Recession

SYNDICATED COLUMN: George H.W. Bush Hagiography is the Elites’ Finest Accomplishment

Published by Anonymous (not verified) on Tue, 04/12/2018 - 9:58am in

Image result for highway of death

Even by the recent can’t-believe-your-eyes-and-ears standards of American elitist hagiography this week’s over-the-top-of-the-top praise of George H.W. Bush was astonishing.

What separated Bush41apalooza from such previous pseudo-griefathons as those for Ronald Reagan and John McCain was that there was so little to work with. Not that it stopped the media.

I knew this was an insane historical benchmark when a major network interrupted its coverage of the G-20 summit with the BREAKING NEWS that George W. Bush had issued a statement about his dead dad: “George H.W. Bush was a man of the highest character and the best dad a son or daughter could ask for.” Stop the presses!

When a right-wing Republican like Bush dies you can count on a Democrat to deliver his most fulsome praise. “America has lost a patriot and humble servant,” said Barack and Michelle Obama. “While our hearts are heavy today, they are also filled with gratitude…George H.W. Bush’s life is a testament to the notion that public service is a noble, joyous calling. And he did tremendous good along the journey.”

Trump lies constantly but it took the death of Bush 41 for American “leaders” and their media mouthpieces to fully commit to speaking an English language whose words have no meaning whatsoever. In this dystopia I’d call Orwellian save for the fact that old George’s prophecy didn’t anticipate its hilarious absurdity, a man who ran for president three times qualifies as “humble.” A commander-in-chief who ordered the massacre of tens of thousands of innocent people in one of the most gruesome war crimes ever recorded—the “Highway of Death” following the ceasefire that ended the Gulf War—is described as having great character—yet no one upchucks all over the camera lens as if it were a Japanese prime minister.

A steward of the economy who refused to stimulate a tide or raise any boats in the middle of a brutal six-year-long recession can be called many things but not—before the Obamas—“joyous.” Preppy, I’ll give you. Joyous, no.

John Sununu, Bush’s chief of staff, explained in 1991, that doing “tremendous good” was actually contrary to Bush’s governing philosophy: “The President feels very strongly that the free-market system operates best when it does not have its hands tied by government, is not shackled by a system that erroneously thinks it can improve it by command and control.” Bush chimed in: “I do not want to see the government pick winners and losers.” Except his government did create losers: his refusal to fund AIDS research killed tens of thousands of gay men.

I’m in favor of behavioral change,” Bush said to justify his policy, a brazen sop to the Christian Right. “Here’s a disease where you can control its spread by your own personal behavior.” Memo to gays: don’t have sex. So “joyous.” So much “tremendous good.” Guess we’ll never get that apology now.

Fawning over dead presidents and the occasional dead presidential candidate is always repugnant considering they’re such a callous and bloodthirsty lot of greed-dogs. But Bush 41—his death dance is different.

Like him or not, Reagan was a consequential person with undeniable political acumen. Even under Democrats Clinton and Obama we have continued to accept the Gipper’s redefinition of the social contract from a culture of looking out for one another to every man for himself. His easy aw-shucks vocal delivery made the most liberal voters sleep through eight years of budgetary, tax and military mayhem—no easy feat.

Likewise John McCain was a deeply—mostly—flawed man who nonetheless had enough of an engaging story, his experience as a POW in Vietnam, for the hagiographers to blow up into a fairly credible heroism narrative, overcoming the uncomfortable fact that the war he volunteered to kill in is understood to have been immoral and illegal.

Bush, on the other hand, has always been a former president universally understood to be a do-nothing failure. Screwed up the economy, set the stage for his son’s Iraq War, refused to turn post-Cold War Russia into a friend and ally, preferring to watch the former USSR plunge into chaos and mass starvation so his big banker backers could swarm in and loot state-owned enterprises. You could call him the Republican Jimmy Carter but Bush—unlike Carter—was never rehabilitated by history or the electorate. Whereas Carter (actually humbly) dedicated himself to Habitat for Humanity during his long post-presidency and so earned respect, Bush 41 just—what? Showed up for presidential reunion photo-ops? He just nothinged. Even Republicans didn’t much care for him.

