Confusion

LITTER modified

When the Bank of Canada’s big cheese said he expects the economy to be ‘below capacity’ for at least two years, lots of people thought that meant rates would stay in the ditch until 2016. Maybe they’re right. We’ll know more on October 22nd, when Stevie Poloz makes a much-anticipated announcement.

But most people are confused. The cost of money is the wrong thing to look at.

Since we got emergency rates in 2009 Canadians have responded with a house-buying orgy. Cheap money encouraged reckless borrowing, so now we owe $1.45 trillion and detached houses in Van and 416 cost about a million. Incomes, meanwhile, have lagged – so we know it’s just low rates that have caused this.

But lost on all your delusional friends and house-horny, granite-snorfling family members is why emergency rates came in the first place. It’s the same reason the US Fed decided to buy $85 billion in bonds per month, and why bank accounts in Europe now have negative returns, thanks to the ECB. It’s why governments everywhere in the West have been printing money like crazy, bloating their balance sheets, embracing deficits and throwing cash out of copters.

They’ve been trying to ward off deflation, which destroys money. Remember what the scariest part of the GFC was? A credit freeze, which sent interest rates soaring and dried up the commercial lending your neighbourhood grocery store relied upon to stock its shelves. Car dealers stopped offering financing, for example, as their parent companies choked on inventory and ran out of money to meet payrolls.

When money’s scarce, the cost goes up. When money’s plentiful, the cost craters. That’s why central banks create it. Without this river of newly-minted cash, it’s likely we’d live in a different world right now – one with falling incomes, collapsing demand, plunging real estate values and 15-20% unemployment. Or worse.

The cure to looming deflation was to let the sheeple borrow money at 3% or less and create a massive, unfathomable morass of debt – both government and private. This is exactly what encouraged all the gold nuts to go creamy as they dreamed of currency debasement, asset bubbles, government bankruptcy and the inevitable worthlessness of trillions of crispy, fresh dollars.

But that didn’t happen. Instead, the US is doing okay (but not great), Canada’s sputtering, Japan is sinking and Europe barely has its snout above water. As I mentioned on Friday, that place is a mess. Inflation among 18 countries is a dismal 0.3%. Prices are falling steadily as unemployment refuses to move much off 12%. Over half the people under 25 in Spain and Greece, for example, have no jobs and no prospects. It’s the stuff revolutions are made of.

This is why the ECB slashed rates again and will do its own asset-buying stimulus thing. Meanwhile all that money printed in Canada and the US – all the deficits, and the extra debt – hasn’t been inflationary in the least. The metalheads got it wrong. All the printing presses did was (a) keep us from reliving the 1930s and (b) convince your daughter it makes perfect sense at 26 to buy a $450,000 condo with $420,000 in debt.

And – guess what? – we’re still closer to deflation than inflation, which is what those terrible jobs numbers were all about on Friday. More private sector jobs were destroyed in a single month than were created in a year. More in that month, in fact, than any previous one.

Now, the Thirties aren’t coming back, simply because central banks are co-ordinated and resolute and won’t give up. But five years of printing cash and hacking rates haven’t restored robust growth or made people more secure. In fact, it’s helped create a giant chasm between the two main groups in our society – those who read this pathetic blog, and those who don’t. In every sense, the richer are getting richer and the middle is evaporating into a fog of monthly payments.

As gee-whiz economist Paul Krugman wrote the other day: “Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors, to have money in the bank and bonds in their portfolio rather than mortgages and credit-card balances outstanding.”

A nice summary. As I’ve said here before (and charted), rich people hold assets. Unrich people hold debt. Most middle-class Canadians have little diversification in their financial lives, with the bulk of their net worth in real estate, and a whack of leverage. So far, the central bank deities have been kind to them, crashing money costs and inflating houses – but at the same seducing new buyers at peak values.

We all know it won’t last. If the economy suddenly revives pushing wages up, then interest rates pop. And down goes property. If the economy slags and jobs disappear then houses deflate – even with free loans. There’s no scenario ahead in which people with financial assets don’t get more of them, and the house-heavy get less.

In the 1930s (not that we’re going there) incomes fell 42% and debt levels didn’t budge.

If you owned the debt, there was no depression.  Good thing to remember.

206 comments ↓

#1 Pat on 09.07.14 at 6:09 pm

True fear and greed which will win out

#2 CPG on 09.07.14 at 6:12 pm

“One might these days contemplate why it took central banking a few hundred years to figure this all out – to appreciate the myriad benefits of zero rates, debt monetization and perpetual bull markets.”

Do Whatever it Takes to Shock and Awe

http://www.prudentbear.com/2014/09/do-whatever-it-takes-to-shock-and-awe.html

#3 Romeo Jordan on 09.07.14 at 6:16 pm

Hi Garth,

Thought you said mortgage rates were heading up?

Do you now thi.knthey may be going lower?

Thanks…either way, the real.eatqte market.looks pooched.

#4 Mark on 09.07.14 at 6:23 pm

Let’s not also forget the spectre of lenders increasingly developing a revulsion to funding consumption (including real estate), and directing their loan activity elsewhere.

There’s no good reason, for instance, that one can borrow for 5 years at 2.7% or so to blow it on depreciating real estate. While BCE pays considerably more, in the wholesale financing market nonetheless, to invest in appreciating telecom assets. Just the reversal of this relationship to its historic norm (that business, job-creation borrowing, is cheaper than consumption borrowing) promises a world of hurt for the consumer over-leveraged.

#5 oslec on 09.07.14 at 6:23 pm

I am now officially depressed :=(

#6 rafwagner on 09.07.14 at 6:25 pm

Garth,

how at risk do you see the CDN economy if jobs numbers continue to be weak? GDP growth is so mediocre already, what else can Poloz do if things slide further? Thx

#7 Me to on 09.07.14 at 6:29 pm

I want to hear more about the chief

#8 jeff on 09.07.14 at 6:30 pm

furst

#9 JSS on 09.07.14 at 6:33 pm

Type “price reduced” in Search and All ads, at the Kijiji website.

The results will tell you how many people are indebted, with so many things (not just houses).

#10 Ronaldo on 09.07.14 at 6:34 pm

Dying too rich. Not many people will have to worry about that. Except maybe Shawn.

http://www.marketwatch.com/story/how-dying-too-rich-can-hurt-you-and-your-estate-2014-07-24

#11 T.O. Bubble Boy on 09.07.14 at 6:38 pm

So…. “own the debt” = own the banks?

Or, should we all put up flyers on the side of telephone poles offering mortgages?

#12 Flawed on 09.07.14 at 6:39 pm

So…….

Maybe someone can explain to us that with the TRILLIONS of “interest bearing” newly created money out there…..exactly HOW it is we are heading into deflation?

Let’s start with the fraud that is central banking. Why are we paying “billions” of dollars in interest on money created out of nothing?

#13 West Coast on 09.07.14 at 6:40 pm

In December at least 60 people will be made redundant at my workplace. These are people with families and mortgages. Their chances of being quickly re-employed in the Vancouver area are slim.
Many of them will be forced to sell and relocate. I hope they recoup their investments.
All I see around me are wages stagnating and jobs disappearing.
No, this will not end well.
Thanks for continuing to spread the word Garth. I don’t know where you find the stamina. Hope your leg is doing well.

#14 crowdedelevatorfartz on 09.07.14 at 6:44 pm

Time to buy some debt.

#15 Sebee on 09.07.14 at 6:45 pm

You said Canada 1.2 trillion @ 34mil. population. Japan 1.3 trillion at 128mil. population.

Are we now better than Japan at 1.45 trillion?

Mortgages plus consumer debt. — Garth

#16 mitzerboy on 09.07.14 at 6:51 pm

out here in sask my grandpa called it the dirty
30s …wind no rain and big black flies and no money…he would trade things for things …little moonshine money paid for most things bought in town

#17 FormerSaskie on 09.07.14 at 6:52 pm

The photo is good for a laugh. Thanks Garth.

#18 Cow Man on 09.07.14 at 6:58 pm

Sir Garth:
“They’ve been trying to ward off deflation, which destroys money. ”

You write a lot of truth. This line is a mystery, not a truth.

#19 Mister Obvious on 09.07.14 at 7:03 pm

Time to switch to the present tense:

This is not ending well.

#20 Mr. White on 09.07.14 at 7:07 pm

Money and credit confused…again, again and again

The debate over the latest policy actions from the ECB has once again reminded me about one of the oldest failures in monetary debate – the confusion of money and credit. This has been very visible in the discussion about monetary policy over the past six years in Canada, Europe and the US.

The confusion of money and credit again and again has caused central banks to make the wrong decisions implementing credit policies and mistaking it for monetary easing.

I should really write a blog post on this, but it has already been done. Our friend and Market Monetarist blogger Bill Woolsey did it back in 2009. Bill used to be a student of Leland Yeager who back in 1986 wrote the ultimate paper on this issue with Robert Greenfield – Money and Credit confused: An Appraisal of Economic Doctrine and Federal Reserve Procedure.

I stole this from Bill’s 2009 post Money and Credit Confused. Bill explains the crucial differences between money and credit very well:

“Money is the medium of exchange. The quantity of money is the amount of money that exists at a point in time.

The demand for money is the amount of money that people want to hold at a point in time. To hold money is to not spend it.

The supply of credit is the amount of funds people want to lend during a period of time.

The demand for credit is the amount of funds that people want to borrow during a period of time.

An increase in the demand for money is not the same thing as an increase in the demand for credit.

An increase in the demand for credit means that households and firms want to borrow more. While it is possible that they want to borrow money in order to hold it, the more likely scenario is that they borrow in order to increase spending on some good or service, including, perhaps some other financial asset.

An increase in the demand for money could result in an increase in the demand for credit. People might borrow money in order to hold it. However, the more likely scenario is that people demanding more money will reduce expenditure out of current income, purchasing fewer other assets, goods, or services. Of course, they could also sell other assets.

An increase in the supply of credit isn’t the same thing as an increase in the quantity of money. While it is possible that new money is lent into existence, raising the quantity of money over a period of time while augmenting the supply of credit, it is also possible for the supply of credit to rise without an increase in the quantity of money. Purchases of new corporate bonds by households or firms, for example, adds to the supply of credit without adding to the quantity of money.

Because shifts in the share of the total supply of credit associated with money creation are possible, the quantity of money can rise over a period of time when the supply of credit is shrinking.

There are relationships between the supply and demand for money and the supply and demand for credit, both in disequilibrium and equilibrium. But money and credit are not the same thing.”

As Bill notes – the first rule of monetary policy is not to confuse money and credit. Unfortunately central bankers do it all the time.

#21 Smudgekin on 09.07.14 at 7:09 pm

Accelerant for the bloc?
http://www.bbc.com/news/world-europe-29101128

#22 Ayn Rand Army on 09.07.14 at 7:11 pm

Only thing good about tonight’s post Garth is the humorous picture because, unfortunately and unbelievably, your theory’s on money and economics are just plain wrong just like Paul K and the rest of the world’s CBs.

How much longer do we have to keep printing money and destroying the value of currency and savings before all the world’s economic half wits realize they’re wrong….. that debasing the currency and stealing from savers does not help the economy just like when a robber robs a bank does not help the bank and business loans. Clueless.

oh ya, they don’t care about the truth just like bank robbers, they’re in it to steal and pretend like they care.

It’s a despicable world we live in today with so much advancement in knowledge, science and understanding in the natural sciences, yet so much utter stupidity and error when it comes to economics and money.

But like i said, it’s not by accident. Governments are thieves and know precisely what they’re doing.

take take take…..

#23 MetalSeb on 09.07.14 at 7:12 pm

All what coordinated monetary easing from UK-US-Can-Europe-Japan central bank has done is preverse these nations way of life at a time when we should have lost some under a real money monetary system (eg. Gold Standard). It probably isnt the best system nowadays but it sets rules in the game, whereas now we play monopoly and play the bank at the same time (I remember this never ended well when I used to play w my brothers…).

We should’ve lived thru deflation for some time and got out of there healthier by now. What we went thru instead purely some status quo. The Central banks involved in the status quo preservation have made us lose a lot of credibility on the world stage. Call Putin whatever you want, this guy is empowered at the moment (and so is China and a lot of other nations).

If the powers-that-be keep doing what they do, a major conflict will be upon us. Always been, always will be..

Build your portfolio (and life) accordingly.

#24 Jonathan on 09.07.14 at 7:14 pm

Interesting stuff Garth. We are so screwed. Here’s more evidence.

A friend of a friend, let’s just say, has some awareness of internal planning at a major hardware big box store, let’s call it High Def.

Anyway, HD Canada executives are digesting an internal forecast that would make most soil their pants.

Expenditures on home renos are expected to drop by 35% and not recover meaningfully until after 2018. Traffic is already slowing at all the stores dramatically, apparently. The ancillary coffee and burger shops that have located in the stores have been closing up for a while, having noticed their traffic down even earlier.

Funny, I thought about this myself last week going into one of their stores, on a Saturday. Only one cash open, burger station closed down, and only one staff on hand to oversee four self checkout stations. Weirdly quiet.

#25 gladiator on 09.07.14 at 7:14 pm

How can deflation destroy money, when it actually increases its value?
Inflation, on the other side, DOES destroy money gradually by eroding its value. How much does a dollar buy today compared to 30 years ago?… Exactly!

#26 Catalyst on 09.07.14 at 7:15 pm

I think the only way the Canadian economy can improve is an economy set up for the consumer to thrive. Imagine if you had 50%+ of your paycheque as disposable income after paying for housing, food, transportation and taxes (fixed costs mostly). Instead we have an economy with high fixed costs and little left over to spur an economy unless it is directly related to housing, transportation, or government.

