Archive for October, 2008

Economists really do not have a consensus as to what will happen in the next little while. At the moment, they cannot agree whether inflation or deflation is the bigger threat.

Deflationists believe that the cooling economy will lead to decreased consumption.  This, combined with lower gas prices, lower housing prices, and the plummeting stock market, will cause the consumer price index to drop below zero.  For example, the Great Depression of the 1930s was a deflationary period when prices of goods and assets significantly declined.

On the mother hand, there are economists who are also predicting global inflation.  With the worldwide demand for financial bailouts comes the temptation for governments to print more money, which will lead to inflation.  For example, the 1973 recession featured runaway inflation in Canada amid oil shortages. At the moment, in Argentina, inflation has reached 25 per cent.  In Britain, inflation is currently at a 16-year high.

What do you think will happen in these uncertain times?

It was bound to happen.  Housing prices are beginning to fall in metropolitan Canada.  In the Greater Toronto Area, housing prices have tumbled the first time in over a decade, down by 3% from last year’s levels.  Average existing home prices dropped to $368,549 in September, from the $380,132 recorded in the same month last year, according to the Toronto Real Estate Board.

Is this the beginning of a downward trend for Canadian real estate prices?  Are Canadians really immune from the US subprime mortgage crisis?

Source: Macleans Blog Central

Keynesian Economics, or “The New Economics,” holds that governments should vary taxes and spending to offset both rising inflation and staggering output. Free-marketers argue that the cost of periodic crashes is worth it, in order to preserve the freedom of capital movements. At the moment, the former notion is prevailing.

Before the 2008 financial crisis, inflation stayed low (did not exceed 4% from 2004 to 2008) and there was little price volatility. It seemed like perpetual prosperity would ensue. What went wrong?

Unfortunately, it would seem that price levels and inflation are lagging, and not leading indicators. Although the metrics seemed stable before the financial crash, behind the scenes, too much money was being shifted from production into speculation. It took some time, but the speculative frenzy triggered by mortgage-backed securities finally kicked in. And the metrics plummeted, and now, output has staggered.

Keynes’ solution to a poor economic state is to “prime the pumps.” This means that government should step in to increase government spending. It is noted that massive military defence spending by the US in WW2 helped to end the Great Depression. If we apply Keynesian Economics to the current Canadian economy, now is the time to increase government spending to stimulate the economy. Our economy needs injections of cash from the federal government in order to prevent a recession.