Were you surprised that Bush died because you didn’t know he was still alive?

There was once a time when, when presidents died, you imagined that at least some of the network news talking heads believed some of what they read to you, that some of the mawkish tributes were heartfelt. No more.

The fakery is so phony they don’t even bother to hide it anymore.

Like Winston Smith at the conclusion of “1984,” the bullet in the back of the rotting head of BS American democracy comes almost as a release.

(Ted Rall (Twitter: @tedrall), the political cartoonist, columnist and graphic novelist, is the author of “Francis: The People’s Pope.” You can support Ted’s hard-hitting political cartoons and columns and see his work first by sponsoring his work on Patreon.)

 

 

Trailer for Mike Leigh’s ‘Peterloo’

The left-wing British film director, Mike Leigh, has a film coming out about the ‘Peterloo Massacre’ in 1819 when a defenceless crowd that had gathered in Manchester to hear the radical politician, Henry ‘Orator’ Hunt, was charged by cavalry.

It was a period of severe economic recession, unemployment, political discontent and stifling censorship of freedom of speech, protest and the press. This passage from The History of the World: The Last 500 Hundred Years, General Editor Esmond Wright (Feltham: Hamlyn 1984) describes the conditions at the time.

At the end of the war England entered upon a long depression which brought to many even greater hardship than the war had done. Industries lay depressed with the sudden cessation of wartime demand, agriculture no longer enjoyed the protection that Napoleon’s blockade had brought and began to contract, while European countries, impoverished after years of conquest and exploitation, could not afford to resume their former level of trade. It was, in fact, twenty years after 1815 before British exports recovered to their previous level. Added to the existing problems of unemployment and low wages were some half a million demobilized soldiers and sailors, suddenly thrown onto a labour market that could not absorb them. The years from 1815 to 1820 were mong the darkest in English history when many feared, with some cause, a repetition of the events which had torn France apart in 1789.

Radicalism – an extreme form of politics which advocated fundamental reform of the constitutional and financial system – grew to brief importance under such popular leaders as Cobbett and Hunt. In their hatred of industrialization they preached a naïve ‘back-to-the-land’ philosophy which seemed attractive to populations of former peasants exposed to the insecurities of town life. Significantly, the cause of the Peterloo Massacre in Manchester in 1819, when a defenceless crowd was charged by squadrons of cavalry, was a speech by Hunt, not on the problem of wages or unemployment, but on the subject of land reform.

Most labour movements in the first half of the century had this strong agrarian background. A majority of the new town dwellers were peasants by origin, unaccustomed to the regularity of factory work and the overcrowded life in slums and tenements. They turned instinctively to solutions that offered simpler, better understood relationship in which men seemed to be something more than mere instruments of production. Working people gave their support to Radicalism, not because they understood or even cared very much about abstract democratic principles but because it represented a protest against the unacceptable conditions of life. To its few middle- and upper-class supporters it was much more – a progressive, democratic demand for a government responsible to the popular will and an administrative system based on efficiency rather than privilege.

To such suggestions the governments of the fay responded with severe repression. The Tory party remained in office from the end of the war until 1830, first under Lord Liverpool, later under the wartime hero, the Duke of Wellington. Their belief was that the British constitution was perfect and that any attempt to disturb it must be put down firmly. Trade unions were illegal until 1824 and even after that striking was still a criminal offence, public meetings and meeting-places required to be licensed and newspapers were subject to a crippling stamp duty of five pence a copy. Together with such measures went a crude system which paid a meagre dole to labourers whose earning were inadequate to support their families (the Speenhamland system of poor relief) and which had the effect of impoverishing whole areas of the country. (p. 396).

