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Thanks to Greg The Analyst's April 22, 2020 blog entry "Why I view this cycle as deflationary, not inflationary." for his unsourced reproduction chart of the "Income Share of Top 1% Relative to Bottom 90%" since 1920 (chart left). I added to the chart mashup the closest comparison I could find to reflect Canada's wealth gap. The two countries track the same trend in income disparity rising from the early 1980's when state mandated interest rate inflation peaked, to now the end of 2Q 2020 when our new Bank of Canada Governor, Tiff Macklem said on June 22nd, "Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work." "avoid a persistent drop in inflation" oh oh... apparently the members of the The Canadian Club of Montreal who are mainly from the business and professional communities addressed by the Governor are not to be exposed to the apparently scary noun... "deflation" I will highlight below the main points of Greg's argument. ​We are indeed beginning to see the elements unfold for another great cycle of deflation, not official yet, but the evidence mounts.

Money Velocity

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Deflation Probability

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​Reopening Canada: 3 stages of recovery

DEPRESSION DEFINITION 
​(✓) = now occurring in various global economic centers.

Depressions are characterized by their length, by abnormally large increases in unemployment (✓), falls in the availability of credit (✓) (often due to some form of banking or financial crisis (✓)), shrinking output (✓) as buyers dry up (✓) and suppliers cut back on production and investment (✓), more bankruptcies (✓) including sovereign debt defaults (✓), significantly reduced amounts of trade and commerce (✓) (especially international trade (✓)), as well as highly volatile relative currency value fluctuations (✓) (often due to currency devaluations (✓)). Price deflation (✓), financial crises (✓), stock market crash (✓), and bank failures (✓) are also common elements of a depression that do not normally occur during a recession. (Wikipedia)

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​First up, here's an abbreviated list of some of the main arguments that "This time REALLY is different" by Carmen Reinhart and Kenneth Rogoff in their new  Bloomberg Markets interview of May 24, 2020 via Moneyweb. ​ This is an interview update of their 2009 history of financial crises "This Time Is Different: Eight Centuries of Financial Folly".

​CR: So pandemics are not new. But the policy response to pandemics that we’re seeing is definitely new. If you look at the year 1918, when deaths in the US during the Spanish influenza pandemic peaked at 675,000, real GDP that year grew 9%. So the dominant economic model at the time was war production. You really can’t use that experience as any template for this. That’s one difference.

It’s certainly different from prior pandemics in terms of the economy, the policy response, the shutdown... The reversal in capital flows in the four weeks ending in March matched the decline during the [2008-09] global financial crisis, which took a year. So the abruptness and the widespread shutdowns we had not seen before.

KR: Certainly the global nature of it is different and this highlights the speed. We have the first global recession crisis really since the Great Depression. 

The economic policy response has been massive and absolutely necessary... But certainly the aggressive crisis response reflects lessons learned in 2008.

CR: Let’s take monetary policy before the pandemic. US unemployment was at its lowest level since the 1960s. By most metrics the US was at or near full employment. It’s very possible that the path was toward rising interest rates. Clearly that has been completely replaced by a view that rates are zero now and that they’re going to stay low for a very long, long, indeterminate period of time, with a lot of liquidity support from the Federal Reserve. So that’s a big game changer, discounting futures.

What this does mean is that the market is really counting on a lot of rescues. The blanket coverage by the Fed is broad, and that is driving the market. And expectations are that we’re going to have this nice V-shaped recovery and life is going to return to normal as we knew it before the pandemic. And my own view is that neither of those are likely to be true. The recovery is unlikely to be V-shaped, and we’re unlikely to return to the pre-pandemic world. 

KR: It’s not just the people not working. What’s the efficiency of the people who are working? The monetary response has been done hand in hand with the Treasury. The market is banking on this V-shaped recovery. But a lot of the firms aren’t coming back. I think we’re going to see a lot of work for bankruptcy lawyers going across a lot of industries.

CR: There is talk on whether it’s going to be a W-shape if there’s a second wave and so on. That’s a very real possibility given past pandemics and if there’s no vaccine.

The shock has disrupted supply chains globally and trade big-time. The World Trade Organisation tells you trade can decline anywhere between 13% and 32%. I don’t think you just break and re-create supply chains at the drop of a hat. 

Another reason I think the V-shape story is dubious is that we’re all living in economies that have a hugely important service component. How do we know which retailers are going to come back? Which restaurants are going to come back? Cinemas? When this crisis began to morph from a medical problem into a financial crisis, then it was clear we were going to have more hysteresis, longer-lived effects.

KR: So we use a much more modest version of recovery. And still, with postwar financial crises before 2008-09, the average was four years, and for the Great Depression, 10 years. And there are many ways this feels more like the Great Depression.

And you want to talk about a negative productivity shock, too... There’s a lot of uncertainty, and it’s probably not in the pro-growth direction.

So there are going to be phenomenal frictions coming out of this wave of bankruptcies, defaults. It’s probably going to be, at best, a U-shaped recovery. And I don’t know how long it’s going to take us to get back to the 2019 per capita GDP. I would say, looking at it now, five years would seem like a good outcome out of this.

“If it drags on, the forces that are pulling the euro zone apart are going to grow stronger and stronger.”

