Why Canadian Real Estate Prices Won’t Deflate While Most Sectors of The Canadian Economy Will – October 3, 2020,
For Canadians hoping to see a real estate crash sometime soon, I have some bad news. There are simply just too many tools at the Bank of Canada’s(BoC) disposal to prop up prices, making the matter worse, in Canada, the Canada Mortgage and Housing Corporation (CMHC) is involved in the mortgage bond market and mortgage insurance market. Thirdly, Canada is basically socialist at this point and although O’Toole the Canadian Conservative Politician might be better for the Canadian economy than Trudeau, there’s a lot of damage that’s been done and O’toole is doesn’t appear that he’ll engage in any austerity measures.
What I say this is because I personally think the debasement of the Canadian is likely to match up with current real estate prices, now, the problem with DEBASEMENT is that it’s often confused with Inflation. Debasement is a currency losing value to pay for FIXED government services, while Inflation, real inflation comes from the cost of imports rising our value being added in the private sector, which justifies price increases.
The BoC and government can create artificial inflation, when the economy has a strong private sector, however, this artificial inflation turns into a nightmare when massive job losses are the norm because prior to fiat money, the government paid its bills by taxing it’s citizens more.
Now, modern monetary theorists, have this tendency to simply ignore hat happened in Argentina and feel as though central bank policy will trump bad NON-MARKET-BASED socialistic policies, but Canada is going to figure out the hard way that this is not the case.
The Argentinian dollar debasement came as a result of REGULATIONS on their economy, their central bank was simply an accessory, the Argentine central bank did what the politicians asked them to do and this allowed their government to grow and eventually, Argentina had a recession and once that recession arrived, Argentine special interest groups who now had a seat in the government refused to budge and all of this stagnant bureaucracy led to money fleeing the country.
Now, Canada is not where Argentina is, firstly, geographically we are in a great place, we’re bordered with America and quite frankly if Canada simply cut our own regulations and our own tariffs with the United States, sadly a lot of our safety nets would get paid by default, but there’s a problem with that idea.
The problem with getting rid of things like supply management and ending the Canadian Dairy Commission (CDC) as an example is that a lot of Canadian industry doesn’t know how to compete. Even Maxime Bernier has stated that he wouldn’t end the dairy cartel over-night because quite frankly a lot of Canadian industry requires the government in order to remain solvent.
Don’t get me started on the government liquor cartels that are set it up in many a Canadian province, all of these price controlled environments equate to ARTIFICIAL inflation propping up the various government offices in Canada and all of these price distortions in Canada are hiding DEFLATION!
What’s unfortunate is that fiat dollars can’t solve the problem anymore, why? Because of household debt! Paying down debt is deflationary and unless the government is going to forgive debts earned or provide more liquidity for defaults on debt, household cash flow is going to become extremely problematic.
Now, everyone reading this knows that forgiveness on debt also would contribute to the debasement of the Canadian dollar, but you see that’s the whole point I’m trying to make. All of what I writing about revolves around the real estate market.
Can the government forgive private sector mortgage debt defaults? Yes! How? By changing amortization, o by making interest-only mortgages the norm, but the real problem is all the other debts, the auto loan bubble already crash and has been bailed out with auto loan deferral payments, most of the other non-mortgage debts also have their own deferral payments, now, if you need a deferral chances are you’re probably dependent on the NEW Employment Insurance (EI) program or the NEW Canada Recovery Benefit (CRB).
Via Jagmeet Singh and current Prime minister Justin Trudeau, Canadians are on average are making more money not working than they’d be making if they worked in the private sector. Justin Trudeau in my opinion has also taken a backward approach to an economic recovery, during a pandemic Trudeau has actually added on more regulations to the private sector.
Trudeau abandoned existing tax-generating industries in favor of non-existent, non-cash-producing carbon-tax-except energy industries that require government subsidies to even be solvent. Trudeau basically has his own green new deal and unlike Norway, Trudeau has decided not to use a ‘State Capitalism’ approach to financing his risky venture.
From a market perspective what Trudeau is doing is pure madness and the worst part of it is that it might take 2 years for people to actually feel the disastrous effects of his policies because people who don’t understand how debt services work, well, if it’s clear that the government is paying its bills with borrowed money and the economy isn’t growing that leads to the domestic debasement of the currency.
Investors bet on Canada because they expect to get a return on their money, once it becomes clear that there is no recovery, future investment in Canada will be based on the hope that other countries are in far worse shape than we’ll be in.
If Joe Biden becomes president of the United States and he creates a green new deal a stagnant U.S economy is going to hit Canada like a ton of bricks, Trump has actually been the best thing to have ever happened to Justin Trudeau, because after all, America is our largest trading partner and love him or have him Trump has been good for the U.S economy, I still can’t believe that the U.S economy didn’t collapse during the COVID-19 pandemic.
Sure Trump won’t get any credit for it, but the 2008 housing market crash was nowhere near as bad a COVID-19 and Barack Obama spent 8 years trying to clean that mess up, Donald Trumps’ only mess so far has been the leftist mainstream medias hatred of him.
Biden is a return to the Obama era and the Canadian dollar spiked under Obama before retreating because of BoC policies to stimulate the housing market. If Biden wins, the Canadian dollar might spike again and this with combined with the new USMCA spells trouble for Canadian industry. I like to remind people that on paper, Trump’s economic policies look like old-stock Democrat protectionist policies.
Prior to the Democrat Party dissolving into a socialist party, the Democrat Party was known for protectionism, so if Trump loses to Biden, Biden has everything he needs to stagnate the U.S economy. Biden plans to add more regulations to U.S business and he plans to raise taxes, this is bad for the U.S dollar and raises Canadas’s cost to pay for government.
I suspect Canada’s response to higher loonie if Biden wins, will be to go negative on interest rates and I based on what I know about negative interest rates, it’s going to have a serious impact on Canada because Canada unlike Europe and Japan as an example doesn’t have policies that favor ALL LEVELS of its private sector.
In Europe, the Value added tax revolves around European governments catering to all businesses, not only big business. Canada’s current tax structure favors big business and big industry and therefore going negative similar to near-zero interest rates won’t have much of an effect on the Canadian economy.
Now, the devalued loonie might help the real estate market, but it’s going to destroy the cashflow for most mid and small-sized businesses. Because Trudeau made the barrier to entry so high, via hs regulation policies, he’s going to create an unforeseen problem, that I know the government and the Central bankers will think is an easy fix! Although the housing market will be an easy fix, the rest of the economy in Canada is going have some serious challenges.
As the Canadian dollar adjusts to its new debasement value, the real problem ahead will be the Canadian CASH FLOW CRISIS!
Interesting times ahead!