Canada's Housing Bubble

Sep 30, 2010 Mike Brock Permalink

Bank of Canada governor, Mark Carney is at it again. This time, with even stronger rhetoric than before.

He is warning consumers to stop taking on more consumer debt.

Instead, Carney should look himself in the mirror and tell himself to tighten the spigot on the Niagara Falls of cheap money, that is the policy he's continuing.

Continuing to allow near-zero interest rates to persist, is akin to giving away unlimited free food, indefinitely, and telling people to stop getting fat. People can't even manage to not get fat when the food costs them money. Let alone when it's free.

Human beings are notoriously short-term thinkers. In fact, very few people are generally any good at making good, long-term decisions unless necessity pins them down with a knee to the neck.

When rate policy and government stimulus is used to "kick-start" the economy, what's really happening is that the market is being encouraged to borrow and spend. Government runs deficits, and the central banks debase the currency to provide more credit to businesses and consumers.

The fact that people like Mark Carney, who worship at the alter of inflationary monetary policy, are surprised that loose money policy leads to high consumer debt is astounding. It doesn't require much theory or study to understand that human beings, while rational actors, do not reason on a macro or long-term basis. Any economic policy that expects them to do so -- like current policy -- in the face of heavy incentives towards extremely short-term, indulgent behaviour is doomed.

The reason, and the only reason, that the Western world is buried under a mountain of debt is for the exact policies which Mark Carney and his foreign counterparts continue to pursue.

While economists throw around their graphs, equations and theories on exactly how much to inflate a currency, and when to stop, the aggregate fiscal position of the entire Western world has been in free fall for over 30 years. Save for a brief reprieve to a return to surplus cashflow for some governments, for a brief period of time -- and hardly for sufficient in time or quantity to account for previous and future shortfalls. The parabolic graph of aggregate Debt-vs-GDP for the past 30 years speaks for itself.

As the world was brought to it's knees in late 2008 in a wave of bad debt, the solution to the problem by Carney and his ilk has simply been: more debt, in greater quantities, at higher velocities.

What's that they say about the definition of insanity?

The deterioration of the balance sheets of consumers in that time period speaks for itself. Consumer bankruptcies in great numbers are on the horizon. You know that Mr. Carney, and you think waving your finger while sitting on top of your digital printing press is going to save you from your real legacy?