Put them together and what have you got?

Another month, another decline in Canadian GDP -- that's five in a row. It looks very much as if the economists who said just this week that the economy was not in recession may have spoken too soon.

In the meantime, there are further warnings that persistently lax monetary policy is storing up problems for the housing market, especially in Toronto and Vancouver. The economists at my old shop at TD Bank are calling the market "frothy", and there are similar concerns from at least one other bank (BMo) and a major realtor.

Bank of Canada Governor Stephen Poloz airily dismisses the rise in home prices as a "side effect" of his stimulative policy stance, so if the data continue to show the economy tanking, he's unlikely to let warnings from banks and realtors stop him from cutting rates again, As I've written before, we won't be calling them "side effects" when the housing market flames out.

And now there's about to be a further complication. The Federal election won't be held until October 19, but PM Stephen Harper can start the campaign any time he wants. For various reasons that I may well examine in a future post, it looks as though the election campaign will formally begin this weekend. Oh joy, an 11-week campaign, with half of it taking place in what's left of the summer. More importantly, that's 11 weeks in which policy makers will effectively be focused only on short-term electoral advantages, and not on the steps that need to be taken to get the economy back on track. This doesn't look good at all.

Canadian Jeopardy!

Talk about unwanted side-effects! We learn this week that Canadian consumer confidence tanked after the Bank of Canada cut rates earlier this month -- and that it had done the same thing when the Bank unexpectedly cut rates back in January. It's hard to be surprised, given all the recession talk that's filled the business pages this past month. And it's not hard to imagine that the rate cut may, perversely, be having the same impact on business confidence: if the Bank of Canada keeps telling you how bad the situation is, chances are you're not going to go out and make a big new investment or hire a platoon of new workers.

One interesting indicator of the state of the economy can be found during TV ad breaks. I'm not thinking of shows like UFC or Duck Dynasty, which attract (ahem) a particular audience, but specifically of the nightly quiz show Jeopardy!, arguably one of the more cerebral offerings* on network television.

Just about every show brings ads for:

• a payday lending company, which uses that well-known Canadian icon, a man dressed in a kangaroo suit, to push its usurious wares;

• an insurance company offering reverse mortgages to seniors who've run out of funds in their golden years; 

• a cheery chap who offers (for a fee) advice on how to restructure your debts and stiff your creditors;

• an ambulance-chasing lawyer looking for clients for his no win, no fee injury litigation shakedown.

Sure, there are one or two pitches for actual products thrown into the mix, but these four spots, together with shameless propaganda from the Federal government, take up most of the interminable ad breaks.

It would be easy to get the impression that the economy was in a deep recession. It definitely isn't, especially in still-prospering Toronto, which is where these ads originate. What's clear, however, is that there's a large and growing population living very close to the edge, people for whom the kinds of services being touted here are a matter of everyday concern. This should be a key issue in the election come October, but of course the kind of folk who rely on payday loans and are pondering personal bankruptcy don't, by and large, bother to vote.

* A low hurdle, admittedly.

Literary criticism

I haven't read the "new" Harper Lee novel, Go Set a Watchman, and based on the reviews I probably won't. Still, it's good to see that something with literary value has pushed the latest excrescence from EL James, Grey, off the top of the bestseller lists. As an aside, though, how cynically clever is Ms James? Tell the same tawdry tale (young woman sells herself to older man in exchange for pricey gifts -- this is feminist porn?) from a different point of view, slap a new cover on it and hey presto, a new bestseller.

I mean, just imagine the same thing being done by Charles Dickens, each of whose novels is packed with fully-drawn characters. If he'd just rewritten Great Expectations from the viewpoints of Estella, Miss Havisham, Magwitch and Jaggers the lawyer, he'd have filled a whole bookshelf without ever having to find a new story.

But I digress. I actually want to write about Ms Lee's new book, and the fuss it's causing. The saintly Atticus Finch of To Kill a Mockingbird is portrayed in Watchman as a older man who's more than a little bit racist.  This has led to all kinds of frenzied exegesis, as critics and readers alike ponder how we all may get a bit cranky as we get older. Some are even saying that what changes between the two books is the perspective of Finch's daughter, Scout, who sees her father in a more nuanced way as she herself advances into adulthood.

