Sustainable Economics 101

Markets, which are fair and free, eliminate unsustainable products and services. The problem for the world's economy is that the world's markets are far from fair and free.

Just as evolution's natural selection eliminates unsustainable biological traits, economies need to purge themselves of uneconomical activities. At present, economic policies and subsidies reward failures and punish successes. They limit the natural free flow of capital that would go to profitable products and services. Economies need to eliminate these policies and subsidies and allow economic natural selections to occur.

Economies also must be balanced and policed. Regulations and oversight that deter predatory competition and greed need to be enhanced and aggressively enforced. If governments worldwide co-operate and implement these measures and other measures that address the world's social and political disparities and environmental limits, a balanced sustainable prosperous worldwide economy could come to fruition.

Unfortunately, the past 30 years have seen developed, democratic economies relying more and more on deficit spending and credit creation to offset economic losses to new emerging economies. They have subsidized their economic growth by stealing from future generations. They have mortgaged their children!

The economic crisis cannot be solved with more bailouts, subsidies and quantitative easing.  Real change is needed.

China 2012 Economic Crash

A China Real Estate and economic collapse may be the news story of 2012. If that happens, 2012 may be apocalyptic, economically and socially throughout the world.

A China crash will cause major collapses in Canada and Australia because both countries greatly benefited from the last decade of Chinese economic expansion.

A China Real Estate bubble crash would play out worse than the 1989 Real Estate bubble crash in Japan. Before their bubble was started, Japan was already industrialized and developed. When their bubble started growing, a significant percentage of their population were able to buy into the early stages of their bubble and benefit from increasing Real Estate values. In China, the connected and early adopters to Chinese economic reforms quickly blew up the China Real Estate bubble. Only a very small percentage of China’s overall population were able to benefit from the Chinese Real Estate bubble. Even though the Chinese Real Estate bubble was not driven by a credit bubble, the rate of speculation quickly drove up prices way beyond what the majority of the growing middle class could afford. Combined with the insane amount of commercial development and corruption of local government officials, a property bubble / economic crash in China could be socially explosive. Additionally, a significant percentage of China’s economy is export based. China’s major export markets are in all decline.

It may be that Beijing has lost control of their economy and is implementing measures to delay and deal with the coming crash and social unrest.

Sustainable Economics Manifesto

Objective:  Establish a worldwide, fair and free sustainable economic model that rewards innovation, success and hard work and reduces social and economic disparities.

Core Systemic Issues / Solutions, Possible Methods & Ramifications

Increasing amounts of consumer credit create asset bubbles, unsustainable demand and production inefficiencies. When credit is added, new products and services appear and/or the prices of products and services go up because there are more dollars chasing each product or service. When credit is serviced, capital is diverted from the economy. If the diversion of capital exceeds new capital inflows, then prices go down and/or products and services disappear.  Predominately, most consumer credit is for consumption purposes. The resulting consumer debt is a tax on future economic activity. The central banks of the world must gradually increase interest rates. Asset prices will generally go down and products and services will disappear. This will trigger recessions that may last a couple of years in most developed countries. If interest rates are not gradually raised, deeper recessions or depressions lasting much longer will occur. Government subsidies including bailouts and tax incentives for any product or service create pricing bubbles, disenfranchise unsubsidized enterprises and sectors and hinder productive capital investments. For example, the housing sector benefits from government tax incentives. Government must eliminate all types of subsidies. This will trigger failures of some financial institutions, manufacturers, builders, farmers and other private enterprises that benefit directly or indirectly from any government subsidies. Some failures will re-structure and re-emerge as profitable operations and others will have their assets bought by solvent private enterprises. Government deficit spending subsidizes wasteful spending, entitlements and the wages and benefits of public sector workers that are substantially higher than the wages and benefits of private sector workers.  (Read more) Enacting balance budget amendments will force prioritized reduced funding for only necessary services and programs. Public sector labor unions have to be disbanded and the wages and benefits for all government employees have to be reduced to private sector levels. Labor Unions are Labor Monopolies. Monopolies can inflate their prices because they have no competition.  (Read more) Disband all labor unions and strictly enforce enhanced labor laws. This will enable previously unionized employers to more quickly innovate and adapt to their evolving markets, resulting in improved productivity. Wage and benefit contracts could be adjusted yearly based on the companies overall profit and inflation. Additionally, companies could offer profit sharing to their employees. Any disputes between employees and employers would go to arbitration.  There would be no strikes or work to rule slowdowns. Income disparity. The gap between society's richest and poorest is increasing. In the 1950s, the bottom 90% of Americans had 68% of the nation’s wealth. In 2009, the top 10% of Americans had 50% of the nation’s wealth. The top 0.1% of Americans had an astounding 10% of the nation’s wealth. The gap is increasing predominantly at the top because of the rise in earnings of celebrities attained from lucrative endorsement & performance contracts and the rise of earnings of the owners, founders and executives of financial institutions and publicly traded companies attained from stocks, salaries and bonuses. Taxation and/or enacting regulations that reduce earnings of the top income earners. For instance, a regulation that requires the executive compensation package of a public company be approved by a majority of individual shareholders. Another regulation could require yearly bonuses be paid based on the performance of the previous 5 years. This would discount or eliminate bonuses accrued in good years if any bad performance years occurred. Ideally, if distribution of wealth was similar to the 1950's, there would be substantially less poverty.