I would be interested to see a chart, for every dollar an economy creates, what portion of that dollar ends up in each industry.

I would wager 40% ends up back with the government, 30% in housing related industries, 15% with transportation, 10% with food, and 5% with ‘other’. And if we want economic growth to come from this ‘other’ category, why don’t we work to reduce the costs of the others?

#27 Anson on 09.07.14 at 7:18 pm

Hmmm… I dont have a comment today because Garth summed it up in a nutshell…..
Great post and music to my ears, keep up the good work, but most of all keep educating the uninformed.

#28 Retired Boomer - WI on 09.07.14 at 7:25 pm

Cure Deflation

1. Raise the US minimum wage (to equal Canada’s for example). Then index the dam thing like we do the old fart’s social security.

2. Revise the income, corporate, and long term rates to make sense and control the gigantic loopholes that exist there. (example: Hedge fund managers paying LT cap gains rates). bullshit, gambling IS gambling.

3. Raise the Tax on social security from the current upper limit of $113K to ay $250K. helps the long end of the program

4. L:ook at import taxes if other nations are not playing fair on “FREE TRADE” which is a crap concept anyway.

5. Build the XL Pipeline already! It’s time, there is no good reason not to.

6. Index use taxes like fuel taxes to allow small annual increases to cover increasing costs.

There I’ve said my piece. Disagree if you must.

IF we still have DEFLATION, then let the dam thing run amuck! Things do correct over time.

#29 Andrew Woburn on 09.07.14 at 7:34 pm

#210 Steve French on 09.07.14 at 6:13 pm
Sorry Saskatoon, your defunct right wing ideology is the problem. And I have no idea why you are defending the interests of the super-rich.

I say let’s hang the super-rich.
===========================

I think I hear the sound of a file being opened at CSIS.

Steve may be unaware but this has been tried before with disappointing results. Google Paris , 1789.

#30 Freedom First on 09.07.14 at 7:35 pm

The last sentence says a lot Garth. The truth that people do not want to hear, except the Blog dawgs who come here. Thanks for my daily dose of sanity.

#31 Mark on 09.07.14 at 7:37 pm

“Maybe someone can explain to us that with the TRILLIONS of “interest bearing” newly created money out there…..exactly HOW it is we are heading into deflation?”

Simple. All that debt, when it was created, stimulated consumption and expansion of the economy. As that debt is destroyed or even fails to grow, the reverse happens.

Deflationary forced in countries that are net exporters are likely to be somewhat stronger than countries that are net importers with large long-term trade deficits. This is why I believe the USA can follow an inflationary path going forward, while Canada diverges. Ultimately pushing the Canadian dollar up to the opposite of the extremities we saw in the late 1990s with the CAD/USD pair.

#32 Mark on 09.07.14 at 7:39 pm

“Let’s start with the fraud that is central banking. Why are we paying “billions” of dollars in interest on money created out of nothing?”

Because you agreed to borrow the “money created out of nothing”, and repay it in “money created out of nothing” perhaps?

Nothing is stopping you from taking out loans denominated/indexed to things other than “money created out of nothing”. And you can certainly keep your savings in things other than “money created out of nothing”. Go talk to gold bugs, they’ll show you how.

#33 Mr. Reality on 09.07.14 at 7:40 pm

Thanks for using the word sheeple Garth, our country is full of these morons.

Living in oil and gas country its astounding how many sheeple worship money and debt and at the same time no nothing about what money is nor how it can destroy your future.

So i sit, wait, diversify and hopefully pick up assets for pennies on the dollar during the next bust. Thanks sheeple!

Mr. R.

#34 Mark on 09.07.14 at 7:41 pm

“Many of them will be forced to sell and relocate. I hope they recoup their investments.”

Why should they? Why should a house be sellable for what a person paid for it? After all, we don’t expect that a car driven off the parking lot of the dealer retains 100% of its value. Why shouldn’t used houses suffer such a fate as well? After all, most people keep their houses 5-7 years before selling and buying another. So losses should be the rule, not the exception, especially on an asset that eventually wears out and needs to be completely replaced.

#35 Harper's harper on 09.07.14 at 7:48 pm

So we lost some jobs, who cares?
And we’ll lose a few more, who cares?
Then we’ll sell less homes, who cares?
Then the Homes industry will begin to lose jobs, who cares?
Then we’ll sell even less homes, who cares?
Eventually or quite fast the Homes industry will come to a stall, who cares?
And even fewer homes will sell, who cares?
Oops, me thinks the Homes industry is a rather big part of the economy in Canada.
Will the Canadian gods come to see the Homes industry is too big to fail??
Will the Canadian gods decide to sink our dollar to the extreme again??
All the manufacturing is gone so who cares??
We cannot capitalize on any of this, who cares??

OOPs, I’m Canadian so I cares!!!!

#36 pravchaw on 09.07.14 at 7:51 pm

“There’s no scenario ahead in which people with financial assets don’t get more of them, and the house-heavy get less.”. If deflation sets in say goodbye to your stocks – look at the 30’s or Japan since the 80’s. Long bond holders will do great, but can’t see this happening. QE4 will be here.

#37 Harper's harper on 09.07.14 at 7:52 pm

The Jobs Job brought to you thru the Free trade from The Business lobby of the Eighties. The Multi-nationals are holding all the money and the little guy all the debt!!!

#38 Entrepreneur on 09.07.14 at 7:52 pm

Soooo, what I have just read debt/credit is bad; we are living in a debt/credit bubble right now. People are straped in making payments which leave little money for the spending on goods and services. But if we just relied on money from the top to the bottem of any business then we would not be in this mess. Sooooo, money is king.

G. Edward Griffin – The Creed of Freedom
He does not believe in groups of anykind and “protect each individual from the greed and passion of the majority.”

I still say “it depends which side of the fence you are on.” Cash or debt and that depends how much you have or not. Let it fall, let it flow, let it be.

#39 Realties.ca » Confusion on 09.07.14 at 7:54 pm

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#40 Drill Baby Drill on 09.07.14 at 7:55 pm

Dear Pathetic Blog : I most definitely get your point on housing being screwed with either scenario of inflation or deflation in Canada. The masses will loose their equity, their jobs and ability to repay said loans and governments at all levels will loose taxation dollars if deflation happens. The masses will have to endure life long servitude, refinancing hell and hope they keep their employment if they are to recoup some of their moneys spent on their mortgages if inflation rules. Many in Canada are caught in a vise and do not as yet realize it.

#41 Anson on 09.07.14 at 7:56 pm

“In the 1930’s wages dropped by 45%”
Look around, it is happening now, all over, one example is a story on msn today about a university instructor Kimberley Ellis for WilfridLaurier university in Waterloo, Ont.
She is on contract and makes a measly $28,000 A year compared to full time saleries of $80,000 to $150.000 a year. This is happening to a lot of people in various fields we are in wage deflation do not kid yourself people

#42 Dirty debtor on 09.07.14 at 7:56 pm

What is going to happen when the liberals come in 2015? We know now the cons are keeping the party going to keep us out of the gutter, but with trudeaus “dedication to the Everyman”, will there be changes to the ways mortgages are ran? Will the tightening of mortgage rules that’s happened over the last 5 years be relaxed?

#43 liquidincalgary on 09.07.14 at 8:02 pm

where’s that ‘cash copter’ now?

sounds WAY more generous than that skinny ‘cash cab’ guy

#44 Shaw on 09.07.14 at 8:05 pm

DELETED

#45 PJ on 09.07.14 at 8:09 pm

What a shocker.

#46 liquidincalgary on 09.07.14 at 8:10 pm

Why are we paying “billions” of dollars in interest on money created out of nothing?

=========================================

because you accessed it

#47 Confused on 09.07.14 at 8:10 pm

The central banks are NOT printing money. Isn’t that what has been pointed out many times on this blog? Just wondering why now you say they are?

Curious…

#48 ozy: KONFUSED!!! on 09.07.14 at 8:13 pm

NOW, I’M konfused…

Garth, you say deflation is bad.

Garth, you say inflation by low central bank RATES is bad – because it generated the real-estate orgy that you think is going to ruin the over-exposed pals.

I say: take a stand for a group or the other. Even you are not allowed to play at 2 heads :)

#49 Confused on 09.07.14 at 8:18 pm

Holders of debt instruments are delusional if they think they are getting 100 cents on the dollar. At some point, someone is not getting paid.

Hold stock in companies that will come through this in one piece. The key is to not lose as much as everyone else. This has years to play out yet, boys and girls. The EU is up next, then a smattering of other countries will do QE (Canada included), then the big IMF bailout with SDR’s. We have the best part of 10 years before things will reset. The financial advice business will be gutted in this timeframe as well.

#50 Anson on 09.07.14 at 8:22 pm

Is it just me or do a lot of comments on this blog seem long in the tooth lately…..Paragragh upon paragragh upon paragragh…Is this section for comments or novels? How many people actually read past 3 paragraghs? I sure don’t

#51 zee on 09.07.14 at 8:23 pm

No jobs and RE going up, sounds like Foreign money that is pushing these prices up.

Hardly. Increasing debt levels are to blame. — Garth

#52 [email protected] on 09.07.14 at 8:24 pm

Time for Cokeconomics

What are the predictions for a 2l bottle of Coke once this is all done for? 1.25? (sometimes on sale for 99C around here)

#53 Playing4fun on 09.07.14 at 8:33 pm

I’ve never bet the farm on it but I always think its prudent to keep a very minor percentage of a portfolio in gold and in particular gold stocks. Many of them pay dividends in US dollars as a bonus hedge against a devaluing Canadian dollar.

#54 liquidincalgary on 09.07.14 at 8:35 pm

36 pravchaw says:

Long bond holders will do great, but can’t see this happening

=========================================

agreed. in fact the ten year US government bonds gave a REAL return of 7%/annum right through the worst years of the Great Depression

#55 tintin on 09.07.14 at 8:38 pm

Soon, the most value asset will be campbell soup cans…

#56 Blake Selk on 09.07.14 at 8:45 pm

https://www.youtube.com/watch?v=M5y8r2MXYpY

According to this video, Japan faces a National debt of One Quardillion Yen as of Aug 2013 . Start watching at 4:15

1,000,000,000,000,000 Yen

#57 Macrath on 09.07.14 at 8:47 pm

Perpetual emergency rates, a recovery that never was, a Everest of debt and soaring unemployment . Banks still lending penny-less people 1/2 a million or more to buy RE thanks to CMHC. It`s sheer madness !

We are supposed to sit and wonder what, mister I`m independent , S. Poloz is going to do ? It`s quite obvious by now that none of them can do much but babble a ton of BS and pretend that they are actually in control.

Draghi, lowers rates 10 basis points to a new low of 0.05 percent, Oh yea, that`s really going to save the planet.

“Now, the Thirties aren’t coming back, simply because central banks are co-ordinated and resolute and won’t give up.” ~ Garth

What makes you so confident these people have a clue ?
Is it because they wear expensive suits ?

#58 45north on 09.07.14 at 8:52 pm

Inflation helps debtors and hurts creditors, deflation does the reverse.

I see people (neighbours , family, my son’s friend ) making big bets on real estate. I mean in houses they personally own. If the market price goes down they won’t just take the loss and move on.

West Coast : I see around me wages stagnating and jobs disappearing.

that got my attention

#59 Vanecdotal on 09.07.14 at 8:52 pm

Wage deflation (suppression), as other posters have noted, is real, and has already been with us in the Vancouver area for quite a few years now. I’ve experienced it firsthand, as have many friends and colleagues, resulting in a complete career change last year for myself as the previous line of work (15 years) was no longer financially sustainable. The exceptions I have noticed, are those in my highest earning peer groups with bonus/commission structures catering to high net worth individuals and corporations. They seem to be doing quite well financially. The others who are at least keeping up with the cost of living are the unionized workers I know in several different sectors, (including, but not limited to government). That said, my previous work was in a highly skilled, unionized workplace, and that union has been making major wage, and other working condition concessions for @ 8 years now, and that was a taxpayer subsidized industry that is supposed to be stimulating investment in BC and creating good-paying jobs. The fiscal policy that has brought us to this point will be seen as utterly irresponsible when judged by history. I don’t think there was a COLA increase in the last 8 years of work. How does that help the economy when the cost of taxes, utilities (hidden taxes), food, etc keep rising far beyond the stated CPI, while wages are suppressed? This is the very definition of deflation, and it is already entrenched in the local job market.

#60 crowdedelevatorfartz on 09.07.14 at 8:58 pm

@#19 Ayn Rands “Army”

Ayn, not your best misandric diatribe.
You CAN do better.
You forgot to mention all the intelligent, beautiful educated, employed women in Toronto lording their “status” over the grubby, unemployed, uneducated, unwashed males in that glorious city at the center of the universe.

As I said before, your diatribe is a tad “stale”
Your starting to lose that “edge” you had before.
Have you met someone? Could it be?
Have you met your “Frank O’Conner”
Say it isnt so………
What will the sisters say at the monthly meetings?
Traitor to the cause?
Good luck Ayn OConner, say high to Sarah OConner when you meet her in the future
I’ll remember you as you were……sniff, sniff
Time for this conversation to be Terminated
I’ll be back.

#61 TEMPORARY® Foreign Prime Minister on 09.07.14 at 8:59 pm

“…..It’s why governments everywhere in the West have been printing money like crazy…….When money’s scarce, the cost goes up. When money’s plentiful, the cost craters. That’s why central banks create it…….”
=========================

Soooooo….

…privately counterfeiting money of thin air is bad, but,
…publicly printing money out of thin air is good.

Makes perfect sense to me….

