US stagnation, stock market redemption and Canadian credit crunch point to perfect storm

Business media talking heads promoting when caution is indicated

The press and the government declared the recession ended months ago but the economy is probably poised on the edge of a decade long decline according to economists.

BNN is reporting deflation fears in the US.  Over the weekend, one of the BNN commentators made a compelling but nerve wracking case for deflation in Canada.

Cautious people are increasing their savings by paying down debt and hoarding cash.

The US economy shed 131,000 jobs in July, leaving 14.6 Americans out of work. WSJ: U.S. Job Market Loses Steam Canada lost 139,000 jobs in July 2010. CBC

Both the US and Canada have borrowed heavily on the future with record deficits to end the recession but it has not happened. President Obama’s optimism has given frustration at his inability to make a dent in the economic crisis. 

The New York Times reports small investors, the mom and pop personal pension funds, are fleeing the stock market in droves.  “Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.” New York Times

During this time Canadians have blithely increased their personal debt to the point many families have no cushion. The Canadian Centre for Policy Alternatives reports “In the past few weeks some of Canada’s most respected economic authorities, including Bank of Canada Governor Mark Carney, have voiced concerns over the fragility of the recovery, globally and at home.  Now Paul Krugman joins that chorus of Cassandras, pointing his finger straight at the wishful thinkers who say Canada’s heavy lifting is done when it comes to economic recovery.”

“Household budgets are a bigger part of the economy, and re-balancing them will take a lot longer if governments prioritize putting their own fiscal house in order first. On this front, Krugman notes, Canadians have little reason to be sanguine about what happens next.” Canadian households: Among highest debt to income ratios in the world

Indeed Canada is last out of 20 nations for household debt. “Canada’s household debt hit a new record of $1.41 trillion in December, with no signs the recession has altered consumers’ willingness to borrow, creating warning signs for the economy, a survey found. If the debt were spread across all Canadians, each person would owe $41,740, that’s two and a half times more than two decades ago, the Certified General Accountants Association of Canada said.”

Canadian housing prices rise defying gravity

“The levels put Canada at the top of the 20 OECD nations in terms of debt-to-financial assets and puts their debt-to-income ratio at 144%, the survey found.” Toronto Sun:Canada’s household debt hits new record, CGA says

Canadians have been enticed by rising real estate values that didn’t decline in 2008 like the US real estate market. Politicians and optimists have been promoting a low interest rate strategy encouraging Canadians to borrow more against their homes to spend and prop up the economy.

That is the exact same scenario that got the US into the deepest recession in modern history. After the dot.com boom and bust and 9/11, the US government and Federal Reserve pumped up the economy with low interest mortgages. When that didn’t do enough they opened the floodgates to grant mortgages to anyone who showed a pulse.

The inevitable crash in the US economy was not predicted by anyone but a few naysayers. During the two years leading up to 2008 stock market crash along with the economy, no one wanted to listen to common sense.

House of Cards on MSNBC is a prophetic portrait of what is can happen in Canada. The media and politicians won’t warn anyone. They want people to spend and prop up the economy.

The crisis in the US was triggered by a drop in real estate prices as confidence fell. New tough mortgage rules in Canada and the HST in Ontario and BC hit the real estate market hard in July 2010.  BC real estate sales dropped 42% in July. Vancouver Sun

A slight rise in the essentially zero-interest rates could be a catalyst for some homeowners.

It won’t take long for Canadian real estate values to settle back to earth leaving some homeowners under water in liquidity. Then the crisis will begin in Canada all over again. Banks and mortgage companies will be forced to call loans and foreclose. Deflation may restore sanity but only at the price of many people becoming victims of the crash.