By Goodwin Ginger
There now seems to be a consensus among economists that the global economy is headed for a cyclical downturn. Further there is a bulding consensus that the US is economy is poised for a soft landing. By extension it is argued that Canada too is in for a similar such softish patch over the next couple of quarters. What happens, however, when the narrative of Goldilocks meets the narrative of Little Red Riding Hood?
In this mashed-up version of the Goldilocks parable our sanguine economists are betting that the wolf gets chopped down by the Woodsman and Goldilocks, although shaken, continues tending to her Granny none the worse for the wear. But as with most popular parables the mashed-up Goldilocks story has a couple of alternate endings. There is the ending where Granny gets eaten and Goldilocks is spared; the ending where the wolf not only eats Granny but also feasts on Goldilocks; and then there is the ending where Granny, Goldilocks and the Woodsman get it. The last of these endings corresponds to the unadulterated version of the Goldilocks parable save for the fact that the three bears take over the house.
In order to think about the fate of the Canadian economy over the next 2 to 3 years we have to understand who we are in the mashed-up Goldilocks parable. Let us cast the emerging markets in the Granny role, Canada and other upper tier but small OECD countries in the role of Goldilocks and the US as the Woodsman. Indeed the whole unfolding of the story rests on what happens to the Woodsman. Should he get injured on his way to Granny’s house it is almost for sure that Granny is a goner. And the fate of Goldilocks rests squarely with how badly the Woodsman is injured and thus how quickly he can get to Granny’s house.
It is no secret that the Canadian economy is highly dependent on resources and much of the present expansion has been fuelled by strong commodity prices. So part of the story about how the Canadian economy is likely to fair over the medium term has to do with the direction commodity prices are likely to go. It is hard to see any significant downturn in energy prices anytime soon without a downturn in the global economy. The Americans have mucked up Iraq so bad that additional supply will not be coming from there anytime soon. The Iranian situation is volatile (although it appears the US is tentatively moving toward a more constructive approach). Similarly the situation in Venezuela is made volatile by the ever-present threat of US intervention. It should be pointed out that the US can do little in the case of Iraq, but can calm the waters in the latter two cases although it would take some foresight and time. So energy prices are staying in and around where they are for some time. Other commodity prices are high too and without a downturn in the global economy they too are likely to stay high.
The most likely scenario, therefore, is that the present round of tightening by the major central banks has to do with domestic labour markets and high commodity prices. High global interest rates could kill two birds with one stone: Or is it three birds? It not a secret that in the present conjuncture leaders in the advanced capitalist countries are worried about more than tight labour supply conditions leading to labour militancy in wage bargaining. Indeed, as was pointed out in part one, it seems that tight labour markets have had little impact on the strength of workers in their wage bargains with employers.
Now it is true that Europe has plenty of labour supply to burn through. Indeed, France and Germany have some of the highest unemployment rates in old Western Europe. What is more, the workers in those two countries are still some of Europe’s most militant. So it seems that the ECB has two very good reasons to go along with monetary tightening.
Another explanation for the increasing appetite for a global downturn is the increasing militancy of key developing countries in Latin America and the Middle East. One sure way to break the militancy of developing countries is to undermine the high commodity prices underwriting that militancy. There is no need to bomb Iran, invade Venezuela or unleash the Dogs of War on Morales. A simple correction in the demand for commodities will do the trick.
But here is the kicker, such a correction needs to last for more than a couple of quarters if it is to break the back of resistance in the south. Indeed, it would take a couple of years. However, it does seem somewhat fanciful that advanced capitalist countries could withstand a two-year slump. However, the fact is that workers in the Anglo-American countries have shown themselves willing to tolerate quite high levels of unemployment and debt. In old Europe it seems as though workers still don’t get that what is good for Capital is good for labour. Perhaps a couple of years of even higher unemployment will finally sap their will to resist.
This bold gambit is fraught with danger. The fact is that the US is teetering on a full on melt down with Japan and Europe finally showing signs of strong growth after a decade long slump. If the central banks overshoot their mark they are going to fatally wound the Woodsman. As is the fate of the Woodsman as is the fate of Canada in a neoliberal world.
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