Five Lumps of Coal for Canada's Economy

The recent IMF Report on Canada prompts me to remind everyone of some startling figures about the Canadian economy: 


1) The private and federal debt combined ratio to GDP is an astonishing 203%. 
2) The jobless rate in November is 7.4%, the worst in 5 months. 
3) Youth unemployment is 14% and even worse in Europe and the U.S. Expect much social unrest in 2012 -  which may coalesce around the occupy movement. 
4) Household debt to income ratio is a staggering 152%.The average Canadian household is $26,000 in debt over and above any mortgage debt.
 5) Real wage gains continue to stagnate in November: 2.4% while inflation is 2.9, a -.5 net loss in real income.


 As I and others - even a few neoclassical economists - have argued many times (see my other posts here), we need stimulus of some sort now, and both the IMF and Mark Carney are in agreement about both that and the problem of household debt. Such recognition by both the IMF and Carney is unusual since die-hard neoclassical economists tend to overlook household or private debt in their macroeconomic modelling. I'm beginning to think Carney may be the check we need against Flaherty and his misguided policies.


Where's Flaherty? It would seem all he can do is tinker with his beloved financial sector - banks and CHMC most recently. Does he even understand the real economy? Does he think it's only exports concentrated in oil and other natural resources? He might since that's the only sector apparently driving the economy, and that in itself is extremely worrisome.

Note:Thanks to the Supreme Court for rendering the right decision on the Federal Securities plan. SCOC rejects Ottawa's bid to create securities regulator

Unemployed people can't pay taxes, and they certainly curtail their spending

Like the good neoclassical economist he is, President Harper said on Friday that he and his bulldog want to indulge their pathological addiction to austerity and tackle that mean old junk yard federal budget when, in fact, we know that they should really be focusing on the job creation strategies we so desperately need. My last  few posts have painted a very bleak picture of the Canadian economy, and further austerity measures or implementing the ones in the works are only going to make things worse, draging out the recession/depression even longer.

There is only one reason to concentrate on reducing government debt at the expense of other economic inititatives, and that is to satisfy "markets" - that is,  to create investor confidence.  But we should always remember that the financial sector contributes next to nothing directly to real GDP.  And austerity in the cause of debt reduction does nothing directly for the real, industrial economy. In fact, it creates only more hardship for real people and the economy by, among other effects, increasing the number of people unemployed and by reducing correlated spending and tax revenue. Unemployed people can't pay taxes, and they certainly curtail their spending.

We need reasonable economic growth through job creation, through some kind of economic stimulus, infrastructure projects or otherwise, for without reasonable growth government revenues suffer, and that gap, in turn, increases the pressure for more austerity measures because the money simply isn't there.  It's a an economic whirlpool difficult to escape. But jobs fuel the economy because employed people spend money, and both they and the business which are recipients of their spending, who also spend as businesses,  pay taxes and thus increase government revenues, part of which can be used for paying down debt at at reasonable pace while maintaining government programs that service Canadians in general.

Not much chance of this kind of thinking in Harperland  given what's emerged for many as a disturbing psychoanalytic reading of Harper the man, whose resentful - sometime vengeful - personality is fully reflected, as Dan Gardner suggests,  in the way both parliament and the government in general are run. This is a regime in which, as someone suggested the other day, lying is not a moral issue but a political tactic and empirical evidence ("stastistics") is irrelevant.  We cannot expect truth from such a regime let alone a wise economic policy, the irony being of course that the Harperites presumably won their beloved majority on the basis of promising sound economic management. Hello! Read my last three or four posts.

The zombie-banker lives and roams the earth

Another follow-up;

Craig Alexander, TD's chief economist - it pains me to reference a classic neoclassical bank economist - noted on Lang and O'Leary last night that Canada's debt to income ratio is high less because of increasing debt and more because real wages are falling.  So the deleveraging I mentioned a few posts back continues slowly, mitigating spending, and slipping wages continues, also mitigating spending. It looks like stagnation or deflation on the horizon, but in either case Canadians are still just swirling around in an economic whirlpool in which they could be sucked down at any moment.

With shrinking wages, it might be tempting to take on more debt to maintain one's household, and of course today's low interest rates are designed both to encourage borrowing - this is how bankers make money after all - and to allow banks themselves to be speculative in their own money-making investments with less risk. Beware. As Max Keiser says, the zombie-banker lives and roams the earth and might be the process of destroying the EU, for it is bankers, not even neo-liberal politicians, in charge, almost all of whom have ties to the vampire squid.

We're in an economic whirlpool with no immediately conceivable way out

An addendum to yesterday's post with some additional observations referenced from Tavia Grant's report in The Globe and Mail today.

I suggested yesterday that we're in an economic whirlpool with no immediately conceivable way out, and Tavia suggests implicitly that what could suck us down to the bottom of that  pool is a significant jump in unemployment, falling house prices, rising interest rates or any combination of these - all of which I've mentioned as worrisome possibilities before in earlier posts, but which now take on a truly alarmist meaning.  Mark Carney also points out  that one in ten Canadians is in a vulnerable financial position, meaning that the cost of servicing debt consumes more than 40 per cent of his or her income.

