Canadian real estate buying may be slowing down, but the long-term problems are just starting to brew. Numbers from the Bank of Canada (BoC) show that mortgage debt is ballooning as interest rates make minor upticks. Mortgage debt is now at the highest ratio compared to the economy it has ever been. Even though the debt service ratios are manageable, it’s created a complex problem that almost certainly won’t be a happy ending.
Gross Domestic Product Vs Mortgage Debt
There’s two things you’ll need to know today, Gross Domestic Product (GDP) and mortgage debt. GDP is the value of goods and services produced in a country, which more bluntly stated is, a broad measure of the economy. Increases don’t necessarily correlate with a wealthier country in my opinion, but it’s the best general measure we have. Mortgage debt is pretty self explanatory, it’s the amount of outstanding debt on residential real estate.
Mortgage Debt Is Now The Equivalent of 76% of Canada’s GDP
Mortgage debt is the largest it’s ever been, in contrast to our GDP. The end of Q3 2017, saw the value of outstanding mortgage debt reach 76.27% the value of our GDP. That’s up 47% since the Great Recession kicked off in 2007. I know. That means nothing to you if you’re just a homebuyer, or trying to understand the economy. Don’t worry, we’ll break it down.
Source: Statistics Canada, Bank of Canada, Better Dwelling.
Mortgage debt is accumulating faster than the broad measure of the economy. We need to go back 12 quarters to find one where GDP growth is higher than mortgage debt growth. Going back that far, we only find one quarter. We need to go all the way back to 2001, to find an actual period where GDP grows consistently higher than mortgage debt growth.
Source: Statistics Canada, Bank of Canada, Better Dwelling.
There’s a reason really smart, and wealthy people are hating on the Canadian housing economy. No, it’s not because they’re jealous of your wicked 400 square foot condo with a combination kitchen/bathroom/bedroom, that’s now worth almost a cool million. It’s created a problem that’s getting worse – what to do with interest rates.
The Complex Problem That’s Getting Worse
Monetary policy isn’t as complex as your high school Econ teacher made it. It’s just difficult to make the right decision, at the right time. Interest rates are lowered to stimulate the demand of “interest-sensitive expenditures.” That’s fancy pants for houses, cars, and other super expensive items that need long-term financing. This weakens the dollar. Interest rates are raised in order to attract capital inflows, in pursuit of higher yields. The increased capital inflow, leads to an appreciation of the Canadian dollar. Central banks are still pretending they don’t know that lowering interest rates leads to inflows that end up in places like urban land banking, but that’s a topic for another day.
Source: National Bank of Canada, Better Dwelling.
Mortgage debt levels are now so high, it’s hard to do anything without setting off a bad reaction. Raising interest rates would require households to spend even more money to service that pile of household debt. This in turn would reduce the free capital available to spend in the economy, likely compressing GDP growth. That’s bad, but we would get a stronger dollar, and that sweet foreign capital to bolster productive aspects of the economy.
Leaving rates lower will prevent the GDP compression, sending debt levels higher and sending the dollar to perma-weakness. Lower interest rate levels will further stimulate demand for those interest-sensitive expenditures you learned about (a.k.a. houses and cars). However, capital inflows won’t end up in the right parts of the economy, weakening the Canadian dollar even further.
Will Canada take higher home prices, and a weaker dollar to continue the growth of the housing economy? Or face the very real consequences of such a poorly structured economy, and face a half decade of suppressed economic growth?
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Thank you for explaining the impact on the loonie. So higher rates are needed to prevent the loonie from falling, but if the economy tanks, doesn’t that mean a lower dollar as well?
People are being mislead to believe that rates will have a continuous hike, but that’s not the case. The BoC can’t just raise it at this point. Foreign demand for Canadian dollar denominated notes are weak, because people can see that the economy is going to have to face a recession soon.
They’ll need to raise and cut, raise and cut. Like pumping the brakes on the economy. They shouldn’t have taken it this low, but businesses didn’t adopt the easy credit and growth the economy.
