Loonie and looming crisis

I don’t know you, but I have already noticed during my weekly grocery shopping that there have been five to 10 cents increase

I don’t know about you, but I have already noticed during my weekly grocery shopping that there have been five to 10 cents increases in the prices of at least a dozen articles I purchase regularly, thanks to the steep decline in the value of the loonie against the US dollar, the (once?) almighty currency unit that dominates international trade and financial transactions.

Widely accepted as a “commodity currency”, meaning strongly associated with the movements of commodity prices in the international exchanges, why is loonie losing value?

If anything, oil market remains fairly strong and gold prices are refusing to fall since the beginning of the year (on the contrary, they are creeping up), and they are the two most important commodities impacting the Canadian dollar.

Loonie is losing value mainly because the global economy is moving on a largely distorted track.

Since the 2008 financial meltdown, the management of national economies has been reduced to practices in accounting, mainly playing with the figures in the books, and creating fiat (artificial) money to show that the balance is in the black.

But this is nothing more than trying to push a dysfunctional car up a hill in the hope that once up there, the engine will miraculously start and the car will be able to move ahead without a push.

Over the last three years, all the world’s major central banks have been printing/creating money. Why?  Because they think that by creating more money (read more debt), they will be able to keep the interest rates down, and by so doing, prevent default on private and sovereign debt, and keep hoping that economic growth will pick up, and then, when profits and tax collections build up, all the debts will be paid off.

In short, a lot of wishful thinking, not to say outright deception.

Let’s take a look at the current global situation and at some of the data from the world’s biggest economy, our southern neighbor, to understand why this is all a dream world: The total output of global economy, agriculture, industry and services included (GDP), was about 70 trillion US dollars in 2013.

The total of private and sovereign debt throughout the global economy in 2013 was US $35 trillion. This gives us a debt/GDP ratio of about 50 per cent for the global economy.

The US has a 25 per cent share of the global economy, that is, about US $17 trillion. But US also has accumulated debt obligations of US $17 trillion (half of all global debt), that gives you a 100 per cent debt/GDP ratio.

Add to this the debt obligations of China, the world’s second largest economy, some US $ 16 trillion (including a huge domestic debt), actually a higher than 100 percent debt/GDP ratio. In Japan, the situation is even more alarming with a 160 per cent debt/GDP ratio (and counting), with a substantial portion of it being the result of domestic borrowing.

Now if the global interest rates continue to creep up (it has just started with Turkey and South Africa, likely to continue with Argentina, Brazil, Indonesia, India among others), these debts will be harder and harder to service and at some point, defaults will be inevitable, meaning we will be back to square one, that is another financial meltdown.

Coming back to the loonie, our national currency is going down because most of the economies that import Canada’s metal, forestry and agricultural products, or buy our gold or oil, are too busy trying not to fall into another trap instead of investing in real economy to create healthy employment, to manufacture and export goods and to expand services.

The crisis that began in 2008 is still very much alive and kicking and it is only waiting for a catalyst to rear its head again.