If it's true that Watchman was written before Mockingbird (and there seem to be some academics who doubt this, but it's the accepted story for the most part) then most of this analysis is poppycock, and any supposed development in Atticus's character is largely inadvertent. Harper Lee based Atticus on her father, AC Lee. As a younger man, and at the time Watchman was written, AC was an old-style Southern segregationist, and so that's how Atticus is portrayed in the book. Later AC became much more liberal, and that was the basis for the Atticus Finch of Mockingbird.

It would be ridiculous to think that Harper Lee deliberately based the evolution of Atticus Finch from liberal to racist on her own father's evolution in exactly the opposite direction!  The Lord protect us from critics (and from EL James, while He's at it).      

The oxymoron of "Government money"

Non-Canadian readers may be surprised by this article from the Toronto Star, which outlines how shameless the Harper government is in its zeal to buy this fall's election. This sort of thing is more or less par for the course here, but there's no doubt that the Harperites are taking it to a new level. Announcing the increase in child tax credits to take effect at the start of 2015, but then rolling up the increase so as to make a big deferred payment to the lucky recipients just ahead of the vote -- this week, in fact -- is fiendishly clever.

The author of the linked article, Carol Goar, is ferociously anti-Harper, which is a sine qua non if you want to work for the Star. Still. the article performs a useful service, even if it's depressing to acknowledge that this particular service is still needed. My late mother always believed that the government had money of its own to spend; maybe it doesn't say much about my skills as an economist that I could never quite convince her otherwise. If Harper's little scheme is successful, it will serve to prove that my mother's belief is still shared by a large proportion of the electorate. If Carol Goar can convince just a few voters that the money they are getting this week is coming from their fellow taxpayers, that would be a good thing.

There are, by the way, at least two other reasons why the Tories should be ashamed of their child tax benefit wheeze. First, the benefits are fully taxable in the hands of the recipients: a good chunk of the moolah that goes into your account this week will be spirited away again in the new year, when tax filing time comes around. Second, these benefits, and all the other largesse that the government is starting to spray about as voting day approaches, are undoubtedly pushing the Feds back into a budget deficit, especially with the economy so sluggish.

This means that the pre-election goodies are not a dividend for Canadians made possible by sound fiscal management, as the Tories would like to portray them: the Government is in fact giving away money it doesn't actually have.  Whether enough Canadians will wise up to that by election day, and deny Harper another term in office, is something we'll just have to wait and see.  

And now he's pessimistic

As I predicted in my previous posting, the Bank of Canada today cut its benchmark rate by 25 basis points, to a new all-time low of 0.50 percent. Bank Governor Stephen Poloz has been all over the map with his economic outlook this year.  Back in January, when the Bank last cut rates,  it was "atrocious"; by the end of the first quarter, Poloz was seeing positive signs, and predicting that the worst impact of the fall in global energy prices was already behind us. Now the Bank has fallen in with those private sector forecasters who have been suggesting that the economy is back into a mild recession, and that recovery in the second half of the year will be slow.

It's getting a bit wearisome (even for me as the writer, so I assume it's the same for you as the reader!) to keep reiterating why easier monetary policy is almost certainly not the magic bullet for the Canadian economy at this time.  A weak exchange rate, half a decade of record low interest rates and a US economy powering ahead have done next to nothing to boost Canada's non-oil exports, and it would be groundless optimism to think that this latest piece of tinkering will make any difference. In fact, by sounding so gloomy. the Bank may undermine confidence and actually make the situation worse.

Meanwhile, there were warnings even before today's move that further monetary easing could generate a full-fledged bubble in the housing market, always assuming that there isn't one already. Interestingly, only one bank has so far cut its lending rate in response to the Bank of Canada's move: my old employer, TD, which has cut rates by only 10 basis points, not the full 25 that would match the cut in official rates. If the other major banks follow suit, as is likely, they will no doubt be accused of profiteering. Maybe so, but it's at least as likely that they're trying to prepare themselves for the carnage that they must fear is coming if the Bank of Canada doesn't wise up.

