Prelude to requiem

There are darker clouds in the horizon than lower oil prices

Canada’s finance ministers ended a two-day meeting in Ottawa at the beginning of this week with the focus obviously being the steep decline in the price of oil and the ripple effects it can create in the national economy.

The fact that both the Alberta’s provincial government and the federal government have been in a panic over this development is so evident that it doesn’t even need special reporting. Just on Monday, Mr. Prentice’s government announced it had appointed a special commission to study the repercussions of the slump in oil prices so that the preparations for the 2015 fiscal budget could be realistically conducted.

Coming just months before next year’s general election, Prime Minister Stephen Harper has been desperately trying to preempt any negative fallout from the loss of revenues from royalties, including such measures as targeting price gouging (which is described by “fake help to consumers” by experts).

The picture is indeed bleak when one factors in the dependency that the whole country has developed on oil economy over the last decade. The (false) assumption that oil revenues would continue to fuel economic growth has also led to complacency on the part of the consumers to such a level that, according to Statistics Canada, the average household debt reached 162 per cent of the annual household income in the third quarter of this year.

But the decline in the oil prices may turn out to be just the smallest of our worries in view of what’s been taking place in the global arena of financial markets.

It was reported last week the US House of Representatives voted to pass a $1.1 trillion spending bill to stop the government machinery from shutting down and then the Senate supported the legislation. This is not news as it is just another chapter of the saga that has been going on for years.

But what constitutes the real news has gone largely unreported: The US Congress, as part of the same legislation, has practically repealed the restrictions imposed after the financial crisis in 2008 on the big investment banks and financial institutions with regard to their risky investments. That is, official Washington has now allowed the resumption of the practices involving subprime derivatives, instruments creating fictitious value, which led to the financial meltdown a little over six years ago. Now here is the beauty (?) of it: The legislation was drafted by the Citigroup, one of the banking institutions, which made billions out of those instruments before the crisis.

One may think that it is a US problem, but that would be an inexcusably ignorant approach to the whole matter. Just as it did in 2008, a US banking crisis can, and will, create another major disaster sometime in the foreseeable future, one that will make the most recent crisis look like a storm in a tea cup.

The indicators are really alarming: The global setup, from the tiniest emerging economy to the giants of the industrialized West, has been unimaginably leveraged, we are floating in a massive bubble, which is growing every passing day. Indebtedness has increased exponentially: When Barack Obama became the US President after the financial crisis, US government debt was $10 trillion, this month it has reached $18 trillion.  Balance sheets of all major central banks have been inflated thanks to massive quantitative easing, that is money printing, which is going on and likely to accelerate.

Now, in this environment of instability, despite all the pinkish assessments by financial advisers and experts, the collapse of oil prices is likely to be only a prelude to the requiem for the death of the world order as we now know it.  How the new one will shape up is anybody’s guess.

– Mustafa Eric


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