Train Wreck Happening

Back in 2008 I posted an article entitled “Train Wreck About to Happen”. I am republishing it here, along with a commentary to bring it up to the present time.

This morning’s news was full of cheer: evidently, unlike everywhere else in the world, Canadians are not experiencing rising price inflation.

You could have fooled me.

Petrol is at $1.26.4 per litre for regular, a new high mark. Two grapefruits yesterday totalled to $8.00, up about 25% from the last trip to the organic food store. If things are getting cheaper or holding their price I’m not seeing it.

Since then, gas (petrol) prices crested at $1.52.4, fell back to the $1.00 range, and again are in the $1.27-1.32 range. Meanwhile food prices are up almost 30%. Official inflation throughout the period? Slim to non-existent.

The numbers the Government puts out are lies from one end to the other.

The radio announcer doing the business news segment on CKNW ended with the comment that “yes, Western Canada is seeing some price increases but the economy’s not doing so well in Ontario — anyway, the Bank of Canada will drop 50 basis points next Tuesday and that’ll fix that”.

Absolute bull, that last bit.

Not about the interest rate cut — I fully expect the Bank of Canada to do the wrong thing and lower rates — but about the “that’ll fix that” sentiment. (As for Western Canada, well, I guess we can just see our prices continue to rocket upward, too much loose credit chasing too few goods of quality.)

This, of course, happened. The net effect after four years of near zero interest rate policy is another 40% on the housing bubble, and Canadians’ personal debt rising to 170% of their incomes.

That is worse that the US was when its bubble burst.

The housing bubble has been snapped in many places … only a few corners of Vancouver and Toronto are still on the speeding up elevator.

Alberta and Sasktachewan at least have economic strength to work with to counterbalance their bubblenomics. BC and Ontario do not.

You take a look at the Okanagan, or Vancouver Island, and you see the future of BC: a population immobilized by their outsized mortgages relative to what they can unload their property for.

This is how the United States slid down its rathole. This is how the United Kingdom slid down its one.

This is why China has separated into two economies — something that could easily lead to internal friction and a split in the country.

Everywhere in the world that you see economies in trouble today, you see price inflation coupled with insolvency.

The last thing you do for either of these is lower interest rates.

So, if lowering interest rates is on the table, the question that comes to mind is “why?”.

The answer is simple: it bails out the financial institutions (which these days are fund managers, brokerage firms and mortgage lenders quite as much as banks).

The trouble is — again, as the United States has shown — lowering rates at best buys a few weeks before the next wave of trouble hits.

Since 2008, China’s situation has reached a danger point, one threatening to shake the Party’s control.

Japan remains stalled and, thanks to the 2011 earthquake, is now in a trade deficit that will persist.

The US economy has not really recovered: new job creation has not kept pace with new labour market entrants, much less clear back into work the numbers thrown out of it. The numbers look “improved” because of people who have fallen off the benefits curve and are no longer counted.

Europe has slid from one crisis to another: next up, Spain.

Make sure you’re clear on that: lowering rates is akin to handing out large bags of drugs to junkies.

I stand by that. Let me add one other point: for the past four years those on fixed incomes have been living on their capital, not the income from their savings (there isn’t much if any of that at 0% returns). Reverse mortgages and other debt instruments are a “new normal”.

Canadians often sneer at Americans for “living beyond their means” but we’ve been up to exactly the same schtick. After all, there’s no way for houses to sell at prices that take 70% of a two income family to make the payment — this a 40 year amortization on the lowest possible down payment — without being “beyond your means”.

In Vancouver they now take 110% of a two income family’s income — in Toronto 105%.

The British used to call installments “the never-never plan”. Well, “never” has arrived — and it wants its due.

The reality is that our pride in governments stopping the deficits and retiring part of our debt has been counterbalanced by corporations taking on massive debt to go private (it’s BCE that bears the $40 billion plus of debt, something that makes that company a very fragile reed indeed), and individuals taking on massive debt which they judge by the costs of servicing, not the amount that’s being racked up.

