Debt is typically the cause of every major recession and depression throughout the history of the world. Through easy credit, people borrow money they can never hope to repay either investing it in foolish things such as Dotcoms or Tulip Bulbs, or perhaps not investing it at all, preferring to do the American thing and buy SUV's, trips to Europe or degrees in philosophy for their spoiled brat children.
This triggers a recession because the funds borrowed could have been lent to the productive members of society and thusly invested in much wiser and productive things, but since they weren't, this results in a decrease in production which is the definition of a recession.
Now I caught a lot of flak for my posting Canada might be a better place to live in the near future, but again, to show that this is not just some whim or me being in a foul mood, take a look at who has been abusing their mortgage debt;
It is an obscure statistic, but mortgage debt as a percent of disposable income is a way to measure how much debt different people in different countries take on relative to the only thing that can pay it back; disposable income. Again, surprise, surprise, our Canadian brothers to the north have taken a more conservative stance and is why they will not suffer as much as their southern neighbors.
The scary thing, is mortgage debt isn't the only kind of debt. There's government debt, corporate debt, student debt, you name it. And when you add it all up, never has the US had more debt relative to GDP (second chart down). And when you look at what we're spending this veritable mountain of debt on (the stimulus, propping worthless auto companies, handouts and welfare) what possible semblance of future production can we expect?
Oh, the depression is on like Donkey Kong.
Captain....one of the first things bankers up here look at is your debt.If a mortgage will cost more than 25% of your NET disposable income,you will not get said mortgage.In fact,if the bank gives you that loan,when it comes to foreclosure time,you can sue the bank for putting you in that position.I don't know about the States,but you also need at least 5% downpayment of the mortgage,in cash,before you can be approved.
Sure.This means that more people have to rent,but they also know how to be prudent,and save the bucks for that downpayment.I was forty before I got my joint,but I also know what it means to me,and how to keep it.BTW, up here,couples get houses easier than singles.UMMMMMMM....maybe I should scream discrimination?/sarc
Would there be another interpretation of this graph, in that this disparity exists mostly because housing costs in the US increased rapidly compared to Canada, so that to own an equivalent house, there was no choice but to assume commensurately more debt?
Again, as me mentioned, GSEs, speculation, and other factors drove up house prices in the US compared to Canada, so this data may not necessarily represent "wise conservative fiscal choices" here in Canada.
(Although if one could prove that Canadians accepted commensurately smaller homes that would help prove the fact). Cheers.
Not to put too fine a point on it, there is a widespread mind-set amongst the current 'consumer generation' that debt is simply the norm.
Yesterday was my grandson's fourth birthday. His parents are up to their eyeballs in debt despite my daughter's $80K+ income.
Their 'starter' home is in one of the city's finer areas. Mahogany diining table for 10. A 25' travel trailer, used 4 or 5 weekends a year. A 21' boat with 250 fuel sucking hprsepower, all bought new of course.
They barely make the 'nut' on their debt each month and lie awake worrying about it.
Getting back to the birthday party, I commented on my daughter's nicely tanned look, only to be told it was in preparation for her trip to Costa Rica in two weeks.
Meanwhile the birthday party - for a four year old - was being held at a local retail gymnastics facility. Fourteen kids, being entertained by two staff members on a Sunday afternoon. Not to mention the expensive 'Spider Man' masks and Spider Man table cloths - all of which were thrown in the trash after 15 minutes of use. Plus the 'goodie bags' which are apparently 'de rigour' for each of the kids.
I figure the two hours must have set her back a minimum of $250 but like most of her generation, it's not how much I owe, but rather, can I make my payments for the month.
And hey, it's their money and their debt, but what really pees me off is that we'd love a second grandchild.
They claim they'd love to give us that pleasure, but they're now 36 years old and they just CAN'T AFFORD IT.
There is one huge difference between the US and CDN real estate markets that explains a lot of what is happening in this chart:
Personal residence mtge debt interest in the US is tax deductible.
This begets to things that have driven mtge debt higher in the US:
1. Americans can afford larger homes than CDNs with equivalent incomes.
2. Their is an incentive in CDA to pay down non-deductible mortgage debt. It has been a long-standing practice in the US to relever one's house to invest in the Stock market and non-residence property. The years of relatively upward stock market movement and regional real estate booms (caused in part to the deductibility) have spurred even more of this practice and encouraged many to be more aggressive in the practicing of it.
