August 9th, 2011
05:23 AM GMT
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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.

Sound familiar?

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.

soundoff (11 Responses)
  1. A I

    A very good and positive article, however the title is mis leading. Its NOT about how the down grade is good for the US economy. Its not even about how good the Canadian downgrade was in 1993.

    August 9, 2011 at 6:22 am |
  2. abdulrahim

    the answer to this problem is to change the economic philosofi from the conventional to the islamic economy system eg. islamic banking ,islamic financial etc................omg

    August 9, 2011 at 6:31 am |
  3. vijayendira

    You remember I spoke about this temple with billions of dollars of Gold it is for arts education and extreme emergency of drought and lack of rain fall for years .... Now if you are doing bad you pay less interest rates at least in old tamil society the stupid system of high interest rates is to keep the rich /... richer and they say things like risk increase so high interest bla bla.. Imagine a poor farmer lending from a rich normal person he dosent want to make a profit of beggers ... unless he is a begger himself ...But we have system where beggers belive they are the rich and dictating rules of interest rates ........agaaaaaaaaaaaaaaaaagh ...........

    August 9, 2011 at 6:40 am |
  4. eclectic

    Credit Ratings is a fraud. It means nothing.

    So beware people.

    American Credit Ratings should be DDD.

    August 9, 2011 at 8:25 am |
  5. Mark

    You are exactly right!!
    The biggest difference between the US & Canada is we the United States of America fought for our freedom.. Canada just followed..
    I don't know if our elected officials understand finances.. I say fire them all & bring the people back to run our government.. We The People have got to stand up.. Run for office & change what these politicians have created!!
    When the people speak the president & congress better listen.. If not they all will be replaced!!

    August 9, 2011 at 9:27 am |
  6. Parmalat

    There's something fishy about this meltdown: we're seeing some of the highest volumes in the history of NYSE and on top of that – the FOREX market failed to put up a reaction.
    As a technical analyst of foreign exchange I have absolutely 0 interest in equities, I could not care less how the equities are doing, as if they're doing someting it will also reflect on my foreign exchange charts. But right now it seems they're not doing much, the FOREX market is witnessing ordinary days of trend continuation.
    Which is why I believe the current meltdown is unsustainable in short to medium term, it's nothing similar to 2008.

    August 9, 2011 at 10:19 am |
  7. octopus

    S&P are the same scoundrels who got us into the previous crisis with their hi ratings of toxic mortgages, Lehmann Brothers etc. The last people anyone should trust.

    August 9, 2011 at 10:20 am |
  8. Steve Thompson

    If one takes a look at how interest payments on the current debt will rise in the future should interest rates return to normal levels, one can quite quickly deduce that the United States will, at some point in time, not have the ability to service its debt unless there are massive, social unrest-creating tax increases as shown here:

    Basically the Congressional Budget Office, in its wildest dream state, can only fudge the revenue and expenditure numbers enough to keep America's federal debt interest payments down to one-sixth of federal revenues by 2035.

    Love them or hate them, the only mistake S&P made was not downgrading United States debt a long time ago to better reflect the real world.

    August 9, 2011 at 12:21 pm |
  9. Katalin Krallics

    The example you have brought up in your article is correct and brings some hope... despite of one very serious fact, which we should indeed take into consideration: we no longer can separate US economy from the rest of the world – unfortunately.
    There is no doubt that US " deserves" the downgrade and the tendency it has been showing with the growing debt numbers is rather scarry. But this is a fundamental problem that most of the countries face, despite of the leading political views. We need a global change of economical politics, but this is probably to easy to say so...
    Everybody agrees, that there is not such a big difference in AAA and AA+ categories and that US should be able to perform on same levels, like before, but the shock the downgrade caused worldwide is much more serious. The weekening EURO contra the rising Swiss Franc has been and will be causing unpredictable brake downs in European households and on governmental, macro economic levels ( majority of the bank loans were Swiss Franc based and only in the past few days it has risen 20 % and the rising tendecy was earlier noted already ).
    " The downgrade" happened when it was less welcome and when it could cause the bigest demages worldwide. What it is if not a well focused and directed slap on our faces, again? Participants of the markets are "saving" their millions, while on the other hand other millions are being gained.
    And at last: Look at what is happening in the Middle-East, look at the scandals on the streets of London... why don't you see the general discontent and fear of the people? Do you still believe that S&P's rating and timing was correct and they have absolutely no Corporate Social Responsibility in the occured economical hysterica?
    You are right. Nothing lasts forever. But I am just married and planning to have a family and see my children grow in health, happiness and stability. For this... I need longlasting and functioning systems... and we all do!

    August 9, 2011 at 3:57 pm |
  10. Parmalat

    I told you so :D

    August 10, 2011 at 1:41 am |
  11. Michael Schneider

    Where are you getting your stats? Canada's debt to GDP is not 34%. In 2010, according to the CIA & Eurostat, it's 84%, ahead of the US' 58.9%.

    August 10, 2011 at 10:16 pm |

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