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The US fell into meltdown because the consequences of spending strangling real wage growth for 30 years finally caught up with them. They're not going to avoid an L-shaped scenario unless the elite consensus shifts far enough to recognize that allowing real wage growth for the bottom 99% is neither inflationary or 'anti-American.' Consumer deleveraging alone is not adequate if wages simply do not support consumption above bare essential levels.

The shape of a Canadian recovery will depend very heavily on non-American demand for commodities and how easily we can re-target our exports away from the (sinking) US market. Notably, on this front, China's push towards green tech does not bode all that well for the value of our oil resources.

L for the US. W for Canada.

Curmudgeon, China's shift away from oil will be a long term story, not something that happens in the next few years. It's too large a ship to turn quickly.

Stephen, thanks. This post was really helpful in clarifying how the Canadian story seems to differ from the US. The other message I'm getting from you, which you and Nick have said before, is that fiscal policy isn't what we needed, and that monetary policy will do the heavy lifting to get us out of this recession (beyond rebounding demand for commodities). Do you think it might be wise to curtail expansionary fiscal policy?

Is there anything to quality of investment spending? Does investing in housing make sense if it means Canadians will just burden themselves with mortgages that will be a whole lot less affordable when rates rise in a few years?

That's a good question; it'll be interesting to break down that investment series. Soon.

This is another great post Stephen; it really helps put things in perspective and you never this kind of well-thought analysis in major media outlets. 1 point, however;

If Canada's hopes for climbing out of the recession are so intertwined with our Toft, it seems to me like we are very, very dependent on highly volatile commodity prices. I probably buy the argument that oil at $70 and gold at $1000 is sustainable in light of EM and Chinese demand, but are we sure? What if oil goes back down to $30 or $40 if the US double-dips into recession and credit markets seize up again? We're screwed? It's only 10 years ago that oil was at $10. Global demand structure might be different now, but surely we should not assume that current prices are necessarily here to stay.

Yes, the volatility of commodity prices is a worry. But I think that there are good reasons to think that the trend will continue upwards for the medium term.

A lovely post, I really like your arguments, and certainly hope they accurately predict a quick recovery for Canada. But I wonder if there will be some regionality to Canada's recovery. Will provinces more dependant on manufacturing have a harder time recovering? Ontario in particular seems to be more dependent upon US markets, do you foresee them deviating from the national path to recovery?

Stephen, I also think that there are good reasons to think the trend (for commodity prices) will continue upwards, but it is not very hard to find very worrying signals in the short term. For example:

Baltic index hits 4-month low on slow China demand (Reuters); or

Oil traders are paying the most ever in the options market to protect against a drop in crude prices. (from FT alphaville)

All in all, I think it is worrying that Canada is so dependant on commodity prices. And as Kosta says, this does have massive implications for the distribution of income across the country.

Care to speculate a little not just on income by region, but for people in different rungs in the ladder ? I read it here that aggregate data may not tell us as much as we would like to know.

I believe that learning james is asking a good question about wealth/income inequality.

Indeed. Sadly, I don't have an answer. My guess would be that if we revert to the path of the last expansion, previous trends will continue.

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