CR: The problem in emerging markets goes beyond the poorest countries. For many emerging markets, we’ve also had a massive, massive oil shock. Nigeria, Ecuador, Colombia, Mexico—they’ve all been downgraded. So the hit to emerging markets is just very broad. Nigeria is in terrible shape. South Africa is in terrible shape. Turkey is in terrible shape. Ecuador already is in default status, as well as Argentina. These are big emerging markets. It’s going to be enormously costly.

For the G-20 initiative, I indeed hope it is the G-20 and not just the G-19. China needs to be on board with debt relief. That’s a big issue. The largest official creditor by far is China. If China is not fully on board on granting debt relief, then the initiative is going to offer little or no relief. If the savings are just going to be used to repay debts to China, well, that would be a tragedy.

KR: The IMF at this point is all-in on trying to find a debt moratorium, recognizing there’s going to be restructuring in a lot of places. But I don’t think the US is by any means all-in, and a lot of the contracts of the private sector are governed under US law. And if the US government is not in, if China’s not in, it’s not really enough. 

KR: The financial markets think there’s no chance interest rates will go up. There is no chance inflation will go up. If they’re right, and if another shoe doesn’t drop, it’ll be fine. But we could have costs from this. We’re talking about economies shrinking by 25% to 30%. And those [declines] are just staggering compared to the debt burden costs, whatever they are. So certainly we would strongly endorse doing what governments are doing. But selling it as a free lunch, that’s stupefyingly naive.

CR: If you look back to 2008-09, nearly everybody had a banking crisis. But a couple of years later, the focus had moved from the banking problem to the debt problem... And if there’s a shakeout that involves concerns about Italy’s growth, then we could have a transition again from the focus on the Covid-19 crisis this time to a debt crisis. But Italy, as I said, is on a different scale than the peripheral countries that got into the biggest trouble in the last crisis. It potentially also envelops Spain. So I think that if you were to ask me about an advanced economy debt issue, I think that is where it is most at the forefront.

KR: We argued at the time that the right recipe was to involve write downs of the southern European debts. And I think that would have been cheap money in terms of restoring growth in the euro zone and would have [been] paid back. And we may be at that same juncture in another couple of years where you’re looking at just staggering austerity in Spain and Italy on top of a period of staggering hardship. Advanced countries have done this all the time—finding some sort of debt restructuring or writedown to give them fiscal space again, to support growth again. If the euro zone doesn’t find a way to deal with this, maybe eurobonds might be in the picture to try to indirectly provide support. Again, we’re going to see huge forces pulling apart the euro zone.

CR: It’s hard to say in China what is public and what is private, but corporates in China levered up significantly, expecting that they were going to continue to grow at double digits forever. That hasn’t materialised. There’s overcapacity in a lot of industries.

China came into this with inflation running over 5% because of the huge spike in pork prices. So I think initially that the PBOC [People’s Bank of China] has been somewhat constrained initially in doing their usual big credit stimulus by uncertainty over their inflation. I think that’s changing because of the collapse in oil price. So I do think we are going to see more stimulus from China.

KR: There will be a pretty sustained growth slowdown in China. We were on track for that anyway. But who can they export to? The rest of the world is going to be in recession. I think if they can average 1% growth the next two, three years, then that will look good. That’s not a bad prediction for China. And let’s remember, their population dynamic is completely changing. So 3% growth in that, with that Europeanising of their population dynamics, would not be bad at all. But there’s a big-picture question about their huge centralisation, which is clearly an advantage in dealing with the national crisis but maybe doesn’t provide the flexibility over the long term to get the dynamism that at least you’ve got in the US economy.

KR: So central banks all over the world are using the fiscal side of their balance sheet...  Monetary policy is essentially castrated by the zero bound.

CR: We really can’t look independently at central banks without also looking at the balance sheet, not just of the government, but the balance sheet of the private sector, which has a lot of contingent liabilities.

On the issue of negative interest rates, I do not share Ken’s views on that particular matter. When you have, as we do today, very fragmented markets, markets that became totally illiquid, I think the way I would deal with that would not be through making rates more negative, but by an approach closer to the one taken by the Fed, which is through a variety of facilities that provide directed credit. Sustained negative interest rates in Europe have led to a lot of bank disintermediation. And often bank disintermediation means that you end up with the less regulated, less desirable financial institutions.

KR: So the probability is, for the foreseeable future, we’ll have deflation. But at the end of this, I think we’re going to have experienced an extremely negative productivity shock with deglobalisation. In terms of growth and productivity, they will be lasting negative shocks, and demand may come back. And then you have the many forces that have led to very low inflation maybe going into reverse, either because of deglobalisation or because workers will strengthen their rights. The market sees essentially zero chance of ever having inflation again. And I think that’s very wrong.

CR: Some of the scars are on supply chains. I don’t think we’ll return to their precrisis normal. We’re going to see a lot of risk aversion. We’ll be more inward-looking, self-sufficient in medical supplies, self-sufficient in food. If you look at some of the legacies of the big crises, those have all seen fixed investment ratchet down and often stay down.

​READ THE FULL INTERVIEW TEXT "This time really is different" by Carmen Reinhart and Kenneth Rogoff in their new  Bloomberg Markets interview of May 24, 2020 via ​Moneyweb.