Surprised he didn’t mention this when talking about the growth numbers. The slashing sent mortgage debt higher, but not GDP. Aggressive slashes sent GDP growth positive, but still not higher than debt.
This means they won’t be able to raise rates. People shouldn’t be worried about their mortgage debt, it’s not like the government will purposely cause thousands of people to lose their homes.
When the 1989 bubble burst, house prices collapsed, there was major recession, AND interest rates skyrocketed.
I believe the recession you are referring to was 1981- 83 as me and husband and others lost our business and our homes.. However I found that people got through it and recovery was not as painful as most thought it was going to be. Some areas were harder then others. I was in the Okanagan and it was harder to make money, but our family and friends in the city did better. But on the other hand folks pooled together quit well and that was good support.
What Vnm says. Just because nobody wants higher rates doesn’t mean they can’t happen. In 1994, unemployment was around 10%, inflation was less than 1%, yet rates spiked at the end of the year and into 1995, killing off a nascent recovery that had only just started to take root. We endured two more years of high joblessness and almost zero GDP growth.
The government deficit was massive. They certainly didn’t want higher rates.
Inflation was non-existent. The BoC certainly didn’t want higher rates.
Unemployment was high, and housing was depressed. The last thing Joe Public wanted or needed was higher rates.
So what did rates do? See above.
The moral of this story is sometimes rates go up – a lot, even when they are the last thing in the world anybody wants or needs.
I hope everyone that listened to a Realtor tell them mortgage debt is good debt, realizes they’re an idiot now. Their homes went up in value, at the expense of the strength of their dollar. They’re house rich, but the cost of all other imported goods are proportionally more expensive.
You think foreign buying is bad now, wait until you see what happens when we have a fifty cent dollar, and no economy. It won’t just be houses, this will extend to every aspect of the economy. Companies, treasuries, etc. All foreign owned. Canada essentially invited foreign governments to dominate our economy here.
Totally true, it has happened in the past. Canada is an economic colony of others, the British, the USA, China, etc. Canada is the economic and financial whore of the world.
An average 3/4 of income is going to mortgage payments?
That can’t be right. Lots of people who bought years ago have relatively small mortgages and interest rates are low, which would mean many people are shelling out, what, 80, 90, …100 percent? How is that possible?
If true, it doesn’t matter what the government does short of nationalizing all housing, for we’ll have entire families in default living in bus shelters.
Or have we sold those to foreign oligarchs as well?
Are you referencing the National Bank home price chart? If so that’s what a new family would need to buy a house. A median family buying a median house would need to devote 3/4 of their income to buying a median house in Toronto or Vancouver. Essentially saying there’s a huge detachment from half of homes vs half of incomes.
If you mean the mortgage debt to GDP, that’s not what it means. Although GDP is about 18% residential housing related (transfers, Realtor commissions, etc.). So if this is peak debt, that starts to fall. If sales drop by 25%, and all other industries expand at CPI, we would have flats growth. If sales drop by 25%, and prices drop by 1%, we have a recession.
The more prices drop, the harder it will be for the economy to make up the gap before recession.
Ah, Ok, thanks. It was the National Bank chart, which just said mortgage debt vs income.
Phew!
Back to merely a massive real estate crash and accompanying recession!
Total mortgage debt = 76% of annual GDP. (Even more alarming, total household debt from all sources is 101.5% of GDP)
That does not mean 3/4 of income going to mortgage payments.
what a mess. Our government is to blame for this shit show no one else.
I agree, although expectations also set government. Here in BC, people kept voting in a Liberal government because they were getting “rich.” Now we have s whole province of people complaining they can’t afford their property taxes, because they’re so rich. FML.
Liberals are the worst. They will
Bankrupt ontario very soon.
So true, self serving that create recessions and sell Canadians out to foreign investors and many are corrupt.
lol!
