The Bank Job

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Are Canadians Spent?

Canadians are being lured once again with a new record low 5 year fixed mortgage rate at 2.79% (CBC News, March 17, 2015). The creditworthy are going to take advantage of the potential to leverage this new helicopter drop.

But according to the charts above, they suggest that the remaining productive Canadians have already spent their future earnings and are liquidating their savings.

The top panel shows Canadian Retail Sales with and without auto sales since the Pit of Gloom in March 2009. The lower panel shows the Canadian Balance of Trade as well as the Current Account in the same time frame as retail sales.

Notice in the top panel that retail sales ex-auto have plunged and are nearly at the March 2009 Pit of Gloom lows. It might be cheaper than last year to drive to the mall but when you get there, imported goods (including refined fuel) require more of those 78 cent dollars. If Canadians are not in the stores buying stuff, employers will reduce labour costs (fewer hours or more automation) and manufacturers will produce less for this market.

In the lower panel, the Canadian Balance of Trade is plunging into deeper negative readings than at the pit of gloom as the export trade gets swamped by higher import costs on a low CAD. 

The Current Account overlay remains at pit of gloom lows and the only way to reverse the deficit trend is to increase exports, decrease imports, depreciate the CAD, increase domestic savings or reduce domestic and or national borrowing or a combination of the above. 

Mortgage debt requires a long term transfer of savings to transform the liability into an asset. A $100,000 loan at 3% with monthly payments over 25 years requires a repayment of $142,263.39 and does not account for increases in interest rates over 25 years. 

The additional $42,263.39 of interest payments is coming out of savings but not going into productive investment. A mortgage is not an investment or a savings plan.

If the collateral securing the mortgage depreciates faster than the loan principal outstanding, debt revulsion will trump consumption desire.

The Storys - Money (That's what I want)