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VICTORIA — It's only been six months since Japan hosted the G8
leaders' summit in Hokkaido Toyako, but the issues discussed then
stand in sharp contrast to those of today. Topping the Hokkaido
agenda was the economic impact of skyrocketing oil prices and the
resulting transfer of economic power from the West to East, along with
the dangerous supply dependency on countries such as bellicose Iran,
Hugo Chavez-led Venezuela and geopolitically ambitious Russia. Food
prices were escalating at the time and the devastating prospect of food
shortages loomed for the world's poorest people. On another front,
enormous U.S. fiscal and trade deficits were battering confidence in
the world's benchmark currency.
In the midst of today's gloom we might wish to turn the clock back, but
could we have lived with ever-increasing food and energy prices and
yielding the West's economic sovereignty to Russia and the Middle
East? I think not. This financial crisis is painful, but we'll get through it
and the fortuitous gain from this shorter-term pain is the avoidance of
a more dangerous outcome. That is, unless ill-considered reactionary
attempts by Western governments to soften the crises brings back
those same problems, as well as saddling taxpayers with enormous
public debts and deficits. What are the signs that this pain-but-no-gain
scenario may well happen?
BAILOUTS OF THE DOOMED
ILL-CONCEIVED SPENDING
Since the supply of assets, goods and services is finite, more money
circulating in the economy necessarily means that the value of each
unit of a nation's currency will decrease, causing the nominal cost of
almost everything to increase. Zimbabwe is the extreme case in point.
The global economic crisis has reduced the cost of fuel, food, housing
and most other things. Given where costs were going, that is a good
thing.
However, printing too much money would put us back into the
inflationary spiral we entered only six months ago.
DEFLATING INVESTMENTS
The value of most stocks will likely recover, restoring the nominal
value of investments and pension funds. However, if the combination
of government stimulus programs and money-printing creates an
inflationary spiral, the buying power of those apparently recovered
investments and pensions may be drastically lower than before the
crisis.
The fact is, inflation is great for debtors, including governments which
have deficit spent their way into un-repayable debt, and individuals
who have done the same. But for savers and pensioners, high inflation
is a crippling plague. The cruel irony of high inflation for savers and
pensioners is pain when the markets collapse, while being little no
better off when they recover.
We must not forget that the real cause of this economic crisis is
imprudent lending practices and the handoff of bad loans, disguised
and rated as quality investments, to unsuspecting investors. The pain
is great, but many of the dangers discussed by G8 leaders only six
months ago have faded. Let's hope government actions don't negate
the gains, resulting in greater long-term pain.