(Yes, there are ways to turn personal residence debt interest into a tax deduction in CDA, but the process is not straightforward and unlike in the US you cannot use the funds from the debt for vactions or improvements to one's house or to buy a new car.)
There is no question that the loosening of Fannie Mae and Freddie Mac rules (the infamous NINJA lending) is the cause of the debt crisis south of the border. But the deductibility rule made the American system far more vulnerable to a collapse.
Sadly, there is zero possibility of this rule being reversed - it has become an entitlement.
No Guff,
Yes, now you know why I avoid marriage and children.
No Guff, you have precisely summarized the direction of the past 40 years of North American society, (for at least some segments), and how we have now arrived at the edge of a big cliff.
Every sentence tells the tale perfectly. Nicely done. Good luck to them and you.
Gord got to a major point. The interest deductability leads to an incentive to buy a bigger house wth a bigger mortgage. Mind you canadians get to keep all of the capital gains from their houses.
Question for American friends....if you take a loss on the sale of your house, what is the tax effect and how long can you carry forward to write off against future income? be an interesting side effect of this. Not all forecloures and losses are people with no income, many were middle and upper class who simply went too far because there was easy easy money....see No Guff's description
And so all those years living within our means, making a budget and sticking to it, saving money, paying off the mortgage tears early - all this while friends partied and borrowed and made fun of us, wasn't stupid after all.
Go figure. Must be a parable in the story, maybe some hardworking ants and party-on grasshoppers.
Or has that already been done ?
Bail me out, Obama!
I guess the first question I’d ask is what made a bus driver believe she could afford an $800,000 house. Unless she makes six figures and had a hell of a down payment, the figures themselves seem so far out of whack that one has to wonder how it occurred at all. The lenders certainly deserve blame here, too, but no one forced Minta Garcia into that house and that mortgage.
http://hotair.com/archives/2009/02/23/video-bail-me-out-obama/
No Guff....you nailed it perfectly.My son-in-law makes over 200K US a year,and they have already taken out a third mortgage on their house.They have more new toys then Santa Claus,but not one of them is paid off.The only good thing,my 18 year old granddaughter has seen their ways,and she owns her own car,rents a place,and has set aside big bucks for college.Works her buns off,and saves for college.You know it's bad when Mom has to go to daughter for a loan!
Here's a major difference for all those looking down their noses at the 'younguns:
When my mom and dad bought their first few homes, the cost of a house was, on average, about a year to two years of salary.
The same house now will cost the average joe 4 years of salary, probably more.
The system requires new home buyers to enter the market to enable a lot of the boomers to retire. Taking them out of the equation, as should happen, given they can't afford the buy-in, will create just as many problems, just for those on the other end of the scale.
Yes, Yukon Gold. Elizabeth Warren has made that point in her lectures and book - The Coming Collapse of the Middle Class.
http://www.youtube.com/watch?v=akVL7QY0S8A
Prices for many things have come down - furniture, clothing, etc etc - thank you China - but prices of four things will strangle middle class Americans:
1. Mortage debt
2. Health Care payments
3. Child Care costs (new since the 1950s)
4. Transportation costs (suburbia, two vehicles, since two people are working)
To the point, she says that one generation ago, one person had to work, and you had a reasonable lifestyle. Now, almost all middle class families need both parents working to keep the show going.
In the past, if one person got sick (ie the working spouse, usually the husband), the wife could take on work until the situation fixed itself. Now, with both people working, if one person is sick/disabled, big problems ensue with the loss of that income.
WRT health care in the US - early discharges have put additional stresses on families.
Interesting videos . . . .
debt is bad...it cripples you....so when you have an essential fundamental nut such as a roof over your head i always reckoned owning it outright was the prudent goal....so i worked two jobs for a good number of years....it's been a good number of years since i had to worry about ill formed circumstances leading to a bailiff or sheriff throwing me and mine out on the street...
it's what my parents did...it's what i did...and it's what i hope my children will do...these days though i reckon a slightly different dynamic is necessary for achieving that security....i think the economics of the zeitgeist determine it's incumbent on parents to assist their children in home purchase.....so i'm thinking of doing an Italian style thingy with 3 families under one roof..sorta like Don Corleone...i'll be that angry looking guy wandering out back in the garden tending my tomato plants...tippling vino the livelong day and tripping over grandchildren and dogs...and taking potshots at mendicant hippies over the wall...periodically howling at the moon....and writing letters to pissant llliberal editors of the local fishwrap...and of course plotting the further erosion and confounding of this socialist nightmare we used to call Canada.
ciaobella!