This sounds very much like the kind of Britain Tweezer, Bojo, Rees-Mogg and their followers would like to return to us to. A country where unions and strikes are banned, restrictions on public meetings and censorship of the press. Except when it supports the Tories, of course. Blair and Cameron both tried to bring in legislation limiting demonstrations. They’ve been banned within a certain area of parliament, and Cameron wanted to pass legislation outlawing public protests if they caused a nuisance to local residents. Which is a convenient way of suppressing public expressions of dissent while claiming that you aren’t intending to do any such thing. ‘The government is fully behind freedom of speech and assembly, but this will be an intolerable nuisance to the people actually in the area’, is how the argument would run. And they’d also like to see more people slaving away in cruel and exploitative conditions in poverty, with a benefits system totally unable to cope.

Which is what makes Leigh’s movie of such contemporary significance. Here’s the trailer.

I caught a few moments of Leigh being interviewed on the Beeb the week before last. He was talking about how the incident was an important event in Manchester’s history. Walking around the historic part of Manchester, he pointed out buildings that had been there at the time and which had been included in the film.

Leigh’s known for his improvisational approach to film making, but the interviewer said that this movie felt more scripted, and Leigh agreed. I can’t say I’m a fan of Leigh’s work – it’s a bit too grim for my tastes – but this is something I’d like to see. The Peterloo Massacre is nearly 200 years ago, but it still has resonance and immense importance to the early 21st century Britain of Tweezer and the Tories.

The budget, the fragile recovery and the next recession

Published by Anonymous (not verified) on Mon, 22/10/2018 - 3:00am in


I'm not a forecaster. I do macro, and worked for Wynne Godley at the Levy, but I feel that there are too many dangers in forecasting. Wynne was also, btw, more concerned with what he called medium term scenarios, than pinpointing when a recession would take place. The obvious joke applies here. Economists have predicted 10 of the last 9 recessions. Having said that let me do the exact opposite and throw caution to the wind.

So I'm going out on a limb here. Everybody thinks the recession is around the corner. I'm more skeptical. Let me start by looking at what Martin Wolf has said in his last column, since he seems to be close to what consensus views would argue. He resuscitates old views about confidence cycles. For him: "Bull markets, it is said, climb a wall of worry... so much optimism was already in the prices of financial assets — in the US, above all — that once worry returned they had nowhere to go but down." He suggests that a "jump in risk aversion" might trigger the recession.

Worse, he suggests, following the IMF (that has changed its mind, according to many), that the US government has not helped by embarking on a highly irresponsible, pro-cyclical fiscal expansion on top of what the IMF labels 'already unsustainable debt dynamics'." In other words, expansionary fiscal policy will promote a crash by sapping the confidence of financial markets. Presumably we need sound finance.
The worst risk for him comes from populism, particularly in the US. He notes:

"The biggest shift of all is in the US. Last week, President Donald Trump broke a longstanding taboo by condemning recent tightening by the Federal Reserve. Under him, the US has also embarked on an assault on the World Trade Organization’s dispute settlement system and an open-ended trade war with China."

As I noted in my previous post on this, the biggest risk in my view comes from monetary policy in the context of a relatively fragile and slow recovery, even if it is a very prolonged one. The yield curve (see below; I use the Fed Funds and the 10 year bond rather than the 10-2 spread, since the Fed Funds is more clearly a policy rate, and gives you the result of policy actions) is closing, but if the Fed does not raise the basic rate too fast, there is a chance for the slow expansion to continue.

Note that there are other indicators that suggest that even though the recovery is not great, it may continue for a while. For example, if one looks at Gross Fixed Capital Formation, it is clear that an initial downturn seems to have subsided (like in the mid-1980s), and that the system got a second wind.


Capacity Utilization in Industry shows a similar picture. Note that this does not mean that the recovery is strong by any means. But last week the news, in spite of the unstable financial markets, were if anything indicating that the economy may continue on this path. I'm referring to fiscal news.


The budget deficit increased. That in and off itself says nothing, since the deficit is endogenous. In part the deficit went up as a result of tax cuts (a lot going to corporations and the wealthy). But also higher spending, quite a bit on defense. So there is a lot to complain about how money is being spent and how taxes are being collected. But that provides a modicum of stimulus. Trump, one should note, actually was more accurate on this than Wolf. He said that there is no fiscal danger, and that the US runs no risk of default (so why would financial markets be concerned with that), since the US can print money. Note that printing money might have consequences, but these are not the ones orthodox economists often suggest (see more here).

