Editorial
The Canadian Dollar, the “Recovery” and
Unemployment
In recent weeks the Canadian dollar has
been rising once again and is approaching parity with the U.S. dollar, as it
did last year. This has been hailed by some economists as a sign of the strengthening
of the Canadian economy and the beginning of the “recovery”. The same
economists point to the rising stock markets as another sign of “recovery”.
However, they are virtually silent on the issue of unemployment, which
continues to rise, not only in Canada, but in most countries in the world.
“Recovery” clearly means different things to these economists and the
corporations they work for than it does to working people.
Just over one year ago, the
international finance system came close to collapse when losses on bad loans totalled in the trillions of dollars. The only factor that
prevented such a collapse was the injections of several trillion dollars into
the coffers of the bankers and other financiers. The pouring of so much money
into the private sector could not have resulted in anything but what we are
seeing today – the rebounding of stock markets and claims that the recession is
over. If the financial crisis were, indeed, solely the result of the financial
mismanagement of the big financial institutions, then the talk of “recovery”
may even ring true. However, the fact that the biggest and most “trustworthy”
financial institutions were forced to resort to unsound and often illegal
measures in order to shore up their profit sheets points to a more serious
underlying problem.
That problem is a worldwide surplus of
productive capacity in relationship to the existing market. In other words,
there is a very serious crisis of overproduction – or, more correctly, of under-consumption – on an international scale. The resulting
surplus of commodities on world markets has been driving down prices and profit
rates for almost two decades. During the 1990s, the inability of the big
capitalists to maximize profits through the production of commodities led to a
shift of investment capital away from production of goods and into increasingly
speculative financial activities. The flood of money into the stock markets
caused a bubble in the 1990s which ended with the crashes in 2000, especially
in the hi-tech sector and the Asian markets.
If nothing had been done, the world
would have experienced a profound economic crisis by 2001 or 2002. However, the
U.S., Canadian and various European governments avoided a recession at that
time by drastically relaxing debt markets in their countries, especially the
mortgage markets. Hundreds of billions of dollars of cheap credit buoyed up the
financial markets once again and re-inflated the financial bubble of the 1990s.
As a result, the U.S. economy attracted money from all over the planet and
American consumers continued their buying spree on borrowed money. Most stock
markets rebounded to pre-2000 levels and China emerged as the world’s leading
manufacturer and leading exporter and foreign capital poured into that country
seeking low wages and maximum profits.
The problem with such a scenario in
which increased consumption is based solely on debt is similar to the problem
with Ponzi schemes. It can only be sustained so long
as new money keeps flowing in faster than people are going bankrupt. The
tipping point came in the summer of 2008 when the defaults on mortgages in the
U.S. reached historic levels. The mountain of bad U.S. debt threatened to
collapse and bring down the whole world financial and economic system with it.
The injection of massive amounts of
capital – estimates range from six to nine trillion dollars – since September
2008 saved the capitalist financial system from collapse. Most of the big
financial institutions were bailed out and their rich shareholders saved from
financial ruin. However, the only net change was the transformation of
trillions of dollars of private debt into trillions of dollars of public debt.
Meanwhile, the overproduction crisis raged on unabated. In fact, the end of
cheap credit further exacerbated that crisis as consumers were forced to reduce
spending. Some of the biggest corporations in the world, including General
Motors and Chrysler, were forced into bankruptcy and a chain reaction of plant
closures and layoffs ensued. In China, alone, 25 million workers were thrown
out of work and, despite a partial rebound in China’s exports,
those workers remain out of work as China’s economy is still operating at about
15 percent lower levels than a year ago.
In the United States, those employed in
non-manufacturing sectors have been given a temporary reprieve and are buying
again, but the majority of workers in the manufacturing
sector are still facing layoffs and demands for wage and benefit
concessions. Unemployment is still at very high levels. Mortgage defaults are
running higher than they were last year leading up to the sub-prime mortgage
crisis. The stimulus package in the U.S. is making it appear that there was
growth in the past two quarters, but when it ends the U.S. economy will
probably sink back into negative territory once again. Plus, the trillions of dollars
in new public debt will require servicing, which means that even more money
will be removed from the production-consumption cycle. In addition, there are
increasing demands from those who benefitted from the massive government
handouts for a “return to fiscal responsibility”, meaning cutbacks in spending
on social services. All of these factors will serve to exacerbate the crisis of
overproduction by removing money from the hands of consumers and putting it
into the pockets of the rich.
The Canadian government and various
Canadian economic advisors have been claiming since last year that the
recession in Canada would be milder and shorter than anywhere else because the
Canadian banks were better regulated and Canadian government were running
surpluses. Now they are pointing to the “strong” Canadian dollar as evidence of
a recovery. At the same time statistics reveal that Canadian exports have
declined sharply, especially exports of manufactured commodities. There have
been limited increases in the export of oil to the U.S. and of some minerals,
mainly to China, but exports in general are down. China recently displaced
Canada as the largest exporter to the U.S. by a sizable margin. Furthermore, it
is not altogether true that Canada did not participate in the sub-prime
mortgage debacle; most of the that debt was incurred under CMHC so it did not
hit the banks so hard, but it is still a mountain of potentially bad debt which
can collapse at any time.
Since the value of the Canadian dollar
is directly related to the volume of exports, why then is the value of the
Canadian dollar rising? The main explanation is that it is rising only in
relation to the U.S. dollar which is falling faster in value than the Canadian
dollar. Furthermore, a rise in value of the Canadian dollar may benefit
importers in the short term, it hurts exporters by
making their commodities more expensive. Therefore, a rising Canadian dollar
vis-ŕ-vis the U.S. dollar is an omen of an imminent decline in exports and,
hence, in the Canadian economy, which is an export-driven economy. This, in
turn, will lead to rising unemployment and deepening recession.
It is highly irresponsible for
governments and economists to talk glibly about “recovery” while Canada’s
economy is so integrated with that of the U.S. and unemployment in both Canada
and the U.S. remains at high levels. A “recovery” while unemployment remains
high is a recovery of profits only and is the kind of “recovery” that sets the
stage for a further, more serious recession or depression. This talk of
“recovery” is a fairy tale to lull the Canadian people to sleep and to fleece
them once more before the next financial storms wreak havoc.