Thanks for giving my argument teeth, EL.
I do know that I make a top 5% wage here in Winnipeg, live in a house that is half the size of my parents (900 sq ft), and my mortgage is still big enough that I`ve gotta watch the bank account every two weeks.
Ahhh...The entitlement generation. Where did they learn their money management techniques from. Their parents that's who!
My son is 21 years and will have a 25% house downpayment by the time he's 22 with no help from his parents...long work hours and hard saving.
My daughter is 24 years with 5 years university (she paid all tuition herself)...no debt and 25% down when she graduates.
When parents want the best for their children they create entitlement and future debt donkeys. The secret is to let them know at a very young age they have to pay their own way...all the way!
No secret to wealth creation just save and spend wisely.
not stirred enough - I constantly tire of network TV shows showing young single 20 year olds in beautiful houses/apartments sumptuously furnished.
We have lost a sense of realism.
As mentioned by Warren in her lectures, the savings rate in the US is negative 1% - that should scare anyone.
Yukon Gold - I'm fortunate as well to make a good living - I can't imagine making any less and still keeping the show on the road, despite living fairly frugally. I don't know how people do it, honestly.
People at my work are finally waking up to the fact, by the way, that their pensions have plummeted. There may be more to come too.
Not a lot of good news lately.
We Canadians tend to have more reticence about debt. The only recurrent debt frenzies have been in the corporate sector, which usually take the form of a high-flying company blowing its brains out through debt-fueled overexpansion. Traditionally, this corporate hubris has taken place in the resource sectors during time of high inflation - but Canwest and Nortel have also added their names to the hall of shame.
I don't know why corporate debt hubris stably coexists with the "tallest blade of grass" effect, but it does.
Sure the USA over spent as a people but that is not what caused this, what or rather who caused this is Carter and Clinton who made it possible to buy houses with zero down and no need to show you can afford to pay for it.
Why these two are able to freely walk around after this is beyond me, apparently you can't get a BJ from an intern and get away with it but you can lay waste to the world credit markets and not be held accountable.
Strange priorities the USA put on their Presidents.
Captain -
I didn't comment on your post about the case for moving to Canada because everything that you said was true. I'm staying in the United States because the United States seems to be much better on personal freedom, specifically freedom of speech and the press and, at least for now, freedom to get my own medical care.
Even though my conclusion is different from yours, I acknowledge that your points are valid, and they were news to me, so I thank you for them.
Erik,
I can assure you there will be no sumptuous furnishings. That type of thing is not spending wisely and going into debt for something like that is just plain stupid.
not stirred enough - hope you didn't think I was maligning your kids - sure didn't mean it that way at all - apologies if I spoke poorly.
By the way, another sign that things were getting out of whack a while ago - every year our office sponsors a Christmas wish underprivileged family.
I looked at their wish list - and my God, the stuff they were requesting was ridiculous. My kids have very low expectations for gifts - and are happy to get what they get.
Ralph Cramden was a bus driver that lived in apartment. This bus driver's house was 700K. I think I see the problem.
Erik,
No malignment taken. It's probably me, I get a little heated sometimes.
"And so all those years living within our means, making a budget and sticking to it, saving money, paying off the mortgage tears early - all this while friends partied and borrowed and made fun of us, wasn't stupid after all.
Go figure. Must be a parable in the story, maybe some hardworking ants and party-on grasshoppers.
Or has that already been done ?"
No Fred, it just makes you a sucker. NOw get to work paying the grasshopper's delinquent bills! The grasshopper will continue to live high.
Fred and Kevin - I was warned this was coming. I asked this same guy two years ago if I should buy gold, and whether he thought there was a coming civil collapse, etc. He said, you can buy guns and gold, and go live in a cave, but all that time people will be partying, drinking, dancing, and having a good time, while you're in your cave with your gold and guns. Things will go bust, but they will move along to the next party, and there you will still be, in your cave, with your gold and guns.
