Letters to the Editor, Toronto Star, (Sent) December 31, 2007
Sir: re The Subprime Fiasco, the Canadian Loonie and the U.S. Dollar.
As Madhavi Acharya-Tom Hew wrote in the Star, December 30, 2007 at page A-23 the "Subprime fiasco to dominate early 2008".
I agree and for example the fiasco has left many Canadian institutions in a very unhappy position - La Caisse de Dépot, the Canadian Imperial Bank of Commerce (CIBC), La Banque Nationale are just some major examples. This is because the loans were made at excessive rates and with inadequate security.
Nevertheless the total exposure on the Canadian economy of such loans, is apparently only one quarter per capita as compared with the exposure per capita on the U.S.economy. American home owners who borrowed on their already mortgaged homes now face foreclosures and the American housing market has reacted by spiralling downward, which only exacerbates the situation.
Canadian authorities expect they can prevent the slide, and believe our home sales and home construction is holding, but can the American authorities do the same? May I suggest it is very unlikely that they can, because the American economy, besides the excessive Subprime debt, has four additional forces against it.
Firstly, the America economy is subject to the excessive drain of the Iraq War, which costs at least 3/4 of a $Billion per day, with no end insight.
Secondly, the American economy, faces an invasion of 10 to 20 million Mexicans, who have flooded the lower end of the labour market, putting great pressure on the Ameican tax system as well as on the American organized labour force, which is shrinking in numbers, income and benefits.
Thirdly, the United States economy is supporting the world's costliest health care system per capita, although 50 million people in the U.S. are apparently uninsured and many more are under-insured. Yet the United States is the world's only civilized country that does not have universal medicare. And there is no hope of adopting such a programme now or in the future and for example none of the Democrat or Republican candidates has dared to propose it. As a result the pressure on the American economy by the insured, the under-insured and the uninsured is enormous as well as being a political and social catastrophy in the offing.
Fourthly, China holds 1.3 $ Trillion in American debt which it can intentionally or unintentionally foreclose upon, at least in part, at any time. . The Canadian economy is partially locked into the American economy, in particular manufacturing, but the above four factors make the American economy especially fragile. It now takes $1.02 U.S. to buy a Canadian dollar. What will it take in the next few weeks and months - $ 1.10 or $1.20 U.S. or more?
It is going to be an interesting year. No doubt, we all will be the wiser.
William Tetley, Professor, McGill Law Faculty