Entries from May 2009 ↓

Sadly, many of your friends, colleagues and relatives are floating.

They live in another dimension, where only other people lose their jobs, home equity’s about to come racing back, taxes won’t rise, interest rates stay low forever, the local car dealership and Home Depot will always be there’ and no consequences will result from governments spending their way into a debt hell.

Well, let’s see where this may be going. In the article below I wrote of the latent forces of deflation – a threat I have alluded to here over the last year. It grows. This, despite the protests of those who have a naked, self-serving vested interest in reflation and excess: the gold bugs and the indebted. The former wish for a currency collapse that will impoverish millions of families so their metal will increase in value, the latter are desperate for a bout of inflation to boost real estate values and water down their crushing mortgages.

Both will be disappointed.

Meanwhile, if you’d like a window on the future, gaze across the sea, where the UK appears to be going to the mat.

Britian’s about to become one of the First World countries to achieve junk bond status. The kingdom will soon lose its G-8, Triple-A credit rating, as Standard & Poor’s lowers its outlook from “stable” to “negative.” Stating the obvious, S&P said the UK will soon have a debt equal to 100% of its entire economy, which would place that country not far behind the average US household (130% debt) or the typical Canadian family (127% debt). This was enough to rattle financial markets, send stocks skidding and raise the prospect other countries will soon be following suit. Like the US.

Why is this happening? What does it mean?

Simple. Political leaders are doing whatever possible to prevent a neo-depression on their watch. This involves massive and unprecedented spending increases, issuance of currency, repurchase of debt obligations, corporate bailouts, the wholesale embrace of deficit spending and debt accumulation and the gutting of monetary policy resulting in zero interest rates. The consequences of this are unknown, since such actions have never before been taken. But they won’t be positive. Count on that.

Britain, for example, is torpedoing the long-term value and stability of its currency, guaranteeing a return to high tax rates, reduced competitiveness and a lower standard of living for virtually all of its citizens – especially homeowners with mortgages who will suffer falling equity (who wants to live in a stagnant, high-tax land?) and rising debt costs (interest rates have only one direction in which to travel).

In fact, actions today by short-term thinkers like Gordon Brown, Stephen Harper and Barack Obama will have an impact on the next generation or two of consumers, investors, voters and families. In order to escape the debt holocaust we all so richly deserve – and narrow cheated in November – political leaders have opted to spread the pain out over the next couple of generations.

In doing so, they have created this alternative universe in which the misinformed, malinformed and merely ignorant believe their governments and the media sycophants. It’s sad what is happening, and about to happen, to a few great countries.

Sadder still for the common folk. Many have been set on a path to perdition.

A favourite ride takes me down a ribbon of highway through a series of towns two hours west of Toronto. In my dust I leave at least six GM dealerships, from the historic to the newly-built, passive to aggressive, sleepy to sizzling.

I’m told three of them are now going out of business, along with 242 others across the country, as GM Canada struggles to survive. And while the rationalization was expected, the consequences are sharp. Three towns where some of the best jobs are ending, peewee hockey clubs will go unsponsored and a large hole’s blown in the local tax base. Three local newspapers just lost their biggest buyers of ad lineage, while the ripple effect will hit license offices, couriers, body shops and future generations of lot boys.

In fact, I guess this is the largest single day of job loss in the country’s history – 14,000 people. Sadly, many of the families taking the hit live in small cities and towns where replacement jobs don’t exist. So I guess they will be moving on, some after devoting their entire lives to their independently-owned dealerships.

But this is not about GM or its cavalier savaging of entrepreneurs who fashioned its public face.

Instead, I write about what this symbolizes – a strengthening undertow of deflation which most Canadians have managed to ignore in their quest for normalcy. So while prices of training houses suddenly surge, equity investors exceed their grasp and cheap rates cause a tsunami of borrowing, the foundation sinks.

Job loss is deflationary. Asking employees to reduce wages, to share jobs and retire early – as is happening in scores of major companies – is deflationary. Interest rates at zero, no-money-down auto purchases and 1,000 new price reductions at Home Depot are deflationary. Erased corporate profits are deflationary. And did I mention the demographic age wave and climate change? The mothers of deflation.

Against this backdrop, a speculative surge in oil or gold prices, like bidding wars, is insignificant. Far from being inflated into a shadow currency, money will continue to grow in value as its purchasing power augments in a deflationary environment lasting several years. This will make debts more difficult to pay, ensure a lengthy correction in real estate values and spank all those dumb enough to think Armageddon would be over in eight months.

By the way, I see the annual government-tallied inflation number just out is 0.4%. Economists think it will be zero by next month. I’d say this is going to get interesting.

(DailyRecord.co.uk, May 20, 2009)

MILLIONS of workers could be set for wage cuts after deflation hit a record low.

Tumbling house prices, lower utility bills and food costs and rock bottom mortgage rates sent it crashing to minus 1.2 per cent last month. And fears are growing bosses will react and pay rates will take a hammering.

TUC general secretary Brendan Barber warned: “There are no green shoots.”Official figures released yesterday show the retail prices index plummeted from minus 0.4 per cent in March – the biggest drop since records began 61 years ago.

The RPI, which includes housing costs, is used by eight out of 10 employers to work out salary increases. Experts estimate seven million workers, including 2.5million public sector staff – from nurses and midwives to junior civil servants and prison officers – now face wages hell.