This manifesto is incomplete.  Please post your recommendations, comments and criticisms.

Europe's Solution to Debt Crisis is to Steal

This article is a sequel to:

Europe's "Stealing from Children" goes into Overdrive

Politicians and economists say that the European Central Bank (ECB) must be the lender of last resort to solve the European debt crisis.  According to this article:

"[Nouriel Roubini] argued the only way to avoid a breakup of the euro zone would be for the ECB to become a lender of last resort, for a fall in the euro's value in line with the dollar and for fiscal stimulus for the "core" euro zone and austerity in the periphery to take place."

The way the ECB lends money is by buying the European government bonds, that nobody else wants to buy.  How does a central bank lend money to anybody?  Where do they get their money from?  By printing it.

Politicians and economists are pushing Germany to allow the ECB to print money.  According to this article:

"Is Merkel ready to switch the ECB printing presses on?...to print trillions of euros in an attempt to save the single currency"

This is probably a way to prevent defaults.

However, whenever anybody prints or creates money out of thin air, it creates inflation.  Inflation devalues the money you are holding and makes you poorer.  As an example, if a criminal uses a photocopier to counterfeit a $1 million, did he create $1 million of additional wealth for his country?  No.  The country's money supply increased by $1 million, but the quantity of goods and services did not increase.  Therefore, the prices for the goods and services will increase, which creates inflation.  The amount of goods and services that you can buy, decreases.  Effectively, the criminal stole $1 million of wealth from you and the population.

Some people say that printing money is a way for the government to tax the population.  However, a tax is when the government tells you exactly how much wealth they are going to take from you.  When they print money, the government does not tell you that.

When the U.S. Federal Reserve conducted Quantitative Easing 1 and Quantitative Easing 2, they did not tell you that they will take wealth from you.  They told the public that they will boost the economy.  However, there is no evidence of that.  In fact, GDP growth dropped after QE2.  There is a lot of evidence that it created inflation and enlarged the U.S. debt, essentially enabling the government to take wealth from the population and spend it.

In addition to stealing from children through deficits and debts, printing money is simply another way the government steals wealth.  However, if and when the ECB starts printing money, the European politicians will tell you that they found a "solution" by getting the ECB to buy bonds.  They will not tell you that the "solution" is to steal wealth from you and give it to the European governments and banks.

In fact, the ECB has already been printing money to buy government bonds (source), because there is insufficient demand from other lenders.  According to this article:

"...ECB had been quietly buying bonds anyway."

According to this article:

"...analysts say the ECB may quietly increase its purchases of Italian bonds..."

The free-market, where the sane people are, are not willing to lend to the European governments or banks at a low interest rate.  This is because they expect that there is a probability that the borrowers may not repay the loan.  In fact, lenders are losing 50% on the money they lent to Greece.  These European borrowers are essentially "subprime", low-income, risky borrowers.  In the U.S., lenders lost a lot of money to subprime borrowers.  Therefore, there is a probability that the borrowers will not repay every Euro to the ECB.

