COVER

Does nothing work anymore

Interest rates are high, the dollar is low and Canadians are losing their cool

Jane O’Hara August 17 1981
COVER

Does nothing work anymore

Interest rates are high, the dollar is low and Canadians are losing their cool

Jane O’Hara August 17 1981

Does nothing work anymore

COVER

Interest rates are high, the dollar is low and Canadians are losing their cool

Jane O’Hara

In his 12 years in power, Prime Minister Pierre Trudeau has enshrined the shrug, elevating it from the footstool of mere body language to the status of a modern political weapon. The shrug—shoulders raised, chin lowered, neck nowhere to be seen, palms turned plaintively upward-seemed to be a piece of polished theatrics. While feigning confusion, he managed to maintain that classic detachment, mastering the Kiplingesque conundrum: to

keep “your head when all about you are losing theirs and blaming it on you.”

Last week, as Trudeau and his three sunny children tanned at a secluded Mediterranean villa owned by Morocco’s King Hassan, Canadians were losing not only their heads but their shirts. And they were blaming it on him.

On Friday, at the end of a week in which it was reported that Canada had the world’s worst strike record, that the Canadian dollar had hit its lowest level since December, 1931 —

80.43 cents U.S.—that the country’s major banks had pegged their prime rate at a record 22.75 per cent, and that in order to keep the Canadian dollar afloat, the Bank of Canada had depleted its international reserves by $1.7 billion in July, Trudeau was not even available for shrugging. He was in Nairobi, where, after a red-carpet welcome on the tarmac, he and his sons flew for the weekend to two luxury Kenyan Game parks where the champagne is perpetually iced and the rooms are $150 a day.

In contrast, Canadians at home were treated to yet another inconclusive round of oil pricing discussions between Energy Minister Marc Lalonde and his Alberta counterpart, Merv Leitch. Even the news that Canada’s postal strike seemed to be finally over failed toplacate a growing restlessness over the woeful state of the economy. Despite the longsuffering nature of most Canadians, the confluence of ill winds proved too much:

in one angry voice they were asking, “Does nothing work anymore?” Speaking for the legions of disaffected, Ruth Burgoyne, a 56-year-old farmer’s wife from New London, P.E.I., said, “This country is going to the dogs.” In the affluent community of Oakville, Ont., 5,000 people signed a petition for the recall of Parliament before the scheduled Oct. 14 date. In Toronto, a

bank teller at the Toronto Dominion Bank nearly wept when telling a traveller to hand over $1,890 Canadian for $1,500 in American travellers cheques. “I’m sorry,” she said. “I don’t believe it myself.”

The disgruntled could be heard from the other end of the country as well. Derek Ludlow, a 31-year-old building supply salesman in Victoria was almost apoplectic: “It really pisses me off that we’re being run like a leisure service of the U.S. The Canadian government

hasn’t got a grip on this mess. The economy’s being run by rules made 100 years ago and they just don’t work.”

In Edmonton, Calgary and Toronto, three tabloids owned by the virulently anti-Trudeau Toronto Sun Publishing Corp. tapped into the frustration generated by Trudeau’s shrugonomics and broke with the tradition of devoting their front page to bare-breasted women and three-alarm fires to run a full-page editorial headlined WEEP FOR CANADA. They enjoined readers to protest either by phone or clipout ballot and the response was belligerent. In Toronto, switchboards lit up with alacrity at 8 a.m. and within minutes the overload of calls had blown exchange circuits, ironically taking with them the phone lines of Wood Gundy Ltd., one of Canada’s largest brokerage house. In one day, 11,000 testy Canadians filed their grievances, leading Toronto Sun editor-in-chief Peter Worthington to comment: “People aren’t apathetic about this anymore. They may not be storming the Bastille, but if a political messiah was around in this atmosphere, he might find himself with a popular front.”

Amid all the bleating few could come close to the emocional pitch of John Bulloch, president of the Canadian Federation of Independent Business. As the shepherd of a flock f 61,000 small Canadian firms, Bulloch was pleased that the postal strike—which had cost small business millions—was apparently settled. But, still, there was the plague of high interest rates, the bane of businesses that rely on shortterm borrowing for inventories and capital intensive expansion. Said Bulloch: “With Trudeau off sunning himself in Yabbadabbadoo, this country is drifting and the mood is hostile. What we need is a bold policy strokenow.”

Trudeau’s frolics in the land of the Masai and acacia might have seemed pardonable were it not for the comparison with his American counterpart,

Ronald Reagan (see box, page 17), who, before trotting off for his own holiday, seemed at every turn of a television dial to be saddling up, taking the reins and jailing at least one enemy to the economic peace—the striking air traffic controllers. On royal wedding day, July 29, as Reagan was bullying his tax-cut program through Congress—he sent his wife to watch the pomp instead—Trudeau chose to attend, leaving the home front unattended to suffer a bout of economic narcolepsy. The Toronto Stock Exchange fell 3.58 per cent over two days, taking the largest tumble in nine months and costing an estimated $5.5 billion in paper losses. And the consumer confidence index, put out by the Conference Board of Canada, plummeted to the lowest level in the 20-year history of the survey.