#62 Stagflation on 09.07.14 at 8:59 pm

It seems that many people have had little wage gains over the past few years. With that being the case going forward, I would much rather have low inflation than high inflation.

#63 TEMPORARY® Foreign Prime Minister on 09.07.14 at 9:01 pm

On a lighter note, love the new automatic spell check, by the way.

Which gives one to ponder, how does Smoking Man continue to make so many spelling mistakes?

Inquiring minds need to know…

#64 Mark on 09.07.14 at 9:01 pm

“No jobs and RE going up,”

House prices haven’t gone up in over a year and a half now in most major Canadian markets.

#65 OttawaLuke on 09.07.14 at 9:06 pm

Was looking forward to this…

“Of course, it needs rebalancing every few months, which separates the men from the sheep.

How to do that? Come back on Sunday.”

Man, you have a long memory. Was preempted, but back soon. — Garth

#66 TEMPORARY® Foreign Prime Minister on 09.07.14 at 9:09 pm

#10 Ronaldo on 09.07.14 at 6:34 pm
Dying too rich. Not many people will have to worry about that. Except maybe Shawn.
=========================

A human being only requires a finite amount of income to lead a happy and prosperous life.

Any excess is reserved for gloating and grandstanding. Just ask Lord Balk of Cross-Dresser.

#67 economictsunami on 09.07.14 at 9:11 pm

We’ve been doing this central planning/ central bank/ G7 coordinated Dog & Pony Show for awhile now.

This is what in recent history really started the ball rolling…

The True Story Of The 1980s, When Everyone Was Convinced Japan Would Buy America:

http://www.businessinsider.com/japans-eighties-america-buying-spree-2014-9?op=1#ixzz3CgHtYSS5

The simple Truth about QE:

http://www.theautomaticearth.com/debt-rattle-sep-7-2014-the-simple-truth-about-qe/

Now that the Fed is unwinding QE (but T-bills will continue to be rolled over) it’s time for the BoJ & ECB to do some heavy lifting.

Highly experimental, never done before but hey the alternatives are horrendous.

So we’re told…

#68 Nemesis on 09.07.14 at 9:12 pm

#AmIBeingPunished?… #I’veBeen’Binned’OnceOrTwiceBefore,YaKnow… #S**tDisturbing?Sure. #S**tLingering?Never. #’GoBags’. #ForSaltierDogzEyezOnly:

http://tinyurl.com/p3hes9a

#BonusZen #FirstDateToiletHumour:

http://youtu.be/ddGwvveSXxM

[NoteToGT: Just between the two of us… Never met ‘Andy’ – although, as rumour has it, we did have the same shrink. In other news, I’ve always managed to BounceBack, as it were. Training? Weren’tAlwaysEasyThough: http://youtu.be/enJJeOqHbqE ]

#69 OttawaGUYrenting on 09.07.14 at 9:24 pm

Ontario more debt issued

http://www.ofina.on.ca/borrowing_debt/issuedbonds.htm

#70 Fidel on 09.07.14 at 9:28 pm

Garth

All this talk about revolution, makes me wonder whether you are listening to too much Tracy Chapman….at the very least add the name Che to you moniker….Che Turner has a cool vibe about it…

#71 TnT on 09.07.14 at 9:37 pm

This time it is different… for Toronto and Vancouver that is…

Since the last Real Estate run started this world has gotten to be a very small place. Global migration for all its reasons finds Toronto and Vancouver a very much desired destination and for that reason alone has made it different this time around.

With global turmoil and migration patterns already mapped out we have only seen the beginning of the next boom. Toronto hosts one of the most diverse multicultural cities in the world.

http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=dbe867b42d853410VgnVCM10000071d60f89RCRD&vgnextchannel=57a12cc817453410VgnVCM10000071d60f89RCRD

2,500,000,000 (that’s 2.5 billion) humans from just 2 countries alone with very well established migration channels to Toronto and Vancouver are enough to make this time different. Canada’s population of 35,000,000 (that’s 35 million for all of Canada) relative to its resources is no match for world demand.

At some point in New York City’s life it became a world class city. It did not happen overnight but it did happen. Toronto and Vancouver are seeing this transformation now.

Born and lived most of my life in Toronto. I moved north of Markham for 10 years then back to Toronto, Beaches area. What felt like a blip living out of Toronto’s sphere and coming back, I cannot believe the changes that have taken place. Old run down neighborhoods that I grew up in the 70’s are now totally revamped and alive again with new families e.g. Liberty Village and Ossington Street, Factories turned into Lofts, Condo’s everywhere, I can’t even recognize the skyline driving across the Gardiner after 10 years of being away.

I know a lot of bloggers hate on these condo’s but it is amazing that we now have people living in these areas instead of dilapidated factories. All these people being here creates demand for other small industries like Dry Cleaners, Restaurants and even big box stores like Canadian Tire have transformed into smaller city boutique shops.

This has prevented the doughnut effect seen in a lot of other major US cities where the people exited the inner city to the suburbs and all the small business died out creating pockets of deserted areas.

I invite those who can to ride a bike across this city to see firsthand the changes going on. There is not a single neighborhood in Toronto and GTA that have not been affected by these changes. Those who have acted upon and participated in these changes have been generously rewarded and enriched. I agree this cannot and will not go up forever but it will not go backwards. This will simply level out to a new plateau and that will be the base for the next phase and generation.

Yessir, let’s replace all those dirty old factories with their steady jobs, manufactured goods and exports with condos and dry cleaners! You’re a genius. — Garth

#72 Vanecdotal on 09.07.14 at 9:41 pm

#64 Mark

Here in suburban Van, we are deluged every week with glossy brochures for new townhome / row home / condo developments touting why they’re such great investments, RE just keeps going up! etc. With each new round of advertising more and more “perks” from the developers. How’s about “5 years no strata fees” sound? Perhaps top of the line appliances and finishes with your “base” model condo? “Free car lease for 1-2-3 years” etc. Prices on new builds are still stubbornly sticky, but there is such a massive oversupply of this type of housing south of the Fraser they’re trying everything in their power to lure new suckers-er-buyers. Many developments are unfinished 2-3 years past original completion date. Thousands of these units on the market now. Desperate sounding radio ads full of buyer incentives. Few buyers, yet prices not yet correcting. I think we’re at the “Mexican standoff” portion of this bubble popping, I see it all around out here. Supply has grossly outstripped demand. These high density urban-style developments are being built in suburban areas, with limited or no transit within actual walking distance, none or very few amenities within walking distance, 1000’s of people crammed in cheek by jowl, all trying to enter / exit the area at the same time each day, it’s a traffic nightmare near many of these “planned communities” in the middle of nowhere, and many are only partially completed as of now. Also, after observing first hand some of the er- “kwality” construction going into an awful lot of this cheaply-built housing stock I really have to wonder how long they will last in our rainforest climate? 5 years? 10? 20? Anyone considering buying this type of unit, at today’s prices is insane. I believe this type of housing will correct the most once the bubble shakes out back to the mean, can easily imagine 30% – 50% haircut in this situation in maybe 5 years time, and if you are even considering purchasing a suburban pre-sale hole in the ground, the likelihood you are throwing your money away is getting pretty likely imho. Worth noting, however, that older, better built homes and townhomes / condos are slowly drifting down in prices, and have been for at least 3-4 years, but enough of them seem to hit a lower bid and eventually sell. Spells trouble for those selling the new units if they can’t lower prices any further without losing money on the project. Am seeing this play out in other Van suburbs as well. The rot starts at the edges, as they say. Metro Van will correct as well, although perhaps the price declines may be moderated somewhat by other influencing factors.

#73 Flawed on 09.07.14 at 9:46 pm

#46 liquidincalgary on 09.07.14 at 8:10 pm
Why are we paying “billions” of dollars in interest on money created out of nothing?

=========================================

because you accessed it

**********************************

Really? That’s funny cuz I don’t remember getting a check. And last I checked services were “going DOWN” not up. And the economy is getting WORSE not better. And I asked all my friends and none of them got any check from the BOC or the FED. So I guess unless your the head of RBC or a NY bank you don’t get any of the money you claim I have “accessed”.

No?

#74 Happy Renting on 09.07.14 at 9:46 pm

#5 oslec on 09.07.14 at 6:23 pm
I am now officially depressed :=(

For blog dogs with financial assets, this post was the opposite of Misery Week.

#75 Flawed on 09.07.14 at 9:52 pm

How much longer do we have to keep printing money and destroying the value of currency and savings before all the world’s economic half wits realize they’re wrong….. that debasing the currency and stealing from savers does not help the economy just like when a robber robs a bank does not help the bank and business loans. Clueless.

oh ya, they don’t care about the truth just like bank robbers, they’re in it to steal and pretend like they care.

It’s a despicable world we live in today with so much advancement in knowledge, science and understanding in the natural sciences, yet so much utter stupidity and error when it comes to economics and money.

But like i said, it’s not by accident. Governments are thieves and know precisely what they’re doing.

take take take…..

*********************************

Enter Bitcoin

– Decentralized therefor NOT corruptible or coop-table

– Impossible to print at will like Central bank money at interest.

– Controlled by the masses not idiotic bureaucratic in govt or thieves in investment banks (RBC, Goldman et al).

– Un-regulated. Which is a feature not a flaw. Regulations do not work. If regulations worked you would not have some black kid put in jail for 5 years for a kilo of coke but HSBC gets a slap for laundering billions for drug cartels. HSBC is not a robot. Its run by MEN. And none of these MEN ever go to jail.

This is why bitcoin is growing and will continue to grow. By years end it will outstrip Pay Pal in transactions. Next year, EBAY etc etc.

Tedious idiocy. — Garth

#76 takla on 09.07.14 at 9:52 pm

There is no guarantee that they will be able to stave off inflation as time proceeds in the face of higher debt levels,slowing productivity,or sudden riseing global interest rates.All that money that’s been printed is sitting on the Banks balance sheets waiting to be lowned with interest.
Also ask your wives if the cost of running a house hold is deflating.real inflation levels is hidden from consumers.
The only reason we enjoy the standard of living we do is because we’re located next to the only country on the planet that has the exclusive right to print the world currency…imagine how well we’d be doing if we all had a printing press in the basement and unlimited paper to print dollars,bonds and T-bills to purchase goods and services
According to the world economic outlook inflation in Brazil reached 6.2%,6.4 in Indonesia,6.6 in Vietnam,6.8 in Russia,7.5 in Turkey,9.5 in India,10% in Argentina and over 40% in Venezuela so world inflation is alive and well.There will be a slow creep of real inflation ahead…prepare

#77 Nemesis on 09.07.14 at 9:56 pm

#JustForFidel…

http://youtu.be/86LSuXi5TLU

[NoteToGT: Go on… You know you want one. Shall I post you a Beret. After all, I do have a spare or two…]

#78 Victor V on 09.07.14 at 9:57 pm

Financial stress acute for striking B.C. teachers

http://www.theglobeandmail.com/news/british-columbia/financial-stress-acute-for-striking-bc-teachers/article20464048/

…but a pat on the back doesn’t pay the rent, and it is likely that teachers have already lost more money than they can hope to recoup by holding out. Mr. Iker’s words reflect that reality.

As he delivered his speech, the average B.C. public school teacher had already lost at least $6,000 in pay in this dispute.

For Surrey school teacher Jim McMurtry, the financial cost is wearing, but he’s also upset by the price that students are paying in lost class time.

“I feel like a soldier in the trenches of the First World War, congratulated for making a sacrifice I was duped into making,” he said.

#79 Yitzhak Rabin on 09.07.14 at 10:08 pm

Deflation is bad for over-indebted consumers, businesses and governments. Guess who is in debt and why they want inflation? To benefit themselves.

Inflation conversely is bad for people on fixed incomes, savers and the poor who spend a higher proportion of their income on basic necessities like food and energy.

In all cases, some benefit and some lose. Just as in the weak currency / strong currency argument.

All government and central bank interventions distort the economy and you can bet your McMansion that the global economy is more distorted today than it has ever been.

All major economies have been screwed up so bad by governments that they are now walking a tightrope between a deflationary debt collapse, on the one hand, and currency destruction, high/hyper inflation on the other side.

If central banks do shrink their balance sheets and raise interest rates you will see massive deflation, in a worse collapse than 2008 as the debt levels are much worse.

Conversely, if central banks resist and fight the deflationary forces with more “asset purchases” (creating money out of thin air) prices for everything will eventually skyrocket. Look back at history and high/hyper inflations can develop over a matter of weeks. This is much worse for the economy than taking our licks with deflation and debt liquidation although both would be painful.

The “metalheads” are not “wrong” today unless they were also “right” in 2011 (or the 12 years from ’99 to ’11). Gold and other inflation correlated assets are cheap right now because the market expects a normalization of monetary policy with no negative consequences. If you look at the rhetoric of central planners right now it is hard to see them choosing a deflationary route or an inflationary one when the fireworks start happening.

#80 suprised on 09.07.14 at 10:13 pm

Garth the financial train is going to accelerate downhill and at the current speed it will be hard to jump out.
you have one choice BRACE.

Time to pay off the debts and get real assets.

#81 Ronaldo on 09.07.14 at 10:16 pm

#34 Mark –

”Why should a house be sellable for what a person paid for it? After all, we don’t expect that a car driven off the parking lot of the dealer retains 100% of its value.”

Of course houses depreciate. It’s the land values that move up and down in value. My house should be worth what it would cost me to rebuild it today after inflation is taken into account as long as I have kept it maintained. The land value is the wildcard. In Vancouver and Toronto people are paying 1 million for a ”tear down”. The house has no value but they like to believe that the lot is worth a million dollars. Many will get a serious awakening there in days ahead. In the 80’s downturn it was possible to buy a house in some areas of the province (BC) for basically the cost of building it. You basically got the land thrown in. Prices remained flat until the early 2000’s, almost 20 years. Many young people today have never been through a downturn like that.