According to this article on November 30th, 2011, central banks of the U.S., Canada, England, Japan and Switzerland, through the printing of U.S. dollars, will lend to the ECB, who in turn will lend to their "subprime" borrowers (European banks) at a lower interest rate than what the borrowers can get on the open market.  Your central banks are now stealing wealth from you and getting into the subprime lending business.

You are helping profligate Europeans borrow like crazy, enjoy 6 weeks of vacation per year and not pay back their debts.

Hence, you are forced into the subprime lending business.  You are now part of the European "solution".

Free-market capitalism is a myth.  The governments created housing bubbles and debt problems in Europe, U.S., Canada, Australia, China, etc.  Now, they are either kicking the can down the road or forcing you to pay for it.

Whenever the government screws around with the economy with socialist policies, they always bring prosperity to a pocket of the population in the short term.  Without fail, they always make the country poorer in the long run.  This record is unbroken in earth's history.

Read more:

Europe's "Stealing from Children" goes into Overdrive 

Stealing from Children 

Socialism vs Capitalism 

Fake Economy 

Fake Wealth

Housing, the most manipulated market in the world

Housing: After the Bubble Bursts

This article is a sequel to these:

Housing, the most manipulated market in the world 

Bubbles - Extreme Maker and Breaker of Wealth 

Real Estate - Ponzi Scheme?

Housing is a large percentage of the GDP.  Therefore, housing bubbles fuel the economy.  When real estate was booming in the U.S., Spain, Ireland and Japan, their economies were booming.  People in the U.S. were living in big, expensive homes, driving multiple cars and installing new swimming pools and kitchens.  Similarly, the economies in Spain and Ireland were flying high.  People were living the good life and "partying like it's 1999".

However, bubbles are temporary and create temporary fake wealth.

What does a country look like after its housing bubble has peaked or collapsed?  What happens to its people?

Some bubbles are still raging on, as in Canada, Australia and China.  Some have started to correct, such as in the U.K.  We will look at what happened to the U.S., Spain, Ireland and Japan, which have largely but not necessarily fully collapsed.

With their bubble collapsed, the U.S. became much poorer, with high unemployment, anemic economic growth and poverty levels hitting record levels.

Many Canadians believe that when this housing bubble bursts, they will have a soft landing, unlike the American's.  They say that the outcome for Canada will not end in a disaster like it did for the U.S. economy, because Canada did not have AAA rated CDOs (Collateralized Debt Obligations), NINJA loans, etc.

True, Canada did not have these, but neither did Spain, Ireland or Japan.  Nevertheless, Spain and Ireland are now worse off than the U.S.  Here is a comparison:

Metric	U.S.	Spain	Ireland
Duration of the Great Recession in quarters (source)	6	7	13
Total GDP loss during Great Recession  (source)	-4.14%	-4.89%	-12.2%
Unemployment	9% (source)	21.5% (source)	14.4% (source)
Youth Unemployment (source)	15%	44%	28%
Last quarter GDP growth rate	2% (source)	0% (source)	1.6% (source)
Public Debt as % of GDP (IMF)	94.4%	60.1%	94.9%
Empty Homes Yes, even a densely populated place like Europe can have lots of empty homes, thanks to the collapse of a bubble.	11.4% (source)	13% (source)	17.4% (source)

The collapse of the Irish housing bubble created a banking crisis, prompting their government to bail out the banks.  Due to this, the government became so heavily indebted, they needed a bail out from the Euro Zone countries, exacerbating the European debt crisis.  Ireland's economy is so bad many are emigrating to countries such as Canada.

As you probably know, both Spain and Ireland are part of the PIIGS countries.

Canada's and Australia's bubbles and household debt levels surpassed the peak of the U.S. bubble and household debt levels.  (See household debt to income ratio chart in:  "Bubbles - Extreme Maker and Breaker of Wealth")  According to "The Economist magazine, House of horrors, part 2:

"home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble."

This implies that it is possible that Canadian and Australian economies are more fake than their American counterpart in 2007.  If their bubbles collapse, it is possible that Canada and Australia will become as bad as the U.S. or worse.