Of course, since 2008, thanks to “Economic Action Plans”, stimulus spending, “Green Energy Transitions”, bailouts for GM & Chrysler, etc., almost all our governments have gone down the debt hole, too.

Two years of deficits under the Federal Government wiped out all the debt repayment of the eight years preceding.

Ontario looks more and more like it’s gone past the point of no return. Québec probably already has.

Meanwhile governments are throwing numbers around like they’re going out of style — BC’s announced new programmes galore, mostly to “be paid for by other levels of government”; Vancouver’s hiding its property tax increase this year by subsidising it with the savings from last year’s city-initiated civic workers’ job action — and the Feds have emptied the cupboard.

In other words, everyone is now positioned to slide back into deficit spending, jam a crowbar in the citizen’s wallet and savings to get much more money, or both.

Which, of course, has happened. Here in Ontario I pay two surtaxes already on top of my income tax, plus the health tax. Even at that the province is running a deficit which (pro rata) exceeds the Federal deficit. Will taxes go up? You betcha — against wallets already strained by all that inflation that “isn’t there” in the statistics but found every week when you buy food and fuel.

Did I say “savings”?

Damned little of that left in the economy — the national savings rate is so close to zero it would barely fog a mirror, were the savings rate a breath of life.

That, of course, is what it is: future life. Put nothing away, and where does the investment come from for new work, new opportunities?

Oh, yes. I forgot. We seem to think that’s government’s job, too. Of course, they’re short of anywhere to produce it from (and long on promises).

These days our governments aren’t even very good at lying to us about jobs. They are, however, very good at unloading a barrage of opinion at anyone who doubts their numbers.

Meanwhile corporations — who’ve been gifted the lowest rates of corporate tax in my lifetime — sit on their cash.

I won’t go into the ever-rising pile of obstacles to small-business formation.

You put those three things together and it explains how Toronto when I left it in 2000 still felt like a predominantly private sector city and now in 2012 feels very much like a public sector one.

Let’s be very clear. The United States has made its bed.

It is going down to a much lower standard of living. The adjustments there will take years.

On the way they will fight it tooth and nail — they’ll “Japan” their monetary policy all the way down to 0% if they have to (that, over in the land of the Rising Sun, has led to an 18 year [and counting] deflation, where all the government spending in the world — Japan’s debt went from best in the G-7 to worst by quite a bit — couldn’t get the economy moving again), and that still won’t save the US financial sector from insolvency.

Zero is where they went, where they’ve held it. Now they, like Japan, don’t know how to stop. Meanwhile all the same problems remain.

They’ll throw up protectionist move after protectionist move, abrogate the terms of treaties, demand special treatment “or else”, and it still won’t create American jobs.

Eventually they will pull back from the world, unable to afford their military. Even then, the adjustment won’t be over.

We’ve been through some of those recently — the “Buy American” provisions once again in violation of NAFTA, the US Border Service people who, in violation of NAFTA, bar Canadians from entering the US to do business allowed under the treaty (and with all paperwork in order), new rounds on the softwood file waiting in the wings, and Keystone XL, which would move Alberta bitumen to Oklahoma rather than to world markets blocked.

Why on earth would we want to follow them?

Simply because they live next door, we have relatives there, we vacation there?

Wouldn’t we be far better off to deal with our own issues and keep Canada economically healthy?

Keeping us healthy means the Central Canadian manufacturing base needs to change from being a branch plant, continentalist entity to one that produces products for sale globally. It means letting the companies with weak management go under if necessary. It means the ones that are owned by failing companies in the US need to be sold to better leaders here, or die with their parents. This adjustment will be hard, but it is needed.

