I still can’t sleep tonight, so I polish up some thought collected in the past few days that I have not published yet.
Look back ten years at Japan to predict America’s future. There are some differences, e.g. in Japan it was corporate debt while in the U.S. it is consumers debt that weight in on the national balance sheet. The results are very similar and the predicament seems to be that in general we humans don’t learn the lesson from our Minsky moments.
Where the U.S. goes, the rest of the western world often follows. Since I presently live in Canada, I am particularly concerned with its specific situation. The U.S. represents 73% of Canadian exports; and exports represent directly about 36% of the Canadian economy. Indirectly probably closer to 50%. The two economies are highly integrated and if the U.S. sneezes, Canada has a cold.
After years of surpluses driven by the commodity boom and somewhat good governance, the Canadian governments are back in the red. Norman Rothery’s debt and tax clock says it all. The humongous stimulus spending is weighting in. There were less excesses in the financial system and no bank has gone belly up, however Canadian consumers are stretched beyond their means, and raising un-/under-employment reduces their income. Assuming constant income and constant asset valuation, the current debt weighting on the head of each Canadian like a sword of Damocle is equivalent to almost three years worth of income. Using one third of current income to clean up the debt mess, it would take Canadians almost ten years to get back to a healthy balance sheet (IMHO one that has almost no debt). Assuming the valuation of assets on their balance sheets (mostly real estate) remains constant as well, something quite unlikely. Demographics at work.
How have we got here? One simple answer: greed. Hyman Minsky’s Financial Instability Hypothesis explains much of what happened. And how do we get out? Hard choices and sacrifice will be necessary as the global economy de-leverages. The choice now is between spreading the pain over a decade or two; or feeling it intensely over a shorter period of time, with draconian belt tightening.
The coming weeks could be crucial: it is the period of the year where retailers make as much as 80% of their turnover. And it is also the period of the year where consumers are caught in a frenzy and load their credit card with debt that will slow them down for the rest of the year. I wish consumers will finally raise to the challenge and stop wasting their money on junk. This season, either buy less and more useful presents, or don’t spend money at all. What matters is your thought, not your participation in the Halloween-turned-Christmas-turned-Valentine’s Day commercial frenzy.