Unlike Europe and the U.S., Japan's housing bubble peaked in 1991.  The collapse lasted for more than a decade.  Ever since, the economy has stagnated and their public debt has ballooned.  Now at 220% (IMF), Japan has the highest debt as a % of GDP in the world.  One can argue that Japan would have fallen in a 20 year depression if their government did not balloon their deficits and debt in order to spend and support the economy.

Since the beginning of 1990 until November 25, 2011, the Japanese stock market (Nikkei 225) has declined by approximately 79% (source).  Yes, you read that correctly.  Minus 79%.  "Buying and holding" Japanese stocks for 20 years would have made you very poor.

As explained in "Housing, the most manipulated market in the world", housing bubbles are mostly created by government.  This is true for the U.S., Canada and China.  (Chinese government officials are in cohorts with real estate developers as they take bribes from the developers and are getting rich in the process.  Source.  There are 64 million empty homes in China, many of which are owned by officials.)

Unlike other bubbles, such as the Dot Com stocks of the 1990's, a housing bubble takes many years to peak.  This means that it is mainly the older generation, such as the Baby Boomers, who bought at cheap or reasonable prices and enjoyed the price appreciation.  It is mainly the younger generation who paid the bubble prices.  This creates huge injustices.

TWO SCENARIOS

There are two possible scenarios after a bubble hits a peak:

1. Flat line or soft landing:   In this scenario, the younger generation spends the majority of their lives, paying the majority of their income towards their house.  In essence, they will be much poorer than the previous generation.  The older generation, if they sell near the peak of the bubble, will be much wealthier at the expense of the younger generation.  This simply exacerbates the massive stealing from children that is already going on through inter-generational transfer of deficits and debts.  Also, some of this stolen money was directly used to fuel the bubble.  Read "Housing, the most manipulated market in the world".
2. Collapse or hard landing:  The older generation may lose their capital gains.  However, the young homeowners will be crushed and will face financial ruin.  Ask the tens of millions of Americans who are underwater with negative net-worth.

Therefore, even if the bubble does not collapse, it creates huge injustices for the younger generation.  If it collapses, it creates an even larger injustice for the younger generation.  Also, a collapse can potentially ruin the country as well.

SPECULATION vs PURE INVESTMENT

Investing in a house is not a pure investment.  It is speculation.  A pure investment is putting money into a business that creates products or services that generate profit by realizing economies of scale during the production of the product or service (read Capitalism for explanation of how economies of scale creates wealth).  A house does not create products or services, therefore it can never realize economies of scale.

A good example of a pure investment is Apple.  Apple creates wealth for every stakeholder:  investors, employees, suppliers and customers.  It creates billions of dollars of wealth for society through economies of scale.  It creates wealth for its customers by providing entertainment value, enabling them to save time and be more productive.  Each year, Apple creates products with more features, more capabilities and better design for the same price.

Each year, homebuilders and speculators sell homes with the same features, same capacity but of poorer quality for a higher price.  (The quality of new homes in Florida are generally poorer than homes built a few decades ago.  Some are so poor there is visible water damage on the outside after a few years.  Some builders cut costs to the bone by installing Chinese drywall, which is now eroding electrical wirings and pipes.)

Apple does not tell its customers, "buy our products because you can make money by flipping it to the next greater fool for a higher price".  Real estate agents do.

Apple can increase the wealth of Americans by selling their products to millions of people around of world.  Homebuilders and speculators cannot do this.

Housing, a speculative fixed asset, cannot create long-term, sustainable wealth for a country.  Only businesses can.  By putting a significant portion of a country's capital and time into housing, you end up with a misallocation of capital.  The capital is wasted because it is not put to work to create long term wealth.  This is why every country that has experienced a housing bubble has gone one step forward and two steps backwards.  A country's capital should be invested in businesses and fostering entrepreneurs.  We need more innovators like Steve Jobs, not more Joe Flippers.

GET LESS FOR MORE OR MORE FOR LESS?

As explained above, we get prosperity when we are able to buy more for less.  Computers have advanced with more capacity every year and prices have stayed the same or dropped.  Cars have more features and functions and the price have stayed the same.  TVs have become bigger every year and prices have dropped.  Smart phones come out with new bells and whistles every year and prices have stayed the same or dropped.

