Unfortunate but true, the United States of America has gotten out of control as a world power. Once a prosperous and free country, I am saddened to see the state that the United States is in today. While I have utmost pity for the citizens of that country, it has all the earmarks of a superpower falling from grace like the Soviet Union in the later 1980s. Indisputable is the incredible sum of debt of the US owed not only to foreigners, but to its own citizenry in the form of impossible to pay social security promises and other social welfare benefits.
The US economy has been in a sorry state for years, but right now the implosion of all the misallocated money created during credit expansion of the early-mid 2000s is beginning to show itself in the form of subprime mortgages. As layoffs continue as companies struggle to retain profit margins, we can be sure to expect this 'credit crunch' to spread to consumer debt, in the form of credit card defaults. The obvious trade deficit is a problem as well, around 700 billion dollars per year. Lastly, the US dollar is depreciating at an alarming rate, losing almost 10% of its value this year alone, as we saw when the Canadian dollar hit $0.85 US this winter.
What does it mean when a government gets into debt? Debt is a promise to pay someone back in the future. Since a government does not actually produce anything, only redistribute wealth, the debt is levied onto the people of that country, the workers that produce goods and services, to pay it back. Currently, there is a debt of $90,000 for every man, woman, and child in the United States.
One attractive option to make paying debt off easier is to inflate the currency so that the huge sum of money to be paid off shrinks in terms of absolute value. This is the route that the US has taken. Year over year money supply growth has topped 15% this year and is reflected in the price of many dollar denominated goods such as gold, silver, and oil. Since the US dollar is the world reserve currency however, this makes the situation a lot more complicated. When the US decides to create new money, it really has to work the printing presses because of the sheer volume of US dollars in circulation abroad. Printing US dollars is the equivalent of pissing into a swimming pool, but the US central bank seems to be able to crank out the necessary volume of money. Of course inflation hurts the average American, but it seems the government cares less about that and more about financing their unsustainable balance sheet. The largest owner of US dollar denominated debt is the People's Republic of China, and when the person that owes you money has the ability to print the money, it is best to cash in your chips as soon as possible. China has its US reserves held in the form of treasury bills, and should it decide to cash it out and use those dollars to buy up assets in the US, it is in for some rough times ahead. Mind you, China is a country which its citizenry saves 35% of their income on average, the US citizen saves -2% of their income (they take on debt).
If I have sufficiently made the case that the US is headed for financial ruin, I would hope to convince you that it is in Canada's best interest to 'diversify' its trade to other areas, specifically China, Japan, the European Union, Russia, India and South America. Secondly, we should be skeptical of any further economic integration with the US in the form of free trade agreements, especially ones that include access to our natural resources. Thirdly, we should increase immigration allowances for highly skilled, educated Americans seeking a better life in Canada.
Canada does suffer from a contracting trade surplus, but luckily it is still in the positive of +50 billion in fiscal year 2007. Exports to the US account for 80% of our export market, and imports from the US account for 45% of our import market. I'm glad to hear that the Conservative government is taking our $460 billion dollar debt and slowly repaying it, certainly a step in the right direction. However their close alignment with the US in the fields of foreign and economic policy worries me. Lastly, the Bank of Canada is cutting our interest rates (creating more money) in the hopes that we will be able to ride out the US-induced economic recession. I would explain why this is an exercise in futility, but if you know any economics you probably know why already.
Should Canada further ally themselves with the US, or is it time to find a new partner? Perhaps one that will be able to pay us in something worth more than the paper its printed on.
Sources:
http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12
http://www.statscanada.ca/menu-en.htm
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