With the mood in the country hotting up last week, Finance Minister Allan MacEachen cut short his seven-day vacation and jetted to Ottawa to fill in at least one of the leadership blanks. There he was met by a groundswell of protest from opposition critics. NDP leader Ed Broadbent railed about the need for “emergency” government con-

trois to stop the flow of short-term money out of the country; he also demanded an early recall of Parliament and a quick budget. Conservative leader Joe Clark upped the ante on the NDP, saying that his party members would take their seats in the Commons even if the Liberals wouldn’t. MacEachen stayed and took his licks for a day, then left for Cape Breton and his mountain lake retreat. This pleased at least one Toronto investment analyst who admitted it was preferable that the government stay on vacation. “What the market fears is that Trudeau and MacEachen will come back and say things we don’t want to hear. They, conceivably, could make the situation worse.”

It is questionable, in any case, whether Canada would be able to achieve much acting in isolation on its own problems. Last week, MacEachen was no doubt hoping Canadians would take some comfort when he told them they were not alone—the entire Western industrialized world is suffering in the current economic crisis, largely created by high U.S. interest rates. Still, a dreary combination of homegrown and imported problems on three major fronts make it a certainty that things will get worse before they get better:

The Dollar: The state of the Canadian dollar today says it all. Dipping last week to a 50-year low, a drop of more than two cents in only three weeks, the dollar, experts say, could go as low as 75 cents if speculation against it remains constant. To date, the Bank of Canada’s $1.7-billion intercession is the only thing that has kept the Canadian currency barely hovering above the 80-cent mark.

At base, the dollar’s lowly status reflects a vote of non-confidence in the nation’s economy when compared to the buoyant conditions in the neighboring

U.S. It means that investors and inter-“ national currency traders rate Canada’s productivity, reliability and economic management at only about 80 per cent of their American equivalents. Thereare myriad reasons for this lack of faith. William Mackness, vice president of the Toronto investment house Pitfield Mackay Ross Ltd., lays the blame on the recent, massive and unprecedented flight of Canadian capital beyond the borders. (As a response to

What $ 1,000 will buy Canada's gains Yield on Changes $1,000 as from of July 31 year ago Britain (pound)................. 440 + 19.8% Argentina (peso)......... 3,831,420 + 130.0% Belgium (franc)........... 32,780 +33.7% China (renminbi) ............. 1,441 + 15.4% Denmark (krone) ............ 6,289 +32.5% France (franc)................ 4,252 + 19.7% Germany (deutsche mark) ---2,002 +30.7% Greece (drachma)........... 48,780 +33.2% Ireland (pound)................ 548 +34.3% Israel (shekel)*............... 9,524 + 113.5% Italy (lira).................. 995,020 +38.3% Netherlands (guilder)......... 2,223 +32.8% New Zealand (dollar) .......... 980 + 11.0% Norway (krone).............. 4,980 +20.5% South Africa (rand) ............ 773 + 17.8% Spain (peseta) .............. 80,190 +29.9% Sweden (krona).............. 4,250 + 18.3% Switzerland (franc)............1,738 +23.0% U.S.S.R. (rouble)*.............. 624 + 12.4% Canada's losses Yield on Changes $1,000 as from of July 31 year ago United States (dollar)........... 812 —5.7% Australia (dollar)............... 715 —4.3% Barbados (dollar).............1,623 —5.5% Chile (peso-official).......... 31,650 —5.7% Cuba (peso) ................... 594 —2.4% Czechoslovakia (crown)* ..... 4,708 —0.1% Egypt (pound) .............. 560 —5.7% Grand Cayman (dollar) ........ 678 —5.3% Japan (yen)................ 194,930 —0.4% Singapore (dollar) ............1,754 —3.3% Taiwan (dollar) ............. 29,460 —4.8% Venezuela (bolivar)........... 3,486 —6.0% * Based on official rate to U.S.S

this, on July 29, MacEachen asked the chartered hanks to reduce their loans to companies that want to convert Canadian dollars into American to finance foreign business take-overs.) Mel Watkins, an economist at the University of Toronto, instead points to the foreign ownership of Canada’s manufacturing sector, while James Solloway, an economist with Argus Research Corp. in New York, says the dollar will remain humble until “the Trudeau government gets its act together and prepares to think in terms of real hardships and austerity.” According to MacEachen, however, Canadians should keep their worries about the dollar “in perspective.” Compared with many other world curren-

cies, the Canadian dollar looks positively healthy (see chart, page 16). It is up 19.8 per cent compared to the British pound, up 30.7 per cent compared with the German deutsche mark and up 38.3 per cent compared to the Italian lira. Chief cause of all the currency realignments has been the high U.S. interest rates. Canada has had to raise its rates accordingly—not as an inflation-controlling device as in the U.S., but to prop up the weak dollar.