#82 Panhead on 09.07.14 at 10:16 pm

#24 Jonathan on 09.07.14 at 7:14 pm

Expenditures on home renos are expected to drop by 35% and not recover meaningfully until after 2018.

Went into said Hi Def store the other day and grabbed 4 small plastic fittings without looking at the price. Got to the till and they rang up $12.00. I just looked at them and told them to keep them. A little deflation in a few places would be welcome. Just too bad we couldn’t pick and choose where …

#83 AisA on 09.07.14 at 10:17 pm

Ever feel like CB interest rates are the gatekeepers of the caste system of the 21st century?

back to beer and silence I go….

#84 TnT on 09.07.14 at 10:23 pm

Yessir, let’s replace all those dirty old factories with their steady jobs, manufactured goods and exports with condos and dry cleaners! You’re a genius. — Garth

********

Wow… The steady jobs were replaced already with modern office jobs and it’s a good thing to have more people living in the city. These new modern jobs need the labour force close to offset the commuters.

#85 wallflower on 09.07.14 at 10:35 pm

#16 mitzerboy on 09.07.14 at 6:51 pm
out here in sask my grandpa called it the dirty
30s …wind no rain and big black flies and no money…he would trade things for things …little moonshine money paid for most things bought in town

= = = = = = = = = = =
what scares me silly about the spectre of poor times is that the domino effect will be enormous; with comparatives at half of what happened in the 30s, we are in deeper trouble than the 30s… because now, our basic costs of maintenance are SO MUCH HIGHER. In the 30s, you could survive in a house with no connections to any hydro grid and no furnace; you could burn wood as you sourced it; even if you did have hydro, the consumption cost was nearly 100% of the bill whereas today it is only 10% in my household so even if I turn off the hydro but stay connected, I am still paying a huge monthly amount (same with gas services). Nobody had condo fees in the 30s and so they just did without all those services; today, how does that work? it doesn’t. Property taxes in the 30s were probably a pittance. Today, our base load costs without even consuming a single thing are enormous as compared with the 30s. This means that even with a small down turn, the load is instantly a higher percentage of carrying costs… and so the domino effect begins.

#86 Mark on 09.07.14 at 10:37 pm

“How’s about “5 years no strata fees” sound? Perhaps top of the line appliances and finishes with your “base” model condo? “Free car lease for 1-2-3 years” etc. Prices on new builds are still stubbornly sticky, but there is such a massive oversupply of this type of housing south of the Fraser they’re trying everything in their power to lure new suckers-er-buyers. Many developments are unfinished 2-3 years past original completion date. Thousands of these units on the market now. Desperate sounding radio ads full of buyer incentives. Few buyers, yet prices not yet correcting.”

Au contraire my friend, all those ‘incentives’ are actually reductions in the offered price, merely disguised in an effort to make the price declines look non-existent.

But when push comes to shove, the declines are real, and you’ve even offered up evidence of them occurring. If a $40k BMW has to be included to sell a condo at the previous year’s price — it simply means that the condo has gone down $40k.

#87 Mark on 09.07.14 at 10:44 pm

“For Surrey school teacher Jim McMurtry, the financial cost is wearing, but he’s also upset by the price that students are paying in lost class time.”

Why doesn’t Mr. McMurty rent a spot in a strip mall, and take the $40/day/student that the government is offering families and earn some money?

The amount of opportunity available to teachers is unprecedented in terms of starting their own business and making their own opportunity here. But most refuse to do themselves, and the students good by taking advantage of such.

I believe that many school boards would also leap at the opportunity to rent some of their under-utilized facilities to striking teachers starting their own schools.

#88 Inglorious Investor on 09.07.14 at 10:46 pm

#20 Mr. White on 09.07.14 at 7:07 pm

Good post. Some thoughts on what your wrote:

“Money is the medium of exchange. […] The demand for money is the amount of money that people want to hold at a point in time. […] The supply of credit is the amount of funds people want to lend during a period of time. […] An increase in the demand for money is not the same thing as an increase in the demand for credit.”

Indeed. In fact they are the opposite. I think of credit as potential money-debt. As soon as bank credit is spent or begins to bear interest, it becomes money-debt, which is a claim on some asset or future flow of income.
————————–

“An increase in the demand for money could result in an increase in the demand for credit.”

When demand for money increases, it means people are holding on to as much money as they can save. This does not necessarily mean they don’t demand credit too, but are two different things.
—————————

“An increase in the supply of credit isn’t the same thing as an increase in the quantity of money.”

Depends on the source of the credit. When the new credit comes from savings, as you point out takes place when people buy corporate bonds, this does not increase the money supply. But when the new credit is issued by banks, this does increase the ‘money’ supply. This is because bank credit is pyramided off of bank reserves, which are created by the central bank, or come from bank deposits.
————————

“Because shifts in the share of the total supply of credit associated with money creation are possible, the quantity of money can rise over a period of time when the supply of credit is shrinking.”

All that’s required for the money supply to increase is for the central bank to create reserves by purchasing assets (typically government bonds). The reserves are not the same as currency in circulation. Reserves are ‘high powered money’ which is the source of bank credit. In the US, for example, every dollar of bank reserves has the potential to become almost 10 dollars in bank credit, assuming a 10 percent reserve ratio. An increase in bank reserves does not necessarily result in an increase in money-debt in circulation, but the real money supply has grown, none the less.

#89 Mark on 09.07.14 at 10:48 pm

“My house should be worth what it would cost me to rebuild it today after inflation is taken into account as long as I have kept it maintained”

You should need to do more than just “maintenance” to keep value. After all, newer houses come onto the market all the time, have ever increasingly fancy features and can be manufactured at a lesser cost due to various applications of technology.

As for your house specifically, even if you do ‘maintenance’, the house still keeps getting older and closer to obsolescence. If one can build a house at replacement cost, then your used house should be worth less than replacement cost reflecting depreciation of its various systems and structural elements.

#90 Gg on 09.07.14 at 10:55 pm

Krugman? Really. His solution to wealth creation is to print money. That is it.

#91 Inglorious Investor on 09.07.14 at 10:55 pm

“They’ve been trying to ward off deflation, which destroys money.”

Deflation does not destroy money per se. It destroys debt. Consequently, it also reduces the price of debt-dependent assets, such as homes.

Deflation reduces the supply of money-debt, but money that is closest to the monetary base (e.g. cash) become more valuable.

#92 Joe2.0 on 09.07.14 at 10:57 pm

I know I’ve said it before but money printing is just postponing the inevitable.
This will not end well.
Enter a deflation cycle and a war cycle.
There is no way around it.

#93 nonplused on 09.07.14 at 10:57 pm

Um, I don’t think that’s totally true. Deflation hurts creditors too, often more so, in the form of default. Deflation implies a reduction in the money supply. Where is that money going? Banks loan it into existence (which can create inflation if they get crazy with it) and debtors default it out of existence. So banks always prefer inflation to deflation because they get the money back. So long as the interest rates are above the inflation rate they are ahead, whereas if inflation is negative, which might imply that the loans are worth more, it doesn’t mean much if all the loans are impaired.

Hence central bankers preference for controlled, modest inflation. Debt lead deflation can spiral out of control, whereas inflation has been stopped successfully before with Volker style rate hikes.

For a central banker, that’s the scary part about it. How do you deal with deflation if rates are already zero and the defaults keep coming? Zero seems to be the boundary. You can potentially pay negative interest to savers, but can you actually pay people to borrow money? (Imagine a mortgage at -5%. I’d borrow all I could, the loan goes away on it’s own.) On the other hand in an inflationary environment you can raise rates to 20% (think the 70’s) and it effectively has the desired effect.

This is why bankers fear deflation. The debt (and money) just disappears in a self reinforcing loop and there is no easy way to stop it once a significant portion of the loans are impaired.

#94 Cici on 09.07.14 at 11:00 pm

Great post, but I thought we were going to talk about rebalancing tonight? I’m impulsive, and the only reason I’ve ever finished reading a book is to get past the cliffhanger…

#95 Gg on 09.07.14 at 11:00 pm

The cure to looming deflation was to … Clean the system of bad debt and banks and reset. Which it will.

#96 Don Sanderson on 09.07.14 at 11:01 pm

There is no confusion. Morons with money always existed. It is just that now the banking, financial system rewards them for now.

They will always get punished later with falling housing prices, rising foreclosures, higher divorce rates, no savings and investments, higher bankruptcy rates, being broker over and over, higher suicide rates etc.

You can’t teach most of them to do well because it is in their nature. Clueless, moronic, financial behavior that keeps getting replenished every day.

A SUCKer IS BORN EVERY MINUTE.

#97 nonplused on 09.07.14 at 11:06 pm

Oh and I forgot to cite the 30’s as an example. So when did you have more banks going under, in the inflationary 70’s or the deflationary 30’s? It was the 30’s, because their loan portfolios were no good so they collapsed taking all their depositors money with them leading to a whole more bunch of people who couldn’t pay their loans, more bank collapses, and so on.

Inflation reduces the value of a loan. Deflation eliminates it.

#98 Gg on 09.07.14 at 11:07 pm

Lol … Keep printing. Things are great until they are not.

#99 Inglorious Investor on 09.07.14 at 11:16 pm

“Without this river of newly-minted cash, it’s likely we’d live in a different world right now – one with falling incomes, collapsing demand, plunging real estate values and 15-20% unemployment.”

Yes, but it’s an illusion.

All that newly printed cash from the central banks does little but redistribute the wealth. That’s why the rich are getting richer and the middle class are getting poorer. You say so yourself, Garth. Only you couch in different terms by basically saying that the rich are on the right side of the government/central bank rigged game by which wealth is being transferred. Indeed, in real terms (the only terms that really matter) it appears incomes are falling.

More money does not equal more wealth. Without a concomitant increase in real wealth to collateralize all the new money, the reality will not change. Printing money only buys some time. It’s a stop gap measure. If an insufficient amount of new wealth is not generated, then the people just travel down the road to perdition a little more slowly, but the destination is the same.

Monetary inflation without inflation of wealth is just an indirect (read sneaky) way of extracting wealth from the people. And when inflating the money supply doesn’t work in this regard, they just go after the people’s wealth directly (e.g. bail ins, higher taxes, fines, levies, confiscation–e.g. gold 1933)

More money is not the answer. The only solution is more wealth. Oh, that plus a brand new system. Get ready.

#100 Inflation on 09.07.14 at 11:26 pm

If low interest rates are to fight deflation, then prices would be falling otherwise I assume. Let’s say 5%. If that were true, then if we are at 2% inflation does that not mean that true inflation (for this example) would be 7%?

#101 Nemesis on 09.07.14 at 11:28 pm

#JustForCiCi…

http://youtu.be/IydM8H49MuA

#102 Inglorious Investor on 09.07.14 at 11:36 pm

With regards to what’s ahead for the world’s monetary system, I’d say that the next monetary system is either in the works or already designed, but not yet unleashed on the public.

People on this blog and all around the Internets debate inflation and deflation, gold vs. stocks, etc. But in reality, the monetary system upon which this is all based is moribund, so we are likely arguing moot points. Raging against wind mills. Behind the curve, so to speak.

The best thing one can do is figure out how to possibly front-run the governments and central banks and get set up for the next monetary system they will be bringing forth.

For almost 100 years the world’s monetary systems (from the gold exchange standard, to Bretton Woods, to today) were based around the US dollar. But that clearly is coming to an end, if it hasn’t already for all intents and purposes. The trick is managing the transition. And this transition is not some event in the future. It’s happening today, right before our very eyes (more or less).

In any monetary metamorphosis the thing to be in is hard assets. Real wealth always has real value no matter what currency it’s denominated in.

And don’t forget, there are always two tiers to any monetary system. One for the common people, and the real one for governments and central banks. Ask yourself: as we’ve transitioned from system to system throughout recent monetary history (silver, gold, gold exchange, B Woods, floating exchange) what is the one asset that governments and central banks have always held on to? What is the one asset they trust and exchange when all else fails? Just asking.

#103 Flawed on 09.08.14 at 12:01 am

This is why bitcoin is growing and will continue to grow. By years end it will outstrip Pay Pal in transactions. Next year, EBAY etc etc.

Tedious idiocy. — Garth
*******************************

Corrupted criminal banks and central banks who HURT hundreds of millions of people? Yes….I agree. Criminal idiots. But they own the govt so they can buy their way out of jail……for now.

#104 drydock on 09.08.14 at 12:05 am

#210 Steve French on 09.07.14 at 6:13 pm

If you thought Saskatoon’s opinions on minimum wage were a load of toss you should hear him on Darwin’s Theory of Evolution.
It’s mind boggling.

#105 Flawed on 09.08.14 at 12:05 am

#87 Mark on 09.07.14 at 10:44 pm
“For Surrey school teacher Jim McMurtry, the financial cost is wearing, but he’s also upset by the price that students are paying in lost class time.”

***************************

How about the price that taxpayers pay the teachers for salary, massages, extra healthcare (that us poh ass privat wawkers do’ get….) and of course….million dollar pensions when they retire. All paid for by taxpayers.

#106 Ronaldo on 09.08.14 at 12:09 am

#66 TEMPORARY® Foreign Prime Minister on 09.07.14 at 9:09 pm
#10 Ronaldo on 09.07.14 at 6:34 pm
Dying too rich. Not many people will have to worry about that. Except maybe Shawn.
=========================

”A human being only requires a finite amount of income to lead a happy and prosperous life.
Any excess is reserved for gloating and grandstanding. Just ask Lord Balk of Cross-Dresser.”