Contrary to Wolf I don't think that the trade wars would affect significantly the US economy. It might affect China, and certainly will have effects on the supply chains of US corporations. It might lead to higher prices, but it's implausible that it would bring the economy to a halt. The American economy depends on domestic demand. Nothing much will be affected by the trade war on that front. Also, while I think that student debt (and car loans too) are out of control, and will have implications, it's not clear that these, by themselves would cause a recession, in the way that mortgage loans did last time. They might not affect domestic demand to the same extent, at least not in the short run.

If there is a risk (besides monetary policy) is the persistence of financial speculation and the shadow financial sector, as represented by for example Collateralized Loan Obligations (CLOs), which have been going to high risk non-financial corporate firms (like Sears). But that does not mean that a recession is around the corner, and this weak recovery can (arguably) prolong itself for a few more quarters. Hey, conceivably it might go on until the 2020 election, giving Trump a serious shot at reelection (and that's not a happy thought).

10 years after the financial crisis and its lasting effects on Americans

Published by Anonymous (not verified) on Mon, 01/10/2018 - 2:00am in

By Breshay Moore.

This year marks the 10th anniversary of the 2008 financial crisis. Although the crisis is remembered for foreclosures, bank failures and bailouts, many American citizens are still unaware of what caused it. Understanding this is important to prevent future crises and think about what kind of financial system we want to have: one that serves people and invests in communities, or one that enriches a handful of wealthy bankers and money managers while making our economy less fair and safe for the rest of us.

In simple terms, the financial crisis was a result of deregulation of the financial sector, and reckless and predatory practices by greedy financial players all across the board, from mortgage lenders to Wall Street traders to the largest credit rating agencies.

In the lead-up to the crisis, mortgage lenders were engaging in fraudulent and deceptive sales practices to make toxic mortgage loans to home buyers, which they knew the borrowers could not afford. Predatory lenders particularly targeted people of color, especially women of color, for these higher-rate loans. Meanwhile, these risky mortgages were packaged and sold to investors around the world, becoming implanted throughout the financial system. The economy went into a recession in late 2007, defaults on mortgage payments increased and housing prices plummeted, resulting in billions of dollars in mortgage losses. This had a chain reaction in the financial system because of the number of financial institutions that had stakes in the housing market. These string of events shook the entire economy, fueling the worst recession in the US since the Great Depression.

Millions of families lost their homes or jobs. Median wealth among households fell tremendously: From 2005 to 2009, median wealth among Hispanic households fell by 66 percent, by 53 percent among Black households, by 31 percent among Asian households, and by 16 percent among white households. Millions of people also suffered major drops in income, property values, retirement savings, and general economic well-being. The crisis produced lasting effects. Families are still struggling economically, especially in communities of color.

After all the damage was done, no one was held accountable. Financial players made billions of dollars in bonuses and profits. Instead of helping the communities that were most affected, Congress and The Federal Reserve began bailing out big banks with public money. We recently learned that 30 percent of the lawmakers and 40 percent of the top staffers involved in the congressional response to the crisis have since gone to work for Wall Street.

In 2010 President Barack Obama introduced legislation containing important reform measures in response to the crisis. The Dodd–Frank Wall Street Reform and Consumer Protection Act created rules to protect consumers and regulate the financial industry. This law created the Consumer Financial Protection Bureau (CFPB) to promote transparency and fairness in the consumer-finance industry, and to holding financial institutions accountable for engaging in predatory and discriminatory practices. This independent agency has done a lot for consumers, and has returned more than $12 billion in relief to more than 29 million cheated consumers.

