Bert Caldwell: Economic discomfort gives rise to loonie behavior

It’s come to this: American at par.

After 31 years, the greenback Thursday yielded the North American currency crown to the Canadian loonie. Can gasoline by the liter be far behind?

The loonie has been coming on for some time, but it was Tuesday’s one-half percent cut in a key interest rate by the Federal Reserve that provided the final boost. Same for the euro. American tourists in Europe are buying baguettes for the price of a small car.

The loonie’s triumph coincided with a full-court press by President Bush, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to reassure Congress and the American people that the U.S. economy may be “unsettled,” but remains fundamentally sound.

Doth they, to quote Shakespeare, protest too much?

The U.S. economy has expanded for six years now. As expansions go, it is neither particularly long of tooth, nor extraordinary of size. Growth in both the 1980s and 1990s was more muscular. If the cyclical nature of the economy suggests there has to be a slowdown at some point, this is not necessarily that point.

Nevertheless, academics from Yale to UCLA are warning that the nation may be one misstep away from edging into a recession. Of course, Forbes magazine Publisher Rich Karlgaard says academics are always ready to sound an alarm, and the media is ready to give them a megaphone. There’s an old joke that says economists have successfully predicted 20 of the last seven recessions.

From the point of view of Karlgaard, who was in Spokane last week, the world is awash in liquidity, the U.S. is just caught in a temporary credit crunch.

The challenge for Bernanke, Congress and the administration is to ease the crunch without unleashing inflation, always the Fed’s primary bugaboo. Commodity markets are on fire, which is fine if you farm or mine. Whether it’s soft white wheat at $9 a bushel or silver at $13 an ounce, it’s all green for the Inland Northwest.

But $83 a barrel oil is another matter. And American shoppers accustomed to the inexpensive imports that have checked retail inflation may soon be in for a surprise, especially if they like maple syrup.

On the other hand, U.S. goods are cheaper overseas. Growth in goods exports has been triple the rate for imports this year. Washington will continue to be a big beneficiary of this trend unless, warns Portland-based economist John Mitchell, protectionist and isolationist forces get the upper hand in Congress.

Mitchell says the half-point move by the Fed, while a bit of a surprise, was a tonic for Wall Street, which rallied strongly in its aftermath.

He’s not bothered by complaints from some quarters that the Fed is bailing out investors — housing speculators, for example — who took irresponsible risks.

“The last flippers are going to lose,” Mitchell says.

Maybe not all of them.

As Bernanke conceded to the House Financial Services Committee, “no government program will be able to provide meaningful help to the highest-risk borrowers without a public subsidy” that might “bail out failed investors.”

An estimated 2 million homeowners facing ruinous adjustments in mortgage rates may not care if relief helps a few speculators.

Bernanke said Congress will have to find that line between needful support and needless subsidy, but the balancing act applies to the Fed and the president, as well. Thursday’s jawboning will not by itself get the job done.

Mitchell, who has tracked the Northwest economy for the two decades, gives odds strong exports and commodities will more than offset difficulties in housing.

“One of the things that continues to amaze me is the resiliency of the U.S. economy,” he says. “My bet is we’ll keep going.”

Greenback, or loonie?