With the holidays now upon us, this will be the last post likely until December 27th. Let’s take a quick tour through some of the interesting data points from the past couple days:
So much for the conservative Conservatives
Just a few weeks after big Jim and warned of tough budgets to come, it now looks like he’s having second thoughts.
“The Canadian economy, which appeared to be roaring back to life a year ago, has been dragged down by a persistently poor economic performance in the United States, Canada’s most important trading partner. Canada’s economic growth slowed to one per cent in the July-through-September period.”
“We didn’t anticipate around the table that we would have so much difficulty this year…”
Evidently they also don’t see what likely comes next. I would argue we now face the significantly underappreciated headwinds of consumer deleveraging, increased savings (amounting to lower consumer spending….65% of GDP), government austerity either willingly or imposed by an increasingly jittery bond market, and an overextended real estate market all coming to a head at some point in the near future.
“People do want us to move toward a balanced budget, but they do not want us to do that at the expense of jobs and growth and the economy.”
I’ll admit that this puts poor old Jim in an awfully difficult spot. He’s expected to be a magician….pick up the slack in demand while at the same time cut back on spending. It would be great if he could do it, but it’s a bit unrealistic at this point.
“Ottawa must continue with hefty spending “in order to continue to foster some economic growth,” Flaherty explained.”
I’m not sure about the rationale behind this line of thinking. I understand that under normal circumstances the government could sustain economic growth via public spending until the consumer and private sector picked up the slack. But how is that going to work with consumer debt levels at all-time highs and bond markets beginning to price in sovereign debt risk? If consumers were sitting on stronger balance sheets, it would be the prudent thing to do. But as it stands, what’s the end game here? Consumers deleverage while the government borrows to sustain the growth illusion, then the government does the same via rising taxes and lower services while struggling with higher borrowing costs? See the problem? At this point I don’t see how we’ll have significant economic growth over the next few years. I think 3% is a pipe dream, but we’ll see.
CMHC under the media magnifying glass
Consumer debt levels have been in the news quite a bit lately. I think it took everyone by surprise when our household debt to disposable income passed that of those crazy Yanks who we used to think were the irresponsible ones. It’s no wonder then that people are starting to connect some dots:
It’s a good article. By ‘answer to’, the article really means ‘culprit for’.
“The reason consumers are borrowing so much is that the government has been encouraging them, just as it’s also been encouraging the banks to lend. It’s called CMHC insurance and the way it works is that Ottawa guarantees virtually all of the risky home loans made by the banks.”
“That’s a good thing but it also provides a key benefit to the lenders since it removes risk of default.”
Can I once again remind my readers that our banks are private, profit-seeking businesses. Why does the government (taxpayers) guarantee them profits while eliminating certain risks? The whole concept of CMHC is ridiculous. We have no need for it in Canada. Those who would say that CMHC helps homebuyers afford a home don’t understand their role in massively inflating the housing market as it is. I would argue that first time home buyers and low income families would have a much easier time entering the housing market despite higher interest rates by the big banks as home prices would sit at a much lower level.
“Thanks to the government guarantee, Canadian lenders were able to securitize billions of dollars of mortgages and swap them for cash. In connection with the crisis, Ottawa vastly expanded the program, allowing the banks to insure and sell more than $100-billion of home loans.
But as financial markets returned to normal the level, government support declined only slightly. For the first time the amount of outstanding mortgage-backed securities passed the $300-billion mark earlier this year, more than double the amount at the start of 2007. 2010 issuance is expected to reach $100-billion, the third highest level in history.
The banks love it because it’s risk free business, and investors love it for the same reason. The problem is that it’s encouraging banks to lend at a time when they need to put their foot on the brake.”
“There’s no motivation for the banks to tighten up on lending – since they know that by the time the stuff hits the fan, much of their risk will be off the table”
…and squarely on the shoulder of the Canadian tax payer. A situation that must be corrected!
China’s economy will blow your mind
An interesting piece by the Business Insider (linked through the Financial Post):
I’ll just highlight a couple. Remember that the China growth story revolves around the massive Chinese ‘middle class’ and their future role as global consumers. Once again I’ll state that I think the Chinese growth story is THE story of the coming several decades, but I do think there are serious structural issues that need to be corrected in the interim. To wit:
And on a perhaps related note, the Baltic Dry Index continues its plunge towards its 2010 lows. It may well end the year at new lows.
While most economists are calling for sustained commodity prices through 2011, I take a more cautious tone. Falling BDI signalling declining commodity demand coupled with ongoing attempts by the PBoC to quell Chinese inflation, and ongoing debt issues in Europe which could result in a capital flight to the USD are all provide possible headwinds against the commodity complex in 2011.
Though I don’t have the time to dismantle the economic theory contained in this final article, I’ll post it anyways and see if one of my astute readers wants to have a go at poking holes through the main premise:
So, is increasing home ownership rates actually the way to a stronger, more robust economy? Is the answer to the US economic woes simply to get people back into housing again? I know…..big questions. If someone has the time or inclination to tackle this over the holidays, feel free to post in the comment section.
Enjoy the holidays! See you on the 27th!