Totally agree. I told both my sons many years ago not to rely on me for their retirement as I’d planned to spend it all by the time I go toes up. So far so good. I think they must have taken me seriously as both are independently wealthy today.

#107 Flawed on 09.08.14 at 12:15 am

#84 TnT on 09.07.14 at 10:23 pm
Yessir, let’s replace all those dirty old factories with their steady jobs, manufactured goods and exports with condos and dry cleaners! You’re a genius. — Garth

********

Wow… The steady jobs were replaced already with modern office jobs and it’s a good thing to have more people living in the city. These new modern jobs need the labour force close to offset the commuters.

********************************

And what are these new modern jobs produced in these cities? Truly I’m curious. Because last I checked we are a resource country not a call centre country. Canada needs to take its resources and make stuff with it in factories, not grow ourselves with 10 buck an hour dorky service jobs.

#108 Loyal Reader on 09.08.14 at 12:17 am

One question for Garth.
I just signed a rental lease agreement for one yr term for detached house in Mississauga and house cost is 700K, I am renting it for 2050 a month. Is it a good deal or bad. We make more than average income in Canada, quite more than average house hold, but my question is regardless of income renting a 700K property for 2050 /month is good deal or bad deal, am I wasting money on rent or enjoying a better life in less cost?
Please reply Garth and let me know of your opinion.

#109 OffshoreObserver on 09.08.14 at 12:43 am

I wish we had Regan, who would fire all the teachers as he did the Air Traffic Controllers.

Which reminds me of my MBA, principal–he was the adminstrator of the program in 1983. Not particularly bright but he had the paper.

A week before my 25th MBA reunion, the Vancouver Sun ran a piece on the civil servants who made over $100,000.

My ex “principal” was listed at $500,000/year!

Fire them all!

And, finally, this:

Those who can, do; those who can’t, teach

#110 Ayn Rand Army on 09.08.14 at 1:19 am

#75 Flawed on 09.07.14 at 9:52 pm
Bit coin is ok, i guess for now, never used it myself but so fare but it’s not much different than fiat currency to some degree since good money must be commodity based that is limited and scarce and requires production by some real means. and there can be no limit on the number of competing digital currencies just as there are many countries each with their own fiat paper currency.

so as always, historically, the key behind all this new money will eventually need backing by gold, then we can have multiple digital currencies so long as each is fixed by some ratio to weight in gold, silver, platinum etc…. something that is physically limited.

So the new gold standard will be improved by technology once these digital currencies are redeemable for fixed weights.

hence is why the us constitution covers money under the section of weights and measures.

good money has to have weight as a property and heavier than paper and non combustible nor volatile memory.

#111 Ayn Rand Army on 09.08.14 at 1:26 am

crowd farter, your ignorance is showing, again, Ayn Rand was an anti feminist.

takla, that’s right, the us exports inflation so is suppressing prices in us currently, but wait til that process reverses and the world dumps the dollar. The us is doomed, and we are tied at the hip. hence all the wars right now and attacks against russia and china to try and maintain usd hegemony.

but time is running out, tic tic tic….. and moving faster imo

#112 Suede on 09.08.14 at 1:36 am

Something doesn’t sit right here….

Rates up
Wages up
RE prices down?

Maybe on paper, but the masses will have more money to be able to service the debt in this case.

#113 Mac on 09.08.14 at 2:00 am

Garth vs TNT

What a low personal attack against TNT who makes a lot of valid points and then has to go on and educate you about the new economy. Factory jobs aren’t coming back. But the new owners the new global factories are already in TO. It should be pretty obvious if you open your eyes and your mind.

The factory owners always own the big homes and the workers the apartments. Today is no different. It’s just global.

#114 A Yank in BC on 09.08.14 at 2:02 am

Krugman. Ugh. I believe it was his suggestion that the US Mint should print a One-Trillion Dollar Bill and hand it to the US Treasury.. and poof! One-Trillion in debt wiped off the books overnight. It’s difficult to take anything he says seriously after that.

#115 Lurker on 09.08.14 at 2:04 am

Really…..portraying central bankers as the hero’s that are saving us from the deflation monster. If I push someone off a boat and then throw them a lifejacket would I be a hero too? If I shoot someone and then drive them to the hospital would I be considered a hero? Central bankers caused the current mess with their reckless policy and they should not be portrayed as hero’s warding off a depression. Central bankers are the villains, not the hero’s.

Central bank policies are 1) destroying the middle class as real wages have been declining for 15 years. 2) destroying hope for the younger generation as they face poor job prospects and high real estate prices 3) destroying financial markets as stock and bond prices no longer trade on fundamentals but instead trade on central bank policy direction. 4) destroying the futures of a large segment of the population taking on too much debt 5) destroying the future of the savers and pensioners who struggle to earn a decent return on their savings that they diligently built up over decades of financial responsibility 6) destroy economic growth in the future as high debt levels will continue to be a drag on the economy 7) caused a massive misallocation of capital as resources get put towards projects which have marginal returns.

Central banks have far too much power for a small group of unelected academics. They have drank the Keynesian Kool Aid and are distorting reality to try and prove their policies work. A small group of central bankers can not, and should not, replace market price discovery in an open, transparent, and free financial market. As central bank intervention has increased, growth has decreased; which should be expected when you replace efficient financial markets with government decision making.

If deflation and a recession is what it takes to get back to a point where growth is driven by savings and investment as opposed to by consumption and debt, then bring it on. If deflation and recession is required to minimize the non productive investment and speculation in the economy, then bring it on. If deflation and recession is required to eliminate an attitude of entitlement and instill a work ethic, then bring it on. If deflation and recession is required to set a foundation for future economic prosperity, then bring it on.

Central banks are not hero’s, they are the problem. If the central banks did not focus solely on bailing out the banks at the expense of the entire middle class in 2008 the recession may have been deeper, however we would have gotten rid of the rot that was plaguing the financial sector and would be experiencing a real recovery by this point. Instead we have put a massive debt band aid on and we will come apart at the seams just like every other bubble the central banks have engineered.

#116 Protect TFSA's at all cost on 09.08.14 at 2:18 am

Here’s an WSJ article concerning Roth IRA’s in the States, which are the equivalent to TSFA’s here in Canada.

Obama has proposed in his 2015 budget that distributions for the Roth IRA’s must start at 70 and half. That will almost entirely defeat the purpose of them; Obama’s basically gutted them for the baby boomers.

I urge all Canadians to protect our TFSA program; be proactive and write their representatives in Parliament instructing them not to follow Obama’s lead and enact a similar budget.

TFSA’s are too important a financial tool to let politicians play with them. I truly hope I’m wrong, but when you see smoke, there’s usually fire.

Here’s the article:

http://online.wsj.com/articles/should-i-leave-a-roth-to-my-heirs-1410120116?ru=yahoo?mod=yahoo_itp#livefyre-comment

#117 Steve French on 09.08.14 at 3:47 am

I followed the sound of a jukebox coming from up the levee

All of a sudden I could hear somebody whistling, from right behind me

I turned around and she said:

“Why do you always end up down at Nick’s Cafe?”

I said “I don’t know, the wind just kind of pushed me this way.”

She said “HANG THE RICH.”

#118 Mark on 09.08.14 at 3:59 am

“So banks always prefer inflation to deflation because they get the money back.”

No, you have that somewhat backwards. Banks, by definition, are always net owners of assets. ie: assets exceed liabilities. Inflation causes assets to melt away, while liabilities tend to increase as liabilities tend to be shorter-term resetting as to their interest rate.

Inflation, particularly hyperinflation, destroys banks, destroys the value of real estate, and destroys the bond market (another place where bankers ply their trade). While deflation is excellent for banks, tends to augment the value of real estate (until it goes into overcapacity, of course), and leads to bond market bubbles.

Eventually we will see bank-damaging inflation, but there’s an awful lot of deflation in Canada’s future as the housing market continues to go down. Many of the worst features of deflation, such as debt default, have been insured against by the banks by way of CMHC subprime mortgage insurance, so the big risk in the Canadian banks is largely political (ie: an ‘orange’ government deciding that the CMHC isn’t going to be bailed out!).

#119 Londoner on 09.08.14 at 5:25 am

I see a lot of posts criticizing central bank intervention, calling it a “fraud”, comparing it to a “ponzi scheme” (how exactly?) and claiming that Canada would have been well on it’s way to economic bliss without it. What you fail to realize is that without central bank actions things would have been a lot worse. In fact, if Garth was Governor of the BoC during the GFC he would have done the exact same thing. As bad as things currently are, consider yourselves lucky you didn’t have to live through a depression.

Is it naivety or ignorance that makes you think that central banks slashed rates to create asset bubbles in housing and stocks? The actions of central banks were in response to a liquidity crisis – when the credit bubble began to collapse the only thing financial institutions were thinking about was counterparty risk. The resulting inflation in certain assets was a by-product. The more recent objectives of trying to create wage inflation and encourage business spending so far remain elusive. But make no mistake, those are the current objectives. Yes, they will try to reign in consumer debt, but without raising rates, which would be counterproductive to economic growth.

With the abundance of forward guidance given by the central banks (something we’ve never had before) you would think that people would be more aware of this. But the only thing that anyone seems to be concerned about is house prices. Get over it already.

#120 MarmotManor on 09.08.14 at 5:48 am

“This is exactly what encouraged all the gold nuts to go creamy as they dreamed of currency debasement, asset bubbles, government bankruptcy and the inevitable worthlessness of trillions of crispy, fresh dollars.”

Your obviously including China and Russia as “gold nuts”.

Those gold nuts are of course bypassing the petro dollar, and ensuring that they are arranging international settlements in their own currencies.

Will these gold nuts take over? No!

Will the US be forced to surrender its role as sole reserve currency? Certainly.

Will China in particular be part of the new reserve currency? Absolutely

There is absolutely no doubt that gold has been manipulated since 5th August 1993. Read here massively suppressed – and that is why gold is not reflected correctly compared to fiat.

#121 saskatoon on 09.08.14 at 7:21 am

#104 drydock

saying an idea is “mind-boggling” is not an argument.

furthermore, wanting to murder people because they have more than you…this is not only immoral and anti-freedom, but it is also illogical:

for, if you had more money currently, you wouldn’t think this way.

#122 jerry on 09.08.14 at 7:29 am

Positioning a portfolio within a deflationary period??

Own debt?

A balanced and diversified portfolio holds both equity and debt. That’s the point. — Garth

#123 Sean on 09.08.14 at 7:34 am

Bitcoin…

– no intrinsic value
– no barrier to entry
– no monopoly nor coercive power, as governments have over national currencies, to even give it “pseudo” intrinsic value

I could, and probably should, create parallel Shitcoin, Zitcoin and Titcoins… and yes, I realize there already are a ton of competitors out there, which should hammer home the point.

Bitcoin truly will return to its intrinsic value eventually.

#124 robbierobertson on 09.08.14 at 7:43 am

@117 Steve French
Plagiarist – the Blue Train must have left for Kokomo without you.

#125 Kenlaozu on 09.08.14 at 7:46 am

All you parents funding your kids to buy tiny $400,000 skyboxes with falling glass and particleboard semis in Milton, this is what your future looks like:

https://ca.news.yahoo.com/blogs/daily-buzz/29-year-old-man-baby-sues-parents-for-not-financially-145831060.html

When RE prices drop and your kids are under water, they’ll be back to you asking for more. You’ll go into more debt to give it to them.

These are the same kids will be the ones controlling your estates and the DNR orders, by the way.

Way to go, Bank of Mom and Dad.

Good parenting!

Yeaaahhhh!!

#126 Gg on 09.08.14 at 8:04 am

“Krugman demonstrates the importance of having your own currency by comparing Spain and Florida” Huh?

Read more: http://t.co/CEjO923Jqh

#127 Crap-Couver Advisory on 09.08.14 at 8:41 am

Sure …most desirable city to live in. I wonder what they paid for that ?

http://www.vancouversun.com/health/Metro+Vancouver+worshippers+beach+coli+keeps+them+water/10182959/story.html

Many of us have been banging the drum on the sewage situation in Crap-Couver for a decade. I have received many many Fatwa’s from the nobility….at the tourism fronts. But…now…..it’s so dangerous you can’t go near the water without picking up some weird disease.

Best place in the world……I don’t think so. Bwahahahahahahahahaha ..the jokes on you Vancouver……The Greatest Public Toilet in the World.

#128 maxx on 09.08.14 at 8:46 am

One of the elephants in the room, perhaps the largest, is the question of when CB’s will man up and admit they were collectively wrong. Massively and chronically wrong.
They were wrong in the eighties and especially early ’90s (housing for all, wealth ascending forever, the miracle of mutual funds for the rank and file……).
Trouble is, this delirium blinded them to the possibility that the real economy is where it all begins….

Today, amidst floundering and sputtering economies, they persist in holding their snouts aloft and still refuse to admit what the world already knows: stupid is as stupid does.

#129 T.O. Bubble Boy on 09.08.14 at 9:03 am

This is why bitcoin is growing and will continue to grow. By years end it will outstrip Pay Pal in transactions. Next year, EBAY etc etc.

Tedious idiocy. — Garth
———————————————

Bitcoin over Paypal by year end???

Bitcoin = 60,000 txns per day (and hasn’t grown much all year)
https://blockchain.info/charts/n-transactions

Paypal = 9.3 million txns per day
https://www.paypal-media.com/ca/about

However, I agree that the USD Dollar value traded in Bitcoin is about the same as Paypal (since 1 txn = at least $400-500)… but, it is NOT growing as suggested.

#130 Steve French on 09.08.14 at 9:03 am

Insane Sydney property bubble going parabolic.

