Did Lehman Brothers cause the last global financial crisis? The answer is no. In 2005 bankers were told that the long term trend was in home ownership. There was deregulation of the banks and mortgages were less local and personal and more all over the place in the US. In Canada you have to put 20% down to buy a house. In the subprime market you had 5% down and 40 years to pay. The housing bubble led to a credit crunch and the Lehman Brothers collapse.
The security of the US banking system was called into question with the Lehman Brothers collapse. The money supply that is money pumped into the economy is controlled by Fed as they control the interest rate at which banks can lend to each other. The central bank's total assets were pumped up in US, Japan, China, etc.
The US Federal Bank bought all sorts of things, including CDO to control interest rates beyond the short term interest rates. Did it work? It sort of did. QE1 and market goes up 47%. QE off and market goes down. QE2 and market goes up 10%. QE2 off and the market goes down. With QE3, 4 and 5, market goes up 16%, 9% and 16%. The perception is that if the Fed takes its foot off the gas the stock markets will go down.
Are markets at a historical high? Is it time to sell? The Taxable Bond Funds were down in 2009, but up since because people want income and safety. Ben Bernanke wanted to help people own their own homes and have jobs. When QE1 came off, mortgage and interest rates dropped. When QE2 came off, mortgage and interest rates dropped.
Are jobs improving? The unemployment rate is 6.5%. The U6 employment rate went from 10% to 17% to 14%. This is a measure of who is underemployed and it measures dissatisfied workers. (I had never heard of this measure before and found a web site that explains it by Dave Manual.
Will US default and what will happen if it does. There are 5 ways to default. Argentina defaulted and walked away. GDP went. Will Ireland default and walk away? The debt is 38% of GDP. Greece was given a payment extension. They were given more time to pay their debt. You can use inflation to pay debt. Borrow today and pay back with inflated dollars. (You do not want deflation.)
There is 7% inflation in India. There is higher inflation in emerging markets. In the develop markets inflation is near zero. Can we control inflation? In the US Housing prices followed inflation until around 1999 and then house prices took off. You can see a chart of this here.
Housing prices have sky rocketed in Vancouver. Toronto has done somewhat better. You can see charts with CPI and housing prices for different Canadian Provinces at the Economist.
You can default by devaluation of your currency. You can decrease your currency so you can sell things to the rest of the world. Canadian oil prices depend on oil prices and there is lots of oil.
There are bail-ins and this happened in Cyrus and Poland. A bailout is when people give you money. A Bail in happens if you have $100,000 in a bank and you lose 60% of the money. In Poland, there were public pensions and private pensions. The private pensions had 50% bonds and 50% equities. The government moved the bonds from the private pension plan to the government pension plan.
Will bail-in occur in US and Canada; will we re-evaluate social contracts? Pensions and health care is in jeopardy in Canada. He gave information on total debts for a few countries and debt per person. He said he got the following information from the economist, but I could not find this.
| Country | Total Debt | Debt per Person | Debt % of GDP |
|---|---|---|---|
| China | 387B | $308 | 27.1% |
| USA | $3,494B | $12.164 | 33.4% |
| UK | $630B | $10.630 | 37.5% |
| Brazil | $333B | $1.921 | 74.9% |
He also talked about household debt. Canada has some $585B of household debt and around $18,748 per person. US have changed to a country of savers, but Canada has not. The only chart I can find on this is at Ritholtz. This chart points to debt to income, but the chart gives the same results. Americans are reducing debt, but Canadians are not.
In Canada, we owe $1.63 for every dollar we earn. Some 30% of University grads in Canada have no job. There will be lower interest for 5 years longer. Low interest rates cause people to invest in the stock market.
(In looking for the chart of Canadian versus US household debt I came across this article to say we are not as bad as some are saying. See article in the Financial Post in July of this year.
A PDF document from TD Bank makes the same point as the Financial Post article. Canadian debt and income statistics are calculated by Statistics Canada, while U.S. income is provided by the U.S. Bureau of Economic Analysis, and U.S. debt statistics by the Federal Reserve. But there is differences in the way things are calculated between the countries, so things are not as clear cut as some have been saying. See the TD article here.)
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.
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