Awesome article in its clarity. One, two wording exceptions to “sweet foreign capital to bolster productive aspects of the economy” – “sweet” and “productive” – there is no evidence of this – and a lot of evidence of the opposite being true (foul and unproductive). Secondly, it is a significant aspect, that needs way more public visibility, that GDP will grow when Cdn returns to “value added manufacturing” – which disappeared because of gov’t policy, (is one of the main reasons why we have huge $20B+ gov’t deficits, the main reason Ont.’s economy has tanked, and the Fed’ promoting the disastrous policy of exporting tar sands from BC). And a better economy can’t/won’t return, solely, because of this unfair trade gov’t policy. Not to mention that the low dollar, to support this unfair trade policy, is hugely inflationary to Cdn consumers, and is a result of this “export raw materials and import finished products policy”. Think what Germany, or Japan would have done, if they found themselves with: an abundance of raw materials, a productive labour force, and piles of available capital. Consider: who has the surpluses – exporters of finished products or of raw materials? ! Cdn’s free trade agreements, as set up, are massively unfair trade agreements; and they are a train wreck for the Cdn economy, employment, and tax revenues. And this is our gov’t’s policy. It’s a significant failure of their fiduciary responsibilities. We have yet to call them on.
Agreed however, other than trump is there another leader looking out for the people or the economy in their country? (cant believe i just typed that)
People work for the government, the government works for the wealthy corporations who in turn work for the lenders (banks). As more people and countries go into debt, more debt slaves are created. (The new form of slavery).
Unless people wake up and start holding their leaders accountable our children will more than likely have a dark future ahead.
If all the countries in the world is in debt who is it owed to?
We have a feudal system of mortgage-indentured serfs and mortgagor barons.
Only two countries are not in debt: Norway and China. Based on the culture of these two countries to whom do you think the world is in debt? Better stock up on water and guns.
Exporting oil is not a “disastrous policy” . Refineries are in fact low margin, low value added activities. The biggest profit you can make from oil is the simple act of taking it out of the ground, upgrading it to a certain standard and sending it to market. The world is awash in refining capacity. Building more refineries in Canada just means more white elephants. That’s why Rachel is busy offering up billions of dollars to anyone who wants to build a refinery in AB. No one wants to invest in refining unless the government pays for it. It’s not a worthy investment on its own right now. Plus, you still need a pipeline to deliver refined product to market.
So what are you saying? Scrap oil all together… or create more government debt to build refineries and pipelines?
Allow pipelines to get built so we can get the oil to market – that’s what I’m saying. We need pipelines, not refineries and other such white elephants. Pipelines also represent massive private sector investment.
Oil industries best days are behind them, they are dieing slowly.
Cost of creating clean energy goes down every year, cost of pulling oil out of ground doesn’t. For every job created in the oil industry, there are 5 created in clean energy, Many European countries are looking to ban or reduce gas powered vehicles in the next 5 to 10 years. The Canadian government subsidizes the the fossil fuel industry with over 3.3 billion dollars a year. That could be used to create more jobs and technology to boost clean energy and a sustainable future for the employers and employees in this sector.
having said that its no wonder : “No one wants to invest in refining unless the government pays for it. It’s not a worthy investment on its own right now. Plus, you still need a pipeline to deliver refined product to market.”
Wrong. USA used to be net importer now becoming biggest producer because of fossil fuel. Canada should follow same path with zero carbon tax and promote our industry. And renewable clean energy costing ontario billions increase electricity and costing manufacturing jobs. Only liberals know how to screw it up.
Ontario electricity costs are driving away business, and driving up costs for electrically heated homes and condos forcing some to sell. Live Better Electrically was Ontario Hydro’s mantra which many embraced now owners of the Live Better Electrically Gold Medallion homes are screwed.
https://youtu.be/Z5KEu5WvdnE
https://youtu.be/7Fwramn5U3M
https://www.smecc.org/live_better_electrically_medallion_home.htm
https://www.thespruce.com/gold-medallion-home-definition-1821516
https://books.google.ca/books?id=Ln_KiVbe_9QC&pg=PA118&lpg=PA118&dq=ontario+gold+medallion+homes&source=bl&ots=IuPdO508P6&sig=etAe7426rJYX4w0ZCmL5yP1QFxo&hl=en&sa=X&ved=0ahUKEwjFtuXQhODZAhUI7IMKHc9fAqcQ6AEIXDAE#v=onepage&q=ontario%20gold%20medallion%20homes&f=false
Here’s about the Ontario Liberals plans regarding electricity and natural gas use for heating homes. https://saultonline.com/2016/05/really-liberals-want-to-eliminate-natural-gas-to-heat-your-home/
Fossil Fuel is as good as clean coal.