Canada GDP % Growth Annualized

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The Canadian economy advanced an annualized 0.3 percent on quarter in the three months to December 2019, below a downwardly revised 1.1 percent expansion in the previous period and matching market forecasts. It was the weakest growth rate since the second quarter of 2016, when the economy shrank 2 percent. (BEFORE THE FIRST COVID 19 CASE HIT)
Source: TradingEconomics.com

In his final official speech May 25, 2020, the Governor of the Bank of Canada ​Stephen Poloz said:

“Although a minority of observers worry that these extreme policies will create inflation someday, our dominant concern was with the downside risk and the possibility that deflation could emerge... Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past... In effect, then, we were saying that the downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy-makers to consider. Picture the pandemic creating a giant deflationary crater in the middle of the economy; it takes what looks like inflationary policies to offset it.” 

A panel of experts assembled by the C.D. Howe Institute and led by David Dodge, a former Bank of Canada governor, on May 25 said the central bank and government should “reinforce their commitment” to the two-per-cent target.

Poloz said the economy will “need significant monetary stimulus in the rebuilding stage,” but that “it is well understood that the bank’s ability to lend without limit must be backed up by the inflation target to anchor inflation expectations.”

Canadian 5 Year Fixed Rate Mortgage Rates 1951 = 05.46%​ +30yrs 1981 = 18.15% +30yrs 2011 = 05.19% April  2015 = 04.64%, a new low for 27 months MAY 13 2020 = 05.04% MAY 20 2020 = 04.94%

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"Eight centuries of global real interest rates, R-G [real wealth returns (R) and broader real growth (G)], and the ‘suprasecular’ decline, 1311–2018" Source Material
by Paul Schmelzing, January 2020. Bank of England Staff working Paper No. 845 (all 110 pages here)

The Introduction, in full:

The evolution of long-term real interest rates has in recent years attracted significant academic interest. Partly in the context of the “secular stagnation” debate and related contributions, which in different variants have advanced theories on the drivers behind a low rate environment, supposedly originating in the second half of the 20th century. Partly in the context of “inequality” and “wealth” debates, particularly stimulated by the contribution of Piketty (2014), and its peculiar view of long-term asset and wealth returns in their relation to broader income growth. Despite regular recourse to “history” from the proponents of such theories, it will be posited in this essay that both debates advance a misrepresentative view of long-run interest rate and wealth return trends – and only partly because they overwhelmingly omit archival and other historical factual evidence.

The discussion of longer-term trends in real rates is often confined to the second half of the 20th century, identifying the high inflation period of the 1970s and early 1980s as an inflection point triggering a multi-decade fall in real rates. And indeed, in most economists’ eyes, considering interest rate dynamics over the 20th century horizon – or even over the last 150 years – the reversal during the last quarter of the 1900s at first appears decisive.

Equally, the historical relation between real wealth returns (R) and broader real growth (G) has assumed a central role in the current debates on long-term inequality trends, culminating in the widely discussed contribution of Piketty (ibid.). The latter contended – on the basis of positing a “virtual stability of the pure return of capital over the very long-run” – that excess real capital returns over real growth rates would soon perpetuate an “endless inegalitarian spiral” (ibid, 206, 572).

From what are, at their core, return and capital cost debates, have sprung various related policy and academic contributions. For instance, more recently the spread between “Safe R” (the real capital cost for the “safe” sovereign debt issuer) and “G” (its respective real income growth rate) since 1950 has been documented, and highlighted as a key variable to assess public debt sustainability (Blanchard 2019).

This essay approaches these subjects from a historical perspective, arguing that the recourse to archives, printed primary sources, published secondary works, and assessed written evidence from the past, raises deeper problems for such recent debates. In what follows, I attempt to document for the first time the particular evolution of both GDP-weighted global and “safe asset provider” long-term sovereign real rates over a span of 707 years, relying on a collection of evidence from 14th century European municipal and imperial registers, over Habsburg, British, Dutch, crown documents, to (often ignored) earlier secondary sources, and to current Federal Reserve data.
 
First, the approach here modifies various of the empirical findings by what is perhaps the most comprehensive existing investigation on interest rate trends, the work of Homer and Sylla (1996, 2005). The latter do not take into account primary sources, and even the secondary source material is limited, once assessed in detail. Neither do they discuss real rate dynamics (bar four pages on the U.S. context), or attempt to build “GDP-weighted”, global series. In consequence, and for all the merits of their work, the timing and evolution of interest rate trends it suggests is partly inappropriate, partly inapplicable for current debates in both the historical and the economics literature.

One key empirical result analyzed here is that there is no evidence of a “virtual stability” of real capital returns, either expressed in R or “R-G” over the very long run: rather, – despite temporary stabilizations such as the period between 1550-1640, 1820-1850, or in fact 1950-1980 – global real rates have shown a persistent downward trend over the past five centuries, declining within a corridor of between -0.9 (safe asset provider basis) and -1.59 basis points (global basis) per annum, with the former displaying a continuous decline since the deep monetary crises of the late medieval “Bullion Famine”. This downward trend has persisted throughout the historical gold, silver, mixed bullion, and fiat monetary regimes, is visible across various asset classes, and long preceded the emergence of modern central banks. It appears not directly related to growth or demographic drivers, though capital accumulation trends may go some way in explaining the phenomenon. But whoever posits particular recent savings-investment dislocations in the context of an alleged “secular stagnation” needs to face the likelihood that such “imbalances” may have been a continuous key driver for five centuries.