Resistance is futile

Today's report that the Canadian economy shed 6400 jobs in June makes a further rate cut all but inevitable, and it's unlikely that Bank of Canada Governor Stephen Poloz will resist the pressure to cut for very long. Truth to tell, mind you, if you look beyond the headline number, today's report is not that bad -- there was a healthy surge in full-time employment, and the overall decline in jobs was produced entirely by a sharp fall in part-time positions.

That full time/part time breakdown needs to be treated with caution in view of the extreme volatility that those series have shown for the past year and more, but in any case, the fall in aggregate employment adds to the impression of renewed economic weakness that has formed in the last week or two. The news of a further small decline in GDP in April has economists openly questioning Poloz's view that the weakness caused by the decline in oil prices might be almost over. A number of forecasters think that the economy is already in a technical recession -- two consecutive quarters of declining output -- and are calling on Poloz to provide further monetary policy support.

Delightfully, just about the only person adamant that there is and will be no recession is Federal Finance Minister Joe Oliver. With the election now just over three months away, the Tories are seeing one of their main bragging points, their supposedly excellent stewardship of the economy, looking increasingly tattered. What a shame!

As anyone who has followed my regular rants about the Bank of Canada under Gov Poloz will know, the question that should be asked about a further rate cut is, will it do more harm than good? Indeed, will it do any good at all?  Canada's latest monthly trade data showed a horrific deficit, with no sign that non-oil exports are expanding to offset the fall in energy shipments. Rather the reverse, in fact: manufacturing exports remain weak, despite the supposed triple booster of low interest rates, a weak exchange rate and a strongly growing US economy. This is no surprise to those of us who think that the Canadian economy's problems are structural rather than cyclical, but it seems to be news to the Bank of Canada.  

And the potential harm from a rate cut? Canadian households are more in debt than ever, and housing prices in the major metropolitan markets grow ever less affordable. A rate cut now will only add to those imbalances, piling up debt to levels that will quickly become unaffordable when rates start to rise. The ugly paradox is that the more Gov Poloz cuts rates now, the more harder he makes it to raise rates at any point in the future without steering the economy straight into the ditch.

Now what?

I confess I'm having trouble seeing the Greek referendum result as the "triumph for democracy" that many commentators are hailing. Look at it this way: Greece lied its way into the Eurozone back at the turn of the century. On the basis of those lies, creditors were willing to lend Greece a lot of money. Then the debt became too much to bear, so the Greeks, first in electing Syriza and then in Sunday's vote, tried to weasel out of paying it back. If that's a triumph for democracy, it's a pretty scuzzy one.

There's more to the story than that, of course: there's blame enough to go round, and not all of it attaches to the Greeks. This article by Richard Gwyn, the Toronto Star's long-serving foreign affairs columnist (I think he may have reported on the Peloponnesian War) is a good place to start.

Gwyn is correct to suggest that you can't compare Greece's problems to those of Iceland a few years ago, and so the solution has to be different too. Iceland was scuppered by its own domestic banks, which exploited shockingly lax regulation to expand at a frantic pace, mostly outside Iceland -- by the time the house of cards fell apart, their Reykjavik HQs were little more than a flag of convenience.

There was a lot of pain for Icelanders after the banks collapsed -- and not a little pain for taxpayers in other parts of Europe, especially the UK, where deposit insurance had to pay out on losses sustained by individuals who had entrusted their savings to the Icelandic banks. However, Iceland had the distinct advantage of having its own currency, which made solving the problems (mainly by imposing capital controls) easier. Those capital controls will be lifted imminently, and barring any problems at that time, Iceland will return to normal international economic relations.