My last rant - thirty years ago, I looked at a house built in the 1940s. The bedroom closets had room for one suit (weddings, funerals, etc), three dresses, and two shirts. Now, some closets are bigger probably half the size of the Kramden's apartment mentioned above.
We have lost all perspective.
no stirred enough wrote --
Congrats all around -- to your kids for being able to do all that, and to you for instilling that sort of work ethic in your children.
A question, though: roughly what dollar amount are you talking about here? 25% down for starter homes where I would be looking would be over $60,000.
What sort of jobs does one have to work to save that sort of cash by the time one is 22?
No disrespect is intended here -- I am just curious to know how they did it.
Personally, I am a big advocate of playing by the rules as currently constituted. I tried the living within my means thing for several years. Then a look around at reality made me realize that whether I personally spent or not, I would be paying either way. So I decided more debt was OK, and when it comes time to line up for bailouts I won't be the one paying all the bills.
From a relative who is contemplating buying a house in the Napa Valley, CA area.
It is very easy these days to track the initial and subsequent sale prices of a particular house.
Built in 2001 for $280k
Resold in 2003 for $350k
Resold in 2005 for $800k
Resold in 2007 for $1.2Million
On the market now for $450k
Graph it and it is plain to see the last stages of a bubble blow-off. Same as $147 oil and $18 wheat.
The last ones in got dinged, for sure. If Obama bails them out on the backs of other, more prudent taxpayers, he may well have a Boston Tea Party tax revolt on his hands.
http://www.cnbc.com/id/29283701
What you are talking about Ron is the greater fool theory. Price does not matter, as long as you can find a greater fool to give you more than you paid. Works like a charm up until it does not work.
Exactly !
We live in the NY area (not in Manhattan) and bought a condo we could comfortably afford on just my salary - it was still hellishly over-priced for what we got but it will see us through one kid - when a second comes along we will probably move and if we can swing it, keep this place and rent it out. The point is, in order to be prudent we had to buy a place much smaller than my parents had at our age, and on a much higher salary (even inflation adjusted).
Of course, I am one of those evil people that Obama is planning to tax the snot out of, so maybe I'll just invest in some bunk beds and never upgrade - that should help the economy.
Erik Larson: "Now, almost all middle class families need both parents working to keep the show going."
Erik, I'd change the word 'need' to 'choose'. It's at least in part, a lifestyle choice. I know a number of parents who have a very moderate single icome but choose to have a stay at home mom - often with home schooling. They may forego some of life's perks, but their kids are generally speaking, outstanding.
Noy Stirred: "Ahhh...The entitlement generation. Where did they learn their money management techniques from. Their parents that's who!"
Stirred, that's what I find so personally frustrating. The spendthrift daughter I described is nothing like her parents. We ran a small business and between us never earned more than $50K/year.
Yet our house was paid off in 14 years, we've taken trips from Costa Rica to Greece and we have absolutely zero debt. Furthermore, we basically retired at 55 and our own (now meagre)investments should hopefully still see us through to old age.
The trick was trimming our wants to fit our ability to pay at every stage of our lives, while slowly building up equity.
Yes, J. Carter and B. Clinton are partially to blame, but so is the media and the overwheaning perception that 'we can have it all' and moreover, have it now.
All on the pay later plan. We saw the tech bubble and the property bubble - now we have a personal debt bubble for which we will all be paying.
And as an Ant, I'm pissed.
"And so all those years living within our means, making a budget and sticking to it, saving money, paying off the mortgage tears early - all this while friends partied and borrowed and made fun of us, wasn't stupid after all." - Fred @ 1:56pm.
It wasn't stupid then, and probably is still not stupid, but you will not be able to avoid paying to clean up after the grasshoppers' party. Even if you never have to pay a dollar of tax money to bail out the imprudent, their party has probably damaged your retirement portfolio, perhaps even wrecked it. I know I'll be in my office chair at least another two or three years longer than I had intended, because of the mess that mine is in right now. And that's only if the meltdown stops some time soon. I see it hasn't stopped today. It's a good thing that I still like working.
Before all we Canucks throw our shoulders out patting ourselves on the back; please note that before 2000 our debt to income ratio was higher than the Yanks.
No Guff - I should have been more specific - my comments about two incomes keeping the show going referred to Elizabeth Warren's data using an average middle class family from the 1970s, inflation cost-adjusted to today, in a US scenario.
