Recession Now.

I wonder how long it will be before Merill Lynch is declared a terrorist organization?  The reasons for the prediction that this recession will last 2-3 quarters is that that is approximately when Bush will be leaving office.  His legacy is astounding: 2 recessions during his time in office (truly one for the history books).  In general, though, the US economy rebounds at the begining of new presidential terms.  If you look at the Yield Curve right now, interest rates are saying the same thing: bad times (indicated by an inverted yield curve) until Bush leaves office (at which point the yield curve slopes upwards again).  These are the market expectations, but what exactly are Obama, Clinton or Edwards going to do differently that will change the course of things (assuming a democratic win in 2008)?  I don't see any particularly spectacular policies coming from any of these contenders.  So what exactly does the market know, that I don't, that results in such expectations?  Or is it just blind faith that any new administration would be better than the current one?  This i can't answer.

So whither Canada?  The BofC is inbetween a rock and a hard place right now, with only one blunt instrument (short-term interest rates), in which to act?  The problem of course is that central banks have three targets to choose from (inflation, unemployment and exchange rates).  The blunt instrument of BofC open market operations can only choose one.  If history is any guide, price stability will be the priority.  (Even if the Federal Reserve chooses a different target). 

Dealing with the other problems will require adressing the underlying problems with our economy. (ie. some of the issues Thomas mentioned above).  These issues, as Thomas rightly point out, have everything to do with our reliance on fossil fuels.  As the balance of payments slowly reverses and the Gulf states and South-east asian countries begin to cash in their dollar reserves, massive increases in demand for commodities and energy will push prices way up.  The best way of avoiding the inflationary impact of this is to drastically restructure the Canadian economy away from fossil fuels.  If the BodC raises interest rates, the federal government should at the same time form massive investment funds to allow companies building alternatives to the fossil fuel economy to access capital at rates far below market rates, lowering the user cost of such capital and dramatically accelerating investment in the sustainable economy. 

Also, immediate regulation on currency speculation (possibly through a tax?) is required, if we are to prevent the exchange rate instability we've recently seen.  Speculators, looking to make a quick buck, have dramatically exasperated exchange rate fluctuations, doing terrible harm to many people and putting the Canadian dollar way above its equillibrium level. 

As we move forwards, times look to be difficult, but we should rejoice in the fact that finally, the ethically right thing to do (in terms of global climate change) is slowly alligning with what is in our own economic interests (though some argue this has always been the case).  This country can either be ahead of the curve (by ending subsidies to an unsustainable way of life, and initiating a carbon tax to send the right price signals, as well as a variety of other policies..), or it can lag behind and see its/our future crumble. 

'Poverty is the worst form of violence" - Gandhi