Repeatedly it has been stated that there are striking parallels between the financial crises in Japan and those in North America.
Both were affected by the collapse of wild speculation in property and the stock market in Japan and the very loose credit here. Both led to disarray in the financial systems.
However, our financial authorities state that we can overcome our difficulties as we can learn from the events in Japan.
Unlike that nation, we believed that we could avoid their troubles by quickly reducing interest rates dramatically, and thus restarting lending.
The optimists claim the moves taken by government will work.
Capital is being supplied to banks crippled by sub-prime mortgages, and a large stimulus package together will combine to turn things around.
Despite all the hoopla associated with the new administration in the United States, the economic downturn will be unchecked.
Also, there will be revisions to government spending plans in Canada, but the impact will not be significant. There is a North American failure to deal with the fundamental problem: the overextended consumers in both countries who have taken on excessive amounts of debt and neglected savings.
There are noteworthy differences between the North American economic troubles and Japan’s.
At more than 70 per cent of Gross Domestic Product in the United States and about 55 per cent in Canada, consumer spending has become the very weak link in our economy.
These numbers compare with a bubble-induced capital spending boom, which accounted for only 17 per cent of Japanese GDP at its peak in the late 1980s.
With our consumers heavily in debt and so crucial to the Canadian and U.S. economy, the faltering in that sector is of critical importance, in view of the rising unemployment totals, and the inability and reluctance of consumers to take on additional debt, it is not surprising that consumer spending has fallen so sharply.
It should be noted too that hitherto consumers used the rising value of their houses as collateral for borrowing to fuel consumer spending, but that option ended because of the decline in house prices.
So, what can be done to restore our economy?
We have focused on tax cuts and infrastructure spending to contain the recession. Yet, infrastructure spending in the 1930s had little discernible effect; it only succeeded when it soared, triggered by the war outlays in the 1940s.
Tax rebates will help marginally, but worried consumers are likely to save the proceeds of any tax cuts.
Clearly, actions taken so far will not accomplish much. What is needed is a pro-saving mentality and time to liquidate debts.
This means that Canada and the United States face stiff headwinds for the foreseeable future. Until we can develop a new consumer – not a likely outcome during the next few years – a protracted slowdown is almost inevitable.