Now try to imagine if all of the goods that you buy go up in price every year like housing.  You continually get less for more money.  After a few years, you will be very poor.

INTER-GENERATIONAL INJUSTICE

The main beneficiary of housing bubbles, which lasts many years, is the previous generation.  The younger generation becomes poorer.  It is a massive transfer of wealth from the young to the old.

Some people argue that the older generation will pass their wealth to the younger generation through inheritance anyways.  They may be right about this.  But why make the younger generation go through the stress of having 482% household debt to income ratio and negative equity?  (read more)

Also, not every young couple is going to get much inheritance.  What if they had parents that have the same philosophy as Warren Buffet, who is giving away most of his wealth to charity?  What if the parents splurged the wealth on themselves?  What if the young couple has lots of siblings?  Then there won't be enough inheritance.

Even if the young couple gets the inheritance, they'll likely be waiting a couple of decades before the folks kick the bucket.  During that time, the young couple is much poorer than the parents were, stressed out with high debts and payments, and enduring a lower standard of living.

Some people argue that the older generation are not going to cash in at the peak of the bubble because they still need a place to live.  The ones who can sell at the peak are the speculators who bought multiple homes, and there are lots of those.  The speculators who captured most of the capital gains from the bubble are the older ones who bought many years ago.

Therefore, the government should do everything it can to prevent and/or suppress bubbles.  If a government does not do this, then it is extremely irresponsible and reckless.  It is bad enough that the government does not do this, it is even worse and self-serving of politicians to create and fuel these bubbles, which is what they have done (read more).

THROW THE BUMS OUT

You should fire every politician who helped create a bubble.  You can start by firing our self-serving politicians (and don't kid yourself, they're buying votes) U.S. Senator Chris Dodd, Senator Charles Schumer, Representative Barney Frank, Canadian MP Mike Flaherty, Canadian Prime Minister Steven Harper and Australian Prime Minister Julia Gillard.

Read more:

Housing, the most manipulated market in the world 

Bubbles - Extreme Maker and Breaker of Wealth 

Real Estate - Ponzi Scheme?

Bubbles - Extreme Maker and Breaker of Wealth

There are many myths in society:

• World is flat
• Mermaids exist
• House prices go up forever

Because people believed that house prices go up forever, real estate bubbles were fuelled in the U.S., Spain, Ireland, UK, France, Dubai and Japan.  All of which have since collapsed.

Real estate bubbles in China, Canada and Australia have yet to collapse.  Real estate is just one of many bubbles.  Multiple bubbles have occurred in your lifetime.  They have happened throughout history and will happen into the foreseeable future.

One of the first recorded bubbles was the Tulip bubble in the Netherlands.  In 1635, 40 bulbs were sold for the equivalent of 1,028,000 Euros (source).  In the past decade alone, there have been several bubbles:

• Dot Com
• Oil
• Commodities
• Housing
• Dubai
• Stocks such as Netflix, LinkedIn, Salesforce.com and Groupon

There is a common phenomenon with bubbles.  When people are in a bubble, they usually deny it, do not recognize it or explain it as the result of non-bubble factors.  Even the smartest people may not recognize it and fall prey.  One of the most brilliant minds in history did exactly this:  Sir Isaac Newton lost the equivalent of 3 million current day pounds, to the South Sea Company bubble in the 18th century (source).

Even though most of us have lived through multiple bubbles, we still fail to recognize the next bubble when we get into it.  After being warned during the Dot Com bubble by a few investment professionals and after recognizing it as a bubble after the fact, we find other reasons to explain a subsequent bubble:  the exploding price of oil.  Jeff Rubin, CIBC’s Chief Economist, appeared on CNBC and BNN many times in 2008 to espouse $200 oil and justified it with:

• Peak production
• Growing demand from China and India
• Etc.

Only a few gave "bubble" as a possible cause of the $147 per barrel price.  After the collapse of this bubble, 60 Minutes explained how the biggest oil companies were Wall Street speculators, not Exxon or Chevron, who hoarded the oil to maximize profits from the bubble (see episode , read transcript).

The memory is so short that only 5 years after the Dot Com bubble collapsed, most Americans believed that house prices will always go up.

