Those who hoped to see the significant drop in the rate of the Bank of Canada will bring down the cost of their mortgages, their student loans or those funding their current consumption were disappointed last week. It was with some indignation mixed with incomprehension that customers of major financial institutions realized that they do not have to follow the central bank. Despite the injection last year of several billion in liquidity into the Canadian banking system, despite the aid package of $ 70 billion announced in the fall by Minister Flaherty, and now, despite the signal by the Bank of Canada is prepared to lower its rate dramatically to support the economy, credit conditions continue to tighten for households and businesses in Canada. What happened?
A liquidity trap
The financial crisis has now become an economic crisis. We are in a recession since the autumn in Canada. This differs greatly from two major recessions of 1981 and 1990 that appeared in the context of a struggle against inflation. Through coordinated action by central banks, a significant increase interest rates had resulted in an economic downturn. The current crisis unfolds in a deflationary environment: the nominal value of financial assets decreased; interest rates are already very low, if not negative, and signs of deflation are beginning to manifest itself in the consumer goods sector. This deflationary drift could loop over itself in a vicious circle of depression as experienced by Japan during the 1990s. This, at least one of the hypotheses put forward by U.S. economist Paul Krugman. This is the trap identified by Keynes as "trap Liquidity, or the desire of everyone to clean up its balance sheet and hold liquid assets contribute to general instability and an overall depressive effect (see article below ).
In such a scenario, all economic actors will engage in a decrease in their activities and especially to postpone their investment plans at the same time they engage in a desperate search for cash. The measures envisaged to date to address the crisis: falling interest rates, loan guarantees, the recapitalization of certain large corporations and financial institutions, are necessary to avoid a complete collapse of the system but can not guarantee a sustainable recovery. The acceleration of public spending in infrastructure can also help avoid the worst, but public investment announced to date are perhaps too shy to break the deflationary / depression. Tax cuts will have an even more insignificant insofar as it is to boost the consumption of those who pay the least, as a reduction in corporate tax not convince them that their markets are fully a sudden expansion.
The deep roots of the crisis
Yet the solutions envisioned, with optimism, Jacques Ménard, Chairman of BMO, in La Presse on November 28 ("A whole day Watch"). Indeed, the crisis was to clean up the balance sheets of households and businesses resulting in increased savings rates. This would ensure that ultimately a recovery in consumption levels experienced during the last two decades. It is important to remember, growth in North America is based primarily on the consumption pattern of households in which we participate alongside our neighbors to the south, central and west. However, Mr Ménard fails in its scenario reflect a reality behind the current crisis. The role of "consumers of last resort" of North American households was constituted in a context of stagnation in real wages, that is to say that the income of the vast majority of workers have not progressed at the same pace of economic growth over the past thirty years. This has, among other things, allowed companies to reap huge profits they have invested in financial markets and kept in liquid form, to the point where, 10 years in Canada and the United States, the sector large enterprises was, until the edge of the crisis, credit instead become globally debtor. Households were able to play their role as guarantor of growth only through an exponential rise in debt. An increase in inflation that their real estate assets has temporarily obscured and that the Securitization by banks of their debts, for some time, given a semblance of viability. Want as requested Mr Ménard they continue to play their economic role of consumer of last resort by requiring them to adopt aggressive practices of savings is deeply contradictory and emphasizes how the substantive issue is taboo. As Keynes pointed 70 years ago, an economy can not grow if it is cleaved by large income inequalities. We'll have to eventually ask the question of wage levels in ordinary households and their income security if you want to restore growth through their consumption and, at the same time, cleaned up their balance sheets and emit a high level of debt.
Rather than engulf our efforts in a liquidity trap, the current crisis should lead us to consider the allocation between corporate profit and wage levels and market mechanisms that drive a wedge between unsustainable revenues stagnant the majority of employees and the explosion of rising income of a minority belongs to Mr Ménard. Because these are, rather than the greed of some and the neglect of others, the factors behind the crisis.
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