Sadly, it also guarantees profits and wages go along for the ride. First, falling prices are not cool, unless you’re an old scotia interest rate differential forex snort on fixed-income government dole. But even so, it’s unlikely you’ll be buying big-ticket items with declining pricetags, as opposed to food and crap from China. So, this is still not a good gig.
Falling prices, as with houses now in Calgary, make reasonable people delay their buying decisions. Consumer spending goes down, and the economy along with it. Canadian GDP is based on consumers, and almost a quarter is directly tied to residential real estate. Second, when people spend less, businesses make less.
They cut back on their own spending. Or they tell people their wages and salaries will be decreased, as is now happening in the oil patch. Or they make employees become contractors, without benefits. Third, when prices fall so do profits. Look at the banks, several of which were downgraded this week by analysts who understand what lower mortgage rates and less consumer spending means. So they have to cut overhead. Like CIBC, which trashed its IT department and punted 500 employees.
As a result, and the fourth component of deflation, employment falls and consumer spending follows. We’re living this now, as you saw this week with a revision of Stats Canada numbers showing job losses in December were three times worse, and our track record for all of 2014 was piteous. Now with the oil contagion spreading, things will only deteriorate. I would hate to be selling truck nutz in Alberta these days. Actually I’d hate it any day. As profits, incomes, jobs and prices fall, money gets more valuable, which means debts are harder to pay. People on your street have never owed as much.
And yet, the sheeple do not learn, as evidenced from new bidding wars in Vancouver and some parts of Toronto in the wake of the Bank of Canada’s regrettable little nip in interest rates. As you might expect, this is being egged on by a voracious and irresponsible real estate industry. Few people alive today have any real experience in fighting deflation. So far central bankers have printed money, flooded economies with liquidity, supported banks, eased credit restrictions, paid people to buy cars and build decks and slashed interest rates. Governments have gone deeply into debt running deficits so they can keep social spending high even as tax revenues crater. These things have been happening for up to six years. Elsewhere, including here, not so much.
But the collapse in oil is a net positive for Americans, the world’s biggest consumers of it, while it is negative for Canada, one of the largest producers. Now the Bank of Canada has dropped its rate to . The US is on track to raise its central bank rate by the summer. Sadly, there’s nothing much to be done for the house-lusty and the debt-infused masses surrounding us. Nor for the struggling retailers, oil guys or idled engineers. Canada because of the oil collapse.
There’s no point trying to change things. This blog will henceforth allow only astute, prescient, unhorny people to read it. Even government will have to cut back on the money paid to the old people. After all, deflation implies significantly lower tax revenues. 900B of subprime mortgage insurance at the CMHC, which will also force austerity upon the government as defaults against such subprime insurance accelerate.
A few quick days and now everything is going to be cheaper. Besides, if this was so bad, don’t you think the governments of the world could put enough pressure for, e. Saudia Arabia to cut oil output and force gas prices upwards to help combat global deflation? Or is this just going to be localized to a few countries like resource-rich Canada? If so, it suggests a far weaker Canadian dollar and higher consumer prices even as deflationary pressures mount. 4th Steak on thr barby on 01.
I am trying to read today’s blog entry but it appears blank on my screen. Oh well, I’ll be on MLS. Let me know when you’re back up and running. Thank you for the dedication over the years! Those who listened will do fine. Those who didn’t are beyond help. I sold my house a couple years ago and put it all in my diversified financial portfolio which has done very well.