Train Wreck About to Happen

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.

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 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.

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

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”.

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. (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.)

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).

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. 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.

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.

Out West, we need to start building local companies. There’s more to life than resource extraction. Local firms and public sector agencies need to buy from other local firms.

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”.

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.

So who is talking about this? 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.

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.

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One response to “Train Wreck About to Happen

  1. Pingback: Interest Rates » Train Wreck About to Happen

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