Since fossil fuels cost us over 3.3 billion a year and it is a dying industry it would make more sense to support clean energy as it is tte future.
Over the next 5 to 10 years there will be more hybrid and battery operated vehicles, solar powered homes etc. heck even Ikea has begun selling solar powered systems for your home.
If have to pay subsidy i would rather have clean energy.
Its a mystery, no one can figure out why electricity cost so much in Ontario because we have a huge dilemma:
TOO MUCH ELECTRICITY!
https://www.thestar.com/business/2011/01/20/ontarios_new_dilemma_too_much_power.html
‘…but it’s the best general measure we have’
Actually, not completely true.
Purchasing Power Parity is a far better indicator.
What really matters in an economy is how much ‘stuff’ the average consumer can buy, compared to the average consumer in another country.
Only the American-centric economists are using GDP, because it strongly favors, well, America, and puts America into a far better light than it actually is.
Are you seriously running out of decent topics to write about? Is the well running dry? Is the pressure of keeping up a regular column causing regression towards the mean (mediocrity) in your writing?
How about some serious original insight, not your recent parroting of what other ‘experts’ are saying?
You used to drill down into the data, see what others failed to see.
In recent articles, you gave data which indicates only a small fraction of Canadians have mortgages, but that these mortgages are giganormous. They skew all of the data, when it is averaged. Sure, a handful of Canadians (who can well afford them) have huge mortgages, but the biggest majority of Canadians (by your own data) are mortgage free.
How about analyzing the data from THIS perspective? What s the exposure of the REAL average middle-class Canadian, not he statistically averaged ‘middle class Canadian’? Forget ‘averaging’ as in ‘mean’, look at ‘average’, as in ‘median’ and ‘mode’.
Methinks you would come to a completely different conclusion.
Only a handful (percentage wise) of Canadians have gone bananas-cockeyed-cuckoo over buying vastly over-priced homes, but they have gone outrageously bananas-cockeyed-cuckoo. Yet, they also have the concentration of money such that they really don’t care. The GDP is now so lopsided towards the rich, that ‘per capita’ ideas and measures are useless.
Just look at the number of ‘outrageous’ bananas-cockeyed-cuckoo mortgages that were made with more than 25% down. They are ‘vanity’ players. They really don’t care what happens.
Stephen, great article but can you please explain some numbers and suggest if below logic is correct.
GDP is annual number.
DEBT is overall debt that we owe ( so if someone buys 1M house they have 25 years to pay it off). As per article definition “it’s the amount of outstanding debt on residential real estate”
Article says that total household debt is 75% of GDP. Does it mean that 75% of total income generated in Canada IN ONE YEAR can pay off entire mortgage debt for all houses in Canada IN just one year?
If yes, this number is not scary at all.
But probably something I don’t fully understand
“Does it mean that 75% of total income generated in Canada IN ONE YEAR can pay off entire mortgage debt for all houses in Canada IN just one year”
No, because the economic activity is payment made. (Or purchases, depending on the measure). Example, I buy 1 barrel of oil at $45, and sell one barrel of oil at $46. $46 in GDP was made, but only $1 in profit, less the cost of doing the transaction. If I buy oil at $46, and have to sell it at $45, $45 in GDP was made, but I lost money.
I hear people say that the size of debt doesn’t matter, but once you understand GDP isn’t equal to profit, you realize we have a problem.