Certain house prices now increasing $265 K, or 24%, within the space of 2 months.

http://www.macrobusiness.com.au/2014/09/meanwhile-on-the-bubble-front-line/

Australian property to infintity and beyond!

Yaa mate we’re the frikkin lucky country. Deal with it.

Don’t hate us Aussies for being smart, hot, and successful.

Only losers don’t own property in Aussie-World (TM).

Don’t be a loser!

#131 rosie "moving forward" in the knowledge that, "this won't end well" on 09.08.14 at 9:08 am

See how realtors lie and deceive. They even convince themselves.

http://ottawacitizen.com/news/local-news/condo-sales-slide-continues-but-some-say-rebound-on-way

#132 Steve French on 09.08.14 at 9:16 am

29 year old Australian accumulated 160 properties and retired 5 years ago with a $30 million portfolio.

“I’ve loved property since I was 13.” – Nathan Birch.

http://www.news.com.au/finance/real-estate/nathan-birch-went-from-pouring-beers-to-owning-a-property-portfolio-worth-millions/story-fnd91nhy-1227051194576

That’s how we roll in Aussie-World (TM) !

If you don’t own at least a dozen investment property units, you’re doing something very wrong down in Aussie-World (TM)!

#133 rosie "moving forward" in the knowledge that, "this won't end well" on 09.08.14 at 9:16 am

One day a young vendor, desperate and hopeless, will be forced by the authorities to stop selling stuff. In his or her despair they will self- immolate. Just like in Tunisia.

http://www.latimes.com/business/la-fi-street-vendors-20140907-story.html#page=1

#134 Big Brother on 09.08.14 at 9:23 am

#63 TEMPORARY® Foreign Prime Minister on 09.07.14 at 9:01 pm
On a lighter note, love the new automatic spell check, by the way.
Which gives one to ponder, how does Smoking Man continue to make so many spelling mistakes?
Inquiring minds need to know…

;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
We are MKULTRA, we programmed him to miss-spell everything. All of his mutterings are a cryptic code that only the tin foil hats can understand! We even allowed him to have an iPhone with spell check and he still does what hes programmed to do! Come to his Casino Niagara Seneca to see him in action with the girls hanging off his arm and a fistful of dollars!

#135 Retired Boomer - WI on 09.08.14 at 9:38 am

The more I look at it, the MORE the concept of DEFLATION has appeal to the debt free lifestyle.

So what if wages fall 10% along with prices? Even a fall in income from returns -or government geezer payments- to match?

Interesting way to re-set the economy. I say, let’s see where the deflationary pressures take us.

#136 Steve French on 09.08.14 at 9:38 am

https://www.youtube.com/watch?v=s8mEx8D31Fg&list=UUiPDTY6a8aqZDkdrOsLHBxA

When s**t hits the fan in AussieWorld (TM) real estate… don’t worry about!

Just buy another property!

#137 Toronto_CA on 09.08.14 at 9:39 am

Interesting tidbit released recently:

“Additionally, salaries for new grads have fallen somewhat. They averaged $41,699 for 2006 grads, six months after graduation, and were $42,636 for 2011 grads. But adjusted for inflation, that amounts to a roughly $3,000 reduction in wages.”

So around a 7% decrease in wages for people with university degrees starting out in Canada.

http://www.huffingtonpost.ca/2014/09/08/best-worst-degrees-canada_n_5774704.html

#138 };-) aka Devil's Advocate on 09.08.14 at 9:43 am

“I believe that banking institutions are more dangerous to our liberties than standing armies.

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

– Thomas Jefferson

You have to know where this is going… It’s not like it’s something new. It’s too big to be stopped now without enduring some tumultuous social changing event which will inflict a dose of pain upon society not unlike that of any of those wars fought throughout history to preserve our way of life. No, this will not end well. But no need to worry as that is not likely to happen in your or my lifetime as, despite it’s flaws, this lifetime is still way too comfortable.

We are an intelligent species. Yet despite that intelligence which separates us from others on this planet we are lazy. We wait until things are broken and only then fix or change them.

#139 Dwilly on 09.08.14 at 9:43 am

On Friday you said to come back on Sunday to learn about how and when to rebalance a portfolio. I came back on Sunday, and this is not that! I feel so misled!

Then come back tomorrow. There will be a test on Thursday. — Garth

#140 Steve French on 09.08.14 at 9:46 am

Common excuses that losers make for not investing in AussieWorld (TM) property

Don’t be a loser.

Take the matrix pill and surround yourself with the right people!

https://www.youtube.com/watch?v=JFx-hmzCkJc

#141 OttawaMike on 09.08.14 at 10:10 am

An interesting note from Ben Tal @ CIBC about RE market divergence:
http://www.newswire.ca/en/story/1407728/moving-up-out-of-starter-homes-getting-much-more-difficult-for-canadians-cibc

This dovetails nicely with a recent conversation I had with an expat living in Virginia. he saw the bubble writing on the wall in 2007 and down sized to a starter home in a dodgy neighbourhood, much like i did in 2008.

Expat guy went on to explain that his small house experienced little down side after the US real estate crash and actually appreciated as the neighbourhood became a refuge for others seeking debt relief from their mcmansions by down sizing. So much so that the neighbourhood shifted from low income renters to owners.

Canada will experience this same shift when the RE correction finally gains momentum.

#142 Inglorious Investor on 09.08.14 at 10:10 am

#119 Londoner on 09.08.14 at 5:25 am

“I see a lot of posts criticizing central bank intervention, calling it a “fraud”, comparing it to a “ponzi scheme” (how exactly?)”

Some would argue that their ability to create ‘money’ out of thin air is a form of fraud, namely, counterfeiting. It’s just legal counterfeiting. In fact, central bank counterfeiting is far worse because when they counterfeit they create high-powered money that can be pyramided on by the commercial banks. One dollar of reserves at the central bank can create many multiples of dollars in the real economy. The basement counterfeiter is far less a threat.

As for the notion that it’s a ponzi scheme, one could argue that the current system relies on the ever expanding issuance of debt to keep paying creditors in much the same the way that a ponzi scheme relies on the continuous inflow of new investors.
———————————-

“What you fail to realize is that without central bank actions things would have been a lot worse.”

True, but it’s the arsonist putting out the fire. What do you think he’s going to do next?
—————————

“Is it naivety or ignorance that makes you think that central banks slashed rates to create asset bubbles in housing and stocks?”

Central bankers don’t want asset bubbles per se. What they need is an ever expanding flow of credit. The asset bubbles are the consequence. In fact, at this point, one can argue they have become reliant on them. That is why many say we live in a bubble economy.

————————–

“The more recent objectives of trying to create wage inflation […]”

I’m sure the banks want their clients to be able to service their debts against what is necessarily a monetary devaluation. However, what they don’t want is for interest rates to rise too quickly. Wage deflation also helps business (in the short term, anyway). But the larger concern is the international bond market, not Mr. and Mrs. Mainstreet.
————————-

“But the only thing that anyone seems to be concerned about is house prices. Get over it already.”

You have realize just how important housing is the economy and to the banks. It’s astoundingly huge. Just look at all the government support structures in place to ensure housing (or more specifically, mortgages) continue to grow, while removing the risk of default from the banks. House prices are an important indicator. That said, if the banks had another asset upon which to generate huge amounts of debt, they would just shift to that one if housing dies. It’s not the house that matters, it’s the mortgage. Witness the huge debts in education? Sub prime in cars. Once the real economy can no longer support more asset bubbles, they will start to mortgage the air we breathe and the water we drink. Slavery will be coming back too, if current trends continue.

#143 Greg on 09.08.14 at 10:12 am

Long, long time reader here. First post. 40 years old.

Seriously thinking about selling my semi in a “hot” area of Toronto (Greenwood/Danforth), literally a 60 second walk to the TTC subway station.

Realistically, should be able to get $800K for it. $250K mortgage owing. No other debt. Wife and I have $300K in RRSPs, stocks, TFSAs.

Subtract real estate costs etc and I think I can add $500K to the portfolio. That gives me $800K invested.

Our combined monthly net income (AFTER saving $3000 a month in DC pension plans and company stock) is $8000. Rent for $2000-$2500, throw an additional $2000-$2500 into savings – $5500/month into savings, $800K growing at 8% (reasonable?) = $2.8M liquid in 10 years (age 50) = $104,000 annual income every year if I withdraw 4%. Meanwhile I have plenty of disposable cash to do fun things with, as well as no “surprises” to spend money on (eg: leaky basement foundation, new roof, other house upkeep).

Is this a crazy idea for early retirement? What am I missing? So many people think Toronto, close to the subway, is a “sure thing” – but I don’t see appreciation at recent levels being a sustainable thing. Thoughts?

#144 Daisy Mae on 09.08.14 at 10:26 am

#38 Entrepreneur: “…People are straped in making payments which leave little money for the spending on goods and services….”

**********************

Being treated to dinner last evening, I was amazed — the restaurant was full to overflowing. Line ups. Standing room only. What gives? Everyone still have their heads in the sand, most if not all using credit?

#145 Happy Renting on 09.08.14 at 10:33 am

#108 Loyal Reader on 09.08.14 at 12:17 am
One question for Garth.
I just signed a rental lease agreement for one yr term for detached house in Mississauga and house cost is 700K, I am renting it for 2050 a month. Is it a good deal or bad. We make more than average income in Canada, quite more than average house hold, but my question is regardless of income renting a 700K property for 2050 /month is good deal or bad deal, am I wasting money on rent or enjoying a better life in less cost?
Please reply Garth and let me know of your opinion.

This was covered in a post not that long ago. $2050 x 100 = $205,000. If the house would sell for $700k then yeah, your landlord is definitely subsidizing you. Congrats on a great deal!

#146 Daisy Mae on 09.08.14 at 11:03 am

#84 Tnt: “Wow… The steady jobs were replaced already with modern office jobs…”

****************

Administration. These jobs aren’t producing a salable product.

#147 Daisy Mae on 09.08.14 at 11:11 am

#86 Mark: “Au contraire my friend, all those ‘incentives’ are actually reductions in the offered price, merely disguised in an effort to make the price declines look non-existent.”

***************

Pricing new glasses the other day, a rough estimate was $650 including new lenses and prescription sunglasses….free! Using existing lenses, the cost was $610. Very creative calculations…

#148 Larry1 on 09.08.14 at 11:12 am

“We all know it won’t last. If the economy suddenly revives pushing wages up, then interest rates pop. And down goes property.”

Down goes all assets which are valued using discounted cash flows… that’s real estate, stock, bonds, preferreds… everything.

Some businesses (insurance, etc.) will have better cash flows with higher rates though.

Not a valid comment. Rates will move gradually, but steadily. Businesses will adjust just fine, financial assets are already priced for change, but individuals will suffer emotional trauma. RE will be most impacted. — Garth

#149 Son of Ponzi on 09.08.14 at 11:27 am

#144
Being treated to dinner last evening, I was amazed — the restaurant was full to overflowing. Line ups. Standing room only. What gives? Everyone still have their heads in the sand, most if not all using credit?
——————-
Agree.
Long line ups at the local McDonalds.
I think it’s the $1 all size soft drinks.
And most people have coupons.

#150 rosie "moving forward" in the knowledge that, "this won't end well" on 09.08.14 at 11:28 am

Well at least a few are recovering, but not many.

http://www.nytimes.com/2014/09/09/upshot/how-are-american-families-doing-a-guided-tour-of-our-financial-well-being.html?_r=0&abt=0002&abg=1

#151 Flawed on 09.08.14 at 11:36 am

Bitcoin over Paypal by year end???

Bitcoin = 60,000 txns per day (and hasn’t grown much all year)
https://blockchain.info/charts/n-transactions

Paypal = 9.3 million txns per day
https://www.paypal-media.com/ca/about

However, I agree that the USD Dollar value traded in Bitcoin is about the same as Paypal (since 1 txn = at least $400-500)… but, it is NOT growing as suggested.

**************************************

Your not counting the other FIFTY PERCENT of transactions that are not counted on the blockchain by people at coinbase and bit pay etc…..

#152 Daisy Mae on 09.08.14 at 11:40 am

Oops…post should read: ‘existing frames’ not ‘lenses’.

#153 Casual Observer on 09.08.14 at 12:01 pm

It’s not deflation that kills jobs, it’s negative real GDP growth (contracting economy).

Central Bankers think that inflation will help the economy grow, but inflation can also cause negative real GDP growth if the inflation rate rises above the nominal GDP growth rate (stagflation).

The argument I keep hearing is that deflation causes people to stop buying things. I disagree. Retailers lower prices to stimulate demand all the time.

Also, people don’t stop buying TV’s and electronics because prices keep falling. They still line up for the latest video game/iPhone/gadget release even though the price will be lower after a few months.

Our economy is something like 70% consumer driven. To keep real GDP growth positive in a stagnant over-indebted economy, consumer purchasing power must be increased.

This can be done either by increasing population (more consumers), increasing wages, increasing debt, or decreasing prices.

Mild deflation (say 2%) can increase purchasing power for consumers, which would allow for an increase in consumer demand without having to take on more debt.

Savers would stop being punished with negative real interest rates because even nominal rates of zero would still be a positive real rate of 2%.

Mild deflation is not as bad as it is made out to be. With 2% deflation, we could still have positive real GDP growth, even if the nominal growth rate went to zero.

As long as there is positive real economic growth, jobs and wages do not have to be destroyed.

#154 Karl Hungus on 09.08.14 at 12:06 pm

Sorry mark you got it wrong. Assets go up with inflation. That’s the definition of inflation, the difference in the price of goods in the “basket” over time. Hint: housing makes up a quarter of that basket

#155 Mac on 09.08.14 at 12:21 pm

We are at least two major economic cycles away from the last time there were manufacturing jobs in TO or MTL. Get over it, they ain’t coming back. Since then there’s been a tech revolution. It’s up to TO to attract business and talent.

