Welcome to Financial Insights!
The lofty purpose of this blog is to share ideas about the macro economy, savings, and investments. The idea is to preserve and enhance our wealth in the turbulent times ahead.
In the coming days I will expand on what I mean by ‘turbulent times’. I will post some primers to help everyone understand what I believe are the large forces that will shape the financial landscape for the next decade, namely deflation, debt-deleveraging, secular shifts in consumer attitudes, and demographics.
I will expand on my general thesis in the coming weeks, but here is an abbreviated version:
1) Presently, our economy is too heavily dependent on consumer spending to generate ‘growth’.
2) This ‘growth’ illusion requires an ever-expanding base of debt to continue.
3) The past 50 years, but in particular the past 10 have seen a massive increase in debt at all levels of society, particularly at the consumer level where the average consumer carries over 150% of debt to income, an all time high.
4) Due to our fractional reserve banking system, this debt serves to expand the aggregate money supply as it is generated out of thin air by the banks yet spends the same as minted currency. The expansion of the money supply (inflation by definition) has the side effect of buoying asset and consumer prices in general, and real estate in particular.
5) Real estate has been a massive driver of growth in our economy. Rising home prices have led to a massive boom in home equity lines of credit, which home owners have been all too happy to tap. This is known as the wealth effect, an interesting psychological phenomenon that is well-studied in acadamia and that we will explore at length in the future.
6) Real estate is in a pronounced bubble in Canada. I won’t say much more than that for now, as preserving your wealth in the face of this bursting bubble is the dominant theme of this blog.
7) The bursting of the bubble, which is happening as we speak, combined with a secular shift in consumer attitudes towards debt will exert powewrful deflationary forces in Canada. As debt represents a claim on future earnings and must be repaid with interest, it may be inflationary in the short term but is deflationary in the long term, paradoxically.
And now for some quick predictions which will also be expanded on in the coming weeks:
1) Canada will see a real estate decline of at least 25% peak-to-trough. Vancouver and Toronto condos will see 50% drops. Barring a hyperinflationary event associated with a repudiation of our fiat currency systen (more on that later), real estate prices will not see their high water mark again for a decade.
2) Canada will be back in recession by the third quarter of 2011.
Lots more to come in the coming days and weeks.