Similarly, negative long-term real rates have steadily become more frequent since the 14th century, and I show that they affected around 20% of advanced economy GDP over time, a share that has historically risen by 1.2 basis points every year: once more, this suggests that deeply-entrenched trends are at work – the recent years are a mere “catch-up period” in this and a number of related aspects.

Together, I posit that the private and public assets covered in the following also go some way in enabling the reconstruction of total “nonhuman” wealth returns since the 14th century. Prior to the recording of robust public statistics, wills and tax assessments suggest that around one-third of private wealth is tied to public and private debt assets, with another third in real estate – in an environment where wealth-income ratios may plausibly have reached 150-250% of GDP. Aggregating such evidence, and constructing plausible long-run R-G series over the last 700 years, suggests that real returns on nonhuman wealth are equally downward trending over time. They are by no means “virtually stable”, a cornerstone of Piketty’s (2014) framework. In fact, if historical trends are extrapolated, R-G will soon reach permanently negative territory – a first since at least medieval times.

With regards to “secular stagnation” debates, I argue that in contrast to prevalent theories, global real rates are not mean-reverting within a certain corridor (Hamilton et al. 2016), and history does not suggest that they reach a steady-state value in the medium-term, even if that value is negative (Eggertsson, Mehrotra, and Robbins 2017, esp. 41). The “real safe rate” is not “normally fluctuating around the levels we see today” (Jorda et al. 2017, 4). In this sense, the decline of real returns across a variety of different asset classes since the 1980s in fact represents merely a return to long-term historical trends. All of this suggests that the “secular stagnation” narrative (Summers 2014; 2015; 2016; Rachel and Summers 2019), to the extent that it posits an aberration of longer-term dynamics over recent decades, appears fully misleading.

The data here suggests that the “historically implied” safe asset provider long-term real rate stands at 1.56% for the year 2018, which would imply that against the backdrop of inflation targets at 2%, nominal advanced economy rates may no longer rise sustainably above 3.5%. Whatever the precise dominant driver – simply extrapolating such long-term historical trends suggests that negative real rates will not just soon constitute a “new normal” – they will continue to fall constantly. By the late 2020s, global short term real rates will have reached permanently negative territory. By the second half of this century, global long-term real rates will have followed.

The standard deviation of the real rate – its “volatility” – meanwhile, has shown similar properties over the last 500 years: fluctuations in benchmark real rates are steadily declining, implying that rate levels are set to become both lower, and stickier. But downward-trending absolute levels, and declining volatilities have persisted against a backdrop of a secularly growing importance of public and monetary balance sheets. This would suggest that expansionary monetary and fiscal policy responses designed to raise real interest rates from current levels may at best have a cyclical effect in the longer-term context.

Finally, this paper is not naïve about the remaining limitations of the very long-term historical evidence. The robustness checks below cannot deflect from the fact that late medieval and early modern data can of course never be established with the same granularity as modern high-frequency statistics. One still has to rely on interpolations here, deal with the peculiarities of early modern finance, and acknowledge that the permanency of wars, disasters, and destitution since the times of medieval Condottieri and Landsknechte has irrecoverably destroyed not an insignificant share of the evidence ideally desired. But I suggest that whoever invokes “history” in the present debates needs to advance against the backdrop of these limitations.

This paper will proceed by first discussing empirical aspects across various assets and geographies, and elaborating on the technicalities of aggregating such evidence, before relating it to other economic and (geo-) political variables, and constructing main derivative series including R-G, the real rate standard deviation, and the long-run negative real rate frequency. This is followed by a discussion of robustness aspects, and, finally, by a closer focus on capital accumulation factors during the late 15th century.

The Suprasecular Rate Decline

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The Conclusion, in full:

This concludes the long-term survey. First, this paper has argued that – partly given their methodological shortcomings (such as the sole focus on secondary source, nominal, country-level, “lowest-issuer”, scattered rate evidence) – relying on existing narratives obscures historical interest rate dynamics: for one, there is across a multitude of assets no evidence of a “virtual stability” of real capital returns, and I have argued that with the approach here it is now at least able to approximate quantitatively actual trend falls over (sub-) periods and asset classes. This empirical basis, for one, suggests that it was not the Black Death that stands out as an inflection point (Epstein 2000, 61ff.), or the 13th and late 17th centuries as Homer and Sylla’s (1991, 556f.) semi-centennial sketch suggests. A far more relevant turning point – one that initiated a “slope” in real interest rates to which the post-Napoleonic period has once more returned – occurs in the late 15th century. That episode coincides with a sharp surge in capital accumulation trends, and a jump in plausible savings rates – an inflection which also clearly precedes institutional “revolutions” such as those proposed by North and Weingast (1989).