EXTREME LEVERAGE

Bubbles are so powerful that it can affect one's wealth more so than one's salary.  Examples include John McAfee, the founder of McAfee anti-virus software, whose net-worth dropped from $100 million to $4 million, due to the collapse of the recent real estate bubble.

The bubble effect, which is already very powerful by itself, is multiplied many times by leverage in housing.  When you can buy a home with 5% down, you have more leverage than what most companies dream of having.  To explain how leverage works, let us say that you invest $10,000 in gold and it increases by $1,000.  You made 10% return.

However, let us say you use your $10,000 as a 5% down payment to buy a $200,000 house instead.  The house price increases by 10% to $220,000.  You made $20,000 return, or 200% return, on your $10,000 investment.  Of course, the reverse is just as extreme.  When the house price drops, you can lose all or more than all of your equity.

Yale University economist Robert Shiller compiled historical home prices dating back to 1890.  His chart below reflects how the housing bubble has caused Americans’ net-worth to explode and collapse, to the extent not possible from regular salary.  Yet, few schools have a course on bubbles.

EXTREME MARKET MANIPULATION

Bubbles are usually created and collapsed by the same two emotions that drive the stock market, commodities markets or any market:

• Greed
• Fear

When prices go up, people see and hear about others making money.  Their greed emotion kicks in.  They want a piece of the action, so they jump onto the bandwagon.  The higher the price goes, the more greed there is and the more people that want to jump on.

However, it is questionable if greed initiated the U.S. and Canadian housing bubbles.  Read "Housing, the most manipulated market in the world" to understand how government socialist policies massively manipulated the housing market and fuelled the U.S. and Canadian housing bubbles.

Household income has grown at a very modest pace, if any at all.  Therefore, the fuel for the U.S. and Canadian housing bubbles was not income growth.  It was bigger and bigger mortgages and debts, that the government encouraged consumers to take on.

At one time, mortgages normally had 25 year amortization and 25% down payment.  In the past decade or so, this was relaxed to 40 years and down payments was allowed to come down to 0%.  If the current mortgage rates rise, which they eventually will, this will make mortgages even more difficult to pay off.

Relaxing mortgage rules enables more people to borrow and buy, which fuels the demand curve, which pushes prices higher.  Is there a limit to this relaxation of mortgage rules?  Can we continue extending amortizations past 40 years?  Can we reduce down payments to negative %?  Using simple math, we know that there is a limit.  This source of bigger mortgages have been reversed in the U.S. and decelerated in Canada.

Housing is usually a person’s largest expenditure.  It has a significant effect on the GDP.  In addition to government’s borrowing and spending, the more the government can get people to borrow and spend on housing, the more the GDP grows.  According to this August 27, 2006 New York Times article, "...real estate sector has accounted for 44 percent of jobs created since 2000 and employs more than one in 10 American workers..."

However, household debt as a percentage of income has more than doubled in the past 30 years (see chart below).  This is also part of what billionaire investor George Soros’ calls the “super-bubble” (source).  The significant incline in the past 15 years coincide with the American housing bubble.  George Soros expected this credit bubble to collapse in the late 1990’s.  To his surprise, it kept growing for another ten years.  Therefore, bubbles can grow for many years, even decades.

Note from the above chart that Americans' household debt to income ratio peaked at approx. 124% in 2007-2008, coinciding with the peak of their housing bubble and fake economy.  After the bubble burst, they have deleveraged down to approximately 105%.

Canadians' household debt to income ratio continued soaring to 150% in February 2011 (according to CBC).  Hence:

• Homes in Florida now cost $30 to $100 per square foot.
• Homes in Canada now cost $200 to $700 per square foot.

Is this a case of "monkey see, monkey do"?

Most of the market manipulation through relaxation of mortgage rules in Canada has happened in the past decade or so.  However, is this sustainable?  The U.S. has shown that is not.

In free markets, price tends to find equilibrium, which is where supply and demand curves intersect.  Now that the price has dropped, the U.S. government is fighting this equilibrium every way they can.  But, it is impossible to manipulate and artificially inflate the demand forever, without getting somebody to pay for it.  To do this, the government is getting tax-payers and the next generation to pay.