Our single biggest failing in Canada has been the endless quest to have prosperity on the cheap. From the latest case — Research-in-Motion, denying that its Blackberry product had been surpassed in a key way — to all those who “sell out” for a pile of money, we’ve wanted the trappings of wealth without the work.

Meanwhile our investment community wants the government to fund all the startups, bearing no risk themselves — then take majority common stock positions for “just enough money” to showcase the firm for sale.

It’s disgusting. Getting the governments out of industrial subsidies, tax breaks, research agendas, innovation agendas etc. so that you had to fund things privately for longer terms would, paradoxically, do much to break this cycle.

Out West, we need to start building local companies. There’s more to life than resource extraction.

Alberta — with all its resource bounty — practically gives the stuff away, afraid to tell industry that the royalties are going to earn a decent return on non-renewable resources for Alberta’s citizens.

The Alberta NDP, in the current Alberta election, is the one championing using the royalties to set up a differential scale: you want to export raw resource, with minimal jobs in Alberta, you pay the highest rate. The more work you do to get to finished goods in Alberta, the lower your rate goes. Now make a business decision.

We need more thinking like that, and less of kow-towing.

Local firms and public sector agencies need to buy from other local firms.

This used to be considered routine. It’s how our economy was originally built. It’s what Jane Jacobs wrote about in The Economies of Cities and Cities and the Wealth of Nations.

All of this needs to be supported by a good savings rate, to finance our own growth in the future. (You want a greener Canada? It requires investment. You want an employed Canada? It requires investment. Enough said.)

Lowering interest rates effectively says “saving your money is worthless; go spend it”.

And so we have.

The gas needs to be bled out of the housing market — certain markets (South Coast BC, Golden Horseshoe Ontario, etc.) need to come down.

The way to do that is to raise interest rates, squeezing out the speculators.

Start by holding the line, at least, then gentle increments so that there’s time to adjust.

Or we can go right behind our American neighbours and hit the failure point.

Average resale prices in real estate are down 49% in Los Angeles, for instance. Want to see your million dollar 80-year-old bungalow on Vancouver’s West Side, or your half-a-million postage stamp condo halved in value?

It’s only worth what someone will buy it for — not what the mortgage amount is.

Push the speculation to its limit, when the financial institutions here become insolvent, too, and that’s exactly what will happen.

The one difference for Canada — for we did not do any of these things, other than reduce the maximum amortization from 40 years — is that our banks will not go under. Instead the taxpayers, thanks to the Canada Mortgage and Housing Corporation “insuring” every mortgage presented to it, no matter how ridiculous, get stuck with the bill.

And so do the home”owners”. Mortgages in Canada are recourse loans. These are multi-generational millstones, hanging over the necks of people who may well wish to move to seek opportunity but are unable to do so.

A better way of impoverishing a nation I can’t think of.

So who is talking about this in our Parliaments, federal or provincial? As far as I’m concerned, this is far more important than whether Cadman was bribed, Mulroney made off, ad money moved in and out of riding associations, Bernier suffers from indelicate tongue or Dion is about to be toppled. It’s far more important than whether or not an election may or may not be forced upon us.

The issues indicated from the early spring of 2008, of course, are dead history — tens of new “scandals” have been shouted across the aisle in Parliament.

That’s not to say that some of these might not have mattered, just that no one wants to talk about the state of our nation and the shape of the future it is creating.

Instead, we’ll get a neophyte Governor of the Bank of Canada who’ll probably destroy us all by cutting rates. But boy! Will it make the financiers happy!

Whatever made me think that stability and order in monetary affairs was the point of a central bank? Foolish me.

Sauve qui peut.

To be fair, Governor Mark Carney has been issuing ample warnings — but has yet to change his policy course. So a “D” rather than an “F”, I suppose.

Since writing this, we have moved right to the edge of the cliff. Our leaders, of course, love to talk about how their plans will work, and how well we’re doing relative to the rest of the world.

As for me, the need to expect the explosions is stronger than ever.


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