But the value of constructing the first multi-century, high-frequency GDP-weighted real rate dataset for both the global “safe asset provider”, and advanced economies on aggregate goes beyond purely empirical qualifications. In its applied dimension, I sought to suggest that a long-term reconstruction of real rate developments points towards key revisions concerning at least two major current debates directly based on – or deriving from – the narrative about long-term capital returns. First, my new data showed that long-term real rates – be it in the form of private debt, non-marketable loans, or the global sovereign “safe asset” – should always have been expected to hit “zero bounds” around the time of the late 20th and early 21st century, if put into long-term historical context. In fact, a meaningful – and growing – level of long-term real rates should have been expected to record negative levels. There is little unusual about the current low rate environment which the “secular stagnation” narrative attempts to display as an unusual aberration, linked to equally unusual trend-breaks in savings-investment balances, or productivity measures. To extent that such literature then posits particular policy remedies to address such alleged phenomena, it is found to be fully misleading: the trend fall in real rates has coincided with a steady longrun uptick in public fiscal activity; and it has persisted across a variety of monetary regimes: fiat- and non-fiat, with and without the existence of public monetary institutions.
 
Secondly, sovereign long-term real rates have been placed into context to other key components of “nonhuman wealth returns” over the (very) long run, including private debt, and real land returns, together with a suggestion that fixed income-linked wealth has historically assumed a meaningful share of private wealth. There is a very high probability, therefore, to suggest that “non-human wealth” returns have by no means been “virtually stable”, as posited by recent popular accounts (e.g. Piketty 2014, 206): only if business investments have both shown an extreme increase in real returns, and an extreme increase in their total wealth share, could the framework be saved. If compared to real income growth dynamics over the same timespan, R-G, we equally detect a downward trend across all assets covered in the above discussion.

There is no reason, therefore, to expect rates to “plateau”, to suggest that “the global neutral rate may settle at around 1% over the medium to long run”, or to proclaim that “forecasts that the real rate will remain stuck at or below zero appear unwarranted” as some have suggested (Hamilton et al. 2016, 663; Rachel and Smith 2017, 37). With regards to policy, very low real rates can be expected to become a permanent and protracted monetary policy problem – but my evidence still does not support those that see an eventual return to “normalized” levels however defined (for instance Eggertsson, Mehrotra, and Robbins 2017, 41, who contemplate a “nadir” in global real rates in the 2020s): the long-term historical data suggests that, whatever the ultimate driver, or combination of drivers, the forces responsible have been indifferent to monetary or political regimes; they have kept exercising their pull on interest rate levels irrespective of the existence of central banks, (de jure) usury laws, or permanently higher public expenditures. They persisted in what amounted to early modern patrician plutocracies, as well as in modern democratic environments, in periods of low-level feudal Condottieri battles, and in those of professional, mechanized mass warfare.

In the end, then, it was the contemporaries of Jacques Coeur and Konrad von Weinsberg – not those in the financial centres of the 21st century – who had every reason to sound dire predictions about an “endless inegalitarian spiral”. And it was the Welser in early 16th century Nuremberg, or the Strozzi of Florence in the same period, who could have filled their business diaries with reports on the unprecedented “secular stagnation” environment of their days. That they did not do so serves not necessarily to illustrate their lack of economic-theoretical acumen: it should rather put doubt on the meaningfulness of some of today’s concepts.

Schmelzing on Bonds, Why Investors Face Years of Losses
January 10, 2017

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Covid-19 MAR 27, 2020 The incubation period (time from exposure to the development of symptoms) of the virus is estimated to be between 2 and 14 days. A very long incubation period could reflect a double exposure. 24 days represented an outlier observation that must be taken into consideration in the context of the main finding of the World Health Organization study. CLICK CHART TO ENLARGE

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The February housing data for Calgary shows that the average price of a condo is trading at prices from nearly 15 years ago and two and a half years before the July 2008 WTI Crude Oil peak. ​The Canadian Federation of Independent Business released their March 2020 "Business Barometer" suit of charts: ​"The index now stands at a record low 30.8, well under the previous lows near 39 recorded in both the 2008 and 1990 recessions. The scale of the negative perspectives appear pretty consistent across industry groupings..." Earlier this year, Jason Kirby via Macleans.ca released their 6th annual "Most important Canadian economic charts to watch in 2020." Note the Calgary trend changes unfolding since February 8, 2016 when WTI Crude Oil prices hit USD$28.49. CLICK CHART TO ENLARGE

Alberta’s Double-Dip Recession?
"Oil producing provinces have faced a difficult five years. Low oil prices cut into revenue, investment, employment, wages, and overall economic activity. Government budgets are increasingly strained, unemployment is stubbornly high, social assistance enrollment is at record highs, and the end is not yet in sight. In fact, a second recession might (just might) be in Alberta’s future. As this graph illustrates, my index of monthly economic activity in Alberta has been negative for most of 2019 – signalling a possibly contracting Alberta economy. A worsening economy in Alberta affects employment and growth throughout Canada, but the ripples go far beyond the dollars and cents. Rising frustration and disappointment are increasingly directed at perceived failures of the federal government and Alberta politicians are happy to oblige. A second recession may exacerbate these tensions and further strain Canada’s confederation. For these reasons, and more, this indicator will be one to watch in 2020." Chart above thanks to Trevor Tombe, associate professor of economics, University of Calgary and research fellow at The School of Public Policy.