Those workers look a lot like what TNT described. Condo dwelling, latte sipping, hipster urbanites. Not saying they’re not up to their eyeballs in debt, but TNT is right… we are not going backward to abandoned urban areas near the Gardiner. And if you look closely there are a lot of new Canadians among them. These people are not going back either.

In fact, more are coming. And more of their children will morph into condo dwelling, latte sipping, hipster urbanites.

#156 Mac on 09.08.14 at 12:23 pm

Daisy Mae,

Most administrative tasks are done … I’d say by computer but even that is archaic now… by apps and cloud technology.

#157 Holy Crap Wheres The Tylenol on 09.08.14 at 12:29 pm

#143 Greg on 09.08.14 at 10:12 am
Long, long time reader here. First post. 40 years old.
Seriously thinking about selling my semi in a “hot” area of Toronto (Greenwood/Danforth), literally a 60 second walk to the TTC subway station.
Realistically, should be able to get $800K for it. $250K mortgage owing. No other debt. Wife and I have $300K in RRSPs, stocks, TFSAs.
Subtract real estate costs etc and I think I can add $500K to the portfolio. That gives me $800K invested.
Our combined monthly net income (AFTER saving $3000 a month in DC pension plans and company stock) is $8000. Rent for $2000-$2500, throw an additional $2000-$2500 into savings – $5500/month into savings, $800K growing at 8% (reasonable?) = $2.8M liquid in 10 years (age 50) = $104,000 annual income every year if I withdraw 4%. Meanwhile I have plenty of disposable cash to do fun things with, as well as no “surprises” to spend money on (eg: leaky basement foundation, new roof, other house upkeep).
Is this a crazy idea for early retirement? What am I missing? So many people think Toronto, close to the subway, is a “sure thing” – but I don’t see appreciation at recent levels being a sustainable thing. Thoughts?
_____________________________________________

Belize !!!!!!!!
Retire and never look back, your young you can do it! I’m too old stuck here with a company to run and large family. I can only visit Belize and dream of it.

#158 Holy Crap Wheres The Tylenol on 09.08.14 at 12:33 pm

It is big banks that run this world, it is not in their best interest to essentially cook the golden goose that lays their $$ eggs. It will be interesting to see how they control the lending vs the mortgage recalls in the future.

#159 bigtown on 09.08.14 at 12:47 pm

The focus seems to be on the younger set in the 25 to 45 who are usually house buyers but economists and the banks and the government wonks forget that our society has a big bulge of BOOMERS in the 50 plus set who depend on income.

Now in the last decade most of the boomer set who would have received a 6 to 8 percent return to fund their lifestyle and use in discretionary spending is MISSING and now the return is 2 to 4 percent.

Of course the credit card companies are charging on average 19% to most card holders so no one escapes the reality of the very low rates set by the Bank of Canada and the Fed.

The Big Bulge of Boomers have to cut back 50 to 75% on their spending even if they are in the upper middle class as as result of the low return on most investments.

#160 Flawed on 09.08.14 at 12:49 pm

#110 Ayn Rand Army on 09.08.14 at 1:19 am
#75 Flawed on 09.07.14 at 9:52 pm
Bit coin is ok, i guess for now, never used it myself but so fare but it’s not much different than fiat currency to some degree since good money must be commodity based that is limited and scarce and requires production by some real means. and there can be no limit on the number of competing digital currencies just as there are many countries each with their own fiat paper currency.

************************************

First of all I love your comments. But your assumption that bitcoin or any other currency needs to be “backed” by anything is just wrong. Value of currencies is purely based on confidence.

Second, by comparing bitcoin (a mathematically derived currency with rules that cannot be corrupted or co-opted) means you do not understand what bitcoin is all about in the first place.

I suggest you do some research on bitcoin and see for yourself “how bitcoin works” and why it is going to replace everything we know today with order and certainty. As opposed to Fraud, Corruption and Ambiguity – which is the sovereign fiat money system along with its laws and regulations are today.

#161 april on 09.08.14 at 1:03 pm

#154 – How many times has it been said here and elsewhere. What we want, homeownership, among other things, goes down with deflation and what we need, food, energy etc goes up – inflation. Currently we have both happening.

#162 Sam Giancana on 09.08.14 at 1:08 pm

I am confused too.

The central bankers made the mess in first place with their reckless lending, now the same people are coming and saying: don’t worry, we will fix it, trust us.
How are they fixing it? By suppressing markets. What would be the interest rate if not manipulated by central banks? At least 5-6 %. So we have a theft of at least 4-5 % from the savers transferred to the borrowers, government and banks.

Are we reaching the limits of the credit consumption driven economy? We are close to the end of it. What will follow? True capitalism with savings driving investments? Most likely.
Not all the central banks are in the business of easing.

Driving currency lower discourages capital investments, it is for idiots who can provide cheap labour, not for innovative, creative economies (look at Germany here).
And deflation is not necessarily bad. Stating that inflation and low currencies are good as they drive growth is a joke.

It seems not everybody is brainwashed though. Having critical thinking would be paramount in surviving the next 2 decades.

#163 NoName on 09.08.14 at 1:11 pm

“Over half the people under 25 in Spain and Greece, for example, have no jobs and no prospects. It’s the stuff revolutions are made of.”
Wander of youth hi unemployment, in eastern Europe, 1989 timeline.

http://www.europarl.europa.eu/sides/getDoc.do?language=EN&type=IM-PRESS&reference=20090826STO59792

For some reason where I lived we got tons of coverage form Romania, it was a brutal over there during a youth riots. But I didn’t something more brutal was coming my way…

I’ll skip Egypt and Arab spring, that’s not history its ongoing thing.

#164 TnT on 09.08.14 at 1:11 pm

#107 Flawed on 09.08.14 at 12:15 am
#84 TnT on 09.07.14 at 10:23 pm

And what are these new modern jobs produced in these cities? Truly I’m curious. Because last I checked we are a resource country not a call centre country. Canada needs to take its resources and make stuff with it in factories, not grow ourselves with 10 buck an hour dorky service jobs.

**************

You mention Canada when I am talking about Toronto.

Toronto is Canada’s financial and business capital.

Rated as one of the top four global cities with economic clout (Cities of Opportunities Report, PwC, 2014), and topped the North American Cities of the Future, fDi, behind only New York, Toronto is a dynamic, diverse, rising city that provides the ideal business environment for companies looking for a competitive edge.

With 2.8 million residents, Toronto is the fourth largest city in North America

One-quarter of Canada’s population is located within 160 km (100 miles) of the city and more than 60 per cent of the population of the USA is within a 90-minute flight

Toronto is one of the most livable and competitive cities in the world as demonstrated by various international rankings and reports

Toronto’s more than 89,800 businesses choose from a large, highly skilled, multilingual workforce of 1.4 million people – one sixth of the country’s workforce

All line items and more can be found here:

http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=41e067b42d853410VgnVCM10000071d60f89RCRD&vgnextchannel=57a12cc817453410VgnVCM10000071d60f89RCRD

#165 Mister Obvious on 09.08.14 at 1:12 pm

“The value of bigger and pricier properties is rising notably faster than less expensive properties—widening the gap between starter home and dream house,…. Regardless of what your starting point is, and by how much your property has appreciated, the desired move up target is getting further and further out of reach.” – Benjamin Tal
————————-

Fantastic! Benjamin may not be aware but he has convincingly superimposed Edwin Hubble’s ‘expanding space paradigm’ theory onto the current state of Canadian residential real estate.

Hubble, who was perhaps the greatest astrophysicist of the twentieth century, discovered that stars further away were receding from us at a faster rate than those nearby. This game changing observation became an important cornerstone of the big bang theory.

This blog predicts, (borrowing from T S Eliot) the RE universe will end “not with a bang but a whimper”.

Still, our friend Mr. Tal may be on to something.

#166 Sam Giancana on 09.08.14 at 1:14 pm

#153 Casual Observer

Mild deflaion is not band for consumers, it is bad for the banks.

dont’ forget who rules.

#167 Koshy Alex on 09.08.14 at 1:15 pm

#47 Confused

The central banks are NOT printing money. Isn’t that what has been pointed out many times on this blog? Just wondering why now you say they are?

Curious…

This is Garth’s blog, just as the remax guys wants you to believe what they say Garth also wants you to agree and believe what he says about the CBs fighting deflation and saving us all

But there is one central banker from my home country who has his doubts about how all this is going to end, I am reposting something he said here, Garth thinks Mr Raghuram Rajan is nuts

http://blogs.wsj.com/economics/2014/08/06/rbis-rajan-sees-risk-of-financial-markets-crash/

He has also written a book that is worth reading

Fault Lines: How Hidden Fractures Still Threaten the World Economy

#168 Blacksheep on 09.08.14 at 1:30 pm

Inglorious Investor # 142,

“Slavery will be coming back too, if current trends continue.”
—————————————————
It been here for a 100 years.

The system’s discovered, free range slaves are far more productive if their handlers maintain the illusion that:

1) Were free to choose were we live. (no matter were you go, you never leave a / the tax farm) + (the US now has global reach)

2) Modern democracy is real (we need to feel a sense of control) + (great excuse for war)

3) The ‘system’ itself functions altruistically. (a lifetime of evidence, proves the contrary)

Solid post I.I. but stopped just a smidge short of the unpleasant truth.

#169 Holy Crap Wheres The Tylenol on 09.08.14 at 1:37 pm

Not necessarily sure about the potential of fracking however this is what I have been touting for years about sending jobs overseas. Eventually they will creep back! Probably not at crazy union rates but enough to put bread on the table for some of these poor souls!

http://www.nytimes.com/2014/09/09/business/an-energy-boom-lifts-the-heartland.html?hp&action=click&pgtype=Homepage&version=LedeSum&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

#170 Godth on 09.08.14 at 1:37 pm

Lacy Hunt: The World Economy’s Terminal Case of Debt Sclerosis
In danger of dying from too much debt
http://www.peakprosperity.com/podcast/86788/lacy-hunt-world-economys-terminal-case-debt-sclerosis

#171 Holy Crap Wheres The Tylenol on 09.08.14 at 1:50 pm

As the economy goes it has been carpet bombed for the last few years. Back in the day when in the Air force we had a saying.
“It is generally inadvisable to eject directly over the area you just bombed.”

#172 Mark on 09.08.14 at 1:59 pm

“Sorry mark you got it wrong. Assets go up with inflation. That’s the definition of inflation, the difference in the price of goods in the “basket” over time. Hint: housing makes up a quarter of that basket”

No, you’re wrong. Assets actually go down with significant inflation in real terms, while consumer prices go up. Inflation implies a greater portion of one’s personal income is spent on, among other things, the basic necessities of life such as food, energy, etc. Leaving very little left over to bid up assets.

In extremus, hyperinflation, assets such as real estate, bonds, and most stocks, go to almost zero, as they did in Weimar Germany. As incomes are almost entirely consumed by scarce day-to-day consumables and thus unavailable for longer-term investment.

#173 miketheengineer on 09.08.14 at 1:59 pm

Garth et al:

Winter looks like to be much worse than last year…

I quote from the article:

“For the sake of comparison to the past winter, lets say that your area received a total of twenty inches of accumulative snow for the season. Because this year the snowfall is predicted to start by the end of September or the beginning of October, you can expect to multiply that number by up to five, ten, maybe even twenty times in some areas. In the worst zones, you could see 50 times the amount of snow you’ve had in the past.”

Here is the link:

http://empirenews.net/meteorologists-predict-record-shattering-snowfalls-coming-soon-bread-milk-prices-expected-to-soar/#prettyPhoto

#174 };-) aka Devil's Advocate on 09.08.14 at 2:04 pm

#165 Mister Obvious on 09.08.14 at 1:12 pm

“The value of bigger and pricier properties is rising notably faster than less expensive properties—widening the gap between starter home and dream house,…. Regardless of what your starting point is, and by how much your property has appreciated, the desired move up target is getting further and further out of reach.” – Benjamin Tal

No question in my mind from what I see in the business here in Kelowna, and elsewhere but especially here in Kelowna, Mr. Tal is bang on.

And that is, in part, what keeps Kelowna among the top performers in real estate – the wealthy want to be here and they can afford the price of admission. The not so wealthy can’t compete. Of course that brings with it problems. But, at the end of the day, Kelowna, Aspen and other such sought after places in the world fair well enough.

#168 Blacksheep on 09.08.14 at 1:30 pm
Inglorious Investor # 142,

“Slavery will be coming back too, if current trends continue.”
—————————————————
It been here for a 100 years.

I agree with the both of you. And ad as per my post at #138…

#175 Blacksheep on 09.08.14 at 2:04 pm

Devil’s A. # 138,

Quoting Jefferson, who would have thought.

“You have to know where this is going… It’s not like it’s something new. It’s too big to be stopped now without enduring some tumultuous social changing event which will inflict a dose of pain upon society not unlike that of any of those wars fought throughout history to preserve our way of life. No, this will not end well. But no need to worry as that is not likely to happen in your or my lifetime as, despite it’s flaws, this lifetime is still way too comfortable.”

“We are an intelligent species. Yet despite that intelligence which separates us from others on this planet we are lazy. We wait until things are broken and only then fix or change them.”
—————————————-
That’s it in a nutshell.

Great post D.A.