In return for all the money that Wall Street has poured into political campaigns and lobbying, President Trump and Congress have been working hard to undo rules that  regulate the financial sector. Countless bills have been introduced and passed in Congress to deregulate banks and lenders. One of these bills, S. 2155, which became law in May, not only increases the risk of future financial disasters and bank bailouts, but makes it easier for mortgage lenders to discriminate on the basis of race, ethnicity and gender. Sixteen Democrats and an Independent supported the GOP in pushing this deregulatory bill. The vote did not go unnoticed and public sentiment is not on their side.  In fact, 88 percent of all likely voters — across party  lines — support holding financial companies accountable if they discriminate against people because of their race or ethnicity. And 64 percent of voters think big banks and finance companies continue to require tough oversight to avoid another financial crisis.  

The lack of restrictions on banks and other financial institutions put consumers and the economy at risk. The 10th anniversary of the financial crisis should encourage us to redouble our efforts to push for changes to our financial system so that it works for us not just for Wall Street.

 

Breshay Moore is a Senior at Towson University, studying Advertising and Public Relations. She was recently a Communications and Campaign intern for Americans for Financial Reform.

The post 10 years after the financial crisis and its lasting effects on Americans appeared first on Economic Questions .

An Analysis of Financial Flows in the Canadian Economy

Published by Anonymous (not verified) on Fri, 06/07/2018 - 6:35am in

An essential but perhaps overlooked way of looking at the economy is a sector financial balance approach. Pioneered by the late UK economist Wynne Godley, this approach starts with National Accounts data (called Financial Flow Accounts) for four broad sectors of the economy: households, corporations, government and non-residents.

Here’s how it works: in any given quarter or year each sector can be a net borrower or lender, but the sum of the four sectors’ borrowing/lending must equal to zero. This is an accounting identity reflecting the fact that one sector’s borrowing must be another’s (or the combination of all others’) lending.

Consider a government deficit. The flip side of that deficit is that some other sector(s) is in credit by the same amount. For example, a $1 billion in government borrowing must be matched by $1 billion in lending from some combination of households, businesses and non-residents. The same is true about the balances for any other sector. The overall balance for the domestic economy (households, corporations and government) must be offset by an equivalent balance vis-à-vis non-residents.

We can look at these flows over time and map them on to events and policy actions affecting the Canadian economy. Some caution must be taken around interpreting causation in this analysis, but it is a useful framework for thinking about what’s happening in the economy.

Figure 1 shows the four sector balances going back to 1990 (as a percentage of GDP). The lead up to and period after the 2008 global financial crisis is also of great interest. Lines above zero represent a credit position, or net lending; below zero is a deficit position, or net borrowing.

Figure 1:

Source: Statistics Canada, Financial Flow Accounts, Table: 36-10-0578-01 (formerly CANSIM  378-0119)

 

Let’s start with government, in this case the combined federal and provincial government balance (in grey). Many readers will remember the large government deficits of the 1980s and early 1990s, which were headline news and to this day have biased the thinking of all political parties towards austerity. In the early 1990s, those government deficits were largely financed by households (blue) and non-residents (yellow).

As the Canadian economy recovered from a bad recession in the early 1990s, it gained strength through the rest of the decade. Strong revenue growth combined with spending restraint drove combined federal and provincial deficits to zero by 1997, followed by surpluses for most of the next decade (apart from two very small deficits in 2002 and 2003).

In the wake of the 2008 financial crisis we then see the government balance drop to a deficit of 4.7% of GDP in 2010, reflecting expansionary fiscal policy. Relative to GDP these later deficits are nowhere near as large as the deficits in the early 1990s. In each case of deficit, however, it is useful to remember the flip side: the private sector wanted to buy government bonds. Around 2008-10 in particular, investors wanted safe havens in which to place their money.

The changing behaviour of households (in blue) is significant. Historically, it was households who were net lenders to corporations and governments. I was not able to get data prior to 1990 online but that surplus position for households continues before 1990 as well.

That dynamic changes in the mid-1990s. As governments borrowed less, households lent less. But when governments turn to deficits after 2008 it is not households from whom they are borrowing (as would have been expected given historical patterns). Indeed, households become net borrowers as of 1997 and remain so to this day, with net borrowing peaking at 4.8% of GDP in 2007. There is some retrenchment back to 2.2% of GDP by 2009, but household borrowing starts to grow again in the 2013 to 2017 period, and hits 3.5% of GDP in 2017.