The debt is total accumulative, and GDP is annual. The debt rises at 5% interest, but GDP rises by additional cash flow of people in the country. The more people pay towards servicing the debt, the less people can do things that generate GDP multiples.
TL;DR more debt means less GDP growth. Raising rates means even more money to service debt, and harder to grow GDP even more. Keeping rates low means a weaker dollar, and more expensive goods, which means lower GDP growth again. All signs point to recession.
btw, Stephen explained GDP multiplying and debt before:
https://betterdwelling.com/canada-didnt-skip-great-recession-delayed-heres-chart-explains/
For the reasons that you mentioned, and a lot more, GDP is an entirely useless measure. It’s one redeeming factor is that it is easy to calculate. It’s second redeeming factor is that it always shows America in favorable terms – more favorable than is merited. (It is like equating intelligence to head circumference). I can not understand why such an article was written, except that the data was readily available and easy to write a column over. But as analysis, it falls well short of the usual standards of these columns.
First, and most obvious, what is important about PERSONAL debt is the amount of PERSONAL income behind it. As is well stated in the favorite topic of these columns, much of the mortgage debt is owed by foreigners. Thus, it is not CANADIAN GDP that is important, it is the GDP of the country of the people actually paying off the mortgage. THAT is where the money is coming from, to pay the mortgage. If a foreigner borrows $10 million in Canada to buy Canadian property, and pays it off with income from his own or another country, the debt shows up as Canadian debt, but the income has nothing to do with Canada. Perhaps we should include a portion of Chinese GDP in the graphs, in proportion to the Chinese ownership of Canadian mortgage debt?
The second thing that is wrong with associating debt with GDP is that, as you said, GDP has nothing to do with income. If my income is generated by investments that I have in foreign holdings, that income is not reflected in Canadian GDP.
Third, it is not the debt-to-income ratio of the statistically averaged Canadian that is important, it is the debt-to-income ration of the people with the mortgage. I could have a mortgage of, say $5 million, but a net worth of, say, $100 million. Thus, there is no problem. But if that $5 million gets averaged over all Canadians, it gets skewed. Why would a person of net worth of $100 million take out a $5 million mortgage? Because the interest they are paying on the mortgage is much less than the return on the money if they invest it somewhere else. So if all of this ‘giganormous mortgage debt’ is owed by a handful of ‘equally giganormous wealthy people’, there is absolutely no problem, except in very skewed ‘averaging’ statistics.
Fourth, as you point out, this mortgage debt is not going to be paid off from the GDP, but from income and profit. Both, as you point out, very different beasts than GDP, and both with absolutely no relation to GDP.
This is a very weak column, indeed.
Also, I should have mentioned, the way that is used to raise GDP in America today is to raise prices, not to sell and produce more. Raising the price LOOKS like you are selling more, but you might actually be selling less. Selling a barrel of oil at $50, instead of selling it at $45, also raises the GDP while selling the same amount of oil.
And,, of course, I forgot point number five.
As has been pointed out in a previous column, real estate is a big part of Canada’s GDP. Mortgages are directly tied to the price of real estate. As real estate goes up, mortgage debt goes up. But so too does Canada’s GDP. The three are directly related. Higher real estate values, higher GDP, higher mortgage debt. It is a circular argument. To raise the GDP, you have to raise mortgage debt. To lower mortgage debt, you have to lower GDP.
One way to calculate GDP (in simplistic form) is to sum all purchases (sales). Another way is to sum all incomes (because we use incomes to make those purchases). Those are two different approaches, but they produce about the same result. So I guess my question still remains the same:
“Does it mean that 75% of total income generated in Canada IN ONE YEAR can pay off entire mortgage debt for all houses in Canada IN just one year”
Just for better understanding can’t the Govt keep interest rates low while increasing the down payment for properties to 20%, increase property tax and enforce capital guns tax and empty house tax plus additional tax if the property is sold within 2 years of purchase to limit flipping. Not only it will decrease speculative risk, decrease CMHC risk and increase taxes for the Govt. This will help address the root issue while not impacting the wider economy. In fact it would help wider economy by moving capital into other engines of growth hopefully manufacturing etc.
