Tuesday, December 20, 2011

Do you hear what I hear?

It's Christmas time in the city and the scarcity of posts from your dutiful scribe is a direct consequence of imbibing in the holiday spirit prevalent at this time of the year.

There's a lot going on and time simply doesn't permit delving into all the topics I would like to cover.

But I would be remiss if I didn't take a moment to reference an incredible speech given recently by Mark Carney, Governor of the Bank of Canada.

As the Globe and Mail noted, "Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time."

Carney says that he believes that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaims, “is now decisively over.”

For many faithful readers, this is not news. However hearing such candor from the likes of Carney is... and it gives you a glimpse of the seriousness and gravity of the situation we are in.

As this blog says ad nauseum, the 2008 Financial Crisis was a severe financial earthquake whose depth and breadth we still do not fully appreciate.

Now... three years later, it is only becoming apparent.

Debt, particularly Sovereign Debt, is the issue of the coming decade.

Carney talks about the “debt super cycle” which occurred all around the world. It's that debt which fuelled consumer spending, not productive investments.

Excessive private debt wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, means the overall debt burden was less sustainable.

Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin.

The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

When countries do what Western ones have done and borrow abroad to fund internal consumption, their situations become unsustainable.

Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.
“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging. We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”
I would suggest that Carney has identified exactly what has been happening for the past five years.

When the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially suppressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf. In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

This isn't to excuse Carney's role in all of this, as the blogosphere constantly points out.

But the fact the at the Governor of the Bank of Canada is now completely dispensing with the malarkey about how splendidly Canada has done during the recession - on a regular basis - is a significant development.

Regrettably the average Canadian isn't hearing him.


Email: village_whisperer@live.ca
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  1. And for Vancouver don't forget all the HAM coming in to upset our R/E market over the last few years. Also, mass immigration in general has pushed up R/E prices to some degree.

  2. Canadian constitutional lawyer, Rocco Galati, on behalf of Canadians William Krehm, and Ann Emmett, and COMER (Committee for Monetary and Economic Reform) on December 12th, 2011 filed an action in Federal Court, to restore the use of the Bank of Canada to its original purpose, by exercising its public statutory duty and responsibility. That purpose includes making interest free loans to municipal/provincial/federal governments for “human capital” expenditures (education, health, other social services) and /or infrastructure expenditures.

    Statement of Claim filed in Federal Court against Bank of Canada et al.


  3. I detest the fact that we have alumni from the "Vampire Squid" as the Governor of the Bank of Canada. It was Carney's responsibility to see this coming and put forward a warning, instead he said nothing back in 2008. GS is the problem!

  4. http://sovcom.net/2011/12/20/statement-of-claim-filed-in-federal-court-against-bank-of-canada-et-al/