Nouriel Roubini, also known as Dr. Doom, the man who in 2006 warned the U.S. that its housing bubble was about to burst and that the fallout from subprime mortgages would ruin the global economy. Last week, Roubini observed that the global economy is like a jetliner with only one functioning engine keeping it in the air, and that that engine is America.
It was only a couple of years ago that predictions from economists such as Roubini, were feasting on the imagined carcass of American capitalism, thanks to an engineered cycle of government debt crises that repeatedly brought the economy to the brink.
U.S. GDP has grown at an annual rate of 3.5 per cent, having been stuck in the two per cent range for several years. U.S. factory activity has also steadily strengthened throughout the year while the number of U.S. job openings has climbed to a level not seen in 13 years. At no other time in the last half-century has America’s fiscal position improved so quickly, with the U.S. federal deficit going from US$1.3 trillion in 2009 to US$484 billion in 2014.
At the consumer level, despite almost no rise in wages, households have brought their debt levels back in line with historical norms when measured against disposable income. While the U.S. Federal Reserve continues to prop up the economy with ultra-low interest rates, it has ended its quantitative easing program, which saw it buy up US$4.5 trillion in Treasuries and mortgage bonds as a way to inject liquidity into the economy, and higher interest rates are on their way.
The contrast between America and the rest of the world, however, is stark. Growth in China and Europe is slumping while Japan’s economy has stalled and developing nations everywhere have hit the brakes. Even Canada’s economy, which has traditionally done well when America does well, seems to be moving in the opposite direction.
For Canada, there’s arguably more bad news than good in all this. As our largest export customer—America—recovers, we will, of course, benefit. But at the provincial and household levels, Canada has barely begun the necessary deleveraging process that has been under way in America for five years. Unfortunately, the chain reaction from that threatens to keep Canada’s economy grounded, even as the American economy soars.