Think recession or depression sound bad? Try cataclysm!

Provincial forecaster expects global economic meltdown within a year

Ray Turchansky, Freelance
Published: Friday, March 06

There is a growing list of educated people predicting that the trillions of dollars spent by governments around the world to stimulate a moribund economy will not work.

There's already Peter Schiff, head of Euro Pacific Capital in Connecticut, and Peter Morici, professor at University of Maryland and former chief economist of the U.S. International Trade Commission. And you can add the name of Allan Brennan, manager of economic analysis and forecasting with the Alberta government's Department of Infrastructure and Transportation.

"Stimulus packages will not help the economy at all," Brennan said in a presentation with Dundee Private Investors branch manager Trevor Hamon.

"A lot of money is going to banks, but unless you get that money to consumers, things will not improve. Money is going down the black hole. If you think they're going to start consuming wildly, I don't think it's going to happen."

Brennan said that within a year, we will face a cataclysmic event that will shake world finances to the roots, leading to a major period of either deflation or hyperinflation, either of which will rock the global economy.

Just what that event will be, he's not sure. It could be the failure of Eastern European countries, or the collapse of the American dollar. If it causes hyperinflation, investors can prosper by letting stock prices plummet for a couple of months, and then invest in commodities, with copper leading the rebound.

"With deflation, you would end up with a very violent, very short, very deep recession, and within three years you'd start climbing out of that. With inflation, it could go on for 20 years."

Brennan explained that we are in this mess where banks are going under because they used over-the-counter derivatives, instruments whose value is based on underlying assets, in many cases the debt from subprime housing mortgages in the U.S.

"When it fails big time, a lot of people will be hurt. If you think we're having trouble now, just wait until the mountain of garbage goes rotten.

"Debt is 470 per cent of the current economy, and the last time things were bad, in 1979, it was 300 per cent. We are probably beyond the point where that debt can ever be saved. This is a solvency crisis, not a liquidity crisis."

Portugal, Italy, Greece, Ireland and Spain are all near bankruptcy. So is the state of California.

"The United States has actually lost sovereignty over its own interest rates and the value of the dollar."

Hamon said that lowering interest rates to 0.5 per cent, as the Bank of Canada has done, will be as ineffective as it was in Japan a decade ago. Japan lowered its rates when its population of baby boomers peaked at age 65, which is now happening in North America. Fewer working people having to fund the retirement and health-care expenses of an aging population doesn't bode well.

He warned that banks have lured people into home-equity lines of credit, and they are now retiring while still in debt.

"In the next couple of years, the art of investing will be not losing your principal," Brennan said. "The way out of this, in the long term, is for people to start saving."

Then they can start spending again, without being in debt.

"The new economy that comes out of this mess will not resemble this economy at all."

He said the nationalization of banks in many countries is inevitable, but it will be done "under the table," as governments buy in and reduce the equity value of other shareholders. He sees the British pound disappearing as an independent currency, the U.S. dollar in peril as the reserve currency, and the euro perhaps splitting into a strong Nordic euro and a weak Latin one.

"Gold will begin to trade as money before this is all over. But I don't think, for most investors, that gold is a good thing to have because it's so volatile."

U.S. banks own 19 million homes through foreclosures, but they haven't put them on the market, knowing it would kill prices. People who cut back on spending and save will be able to buy those homes with 25-per-cent down payments.

In the end, Hamon said, we will return to the way we used to live a generation or two ago. That means grandparents living with their children. Workers taking lunch pails to work instead of eating at Tim Hortons. One-income families. People raising their own children and cutting their own grass. Camping instead of cruising.

"There will be a reduction in living standards," Brennan said.

Ray Turchansky, a freelance writer and income tax preparer, writes Fridays in the Journal. He may be contacted at [email protected]

© The Edmonton Journal 2009

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