August 9th, 2011
05:23 AM GMT
In April, 1993, I was a young Canadian reporter covering politics and finance, trying daily to make sense of debt-to-GDP ratios, a falling Canadian dollar, and a good old fashioned free-for-all in Canadian politics. The political debate of the time was rife with the same threadbare arguments we hear today, from among the Keynesians who wanted to spend their way to prosperity, and the hackers-and-slashers who felt that deep cuts were the only way to save the tanking Loony and stem the rising Canadian unemployment rate.
So forgive me for wanting to crawl back into bed as I stumbled home from a vacation week of relaxing and fishing in my former homeland directly into my first day back at work in the United Sates and a 600-plus point freefall on the Dow Jones. This was not what I had in mind.
Without doubt, Standard & Poor’s downgrade of the long-term sovereign U.S. debt rating is serious and sad - $2 trillion worth of equities has disappeared in the past two weeks - but nothing here is permanent.
In fact, on the first trading day since the downgrade, the U.S. did not suffer higher borrowing costs like everyone said they would. On this crazy Monday, the 10-year note actually went up in value. Treasuries appeared to still provide a perceived safe-haven.
Canada lost its top-of-the line credit rating in April, 1993 when this reporter and others scrambled to make sense of the Canadian Bond Rating Service downgrading the Canadian government’s debt rating to AA+, from Triple-A. At the time, the country had run up enormous deficits. I recall reporting that the debt-to-GDP ratio had topped 70%, and a quick fact check reveals the ratio was pegged at 72% in 1993.
Back then, it felt like the sky was falling. But by 2002, tough austerity measures helped Canada win back its Triple-A status. It was not easy. It took almost a decade of political cooperation and economic seriousness which included tax hikes and deep spending cuts. A robust economy just a few years later also helped Canadian stocks roar ahead, shrugging off the downgrade and surging forward.
Can the U.S. accomplish the same? The U.S. has a debt-to-GDP ratio that is forecast to climb from about 74% now to 85% by 2021 if nothing changes. Its political system, depending on who you talk to, is either the best in the world, or hopelessly broken.
To this reporter, it all sounds somewhat familiar. Canada’s debt-to-GDP ratio is now 34%, it enjoys a strong AAA rating, and as my blown vacation budget reveals, a robust dollar that now means Americans take a big hit when they travel north, a currency discrepancy that I remember existing briefly as a child, and never since.
Of course, I’m writing about two very different countries in very different times. We don’t know what’s ahead here and that’s scary. But a quick look back reminds us that nothing is forever.
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