July 13, 2021 | Enough

Big reveal tomorrow morning in Ottawa.

Our central bank will review its key rate, make a sexy announcement and shed some light on what to expect in terms of your mortgage when it renews. First, I hear you cry, “Tell us how much money the CB has spent snorfling up Mr. Socks’ debt.”

Okay, this much…

Source: Bloomberg, Bank of Canada

If you ever wondered what a Holy-Mother-of-God! chart looked like, well, there she be. You can see how much government debt – issued to pay for historic spending programs – now sits on the balance sheet of the bank. And it is still being accumulated – currently at the rate of $3 billion a week, which is $600 million each business day. (That’s $25 million an hour, 24/7.)

So on Wednesday morning the word will be that (a) the bond-buying is being scaled back for a third time, now to just $2 billion weekly, and (b) the bank’s benchmark interest rate will stay at just one-quarter of one per cent for a while longer.

The numbers are numbing. So big most people cannot grasp the significance. Recent polls show “the deficit” comes out slightly ahead of “Indigenous reconciliation” as a major election issue – and way down the list from others. (“The economy” is first.) But deficits are only deferred taxation. So when T2 takes an expected $19 billion shortfall and turns it into $354 billion in one year while firing his prudent, experienced Bay Street finance minister to bring in an academic and journalist to replace him, well, Dog help us.

In short, people have no idea what’s coming. After the election, of course.

Speaking of the unwashed, house-horny, hormonal, debt-addled masses the latest Nik Nanos poll is fun. When asked where real estate prices would be going over the next six months, here’s the response Nik received:

Increase – 57.56%
Stay the same – 28.5%
Decrease – 9.26%
Huh? Don’t know – 5%

Those polled were almost equally renters and owners, by the way. Meanwhile the swaps market is signaling investors are pricing in four Bank of Canada rate increases over the next 24 months. That would raise the basic rate a full 100 basis points, and given the low base upon which this would be heaped, it’s a big deal. Each quarter point now, economists have been saying, has the impact of much higher moves in the past.

That’s shock one. Shock two, of course, is the unsustainability of federal finances and the certainty of higher general taxes. Look at the chart above. How could it be otherwise?

Already the greatest impediment to middle class joy these days is unaffordability. In the US – where prices have also romped during the pandemic but not as much as here – the market is cooling quickly as potential buyers throw in the towel. Home sales have fallen four months running as newbie purchasers turn their backs on competition, low inventories and prices that nine out of ten cannot finance. These days less than a third of would-be first-time owners think it’s a good time to buy. That number has never been lower. Ever.

Why the immense disparity between attitudes north and south of the border? Are Americans wary of the future, while Canadians believe ‘the government’ will make everything ducky? Can we actually insulate ourselves from economic and fiscal reality, borrowing billions more every week while expecting endless services and no consequences?

Or will the CB governor get up tomorrow and say, “We’ll soon be pooched. So here’s the plan…”

In your dreams.

Garth Turner July 13th, 2021

Posted In: The Greater Fool

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One Comment

• George Summers says:

  July 13, 2021 at 11:14 pm

  Over the long term house prices will always increase because of the Bank of Canada’s policy of deliberate inflation. The only way house prices would stabilize would be if the Bank of Canada would abandon that policy. Which it will never do. To do so would be anathema to the banking/mortgage/real estate broker and realtor industry.

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