While not increasing interest rates will lower CDN$ would it not help improve our manufacturing & exports industry? Our over reliance on oil resulted in higher $ resulted in cheap credit and gutted manufacturing.
Lower interest rates are NEVER a good thing for growing the economy. Investors want returns before they invest. The higher the return, the more they invest. Historically, over thousands of years, interest rates of around 5% have produced the most stable, consistent, sustainable growth. Any more, any less, and the economy just goes out of kilter. Either there was a war, or there was a famine, or there was an unhealthy concentration of wealth that LEAD to a war or famine.
‘Mortgage debt levels are now so high, it’s hard to do anything without setting off a bad reaction. Raising interest rates would require households to spend even more money to service that pile of household debt.’
No, absolutely NOT. As you have said in other columns, this huge mortgage debt is owed by only a handful of wealthy Canadians. The majority of Canadians owe very little, or have no, mortgage debt. Raising interest rates on the mortgages effects only this handful of Canadians, that can well afford to carry higher mortgage debt.
Yes, there will be SOME Canadians, who over-reached, and will not weather higher interest levels, but these numbers, as you have very eloquently stated before, are only a handful. They are recent entries into the market, and the stress tests are keeping them from being overly exuberant.
That is, the easy pickings, ripe fruit for higher mortgages and higher real estate prices has been already picked. Now, over-exuberant real estate agents are trying to entice the more vulnerable into the market, and THAT is why the stress tests.
I’m buying a certain amount of gold for worst case. But I should be okay because cash is not in a Canadian bank like BOM etc. But let’s hope the banks don’t fail. And what about HELOCS?
Canadian banks are among the best managed in the world. If Canadian banks fail, then I am not sure gold will do you any good. The entire WORLD banking system will have collapsed. A least the greenback-based banking system. Remember, the renminbi and the greenback banking system are entirely separate. The renminbi is guaranteed by the socialist state, the greenback is guaranteed by ‘financial market forces’ (i.e., the capitalistic oligarchy).
What are you basing your statement that “canadian banks are the best managed in the world” on?
Because every bit of data that i have read in the past few months would suggest that canadian banks might be in a bit of trouble.
It started with two mortgage lenders with bad mortgages on their books, b20, change in foreign mortgage requirements, change in government policy for bail outs for banks.
I think you have far too much faith in how much money chinese people actually have. Their debt is worse than ours.
Canadian banks are in trouble, if they werent, there would have been NO policy changes in the past year…..
The policy changes were at the express desire of China, which was pushing for an end to money laundering. TD is now one of the top ten banks in America, neck-and-neck with Capital One.
Each of the Big Six banks have profits every QUARTER in the billions of dollars. Hardly what I would call ‘in trouble’.
Justin if the banking system is about to collapse the gold count better than anything else !!
Gold is the really money. One currency can loose the value totally up to zero, physical gold never in the hystory of the world collapsed up to zero. By the way is good to keep 10/25% in gold not all the saving in my humble opinion.
The price and value of gold is set only because of its exuberance. There is no intrinsic value in it. If no one wants it, it has no value. You can’t do much with a brick of gold. At least, with real estate, you can grow food on the land. In a world economic collapse, and that is what it would take for a Canadian bank to fail, value will be in utility.
Well, then find someone does not accept it. Central banks are the first buyers !! Take a gold bar and go around the world and see if someone who does not accept it. Right, no intrinsic value, does not produces nothing but preserves the value in terms of money compared to any paper currency with zero intrinsic value that we use today. An example ….. look at Venezuela if people have bought gold did not lose the value of money.Look Argentina during the last big crises……read about Germany during the twenties where hyperinflation destroyed totally the value of the money up to zero.