Here in Canada, there is not the health care factor in people's lives.
Also, as mentioned above - the cost of housing in the US ballooned because of mortgage deductability (jb) and GSEs, further crippling that prototypic family. Cheers.
felis corpulentis - one thing that bothers me is the high likelihood that my tax dollars are going to be used to top up public pension funds - further crippling my retirement plans. I'm going to die working, just like my ancestors, except it will be in an office rather than a field.
Joe: "...please note that before 2000 our debt to income ratio was higher than the Yanks."
Not mine, Joe. My debt to income ratio then was zero and it still is today.
However, my retirement portfolio - and I don't get a pension from anyone, other than CPP in another year - has been devestated.
Despite being VERY conservative, you know, Royal Bank, CN Rail and such, my retirement portfolio has dropped over $70K in just a few months. Even the AAA+ rated GMAC bonds I bought nearly five years ago are a worry. They could easily go under before their June due date and there'll be thousands more $$$ up in smoke.
So, yeah....I'll pat myself on the back for being a good, contributing Canadian. But where did it get me? It gets me bailing out all those ^*#+! others who now have a claim to my retirement nest egg.
Erik: "Here in Canada, there is not the health care factor in people's lives."
I have to disagree with you re healthcare. This seems to be based on the 'health care is free in Canada' meme. In the U.S. you might spend $6000/year or $500/mth - perhaps a little more, on reasonable coveage. But you get to choose how much or how little you spend, even nothing if you dare.
In Canada, we pay just as much but it's taken away at the source so we don't really feel it.
On a $48,000 income, I'd guesstimate that about $6,700 of your taxes go directly to some aspect of 'health care' - whether you personally take advantage of it or not.
Difference is, you don't get to make any decisions about your health and have to stand in line along with those who don't pay taxes, just to get substandard care.
Then you are like me No Guff. I haven't had any debt since 1983. However the chart above shows the average Canuck is not as prudent as some commentators would have us believe.
Erik hit the nail right on the head.
Just take a look at the pension liabilities of all of the provinces, municipalities, school boards, hospitals etc, etc, etc.
Who on earth is going to pay for all of this? Just wait until municipalities start going bankrupt.....I can just hear the crying now.....
And with certain politicians(Flaherty just rejected the idea flat out, thank goodness)promising to cover not only public, but now private pensions....certain trough wallowing librano morons need a reality check....
Either come up with an entitlement for all, or let every last one of them stand on their own merits......it is not my fault most pension managers did not see the bubble coming ! ! !
VOTE REFORM !
GO ARMY !
"Debt is typically the cause of every major recession and depression throughout the history of the world."
I disagree Japan has been in recession for well how long decades because of demographic suicide.
In the 30's north America had the highest proportion of immigrants ever except for maybe now which means when it does go people have nothing to fall back on because that's in the first part of their hyphenism.
Maybe it's merely an exacerbating factor but maybe not.
Our mtg is several times our family income. Never mind some whimpy% like 60 or 80.
"As mentioned by Warren in her lectures, the savings rate in the US is negative 1% - that should scare anyone."
But if I put my savings against my house...
Sorry No Guff, I meant that the cost of health care in the US has (probably) escalated more than the costs of health care in Canada, inflation adjusted, "hurting" the middle class.
Here is an article by Warren, maybe better than the video for a quick scan:
http://www.bostonreview.net/BR30.5/warrentyagi.html
"The rising cost of health care has also taken a bite out of the family budget, even for healthy families. In one generation, the average out-of-pocket cost of employer-subsidized health insurance has jumped by about 90 percent. And a growing number of families are offered no employer-subsidized health insurance at all; they must either buy health insurance on the open market or forgo it altogether. In recent years, the number of middle-class families with no health insurance has grown precipitously."
And, we certainly do pay for health care in Canada as you say, and I've heard many provincial cabinet ministers complain that the health care portfolio is "eating their lunch".
But we don't get financially catastrophically hit by illness in Canada. But, we can suffer morbidity and mortality due to waiting lists, no doubt.
I'll keep quiet, I'm making things worse!
Justthinkin:
You didn't get your joint until you were 40?!
Just go down to your local high school; you'll have a joint in about 15 minutes!
CC got into a good rant there. I can understand his frustration.