Add to these observations everything I sadly offered yesterday, falling real wages, the lack of jobs and job creating initiatives, slipping stock prices, the absence of pensions in the case of many Canadians and, of those with them, a drop in their value because of eroding assets and we have ourselves an overwhelmingly serious economic crisis.

Why is it up to Mark Carney to tell it as it is? Where are President Harper and his bulldog, who, with the financial sector, are jointly responsible for this horrendous state of economic affairs? Would some courageous journalist please call them on this.

Note: Other stats from Stats Can that can be correlated with the above observations: The Daily, Tuesday, December 13, 2011. National balance sheet accounts 

1) Canadian household net worth declined 2.1% to $22.6 trillion, the second straight quarterly decline - probably because investment and pension assets declined.

2) Per capita household net worth dropped to $180,000 from$184,700 in the previous quarter.

3) Credit market debt  to assets reached a record high 20.1%.

4) Debt to net worth rose to a record high 25.2%

Neither Deleveraging nor Further Leveraging of Household Debt Works

Canadian household debt hits record high  Carney calls on businesses to step up - The Globe and Mail  

National balance sheet accounts 

Okay, so Stats Can tells us today that Canadian household debt has reached a record high 152.98%, a level relative to income that surpasses that of the U.S. and Britain and 13% higher than before the -so-called recession. But President Harper and his bulldog Flaherty continue to spin the "but we're better off" sop. At least Mark Carney is forthright in saying exactly what the problem is, as he did at the Economic Club of Toronto recently: Canadians must reduce their "debt-fuelled" spending while Canadian businesses step up to the plate and begin some serious investing.  He also recognizes that whatever capital is coming from abroad is being used to to push household spending, not investment in Canada's real, industrial economy. In other words, he recognizes that the financial sector is the source of all our woe even if he is reluctant to use language that aims at the sector directly.

Given the state of the world economy and a slowing Canadian economy, how likely is business to step up?  And given the new Stats Can revelations, it would seem that the deleveraging of household debt about which we learned a week or so back is not going to be a continuous process but one with ups and downs. This phenonmeon is no surprise really, for, as I've suggested before, the deleveraging process will take many years with all sorts of minor and medium crises along the way. To balance the absence of spending as deleveraging continues, however erratically, business investment, exports, government spending - some combination - has to step up with 7 % of GDP.  As I've suggested, business seems reluctant to invest, and President Harper and his bulldog worship at the altar of austerity. That leaves exports in a slowing world economy.  

So either way, deleveraging or increasing debt is a problem:  the former takes considerable spending out the economy, a potential vacuum that business investors seem unwilling to fill, and the latter pushes households to an unsustainable debt to income ratio. Nice mess into which the financial sector, Flaherty, and all the neoclassical economic advisors to government have brought us.

A Simple Solution for the Deficit that Might Please Both Progressives and Neo-classical Economists

Given the record profits of and incentives paid out in Cdn banks recently, there is no credible argument that says they can't afford a financial service transaction tax, and, as we know, it is the financial sector that is largely responsible for the economic mess in which we find ourselves.  It seems only fitting, then, that the revenue from this tax be used to pay down the almighty deficit about which neoclassical economists dream frettfully every night. This is a simple, easily doable solution, but one, alas, never mentioned in a Canadian context in public economic discourse for fear of upsetting our sacrosanct banks, who will claim, yeah, okay, we'll absorb your tax but you can count on us to pass it on to investors. 


Of course paying down this debt would do nothing directly for ordinary households which are leveraged at a 150% ratio to income and approximately $26,000 in debt over and above mortgage obligations.  But it will allow those poor neoclassical economists to get some sleep at night.

Well-educated Cardiologists Don't Know Everything about the Occupy Movement

Had a debate with a well-educated cardiologist this morning who said the occupy movement is missing a political opportunity because it doesn't have a single focused message.  How many times have I heard that, and how many times have I answered that the occupy movement is not a conventional protest movement.  It's sloppy democracy in motion -  slow, jagged, uneven, a little bit here, a little bit there a month later, a tiny bit a week later, everybody talking to everybody about everything. So I argued once again that it has many messages and that he just isn't hearing those messages because of his liberal expectations of a conventional demand protest. As Naomi Klein has said, this isn't a negotiation. If he listens hard, however, this is what he might hear: it's okay to utter the word capitalism in public, and it's okay to say it's irrational and dysfunctional.  It's okay to say we need to change the economic-political system, which is undermining real democracy.  It's okay to say there's an appalling income disparity in the U.S. and Canada and that clearly the financial sector is largely responsible.  It is at "heart," I tried to tell him,  a fundamental recognition of the weaknesses of neoclassical economic theory and the ideology of neoliberalism driving governments that support it. It's simple, my dear cardiologist:  the reality of the unjustly disadvantaged  99% resonates with people. Democratic discourse and political awareness:  we have not been able to say such things for forty years. 