Energy: When the latest round of energy talks between Alberta and Ottawa broke up last week another nail was driven into the coffin of quick economic recovery. “Major differences” on energy

pricing and revenue sharing still separate the two governments and the 16month stalemate is considered by some to be largely responsible for the weak dollar and the erosion of confidence in Canada itself. The National Energy Program (NEP), which was unveiled along with MacEachen’s budget last fall and which was devised to bring an increasing share of the oil industry into Canadian hands, is at the crux of the squabble. It has scared off foreign investors and consequently reduced the amounts of money needed for exploration and development. This effectively means that less money is coming into the country and less is going out; the former reduces the buying of the dollar,

the latter increases its selling—two surefire ways of further depressing the Canadian currency. As well, the dollar has also been hobbled by Alberta’s cutback of 120,000 barrels of oil a day (on Sept. 1 it plans to cut back another 60,000 barrels per day) because that increases the amount of imported oil Canada must buy. This not only adds to Canada’s predicted $6 billion annual imported-oil bill, it also means that more dollars are flowing out since few foreign oil suppliers will accept payment in Canadian funds.

The “Canadianization” of the oil industry has also meant that more than $7 billion worth of foreign interests in the Canadian oil industry have been sold; this, in the short term at least, has added to the downward pressure on the dollar since most escaping foreigners want their money in cold, hard American dollars instead of their insipid Canadian equivalent.

There is some optimism that an agreement will be reached before the Oct. 14

recall of Parliament, with revenue sharing, not pricing, the major remaining hurdle. What is clear is that the longer the impasse is left unbridged, the more damage is done to the dollar, the more uncertainty is created in the marketplace. The very hint, for example, that Ottawa and Alberta wçre about to make a deal last week helped the Toronto Stock Exchange to post its best day of the year, its sixth best ever, while the dollar gained half a cent. Though the dollar retreated sharply when the talks ended unresolved, it proved one thing: in the heady world of high finance, wins and losses depend not so much on what is really happening but on what the market thinks is happening.

Labor: If 1981 is shaping up as the year of the picket, the reason is painfully clear to workers and their families across the country: the buying power of their wages has been severely eroded by inflation. And, if the economy continues on its helter-skelter course, it bodes tough times ahead around the bargaining table.

The labor unrest that has clouded the Canadian summer is perhaps less a crisis than an example of a self-doubting nation. Only last week: 23,000 postal workers pushed their strike into a second month before settling at week’s end; 60,500 British Columbia forest and paper workers went on strike; 16,000 went out at Stelco, Canada’s largest steel company; 3,500 coal miners pick-

eted the Cape Breton Development Corp., the first legal coal strike in Nova Scotia in 34 years; and 2,100 CBC technicians continued their lonely patrol for the third month. And the list does not stop there. Other economically critical disputes could flare up this fall resulting in either settlements or stoppages on the railways, on the Great Lakes and in western grain elevators.

Another reason Canada may be strikebound this year. It has been three years since the Anti-Inflation Board closed shop and, given their three-year lifespan, many big industrial contracts are coming up for renegotiation this year. So now, as Peter Warrian, research director for the United Steelworkers of America, puts it; “We’re playing catch-up.” But even that may not be enough. Management consultants Woods Gordon predict that inflation will outpace wage gains in 1981 for the fourth straight year—a fact that explains the trend to more one-year contracts and fills the strike-weary public

with horror at the thought that Canada’s record as top dog in the international strike stakes (see chart, page 19) will be maintained. But while strikes have been hitting the headlines recently, Bill Kelly, a senior assistant deputy minister at the department of labor, says, “I don’t accept that there is chaos in Canada’s industrial relations.”

In chronicling a list of Canada’s economic misdemeanors, things look fairly bleak. All indicators point to a society living beyond its means. In fact, however, Canadians are living on top of their means—standing, walking, playing on top of some of the world’s richest natural resources. Despite a somewhat unkempt economy, Canada can anticipate an annual real GNP growth rate of 3.5 per cent during the next decade, based on its natural wealth: energy, mining, agriculture, forestry and fishing. Disposable income will rise at an annual rate of 2.1 per cent and by 1991, the country is expected to become a $l-trillion economy. With energy using capital investments of more than $300 billion, the federal government will be in a surplus budget position for the first time since the Second World War hooked Canada on deficit spending. As the third-largest mineral producer in the world, minerals net the country $15 billion annually in new wealth. Similarly, the forestry products industry constitutes 17 per cent of Canadian exports: the country exports $12.6 billion annually while importing only $1 billion. Forestry generates more jobs and exports than any other Canadian industry, making the country the largest newsprint producer (33 per cent) in the world. With so much at stake, it’s little wonder that Canadians are asking those who manage the nation for more than just a shrug.

With files from Ian Anderson, David Coates, David Halpin-Byrne, John Hay, Bob Scott and Anthony Whittingham.