July 2009 newsletter

Shots
across the
bow

Is the medicine working?

The erstwhile gloom and doom isn't as evident as it was, but the outlook does appear to remain rather uncertain. Depending on who you talk to or which guru you listen to, things are either beginning to get better or they're still bound to become a whole lot worse.

But who really knows - and how much faith can you put in any of the predictions?

Well, my personal view is that, on balance, the medicine IS working.

In fact, it isn't altogether wrong to claim that my faith in politicians has been restored -- or at least that it's lately become a great deal stronger than it's tended to have been for much of my lifetime.

So permit me, if you will, to offer some reasons, as follows.

Lessons learned

The more you study economics, the more you're faced with the difficulty of knowing what's going to happen. Human nature has much to do with it. The way people do -- and do not -- behave is open to many questions and there are few absolute answers to them. What someone did yesterday or even does today isn't necessarily what they'll do tomorrow. People change their minds, act with a degree of inconsistency, and can frustrate the predictions of the experts.

For instance, ask any politician and you'll learn that staying in power -- and never mind getting into it -- is as much a matter of luck as anything else. Reading the public mind correctly and forecasting the outcome of an election accurately amount to an exercise that is seriously impeded by the lack of any guarantees. Like the future, the only certainty is that it WILL eventually arrive, but the results may be decidedly wide of what's anticipated.

And yet there are discernible patterns and history does have a way of repeating itself. Better still, there are lessons that can be learned and, on some occasions, they are given the heed they deserve.

Or, to make my primary point, I see the present time as an example of this.

A political consensus

There's no question that mistakes made on Wall Street have thrown Main Street into turmoil. Our financial underpinning has been shattered and it won't be rebuilt quickly. We not only need to undo the mistakes. We also have to make sure that they cannot -- and won't -- be repeated. Worse still, more than one highly knowledgable guru in the banking field has admitted that the solutions aren't at all obvious.

However, the one certainty is that something has to be tried and, with what can perhaps be seen as a surprising lack of strong disagreement, it is taking the form of government intervention. Politicians will, of course, attempt to score points, as they've always done, but left, right, and centre there are no voices crying out loudly about the foolishness of deficit financing. Parties of all stripes, be they in the USA, Canada, the UK, or numerous other nations of the world, have embraced -- and are continuing to embrace -- the concept of prime pumping their economies. In the past, the idea of leaving people to fend for themselves was the accepted response to times of severe national financial difficulties. However, with the arrival of F.D.R and his application of Keynesian economics when faced with the Great Depression, this began to be an untenable opinion. In fact, nowadays a reliance on waiting for things to sort themselves out -- even if the past suggests that they inevitably do -- is now little short of political suicide.

Leading the way

I make no apology for my high regard for President Obama (and I've expressed it in several recent newsletters), but its basis lies, maybe most of all, in my longtime interest in economics and the ways in which politicans do -- and do not! -- manage the ups and downs of a country's fiscal health.

Certainly, since the end of WWII there has been an ongoing concern about wage/price spirals, the risks of inflation and deflation, and the impacts (both good and bad) of tinkering with the money supply. Yet, these are nitpicks when compared with what is now being done.

And more to the point, America and its president are out in the front of the stimulus programmes.

Money is being thrown hither and thither and seemingly with no predetermined upper limit. Doing whatever it takes appears to be the current thought, and worries about balancing the books can be put off until recovery has occurred. It's enough to gladden the hearts of Left-Wing Politicans while shaking the very foundations of Conservative and Republican thinking!

But President Obama seems to be a Democrat who has risen above his party's dogma, Prime Minister Harper is no Liberal, and Prime Minister Gordon Brown is, so far at least, an unreconstructed New Labourite -- and they are all speaking the same language and, while listening respectfully to murmerings from European (and even Russian) political leaders, are setting a bristling pace and demonstrating an avowed intention to turn things around.

Sometimes it seems that it takes a war to bring people together and that nothing else will unite them in a common purpose. Maybe, then, that's what we're witnessing: a fight to the bitter end and regardless of the cost. We will NOT be beaten. We WILL end up victorious. We ARE going to survive.

Strong medicine

Whatever the case, I think we can be encouraged by news reports that strike a positive note. The prognosis isn't altogether bad. Various commentators, both in and out of government, mention the likelihood -- and even certainty -- of an upturn in 2010 and a steadily increasing, albeit slow, economic recovery beyond that. Some caution is still called for and reservations continue to be expressed, but the doomsayers are no longer being listened to with unquestioning acceptance.

Some bitter pills have already been swallowed and other unpleasant prescriptions are undoubtedly headed our way, but the great majority of people aren't flat on their backs. Perhaps many of them are down, but only a limited number of them seem to be out. Returning to the unpredictability of human nature, it nevertheless includes an ability to adjust to circumstances. People don't give up -- or in -- all that easily.

Expenses can be cut back, especially with regard to big ticket items. Eating can be limited to home meals as opposed to restaurant fare. Vacations can be confined to day visits or local attractions. Life can proceed at a less costly pace.

Beyond this, though, the chances of earning money on our own doorstep aren't altogether lost, either. For example, it seems as though GM is going to stay in business, if only in a re-engineered form. In addition, there are significant grants being given to Brock University and Niagara College. Indeed, the latest Niagara Economic Development's newsletter is unmistakably upbeat, particularly if you play the video it incorporates.

For good measure, too, there's the prospect of Project Niagara, an idea that's music to the ears of many residents, even though it's also led to passionate objections from others -- as invariably happens when it comes to something new in Niagara on the Lake!

There are also plans afoot to commemorate the 1812 War. This was an event that, ahem, America started, much as it's often blamed for the battle that's now raging against our financial troubles. Yet peace was achieved in due time and I don't think there's any good reason to believe that victory won't again eventually be in our grasp.

And not the least, it's worth noting that there has been an upsurge in local housing sales during the past few weeks. Admittedly, the sceptic in me sees it as no more than an offset to a well-below-average number of transactions during the first quarter of the year. Yet, if we're merely seeing a move forward from a pent up demand, the increase in figures do represent an additional positive sign.

A dose of reality

Of course, not everyone agrees wholeheartedly with what's being done. For example, one recent report argues that forecasts by Finance Minister Jim Flaherty, not to mention supporting statements made by Primer Minister Stephen Harper, are much rosier than they ought to be. The truth may well be that our GDP is going to be lower, unemployment will become higher, and the accumulated national deficit could exceed $155 billion by the year 2014. Along the way, as well, house prices are probably going to drop by five or six percentage points.

Small comfort, no doubt.

Yet there's a general view that this pessimism is more extreme that it needs -- or deserves -- to be. If even related to the total economy, the deficits being built up aren't considered to be unmanagable. Better still, there appears to be an indisputable commitment to reducing the indebteness as soon as recovery starts to be evident.

Herein perhaps lies the greatest reason for hope.

The other half of Keynesian economics is that money borrowed to keep a country in business should -- and must -- be paid back as soon as things get turned around. I personally doubt that FDR had any thought of not doing so. However, this plan was overtaken by the 1939-1945 conflict. Money had to be spent in waging a different war and, ironically, brought America back to a time of unparallelled prosperity when the fighting was over.

In any case, I perceive what we're going through as being no different than taking out a mortgage. As long as we mean to pay it off -- and never waiver in our determination to do so -- we end up being free from debt.

And why shouldn't the future hold that prospect out to us?

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail address changed as above on Nov 3 2007

website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com.

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