In the meantime, some U.S. groups are occupying a different kind of political space, pumping up the discourse by confronting the current U.S. system head on.  Check out these two videos.

Hundreds 'occupy' US Congressional offices 

Labor Activists "Occupy Congress"

slipping down the pot-holed road of recession towards the sink hole of depression

Paul Krugman remarks below could easily apply to Canada, for it is essentially homeowners with their massively extended debt load who have bumped our debt to GDP ratio up to 203%, and we too require expansionary fiscal and monetary policies to support the Canadian economy.  We won't be getting them from Flaherty or Carney, of course, the latter linked, after all, to the vampire squib in NYC and the former a devotee of pathological austerity.  I fear all three jurisdictions slowly but inevitably slipping down the pot-holed  road  of recession towards the sink hole of  depression.

 "The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries [in the EU] to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.

... In America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives." 

Killing the Euro - NYTimes.com

Elsewhere, Krugman says that "Europe’s march toward a common currency was, from the beginning, a dubious project on any objective economic analysis" - one doomed to failure.  As I've suggested more than once, the process will be slow, but potentially this could happen over that dragged out process:  If Europe goes, the U.S. goes, and if the U.S.  goes, Canada goes.

 Boring, Cruel Euro Romantics - NYTimes.com

Jobs Waning, Debt Mounting, Wages Slipping: A Bleak Outlook

Here are some followup comments that supplement my last post.


The emerging picture of the Canadian economy is bleak.  Inscribed as every government in the Western world is in neoclassical economic policy that shapes the global economy, the blame can be easily spread around, but our own government could be combatting the situation meaningfully with different policies instead of just going along with mainstream economic theory that privileges the financial sector over the real economy and austerity over job creation in the mistaken belief that that sector drives the industrial economy.


First some  relevant remarks from Jim Stanford's post about recent GDP numbers that reveal how bad things really are:


"Exports account for 134% of the expansion in GDP. If it weren’t for the sharp rise in exports in the third quarter, real GDP would have declined.


Energy exports accounted for 60% of that growth in exports in the third quarter.The energy industry alone directly accounted for 26% of the increase in real GDP at factor cost by industry between June and September. Considering that this sector employs about 1% of working Canadians, that is a stunning dependence on one sector.


Consumers and governments have pretty much hit the wall, as far as new spending. Consumer spending and government consumption barely grew at all in real terms. Government investment spending (all that infrastructure money) is now falling at a 5% annual rate, putting a big hole in the demand side of the economy.


Another weak spot was business investment spending, which also declined at a 4% annual rate in the third quarter — even with the enormous spending on tar sands projects (not to mention the “stimulative” impact of Harper’s corporate tax cuts).


In fact, business non-residential capital spending is the only sector of Canada’s domestic spending that is still well below its level in the third quarter of 2008 (as the recession hit). 


All other domestic spending categories (consumer spending, government investment and consumption, and residential investment) long ago regained and surpassed their pre-recession peaks. Government investment spending is 32% higher than that peak (although it is now being clawed back by austerity-minded politicians)."


The Progressive Economics Forum » Canada’s Petro-Recovery 


Here's another set of revealing stats from George Athanassakos - The Globe and Mail


Total Canadian government debt combined with total Canadian household debt is 203% to GDP. Greece is 195%. Just luck, not good economic management, is the main reason we're surviving economically. But if natural commodity exports begin to shrink - and they will as both China's and India's economies slow down - and the housing market begins to slacken off - which it will in an economy clearly slowing down - we're in more trouble than we already are.


In today's Globe and Mail,  Tavia Grant reports the the Canadian economy unexpectedly shed 18,600 jobs last month, the third drop in four months, and the first back-to-back drop since the so-called recession - so-called because we're really still in it, as we can see from the small and medium crises I noted in the previous post that continue to occur. That's roughly 72,400 jobs lost in the third quarter with one more month to go.


And to fill in this disturbing picture even more, Tavia Grant reported yesterday in The Globe that the average weekly earnings for an employed Canadian fell 0.3% in September to $872.75.  Of course annual wages are growing at only one-third of inflation, meaning real wages are slipping, as they have been for quite some time - some would argue over decades. Canada also has, according to the U.K.-based Resolution Foundation, the weakest median wage growth of all OCED countries since the so-called recession.


The bottom line: with such weak wages and so many jobs pooling in low-paying and part-time work, both the resulting reduction in spending in particular and debt servicing will unquestionably slow the economy down. Add to this situation government austerity programs and a lack of government spending and job creation initiatives and we have a recipe for a long drawn out recession - maybe even, as Steve Keen suggests, a depression.


How can either Harper or Flaherty look any us in the eye with such an appalling Canadian economic performance?