This should not be a surprise to anyone following the Canadian economy, in particular the run-up in mortgage debt in recent years. This era, especially 2001 onward, is characterized by very low interest rates, which enable households to take on more debt for a given level of income. And as home prices rose, this new equity for homeowners allows for even greater debt loads. Unfortunately, these data do not break down the distribution within the household sector, so the total is masking some deeply indebted households while some percentage of wealthy households would be in credit positions.

What about corporations? Historically corporations borrowed from households (before the period in Figure 1), but starting in the 1990s, then really picking up in the 2000s is the fact that corporations become net lenders. A study from Statistics Canada attributed this to surging profits accompanied by a slowdown in capital investment (i.e. machinery, equipment and factories) and an increase in financial investments. This pattern of “dead money” – in the words of then-governor of the Bank of Canada Mark Carney – has deteriorated in recent years and the corporate sector even goes into deficit in 2015.

Figure 2 breaks out the corporations balance into financial (banks, insurance companies, etc) and non-financial corporations. Financial corporations are consistently in a net lender position, as would be expected. Non-financial corporations show greater volatility, but notably swing into a net borrowing position since 2012.

Figure 2: Net financial investment of financial and non-financial corporations

 

Finally, go back to Figure 1 and look at non-residents. In the early 1990s non-residents lent to Canadian governments, but during the 1999-2007 period Canadian corporations were net lenders to non-residents, perhaps reflecting trade and investment liberalization.

After 2008, we see a dramatic shift to non-resident lending, and at fairly large magnitudes of around 4% of GDP per year. Even while government deficits shrink after 2010, the total inflows from non-residents continue through to 2017. These data do not tell us from which countries the flows from non-residents are coming, although the US is historically Canada’s largest foreign investor by far, followed by several European countries (Netherlands, Luxembourg, UK and Switzerland).

Overall, this analysis shows some major shifts in the relationships across sectors of the Canadian economy. The shift of households into an ongoing deficit position is notable, as is the role of non-resident lending in recent years. Restrictions to dampen housing markets and the introduction of foreign buyer taxes in BC and Ontario suggest non-resident lending will decline as a share of GDP. And the record levels of household indebtedness, plus increases in interest rates, also point to a potential rebalancing for the household sector.

** With thanks to Joelle Leclaire and David Pringle for comments on an earlier draft.

An Analysis of Financial Flows in the Canadian Economy

Published by Anonymous (not verified) on Fri, 06/07/2018 - 6:35am in

An essential but perhaps overlooked way of looking at the economy is a sector financial balance approach. Pioneered by the late UK economist Wynne Godley, this approach starts with National Accounts data (called Financial Flow Accounts) for four broad sectors of the economy: households, corporations, government and non-residents.

Here’s how it works: in any given quarter or year each sector can be a net borrower or lender, but the sum of the four sectors’ borrowing/lending must equal to zero. This is an accounting identity reflecting the fact that one sector’s borrowing must be another’s (or the combination of all others’) lending.

Consider a government deficit. The flip side of that deficit is that some other sector(s) is in credit by the same amount. For example, a $1 billion in government borrowing must be matched by $1 billion in lending from some combination of households, businesses and non-residents. The same is true about the balances for any other sector. The overall balance for the domestic economy (households, corporations and government) must be offset by an equivalent balance vis-à-vis non-residents.

We can look at these flows over time and map them on to events and policy actions affecting the Canadian economy. Some caution must be taken around interpreting causation in this analysis, but it is a useful framework for thinking about what’s happening in the economy.

Figure 1 shows the four sector balances going back to 1990 (as a percentage of GDP). The lead up to and period after the 2008 global financial crisis is also of great interest. Lines above zero represent a credit position, or net lending; below zero is a deficit position, or net borrowing.

