, or take your losses now and go back when the market bottoms out. And we cynically note that these "gurus" work for big investment companies so what else would they say? Who are these guys anyway??
  Whew!!
  The perspiration is building. Greenspan speaks - we shudder. Theissen speaks and we yawn. The Euro takes a nose-dive, and we don't have the faintest.
 

The economy may be denied a "soft landing" by a monetary crisis in which there's no cash for companies to meet their future obligations

  As the Old Philosopher used to ask: "Is that what's bothering you, boobie?"
  Examine the danger signals. The august Organization for Economic Cooperation and Development (OECD), the Paris-based economic prognosticator where Canada's own Sylvia Ostry used to work, says interest rates have to rise to combat inflation and to stabilize currency. It also predictably advises us to stop spending money and pay down the debt. The International Monetary Fund (IMF) - the despicable servant of Big Money says the same thing. Paradoxically, the IMF doesn't like tax cuts! But they also don't like social spending, which is why, in the interest of Global Prosperity of course, they tell Third World countries staggering under huge debt loads to cut back on spending for silly stuff like food and shelter and health care. Translation: Third World workers tighten your belts! If they had belts to tighten that is.
  Enough poking the finger in the eye. Down to business.
  There may be no "soft landing". It's not the plummeting hip-tech market nor the threat of lower corporate earnings. It is a monetary crisis: the cash companies need to meet their future obligations may not be there after all.
 

If companies default on billions of dollars in debt, the so-called "wealth" created by soaring stock price dissolves into thin air

  Witness the failure of Izzy and Canwest Global to raise the money to buy Tubby's papers. The deal almost collapsed because Asper couldn't get bond financing.
  Once you stifle the money supply you head toward downturn. The purpose of the Central Bank - (The Greenspan-led Federal Deposit Bank - "Fed" in the US - or the Gordon Theissen-led Bank of Canada) is to keep our economy on the rails. That's monetarism. In simple terms the central bank turns the money tap on if the economy is slumping, turns it off if the economy is going up too fast or too many people have jobs or inflation is looming. Inflation is also the "overheating" of the money supply because big companies want to get bigger and they borrow to get there. And the boom-junkies can't wait to lend them money. So they borrow and they borrow and they borrow and they expand and expand and then suddenly their profits dip
  What happens to their stock price when there is the possibility that they could default on billions of dollars in long and short term debt? The so-called "wealth" created by soaring stock price dissolves into thin air. Even worse, the billions of dollars in bonds you can't repay makes the economy shudder. A few years ago when a huge hedge fund called Long Term Capital Management went to the bottom Allan Greenspan had to save the economy by lowering interest rates. He made up for the billions in losses by printing more money.
  Meanwhile, if you can't pay your bills no one will lend you more money. No more money being lent stifles growth. Or bond prices head back into the "junk" range where desperate companies pay exorbitant interest rates.
  Failure to meet your debt payments leads to bankruptcy or receivership. Canada's once high flying Laidlaw, a leader in garbage disposal and with school buses all over North America and a stumbling Greyhound Bus Line, teeters on the terrible edge. The stock price has gone to pennies as the company tries to re-negotiate it's debt. Eatons choked on debt and took millions of dollars in the process. Olympia and York removed billions from the economy and stiffed a few banks when they crashed. (Miraculously they have returned, courtesy of the same people who lent them the money to go crazy before.)
  The real tragedy stew is that elected representatives have abdicated control of our economy. Chicken politicians in Canada (and even more in the U.S.) have turned our economy over to monetarists. The people who turn the money taps on and off, who raise and lower interest rates, have complete charge of out lives.
  We are supposed to have given that stewardship over to the people we voted for. They won't touch it with the proverbial ten-foot. A public hungry for tax cuts will not vote for anyone who won't promise them. (In the U.S. it is even more severe. Fritz Mondale committed political suicide when he dared to suggest in his presidential campaign, that taxes might have to rise.) When you vote for tax cuts you are responsible for even more inflation. The neo-con notion that more money in the hands of people is good for the economy is just plain nonsense. If that were true, why do we empower the Bank of Canada to raise interest rates whenever the dollar is falling or when inflation threatens? It does what economists call reducing the money supply. But if it is prudent to reduce spending by raising interest rates, why is it acceptable to increase spending by reducing taxes?
  Politicians won't take the initiative to manage the economy through fiscal (as opposed to monetary) policy. Most people don't know the difference. I once heard a CBC journalist describe Alan Greenspan the "the man who controls fiscal policy in the United States!" Hopeless! Monetary (which is what Greenspan controls) is what you do TO money, "fiscal" (which is what governments do) is what you do WITH money. Only government, through fiscal policy can ensure that we keep debt under control. That there is money set aside for bad times, that social programs are maintained, and that budget surpluses are not squandered on election promises. Only the government can raise or lower taxes. Only the government can pay down the debt. Only the government can spend tax money for the greater good of the entire community.
  Unless politicians take real charge of the economy, and learn how to do long range economic plans, we could be headed for a serious, if short, recession.
  In the 1960s, they told us that by now, our biggest problem would be what to do with our leisure time. Ten years ago, there was tremendous optimism that cold fusion could solve all our energy problems. Now, our government, and the US even more so, are predicting that the sky will never fall and are projecting huge surpluses into the next decade! This old skeptic's Spidey Sense starts tingling when he hears this kind of talk. What about you?

You've heard from Larry Solway. Now we'd like to hear from you.

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