CANADIAN EMPLOYMENT RATES
in Vancouver, Calgary, Toronto, Montreal and their Provinces
See also my previous posts with charts related to DEFLATION and what to expect:
Asset Prices Drop
Investment Spending Drops
The Savings Rate Rises
Debt Delinquencies Rise
The Credit Boom Turns to Bust 

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ITEM: "People are hitting the wall’:
Delinquency rate highest since 2012  GlobalNews.ca MAR 5, 2020

"Canada’s so-called 90+ day delinquency rate on non-mortgage payments climbed to 1.2 per cent in the final three months of 2019, an 11 per cent jump compared with the same period in 2018, Equifax data shows... Delinquency rates had been “marching higher” for much of 2019 and will likely keep going up in 2020... The trend is strongest in British Columbia, Ontario and Alberta, where delinquencies are now back above their 2016 level."

Canada sees rising numbers of consumers defaulting on their debts even amid a healthy economy and solid job market. Consumer insolvencies were up more than 10 per cent in January 2020 compared to the same month in 2019, according to the latest figures from the Office of the Superintendent of Bankruptcy.

Scott Terrio, manager of consumer insolvency for Hoyes, Michalos Licensed Insolvency Trustees said "much of the debt he sees from clients filing for insolvency is much older than two years... "We’ve run up debt for most of a decade... Some borrowers are simply getting to the end of the runway... That may be especially true among renters, who, according to Terrio, made up more than 90 per cent of debtors who filed for insolvency with Hoyes Michalos over the last couple of years... While sky-high home prices allow many homeowners in expensive cities to keep borrowing against their home equity, renters have fewer options to keep borrowing and consolidate debt."

“Outside of mortgages, we have seen a significant pullback in demand for credit,” Johnston noted. Consumers, Terrio said, are “entering a period here of self-policing.”

ie: DEBT REVULSION

​"Deflationary Spiral" - The Khan Academy
"EMPLOYMENT DRIVES DEMAND"

​TEXT FROM VIDEO ABOVE Created by Sal Khan: So in a normal economy we know that employment will drive overall demand. If we have high employment or low unemployment, then people are going to have more jobs, and they're going to have higher wages, and that will have higher demand. Or if the other way goes around, if they lose their jobs, demand is going to go down, wages will start to go down, and people aren't going to have money in their pockets. So employment drives demand. And we can view the demand-- and I'm making a huge simplification here-- demand will drive production. Or maybe we could think of it as supply. It'll drive supply, and it can also be a driver of price. And of course, there is a little bit of a negative feedback loop for both of these things. If the demand is high and the price goes high, that might produce a little bit of negative feedback on the demand. Instead of an arrow, this line here means negative feedback. I'll put a little negative sign here. And let's say the demand is high and then the supply goes high. Well actually, the supply going high would drive the price going down. So maybe I should draw a negative feedback like here. High supply would mean lower price. But that's not what I want to focus on in that video. And we could keep adding more lines here. But this is roughly simple take on it. But the general idea is supply and price will then drive corporate profits, or just profits in general, even for an individual business owner. And then profits are going to drive employment.

Now, let's imagine a scenario. We are in a bad economy, maybe a depression-like economy. So in that situation, you could start really at any point in this circle. I'll just start at employment. So let's say employment is really low. That's going to make demand really low. And if demand is really low, then supply is going to go down, and price is going to go down. And then that's going to make profits go down. And that's going to make employment even lower. And so what we find ourselves in this kind of recessionary or depression area environment, this would be called a deflationary spiral. And it's a spiral because a bad economy is driving lower prices, which is in turn driving a bad economy. And to make matters worse, if this continues long enough, or if these price declines are severe enough, you could imagine people saying, look, I have this dollar in my pocket. I'm not going to spend this dollar because, one, I might lose my job at any moment, and I know that that dollar is becoming more powerful, that I can buy more every minute that I wait. So as the price goes down, so as all of this scary stuff happens-- so the employment is going down, profits are going down, prices going down-- this makes people not hoard goods the way that they would do in an inflationary spiral. But it makes them hoard money.

​And why it's ultra scary for central bankers or for governments is they start to not have as much control over the economy. They can't just run the printing press and try to stimulate the economy in this situation, because if they did people are so conservative right now-- You could imagine maybe a depression is going on for years and years and years. And let's say that they take some type of a helicopter-- And this isn't how you actually distribute money to the money supply, but it's just to show an extreme example. So they take a helicopter, and they start dumping cash on people. They print cash, and they start dumping it on people. So every man, woman, and child in the country gets a $10 bill. Well, if people are really scared and really afraid, they're just going to take that $10 bill and stuff it into their mattress, and it's not going to change anything. That dollar isn't going to actually enter into the money supply. The velocity on it will be 0." 