Figure 1:

Source: Statistics Canada, Financial Flow Accounts, Table: 36-10-0578-01 (formerly CANSIM  378-0119)

 

Let’s start with government, in this case the combined federal and provincial government balance (in grey). Many readers will remember the large government deficits of the 1980s and early 1990s, which were headline news and to this day have biased the thinking of all political parties towards austerity. In the early 1990s, those government deficits were largely financed by households (blue) and non-residents (yellow).

As the Canadian economy recovered from a bad recession in the early 1990s, it gained strength through the rest of the decade. Strong revenue growth combined with spending restraint drove combined federal and provincial deficits to zero by 1997, followed by surpluses for most of the next decade (apart from two very small deficits in 2002 and 2003).

In the wake of the 2008 financial crisis we then see the government balance drop to a deficit of 4.7% of GDP in 2010, reflecting expansionary fiscal policy. Relative to GDP these later deficits are nowhere near as large as the deficits in the early 1990s. In each case of deficit, however, it is useful to remember the flip side: the private sector wanted to buy government bonds. Around 2008-10 in particular, investors wanted safe havens in which to place their money.

The changing behaviour of households (in blue) is significant. Historically, it was households who were net lenders to corporations and governments. I was not able to get data prior to 1990 online but that surplus position for households continues before 1990 as well.

That dynamic changes in the mid-1990s. As governments borrowed less, households lent less. But when governments turn to deficits after 2008 it is not households from whom they are borrowing (as would have been expected given historical patterns). Indeed, households become net borrowers as of 1997 and remain so to this day, with net borrowing peaking at 4.8% of GDP in 2007. There is some retrenchment back to 2.2% of GDP by 2009, but household borrowing starts to grow again in the 2013 to 2017 period, and hits 3.5% of GDP in 2017.

This should not be a surprise to anyone following the Canadian economy, in particular the run-up in mortgage debt in recent years. This era, especially 2001 onward, is characterized by very low interest rates, which enable households to take on more debt for a given level of income. And as home prices rose, this new equity for homeowners allows for even greater debt loads. Unfortunately, these data do not break down the distribution within the household sector, so the total is masking some deeply indebted households while some percentage of wealthy households would be in credit positions.

What about corporations? Historically corporations borrowed from households (before the period in Figure 1), but starting in the 1990s, then really picking up in the 2000s is the fact that corporations become net lenders. A study from Statistics Canada attributed this to surging profits accompanied by a slowdown in capital investment (i.e. machinery, equipment and factories) and an increase in financial investments. This pattern of “dead money” – in the words of then-governor of the Bank of Canada Mark Carney – has deteriorated in recent years and the corporate sector even goes into deficit in 2015.

Figure 2 breaks out the corporations balance into financial (banks, insurance companies, etc) and non-financial corporations. Financial corporations are consistently in a net lender position, as would be expected. Non-financial corporations show greater volatility, but notably swing into a net borrowing position since 2012.

Figure 2: Net financial investment of financial and non-financial corporations

 

Finally, go back to Figure 1 and look at non-residents. In the early 1990s non-residents lent to Canadian governments, but during the 1999-2007 period Canadian corporations were net lenders to non-residents, perhaps reflecting trade and investment liberalization.

After 2008, we see a dramatic shift to non-resident lending, and at fairly large magnitudes of around 4% of GDP per year. Even while government deficits shrink after 2010, the total inflows from non-residents continue through to 2017. These data do not tell us from which countries the flows from non-residents are coming, although the US is historically Canada’s largest foreign investor by far, followed by several European countries (Netherlands, Luxembourg, UK and Switzerland).

Overall, this analysis shows some major shifts in the relationships across sectors of the Canadian economy. The shift of households into an ongoing deficit position is notable, as is the role of non-resident lending in recent years. Restrictions to dampen housing markets and the introduction of foreign buyer taxes in BC and Ontario suggest non-resident lending will decline as a share of GDP. And the record levels of household indebtedness, plus increases in interest rates, also point to a potential rebalancing for the household sector.

** With thanks to Joelle Leclaire and David Pringle for comments on an earlier draft.

New Book Contains Shocker

Published by Anonymous (not verified) on Fri, 02/05/2014 - 6:00am in