What part of "you can't live on credit" do you people not understand?
You know things are insane when there are people who rent their furniture.
Who raised these people?
Daycares?
Who rents furniture ? ? ?
"I don't know about the States,but you also need at least 5% downpayment of the mortgage,in cash,before you can be approved."
Nope. I had two former co-workers get mortgages with zero down back in 2004/2005. The head honcho of the bank where my business account is also offered to get me a zero down mortgage recently (which is plain nutz).
As I posted in another thread, the "NINA" - no income, no assets - mortgages that are principally responsible for the housing meltdown in the US (at the margin, these mortgages allowed the prices of lower quality homes to be bid up, which allowed the prices of better homes to rise up as well) are now beginning to be advertised in Canada. These are going to cause the same problems here that they caused in the US. If anyone wants to know what will cost PMSH his majority in the next election (assuming it occurs in 2010), it will be these mortgages and the associated "high yield" securities that are being sold to yield-hungry investors. (The Post's financial section had ads for "real estate" backed securities offering yields of 9.9%, 12.5%, and 15% this past Saturday.) When this budding house of cards comes crashing down, it's the Tories who'll get the (undeserved) blame.
Kingstonland: "Just take a look at the pension liabilities of all of the provinces, municipalities, school boards, hospitals etc, etc, etc."
Good point, my friend. My property taxes jumped an incredible 25% last year, so I had a 'face to face' with our municipal administrator.
I'm still crunching numbers and need some clarification, but here's a couple of warning flags. First, an accounting clerk makes $32/hr in wage/benefits. Compare that with a similar position in the private sector.
A 'gardner' for the City of Nanaimo makes $56,000. The city administrator makes $218,000 - this for a city of 80,000 people. And of course, their pensions, which are typically taken at age 55, are based on their best 5 years of earning.
I have yet to find out whether pensions are defined benefit (God forbid) or defined contribution and whether they are able to 'bank' sick days or receive other perks or benefits not generally available to the people paying their wages.
What really bothers me is that as taxpayers, we are expected to pay up to twice as much for the same job/services as we would to a private sector company. What's up with that? Just because you belong to a union and your employer has the power of taxation, we have to accept being serfs? What ever became of the concept of being a public SERVANT?
When I took our Board of Directors to task, one of them (an NDP member) accused me of wanting the workers to be in a 'race for the bottom' and asking them to work for minimum wage. What a gross canard.
In fact, it is the union based municipal worker who is becoming the 'priviledged class' as they continually improve their status at the expense of the taxpaying peon.
Kingstonland: "Just take a look at the pension liabilities of all of the provinces, municipalities, school boards, hospitals etc, etc, etc."
Good point, my friend. My property taxes jumped an incredible 25% last year, so I had a 'face to face' with our municipal administrator.
I'm still crunching numbers and need some clarification, but here's a couple of warning flags. First, an accounting clerk makes $32/hr in wage/benefits. Compare that with a similar position in the private sector.
A 'gardner' for the City of Nanaimo makes $56,000. The city administrator makes $218,000 - this for a city of 80,000 people. And of course, their pensions, which are typically taken at age 55, are based on their best 5 years of earning.
I have yet to find out whether pensions are defined benefit (God forbid) or defined contribution and whether they are able to 'bank' sick days or receive other perks or benefits not generally available to the people paying their wages.
What really bothers me is that as taxpayers, we are expected to pay up to twice as much for the same job/services as we would to a private sector company. What's up with that? Just because you belong to a union and your employer has the power of taxation, we have to accept being serfs? What ever became of the concept of being a public SERVANT?
When I took our Board of Directors to task, one of them (an NDP member) accused me of wanting the workers to be in a 'race for the bottom' and asking them to work for minimum wage. What a gross canard.
In fact, it is the union based municipal worker who is becoming the 'priviledged class' as they continually improve their status at the expense of the taxpaying peon.
the graphs above do not address the structure differance in the Canadian and US tax systems where US mortgage interest can be written off against income tax but are a capital gain when sold and Canadian houses are capital gain exempt on principal residence. the tendancy in the US over the past few years has been to maximize mortgages and hope for a big payday at the end.
Wait a second. Didn't this blog use to claim that the so-called coming recession was just a media ploy?
http://www.smalldeadanimals.com/archives/008455.html