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While we wait for the July Canadian housing data to trickle out, let's return to Japan and their housing price experience after nearly 20 years of ZIRP and NIRP. I have posted charts about Japan since 2012 to illustrate the folly of global central banks and their monetary policies of instituting ZIRP & NIRP to stimulate inflation > consumption > production, the by-product of which, has been the manic search for yields as the underlying asset class values became stretched to perfection under pressure from the FOMO crowd. Instead of using fiscal policy which requires long term planning and socially cohesive agreements directed towards production and well being, the quarterly knob twiddling monetary policy has in part, along with the rise of a digitized global financial network, unleashed "megabyte" money laundering which the UNODC  estimates at 2-5% of global GDP per year. It has also crushed the incentive to save for a future funding of investment into productive assets.   The Household Saving Rate in Canada has decreased to 1.1% in the first quarter of 2019. ​​

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​Commodity Super Cycle - 10 Years into the Bear

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Here is a chart I published in a 2012 post "What Do You Do During a Housing Bust". The answer is "save". ​ If the CRB chart above has correctly identified a cyclical swing between bull and bear commodity production, then we should expect another "lost decade" of balance sheet repair especially in the over-speculated and now depreciating housing asset markets of Canada.

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Image slide show below of the 3 charts above.

​St. Louis Fed June 24, 2019 Recession Notes

​
By William Emmons, Lead Economist, Center for Household Financial Stability
Federal Reserve Bank of St. Louis June 24, 2019

As of late 2018, four housing indicators that had signaled each of the three most recent recessions were on a track consistent with a late 2019 or early 2020 recession. They are:

30-year fixed mortgage rates
Existing home sales
Real house prices
Contribution of residential investment to GDP growth

What Might These Four Housing Indicators Be Signaling?
The recession signal provided by several key housing indicators in late 2018 strengthened in early 2019 in the sense that their cyclical behavior is well within the range traced out in the run-up to the three most recent recessions. Combined with movements in other indicators with good forecasting track records (such as the inversion in the slope of the Treasury yield curve), these housing measures suggest an above-average risk of recession within the next few quarters. Of course, the onset of the next recession is unknown.

​The New York Fed Agrees

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The New York Fed’s recession probability model is currently warning that there is a 30% probability of a recession in the next 12 months. The last time that recession odds were the same as they are now was in July 2007, which was just five months before the Great Recession officially started in December 2007. July 2007 was also when Bear Stearns’ two subprime hedge funds lost nearly all of their value, which ultimately contributed to the investment bank’s demise and the sharp escalation of the U.S. financial crisis.  Read Whole Article

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The Canada Mortgage and Housing Corp. (CMHC) defines a household as being in “core housing need” if it “falls below at least one of the adequacy, affordability or suitability standards and would have to spend 30% or more of its total before-tax income to pay the median rent of alternative local housing that is acceptable (meets all three housing standards).” thecanadianencyclopedia.ca

"estimated that approximately 35,000 Canadians experience homelessness on any given night, and at least 235,000 Canadians are homeless in any given year."​ AND  According to the Canadian Observatory on Homelessness, mass homelessness in Canada emerged around this time (1987 Conservatives) as a result of government cutbacks to social housing and related programs starting in 1984 (Conservatives). In 1993 (Liberals), federal spending on the construction of new social housing came to an end. In 1996 (Liberals) the federal government transferred responsibility for most existing federal low-income social housing to the provinces.

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​Conclusion from Statistics Canada’s Insights on Canadian Society.

Using data from the 2016 SFS, this study looked at the association between the debt-to-asset and debt-to-income ratios and financial distress, while controlling for various socioeconomic characteristics. Three financial distress indicators were considered—missing non-mortgage payments, missing mortgage payments and taking out a payday loan.

The varied results call for a nuanced interpretation. The first point to note is that the debt-to-asset ratio tells a more consistent story than the debt-to-income ratio. Across all three distress indicators, people in the highest debt-to-asset groups have a higher probability of reporting distress. However, after controlling for other factors, the debt-to-income ratio is not associated with the measures of financial distress since the results are not statistically significant.

The debt-to-asset ratio might be a more predictive indicator because debtors can often sell assets to make debt payments, even if they do not have the income to make payments. Alternatively, those who own homes often have access to home equity lines of credit. These results are important because they suggest that the debt-to-asset ratio is a better indicator of financial precariousness than the debt-to-income ratio.

Additionally, some demographic groups face relatively higher probabilities of reporting financial distress, including lone-parent families, and “other” family types. Conversely, families whose major income earner had a university degree, were less likely to be in financial distress. Similarly, homeowners with or without a mortgage were less likely to miss payments or take out payday loans.

Financial distress has many dimensions and can take multiple forms. Future measurement should provide additional details, such as the frequency at which specific financial services are used when under financial duress. More research will be needed to better comprehend the extent to which Canadians are facing financial difficulties.

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​As Cities Grow, So Do the Numbers of Homeless Joseph Chamie, July 13, 2017 Homelessness is a mark of failure for communities in providing basic security. Based on national reports, about 2 percent of the world’s population may be homeless. Another 20 percent lacks adequate housing, reports demographer Joseph Chamie. Such statistics come with a caveat. Obtaining accurate numbers is difficult, mostly due to wild variations in definitions around the globe. Also, measuring homelessness is costly: Cities may under-count due to embarrassment while individuals avoid officials due to shame and fear of arrest and harassment. Reasons for homelessness include “shortages of affordable housing, privatization of civic services, investment speculation in housing, unplanned and rapid urbanization, as well as poverty, unemployment and family breakdown,” Chamie explains. “Also contributing is a lack of services and facilities for those suffering from mental illness, alcoholism or substance abuse and displacement caused by conflicts, natural disasters and government housing policies.” Even people with jobs can struggle to keep homes. As experts debate whether the issue can be resolved or not, some governments offer support programs while others do what they can to chase the homeless off to other locales. – YaleGlobal

Prominent Canadian economist David Rosenberg is warning that record household debt levels in the country will hinder economic growth...
​(ie: your income, your cash flow, your ability to service your debt)

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​Bill Gross of Janus Capital commented on... his recent investors’ letter (emphasis added is ours Macro-Ops.com): ​“What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion.”

