Monday, October 19, 2009

Never mind a collapse of the US Dollar, might we see a collapse of the Canadian Dollar?

Sitting outdoors at the sidewalk café in the wee hours of the morning its clear the seasons have changed from summer to autumn.

A late night fog descends in parts of the Village on the Edge of the Rainforest and one coffee compatriot scuttles away to procure a winter jacket. The dampness in the air has returned and it chills to the bone.

But more chilling than the night air is the realization that our nation could be setting itself up for a fall of epic proportions.

As we all know the real estate market continues to boom upward fueled by historic low interest rates. And it’s not just in BC.

Check out this graph from Jonathan Tonge over at It shows the total outstanding mortgage credit in Canada from 1980- April of 2009.

Debt, in Canada, has exploded. (Click on image to enlarge).

Next up is this chart showing outstanding residential mortgage debt as a percentage of salaries and wages. An ugly picture, indeed. (Click on image to enlarge).

It's not hard to see that if we don’t get a dramatic recovery in the economy, Canada is going to be in deep trouble.

And while we are told things are turning around and that we are on the cusp of recovery, the fact of the matter is that if you consider all of the structural problems in the U.S. economy, the root causes of what created the near debilitating financial and economic crisis still remain:

  • US Banks are still saddled with toxic assets,
  • US Housing prices are still 30% lower,
  • Foreclosures are still hitting new record levels,
  • Both US and Canadian budget deficits have ballooned,
  • And debt levels around the world have climbed.

As we have already said, this is a recipe for climbing interest rates.

Rates remain low for now because of evaporated consumer wealth, tight credit, and high unemployment… factors which have made deflation the immediate problem.

The government response: zero interest rates and "printing money"; central bank tools that are at work to prevent a deflationary spiral and to curb the housing implosion with low interest rates.

But as these policies threaten the US Dollar’s status as the world’s reserve currency and spark concern that it could result in a US dollar collapse, many Canadians look at events as solely an American problem.

One blog dog recently suggested, "Well, if the USD loses its reserve currency status and goes into free-fall we can only hope that the Canadian dollar decouples from it. Maybe we'll be saved somewhat by being a resource-based economy."

Would we?

Look at the size of Canada’s exploding household debt.

Is the stage being set, not only for a massive real estate collapse, but for a massive Canadian dollar collapse as well?

In past posts we have talked about the catastrophic impact spiking interest rates could have on real estate values. Rates comparable to the mid 1970’s will drive real estate values down by 50% or more.

Worse, such a collapse would trigger defaults and foreclosures comparable to what is happening in the United States right now.

Who will be on the hook for this?

As we have already discussed, CMHC currently guarantees more than $600 Billion dollars in real estate mortgages. And CMHC is the Canadian Federal Government.

If the Bond market forces interest rates significantly higher - and CMHC has to cover American style defaults and foreclosures – our current, record setting $50 Billion dollar deficit will seem like a cakewalk to the amount the feds will be on the hook for.

If that were to happen, international confidence in Canada would evaporate overnight. And the Loonie would collapse even faster than the greenback.


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1 comment:

  1. Hi,
    I would be optimistic about that.
    I read somewhere that the central bank's perspective for Canadian economy is rosier than its view on the U.S. as we know. The statistics are quite clear. It expects to expand 1.8 per cent next year, and Europe, at a meagre 0.9 per cent.