#176 Rational Optimist on 09.08.14 at 2:07 pm

155 Mac on 09.08.14 at 12:21 pm

“We are at least two major economic cycles away from the last time there were manufacturing jobs in TO or MTL. Get over it, they ain’t coming back.” There are so many things wrong with this. Firstly, what is a “major economic cycle” to you? Fifteen years ago (year 2000, to be exact), a million Ontarians worked in manufacturing. It’s two-thirds of that now, which is tragic, but 600,000 people in Ontario actually working in making things is a far cry from what you said. If you think there’s no manufacturing in Toronto, I surmise that you must not actually live there- there is a tonne of manufacturing in North York, Etobicoke, Scarborough. Even more in the outlying municipalities.

You can’t stay rich with a back-scratching economy. The only way to create wealth is to make things.

#177 happity on 09.08.14 at 2:12 pm

What do banks create? What tangible to society do they provide?

Are central banks any better?

Just Google Andrew Jackson.

Paul Krugman?

Did you say Paul Krugman?

Lol lol lol lollipop

#178 Sash Toronto on 09.08.14 at 2:16 pm

This post is for Garth’s Calls over the years. I gotta give it to Garth for two things.

He called the GOLD sell off and it occurred, just look at $GLD.

He called the bitcoin craze a bubble, and it burst over 50%.

He has not been correct on the housing bubble, but based on data and statistics he has a point and a lot of us agree with him. Why it hasn’t dropped is cheap interest rates, that simple.

#179 Smoking Man on 09.08.14 at 2:27 pm

#63 TEMPORARY® Foreign Prime Minister on 09.07.14 at 9:01 pmOn a lighter note, love the new automatic spell check, by the way.

Which gives one to ponder, how does Smoking Man continue to make so many spelling mistakes?

Inquiring minds need to know…
…..

It’s a ridiculous and demented form of protest against the machine.

Not to mention, under promise, over deliver. I do have a book coming out soon…

It must exced everyone expectations…

Do the same in code smithing, it works…

#180 robert reid on 09.08.14 at 3:04 pm

BREAKING NEWS BULLETIN FROM THE CALGARY HERALD (and CIBC):

“It’s getting more difficult for Canadians to move up from starter homes”

http://www.calgaryherald.com/business/real-estate/getting+more+difficult+Canadians+move+from+starter/10184796/story.html

#181 Guy on 09.08.14 at 3:09 pm

What you say is very true. If the Fed wasn’t doing the QE and ZIRP thing, we would be in the middle a depression right now!

There were other aspects of the depression as well. Such as over production which caused companies to close plants until the excess stock was sold off. This caused the problem to get worse.

One concern that I have is, are we legislating ourselves out of business?

#182 Ronaldo on 09.08.14 at 3:09 pm

#172 Mark – you are absolutely correct. Saw this happen in 74 at the top of the RE bubble. We were into runaway inflation and prices of day to day goods were changing from day to day. It was around this time that vendors stopped putting prices on their products. RE prices topped out in the summer that year and corrected by 20% by fall. Worst hit was West Vancouver, the high priced area. All it would take is another oil shock or some such other world event. Shortly thereafter the governments of the US and Canada slapped on wage and price controls.
A lot of strikes taking place back then. I recall the BC Railway going on strike for three months the winter of 74/75. Shut down completely. The lumber market had tanked. Was not a good time for many people who had to declare bankruptcy and lose their homes. And interest rates had only to rise a mere 2 percentage points from 10 to 12% to create this havoc. We better hope the oil taps stay open. I believe we are in a similar situation now. RE was more affordable at 12% interest rates than it is today at 3% because of the huge inflation in the home prices as a result of the governments emergency interest rates. Prices will indeed correct.

#183 NotAGreaterFool on 09.08.14 at 3:16 pm

Must be house buying season again:

BMO Bank of Montreal decreases mortgage rates. Effective September 9, 2014 teh new rate for a 5 year fixed is 2.99% .

Garth, let’s see if the slide in prices (April through July of 17%) sustains itself.

#184 bingo0000 on 09.08.14 at 3:16 pm

“When money’s scarce, the cost goes up. When money’s plentiful, the cost craters.”
Do you mean the other way around? With plenty of money the cost of the houses goes up. If house financing dries, then the cost goes down.

#185 Inglorious Investor on 09.08.14 at 3:20 pm

#172 Mark on 09.08.14 at 1:59 pm

Let’s remember that hyperinflation ala Weimar Germany is not a very high inflation; it’s an outright currency collapse, even though in the early stages it looks like rampant price inflation.

Real, hard assets like real estate don’t go to zero in a hyperinflation. In fact, real estate was partially used to collateralize the new rentenmark that was introduced after the collapse of the papiermark.

Real assets hold their real value no matter what funny money is used to determine a ‘price.’ The currency is just a medium of exchange with no intrinsic value. The US dollar could collapse, but that would not erase the value of the real wealth of the United States. After a period of adjustment and lots of pain, you wipe away the debts (and savings) and being anew with a fresh currency.

Real estate can go to zero if, for whatever reason, demand utterly collapses and the affected area is all but abandoned.

#186 Holy Crap Wheres The Tylenol on 09.08.14 at 3:22 pm

If you dog poos put it in the bin, My dog is bigger than the one in the picture. No way hes going in there. Hes a Belgian Malinois and would probably rip my arm off if I tried but he would then bring me the arm and drag me to the hospital. Do you ever notice the little cockapoos and toy shituzes crap nuggets continuously, but the geese here in Oakvillle are monsters. Ive found a new WPA for the unemployed. Put them to work cleaning up the doggie dew and goose bombs. Just think of it as another New Deal!

#187 Holy Crap Wheres The Tylenol on 09.08.14 at 3:33 pm

#138 };-) aka Devil’s Advocate on 09.08.14 at 9:43 am

“I believe that banking institutions are more dangerous to our liberties than standing armies.
_______________________________________________

While Jefferson did own slaves he was no dummy!
He was first a successful businessman, husband, father, president, vice president, secretary of state, foreign minister to France, governor and inventor!

#188 Nuke on 09.08.14 at 3:34 pm

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

a fun article regarding real estate investments.

#189 EB on 09.08.14 at 3:38 pm

#147 Daisy Mae on 09.08.14 at 11:11 am – there’s no sane reason to buy glasses in Canada. You can get them made in China for $40 and sent here shipping-free. Only drawback is that you can’t try the frames on first.

#190 chapter 9 on 09.08.14 at 3:50 pm

“Represent your constituents and speak or vote in a different direction than your party leadership wishes you to and you will find yourself on the outside looking in” former tory MP Edmonton-St. Albert Brent Rathgeber. Sound familiar Garth??

#191 Holy Crap Wheres The Tylenol on 09.08.14 at 4:07 pm

Smoking Man is this your homeworld?

http://www.stumbleupon.com/su/2wBZtM/:IQJ0$wI3:M1r-YeHt/www.theweek.co.uk/politics/11147/planet-20-light-years-earth-could-support-life?domain=theweek.co.uk/

#192 Shawn on 09.08.14 at 5:31 pm

Loose as a Goose?

Holy Crap said:

Do you ever notice the little cockapoos and toy shituzes crap nuggets continuously, but the geese here in Oakvillle are monsters.

****************************************
Hence the old (probably defunct) saying, “Loose as a Goose”

#193 Shawn on 09.08.14 at 5:37 pm

Do Banks Earn an Honest Living?

Happity sadly asks:

What do banks create? What tangible to society do they provide?

******************************************
Credit is the grease of the economy and banks provide credit. Banks are absolutely essential to the economy and therefore to our high standards of living. That’s all.

Without banks standing as intermediaries between savers and borrowers, interest rates would be maybe five to ten times higher.

#194 Shawn on 09.08.14 at 5:47 pm

Things are better than services?

(Depends on the service, I suspect)

Rational Optimist asserts:

The only way to create wealth is to make things.

***************************************
Not true, wealth is created when a product or service is provided and is worth more than the cost to produce that product or service. (For example producing cars at a loss would not generate wealth)

Tangible things are not inherently superior to services. Basic needs tend to be things: food, clothing, shelter. After those are satisfied we may value services higher than things.

Services can be exported as well. Entertainment for example as well as finance services.

Do service companies make an honest living? I would say, yes.

#195 Mark on 09.08.14 at 6:42 pm

“Real, hard assets like real estate don’t go to zero in a hyperinflation.”

Real estate doesn’t behave like a ‘real’ asset until all of the leverage has been removed. As leverage in a hyperinflation goes to zero (ie: nobody lends).

So sure, real estate still kept some value during the Weimar hyperinflation, but only to the extent that one could actually buy it without credit. Which meant severely depressed prices relative to income. I’ve read stories of entire apartment blocks being priced at a mere 1 ounce of gold. Which is effectively a collapse in real pricing.

Real estate generally only regains its pricing during the deflation that inevitably follows a hyperinflation, after having lost most of its value during the hyperinflation. If you believe we’re going into a hyperinflation (I don’t), then you want to own necessities or the means of producing necessities. Not real estate.

#196 liquidincalgary on 09.08.14 at 8:03 pm

flawed

#46 liquidincalgary on 09.07.14 at 8:10 pm
Why are we paying “billions” of dollars in interest on money created out of nothing?

=========================================

because you accessed it

**********************************

Really? That’s funny cuz I don’t remember getting a check. And last I checked services were “going DOWN” not up. And the economy is getting WORSE not better. And I asked all my friends and none of them got any check from the BOC or the FED. So I guess unless your the head of RBC or a NY bank you don’t get any of the money you claim I have “accessed”.

No?

—————————————————————————-

no, not YOU specifically.

idiot

#197 };-) aka Devil's Advocate on 09.08.14 at 8:41 pm

#193 Shawn on 09.08.14 at 5:37 pm
Do Banks Earn an Honest Living?

Happity sadly asks:

What do banks create? What tangible to society do they provide?

******************************************
Credit is the grease of the economy and banks provide credit. Banks are absolutely essential to the economy and therefore to our high standards of living. That’s all.

Without banks standing as intermediaries between savers and borrowers, interest rates would be maybe five to ten times higher.

Not an entirely bad scenario. Been there close. We managed and will adapt. Using someone else’s money should have a cost, as it does, but a higher cost as incentive to get more of your own to fund your life instead of borrowing against it.

#198 };-) aka Devil's Advocate on 09.08.14 at 8:45 pm

#193 Shawn on 09.08.14 at 5:37 pm

1982 interest rates exceeded 20% (close to then times today’s rates)

#199 Behavioral Finance on 09.08.14 at 9:03 pm

Wait the minute…inflation hurts the creditors…I doubt it as these creditors own most of the stocks and the wealth of the nation. Capitalism only works if there is inflation otherwise we go back to stone age.

#200 Mac on 09.08.14 at 9:27 pm

Greg!

800K to 2.8M in 10 years? No way. Recalculate again, this time paying your taxes.

#201 Kenchie on 09.08.14 at 10:50 pm

#108 Loyal Reader on 09.08.14 at 12:17 am
“One question for Garth.
I just signed a rental lease agreement for one yr term for detached house in Mississauga and house cost is 700K, I am renting it for 2050 a month. Is it a good deal or bad. We make more than average income in Canada, quite more than average house hold, but my question is regardless of income renting a 700K property for 2050 /month is good deal or bad deal, am I wasting money on rent or enjoying a better life in less cost?
Please reply Garth and let me know of your opinion.”

$2,050*12 = $24,600
If the house traded for an all-in cost of $700,000, then the “gross” yield would be 3.5%. Net yield (since I have no details on prop tax, insurance, etc) would likely be about 3%, give or take a couple basis points.

So yes, you’re doing fine, considering gov’t of Canada 10 year bonds trade about 2.5%-2.6% on Friday.

#202 Kenchie on 09.08.14 at 11:36 pm

#160 Flawed on 09.08.14 at 12:49 pm

“I suggest you do some research on bitcoin and see for yourself “how bitcoin works” and why it is going to replace everything we know today with order and certainty.”

That eerily sounds like something Lenin would say. “Order and certainty” above all!

Please. The human race is nothing but a somewhat orderly chaos at the best of times. And there is no guarantee that one day bitcoin bankers will be developed and they will start lending out bitcoins in the same way gold-backed paper slips was in previous centuries.

#203 Kenchie on 09.08.14 at 11:51 pm

#184 bingo0000 on 09.08.14 at 3:16 pm
“When money’s scarce, the cost goes up. When money’s plentiful, the cost craters.”

Cost of money is the interest rate. So when money is plentiful, the excess supply pushes down the interest rate to meet demand at a lower equilibrium. And when loanable funds dries up, interest rates jump.

#204 Entrepreneur on 09.09.14 at 12:17 am

#144 Daisy Mae…”most using credit.” People have to go out to give themselves a “pat on the back” for whatever reason and going out to a restaurant is one of them. Paying credit is not a good idea as it well catch up to you if not careful. Things happen. People should try paying with cash which is more rewarding.

Rational Optimist…”The only way to create wealth is to make things.” Making things is good for the community;this is how small businesses start out. It is also a healthy one.

#205 Larry1 on 09.09.14 at 12:34 am

“Rates will move gradually, but steadily. Businesses will adjust just fine, financial assets are already priced for change, but individuals will suffer emotional trauma. RE will be most impacted.” — Garth

Hope you’re right. RE, high coupon and dividend payers will get hit the hardest when rates rise. Pricing power is key.

#206 screwed on 09.09.14 at 12:40 am

@ #174 };-) aka Devil’s Advocate

You seriously compare Kelowna to Aspen?

Wow!

Tomorrow you probably dream that Vancouver is the Monaco of the Americas?

There is a little money in Kelowna and there is surely money in Vancouver but compared to the real playgrounds of the elite, these two are just third grade.

Few rich & famous have bought their piece of West Van and only to live there unnoticed.

Kelowna has got to be one of the most depressing places when the fog sits on the lake. Not even dramatic or inspiring like some foggy places in Ireland or Scotland.