Greece, of course, no longer has its own currency, a fact which cuts both ways as we examine the problems there.  Most analyses are focused on the fact that membership of the Euro limits the steps that Greece can take to extricate itself from its current predicament. This is certainly true, but it's equally plausible to argue that Greece would never have been able to borrow so much if it hadn't been a part of the Eurozone -- and, as we noted at the outset, it only managed to adopt the Euro by lying about its fiscal situation.

Mark one point against the Greeks, then, for getting themselves into an unmanageable debt situation through mendacity and irresponsibility.  However, it's harder to blame the Greeks alone for the fact that they have been unable to get on top of their problems after more than half-a-decade of trying. As everyone warned at the time, the austerity measures imposed by the EU and other creditors as conditions for the initial Greek bailout were always going to crush the economy, and thereby make the debt more rather than less of a burden.

Reading the rhetoric from the Greek side in the last few months, this seems to have been the point that the Syriza government was trying to get across to the creditors.  Prime Minister Tsipras and his team have repeatedly said that Greece has no wish to default on its debt. However, the austerity imposed by the creditors in the past has only lessened the country's ability to meet its obligations, so it can't possibly make sense to double down on austerity as a condition of further help. Even the now departed Finance Minister Varoufakis said at one point that Greece did not want its creditors simply to lend it more money -- they had already loaned it too much in the past.

So where do we go from here? There were hopes that the departure of the abrasive Varoufakis might make it easier to get a deal, but there are no indications yet that Greece has much new to propose, and the creditors seem disinclined to take the initiative. Banks are to stay closed for at least a few more days, and ATMs are expected to run out of cash very soon. Any solution to the problem must involve a significant measure of debt relief or even forgiveness, but it will be difficult in the extreme to agree anything as controversial as that in the very short time that seems to be available before the Greek economy and financial system seize up entirely. Mr Tsipras may yet end up wishing that he had lost Sunday's referendum, rather than winning it so comprehensively.  

Those side-effects'll kill ya

It was reported on Tuesday that Canada's GDP shrank marginally in April, the fourth decline in a row.  Although the energy and resources sector was predictably the worst performer, the weakness was surprisingly widespread across major sectors of the economy. As a result, market expectations of another Bank of Canada rate cut, perhaps as early as this month, have solidified.

It seems unlikely that Bank Governor Stephen Poloz will resist the temptation to ease further. Speaking at a BIS meeting last weekend, Poloz compared the Bank's surprise rate cut in January to life-saving surgery, and dismissed the possible impact on Canadian households' record indebtedness as mere side effects: "If the doctor says you need surgery to avoid death, the side effects don't usually deter you, you just go ahead and manage them somehow". A new definition of manage, it would appear: ignore them, and hope they go away, because there's no sign that the Bank is doing anything at all about debt levels.

If we want to stay with Poloz's medical analogy, it might be appropriate to ask if the medicine is actually working.  Interest rates have been at record lows for half a decade, the exchange rate has depreciated by 25 percent in the last three years, the all-important US economy is moving smartly ahead -- and Canada's non-oil economy continues to struggle for traction.

It ought to be clear by now that the economy's malaise is structural, the result of the hollowing out of the manufacturing sector as a result of a series of free trade deals and the emergence of lower-cost competitors around the world. Many of the parts of the economy that would in the past have offset the weakness in the energy sector simply don't exist any more. With the Bank's reference rate already down to 0.75%, any further cut that Gov Poloz may decide upon amounts to no more than an empty  gesture, one that's highly unlikely to have any impact on the economy's underlying strength.

It will, however, have an impact on indebtedness.  Cheap money will continue to drive housing prices, especially in Vancouver and Toronto, to fresh records, and to push the household debt/income ratio to unsustainable highs. It's being reported that the same US investors who bet against the US housing market almost a decade ago (see Michael Lewis's The Big Short for a knockabout history of the time) are now setting themselves up to profit from what they see as an inevitable bursting of the Canadian housing bubble.

The economy will very likely start to do better in the coming months, whether the Bank cuts rates again or not; but any gains are likely to be swamped by the huge losses that will quickly be felt when the bubble bursts. We won't be calling them side effects when that happens.

And on that cheery note, happy Canada Day, Governor Poloz!