Lining Up at the Trough

The forestry industry in B.C. and Canada is now lining up in Ottawa and asking for a bailout or some other kind of relief for its problems. Can’t say as I blame them. Why shouldn’t they? After all, they do represent a real Canadian industry, instead of branch plants of American companies like the big automakers. But of course the forestry industry will only be the second in what’s going to be a long line at the government financial trough. What about the oil industry, which is in deep do-do because of suddenly falling oil prices that make projects like the Tarsands project uneconomic? What about any resource industry, like mining, which borrowed wads of money and was suddenly confronted with the collapse of the commodities bubble. What about the secondary industries like retail, and services and media? They’ve been hurt by financial turmoil as well. In other words, where does all this stop? Here’s the answer: At your wallet. Governments aren’t terribly innovative, so are using the same old mechanisms. In Canada, the US and around the world they’re shoveling money off the back of a truck to save jobs, and hence votes,. And they’re going to have to get it somewhere, which means the borrowing market. They’ll borrow trillions of dollars, and then start printing money like mad to repay it at dollars that are worth less. Lenders know this, so will charge higher interest rates to compensate. And so, while we’re going to see a bout of deflation at first as governments cut interest rates to stimulate buying (which won’t work because everybody’s too frightened to buy anything) and set themselves up for a massive intrusion in the financial markets, the inevitable result of all this borrowing is inflation. We’ve just come through a decade of low inflation, but some of the older folks out there will remember the stagflation days of the 1970s, which culminated in massive government deficits and interest rates near 20 per cent in the 1980s. So get ready for the big comeback. It won’t be long before you’ll be recounting stories of near-zero interest rates.