​There is a phase in the debt cycle when revulsion sets in.

​At the end of the business cycle there are three forces at work:
1) Rising interest rates sap demand and raise the cost of capital.
2) At the same time, according to capital theory, future returns decline due to over capacity.
3) While demand is decreasing and there’s a glut of supply, the herding nature of market participants create euphoric sentiment that drives expectations (and market prices) well past likely outcomes.
This process is what forms a market top. Alex Barrow Co-Founder of Macro Ops

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The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, edged up to 14.9% in the first quarter (2019), as total obligated debt payments grew at a faster pace than disposable income. Mortgage interest payments (+4.0%) have outpaced mortgage principal payments (-0.4%) as a result of higher interest costs, continuing a trend since the second quarter of 2018. Household credit market debt as a proportion of household disposable income remained at 177.6% in the first quarter, as debt and income grew at similar rates. ​In other words, there was $1.78 in credit market debt for every dollar of household disposable income. ​StatsCan June 13, 2019, ​

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Ray Dalio's Economic Machine

​‘Maxed out’: 48% of Canadians on brink of insolvency, survey says.

Whaaaat?

48% - of Canadians are $200 or less away from financial insolvency every month.

35% - say an interest rate increase would move them towards bankruptcy.

54% - worry about their ability to repay debts. 

40% - said they won’t be able to cover all living and family expenses in the next 12 months without taking on more debt. 

​55% - say they are $200 or less away from the financial brink in Atlantic Canada.

51% - say the same thing in Quebec.
​
48% - say the same thing in Ontario.

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​But this is not new news because since the July 2008 commodity peak, the Canadian Balance of Trade has been negative for 77% of the time (monthly prints). Also the Federal Direct Investment metrics have been negative for the last 20 years and the spread has widened in the last 3. CLICK CHART TO ENLARGE

...and the Yield Curve

The flattening of the yield curve is a signal from the bond market that it is worried about the economy and its ability to continue to grow. In addition, it is a signal that future inflation is nowhere to be seen. One outcome of an inverted yield curve is a weakening in bank lending as banks begin to earn less profits from making loans. In the most recent earnings announcements, the banks have already made this clear as they expect net interest margins to contract. This is because a bank’s role is to borrow funds at usually lower short-term rates and lend those funds at usually higher longer-term interest rates. The spread between these two rates represents the banks’ profits.

However, with an inverted yield curve, the spread between the short-term and long-term rates narrows and the banks’ incentives to lend are greatly reduced. Not only is the profit margin eroded by the yield curve, but the banks could become worried about the possibility of an economic slowdown. As banks become less incentivized to extend credit (make loans) to their customers, it results in a vital lifeline of the economy being choked off. PacificaPartners.ca

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​Credit booms are followed by credit busts and as the chart shows, Canadian Residential Mortgage Credit (%Y/Y lending) has been shrinking dramatically since the July 2008 Crude Oil Peak and the Crash into the March 2009 Pit of Gloom (6 Metros Chart).

"There hasn’t been a serious economic downturn in Canada since the 1990s; the last time that mortgage credit grew as slowly as now. Unfortunately bank lending is pro-cyclical, so lenders will tighten credit conditions just as real estate borrowing stops growing, which will make the downturn worse. This boom/bust cycle is inevitable as long as lenders focus on lending for real estate investment and speculation rather than more productive investments. To change that focus, a new set of rules and regulations that govern lending is needed.” Quote included in Jason Kirby and MACLEAN's Most Important Charts to Watch in 2019

​Canadian Banks on "Credit Doomsday Watch" CIBC

The CIBC analysts said that Canadian banks appear to be headed for their weakest credit cycle since the oil price collapse, which caused related loan losses to jump in 2016. While their prediction is “not a coming apocalypse,” the report said the banks’ loan losses last quarter had a “one-off feel to them” that could become more frequent. “For reference, the actual doomsday clock sits at two minutes to midnight,” the analysts said.

​ Well it could easily be one o'clock in the morning as weak hands cut their losses. Hat Tip to @Hutchyman​

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The Bank of Canada acknowledged that our current economic slowdown is now “more pronounced and widespread” than it had previously forecast.

Global economic momentum is slowing.

Our economic slowdown has been sharper than expected.

Housing and consumption have slowed, and business investment and exports haven’t picked up the slack as the BoC had hoped.

Inflation expectations have been lowered.

Uncertainty is increasing.

Our output gap is widening because debt is choking off growth, and that is a powerful, long-term headwind, which will continue to exert itself long after global trade networks have been re-established.

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