Bubblenomics is Alive and Well in Canada
Here is a guest post from BC union (Steelworker) researcher Kim Pollock.
By Kim Pollock
There is growing evidence that a new stock-market bubble is growing daily, right before our very eyes. But while stock-market prices and market capitalization grow, there are still few signs of real economic recovery.
In Canada for instance, real gross domestic product decreasedÂ 0.5 percent in May, a faster rate of decline than in the previous three months, according to Statistics Canada. And it was the goods-producing industries that saw the biggest decrease in real GDP. The energy and manufacturing sectors were the main contributors to May’s decline notes Stats Can, while construction and wholesale trade also decreased.
Conversely, the activities of real estate agents and brokers as well as retail trade actually advanced in the month. This indicates thereâ€™s no end in sight to the massive growth in debt that helped fuel last yearâ€™s economic meltdown and that now is likely to deepen the recession. In March, the Chartered General Accountants of Canada reported that household debt is at an all-time high, reaching $1.3Â trillion in 2008. And they warned that the escalation of debt is primarily caused by consumption motives rather than asset accumulation.
The three main indicators of household indebtedness â€“ debt-to-income, debt-to-assets and debt-to-net worth ratios â€“ have all deteriorated significantly in the past twoÂ years and particularly during 2008, say the CGAs. Canadian households are financing consumption activity and fuelling gross domestic product growth with unearned money as families increasingly turn to credit to finance day-to-day living expenses. While their wages stagnate, working families are borrowing just to maintain their living standards. And with growing unemployment, there will either finally be a decline in debt-creation, putting pressure on consumer demand or else a further growth in indebtedness and insolvency.
In July Stats Can says that another 45,000 people became unemployed across the country â€“ more than twice what most economists predicted. Losses were severe in both full- and part-time work. â€œSince October, total employment has fallen by 2.4 per cent, all in full-time work, with the vast majority of employment losses in manufacturing, construction, and transportation and warehousing,â€ the report stated. â€œDuring the same period, the unemployment rate increased 2.3 percentage points to 8.6 per cent, the highest rate in 11 years.â€ Worse, itâ€™s increasingly clear that the Harper governmentâ€™s â€œstimulus packageâ€ was either too puny or so ineffectively delivered that it will do nothing to stop the tide of joblessness.
As a result of the growing employment crisis, Canadian personal bankruptcies are also jumping, up in June by over 50 per cent compared to the same time last year. CBC reported a total of 10,823 personal bankruptcies in June, up 54.3 per cent compared to the previous June’s numbers. The Office of the Superintendent of Bankruptcy Canada says that while only 7,013 individuals had to resort to bankruptcy in June 2008, a few months before the recession took hold. This June, there were also 515 business bankruptcies, up 10.8 per cent year-over-year.
The June 2009 personal bankruptcy numbers represent a 9.3 per cent increase compared to the previous month’s figures, when there were 9,900 personal bankruptcies. Personal bankruptcies rose for all provinces, both year-over-year and compared to May numbers.
In other words, weâ€™re simply seeing an extension of the same perverse economic forces that were at work before the global economy imploded. Capital continues to be diverted from production to investment and spending rather than production of goods and services. Corporations and consumers continue to try to square the circle through borrowing. And real investment and employment creation remain in the tank.
With respect to investment, Statistics Canada for instance reported recently that business fixed capital formation â€“ investments in the buildings, machinery and equipment needed to actually produce goods and services â€“ fell by 6.4 percent from the last quarter of 2008 to the first quarter this year. Compared to a year ago, capital formation was down by 6.3 percent.
Companiesâ€™ record in machinery and equipment investment is even worse, falling by 10.8 percent from the last three months of 2008 to the first three months of 2009 and down almost a fifth since the first quarter last year.
But bad as this seems, itâ€™s even worse when you take oil and gas investments out of the mix. Almost all of Canadian firms investments in the past decade were in fact in the oil patch: Canadian firmsâ€™ investments in the energy sector grew by 12.2 percent per year from 1999-2008, while investment in the overall goods-producing sector actually fell by 0.1 percent per year.
So even though itâ€™s a good time to invest, with prices of many commodities low and even falling and plenty of people looking for work, and even though new investments are clearly needed to keep Canada internationally competitive and save Canadian jobs, companies are currently not taking the opportunity.
Instead, what they are doing is continuing to shovel capital into stock markets, where the rate of profit continues to exceed that offered by real production. Itâ€™s what UCLA historian Robert Brenner calls â€œbubblenomicsâ€. The Toronto Stock Exchange hit bottom in early March at an index level of just below 7600. Since then it has rebounded to about 10,800, a recovery of about 42 percent. So while capital has poured back into the stock market, it has not gone into investment or production of goods and services. And sadly, financial investment will not significantly ease the employment crisis.
The growth in stock values helps to explain one thing though: why some economists insist they can see signs of economic recovery. Apparently they donâ€™t get or donâ€™t value the difference between real investment in production and speculative investment in stocks, bonds, securities or weird financial instruments like derivatives â€“ the same bunch of exotic, fictitious assets that helped push the economy over the brink last year. Itâ€™s the sort of thinking revealed by former US Federal Reserve chair Alan Greenspan, who told Congress last year he didnâ€™t see the crisis coming! During the run-up to the recent crash indeed, the illusion that all was well seems to have been fed at least in part by the sustained growth in market values and share prices.
In fact, there wonâ€™t be any shift toward real investment without concerted government intervention. This might take the form of a concerted program of investments in infrastructure such as urban transit and commuter rail, alternate energy projects, improved social program delivery, child care, health care and education. Hopefully these should be combined with â€œBuy Canadianâ€ procurement policies â€“ instead of howling about the US â€œBuy Americanâ€ program in other words, the Harper government should match it with a Canadian equivalent to ensure that the benefits of stimulus stay here in Canada rather than get exported to China and other low-wage platforms.
There also has to be regulation of lending and capital markets to stop the flow into speculative investments rather than goods and services production. The reason that capital continues to flow into financial dealing is not hard to find, after all. Stats Can reported in May that while lower corporate revenues contributed to falling profits across the economy â€“ Canadian corporations reported operating profits of $55.1 billion in the first quarter of 2009, down 11.8 percent from the prior quarter â€“ profits in the non-financial industries fell 12.6 percent to $41.0 billion, compared to only 9.3 percent to $14.1 billion in the financial sector. This comes after a decade or more in which profits in financial dealing exceeded those in the real economy.
The net result is a strong and likely mounting corporate preference for stock-market speculation, not real investment. The federal government should break that tendency with investment targets in manufacturing and other goods-producing industry, as well as measures to encourage training and infrastructure development. These are measures that would lift sagging consumer demand, create jobs and put Canada on a firm footing to compete globally when the slump ends.
In short, it seems like all the forces that created the economic crash and drove the economy over the precipice remain fully in effect. There is little reason to expect a recovery of the Canadian economy any time soon, in spite of the repeated cries of â€œlight at the end of the tunnelâ€ or sightings of â€œgreen shootsâ€ of economic growth. And thereâ€™s particularly to reason to expect an early recovery if the government sits on its hands.