During all these times the gold was used to buy food and basic needs and I do not thing Canada is going to have the economic crisis of this size
Read about the Bretton Woods Agreement :
The Bretton Woods Agreement is the landmark system for monetary and exchange rate management established in 1944. It was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944. Under the agreement, currencies were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold. (Unfortunately int he 1971 Nixon suspend temporarily the convertibility of the dollar into gold ……well not really temporarily but still today is suspended )
For sure own land (no building or houses) it is not second to gold but in my opinion if I have to choose I will own a piece of land to produce, an home where to sleep and gold to exchange with items I need that the land can not produce.
I do not think at all the price and value of gold is set only because of its exuberance………..
See ‘Why Gold Would Be Useless in an Economic Apocalypse’ tps://www.theatlantic.com/business/archive/2013/12/why-gold-would-be-useless-in-an-economic-apocalypse/282662/
for an explanation of the reasoning.
Gold had to be formed into coinage before it became a true currency, before it had purchasing power. Before that, people wanted gold, but they did not want to USE it as a means of universal exchange. They wanted it for its exuberance, based on its scarcity. Gold is no longer scarce. Once coinage was minted from gold, it was the currency that had value, not the gold. Eventually, gold in currency was replaced by other materials. It is these other non-gold currencies that now determine the value of gold. No currencies, no value. The value of gold is in how much of a currency one is willing to pay for the gold, not how much purchasing power it has. If all currencies collapse (as would have to happen for a Canadian bank to fail) there would be no currencies left in which to give gold any value.
Sorry Justin I am not 100% agree with you but thank you to exchange your opinion with me. If all the currencies collapsed then does not mean there is not food or agricolture in the country so people can start to barter. It would be a financial collapse which happen with Hyperinflation. Then after the system will coin another currency then if you own gold you can recovery the value with the exchange with the new currency. What can happen today is not different than before happen many times through the hystory. If there will be total collapsed and the nuclear war then who knows. I think Justin we are talking the same language only from different prospect. First is the barter situation where gold does not count, second is when the system will be stabilized then gold does count as has been many times for example like after the first or the second world war.
By the way I do not believe in a totally melt down of the currency but I beieve this system to create money so easily and created problem and one of the effect the real estate totally disconnected from the real economy and job not just Vancouver but in many others country and cities of the world.
It’s not just real estate.
The foundations for the collapse of the entire world economy (okay, not sure about China. I think the renminbi will survive, but just try to convert your gold into renminbi) started 400 years ago, with the beginning of the stock market. The East India Company was sound – sell a future interest in a start-up, with a strict deadline for pay-out when the ships came back. Capital was applied to production, and the rewards were immediate. Investment capital was continuously recycled.
Then, the South Seas Company discovered that it was the stock certificate itself that was valuable, not the venture, especially when the certificate never had to be paid out. It was like printing money – you got wealthy on nothing. It was this development – that stock had unlimited duration, and permanent value in and of itself – that set the ultimate demise. Money in, but no requirement for money back out. The stock issuers got to KEEP the money, never having to pay it back.
Now, the world is flooded with stock certificates that are supposedly valuable in their own right, independent of the company, Fake wealth. False money. There is more ‘wealth’ in these certificates than there is in reality. In fact, today’s corporations are finding that if they produce less, and cut back more, the value of these pieces of parer goes up.
The inevitable result is that no one produces anything, and people make their money exchanging these pieces of paper.
China, about the only country that is EXPANDING it’s production of stuff, is stating in the direction of puting term limits on stock. After a certain period, the company has to pay out. Going back to the original intention and purpose of stocks. A ‘People’s Stock Market’, where the price is set at the original issue price (plus inflation), more like a bond. That money goes to new manufacturing capacity (new stock issue), not trading in old stock issue.
So, when the entire value of Western currencies becomes completely invested in stock, and the companies behind it all stop producing in order to reduce costs and thereby increase profit, the currencies become null and void. Worthless pieces of paper. Think of the dot-com collapse on steroids. Currencies are no longer backed by the gold standard, they are backed by these stock certificates.
I mean, when Apple stock goes UP in price, because the company produces FEWER phones, but charges more for them, something is definitely wrong, something is definitely going to break.