EXTREMELY SIMPLE MATH

If household income increases at the same rate as house prices, this is sustainable forever.  However, in a housing bubble, the price goes up faster than household income.  This can happen for several years, but the laws of simple math show that it is impossible for this to continue forever.  Using simple numbers to make the point, let us say that a household currently spends 50% of income to service the debt on housing, and 50% on everything else such as food, clothing, etc.  When house prices increase faster than income, the percentage of income spent on housing will increase to 60%, 70% and so on.  Mathematically, it is impossible to surpass 100%.  However, the threshold is far lower than 100% as people still need to eat and clothe.

When prices cause debt-servicing to surpass this threshold, there will be fewer purchasers.  When this happens, prices may stop increasing.  When this happens, the speculators start behaving like speculators on the stock market.  The shrewd speculators start locking in profits by taking money off the table.  When they sell, price starts to go down.  When this happens, more speculators lock in profits.  When they do this, price goes down more.  When this happens, the fear emotion kicks in causing the masses to sell, driving the price down even more.  Note that in most markets, when it falls, it usually falls twice as fast as it rises.

Eventually, there might be panic which causes prices to drop so much that home-owners become underwater (which means that the price is lower than the mortgage).  According to this article, half of Americans are underwater.  According to this article, 25% of American home-owners who can afford to pay, are walking away from their mortgages because they are underwater.

THE CANADIAN HOUSING BUBBLES

This brings us to the Canadian housing bubbles.

In 1989, people with many years of real estate investing experience, stated that real estate:

• is the safest investment you can make
• prices have never gone down in history
• you have to get into real estate now, or else you'll never get in

Yet, house prices have dropped before and after 1989.  In this decade, real estate agents and others are re-creating the “buy now or never buy” mentality, according to Garth Turner.

You might hear or read these reasons, especially from real estate agents or the CREA, why bubble prices will not come down:

• immigration
• foreign investors
• it's under-priced here compared to other world-class cities
• they aren't making any more land
• this time, most buyers are not speculators

Each of the above points are debatable.

There was immigration in the U.S. and foreign investors in Dubai.  Yet, their bubbles eventually collapsed.

According to MacLean's magazine, Canadian real estate is not under-priced compared to other world-class cities.  Vancouver has the most expensive housing market in the world (source).

Japan has less land per person than most countries in the world.  It has less than half the land of Ontario and approximately ten times more people.  Yet, their real estate bubble burst in 1989 and has never gone back to the peak.  (Chart below is from March 2008.)  Therefore, land is not be a valid argument for Canada’s high prices.

According to Finance Minister Jim Flaherty, condominium speculators are highly active in Toronto and Vancouver (source).

One can argue that, in Canada, condos may have been bought on speculation, but very few houses were bought on speculation.  However, this was also true in the U.S.  Just as in the U.S., Canadian house buyers are stretched to the limit.

One can argue that, in Canada, most mortgages have fixed rates, not variable rates, and therefore most home-owners will be insulated from rising interest rates.  However, new home-buyers are not insulated.  Even if current home-owners do not sell, if there is a drop in buyers, prices will drop.  If prices drop, this might trigger speculators to lock in profits and start the domino effect.

EXTREME DEBT

CTV reported:  “The level of household debt in Canada is rising, and has become "a key source of vulnerability" for the country's economy, the Central Bank has warned.”

According to McLean’s magazine (source):

• ‘“As the rest of the world saves, Canadians are getting dangerously deep in debt.”
• “…this is about a lot more than just people paying too much for homes.  In the same way house prices have defied the moribund economy, Canadian families, already saddled with record levels of debt, have continued to pile on mortgage and consumer loans at a blistering pace.  In the last 10 years the amount of consumer and mortgage debt hanging over our heads more than doubled to $1.4 trillion, with $100 billion of that taken on in the last year alone.”
• “Even before the recession began, Canadians were up to our eyeballs in debt.  Since then, we’ve slipped below the surface.  Over the last two decades, mortgage debt in Canada has nearly quadrupled to almost $1 trillion.”
• “…look at how much debt households are carrying relative to their personal disposable income.  The results are shockingly American in scale…”
• “Over the past two difficult years of the economy, the total residential mortgage debt load in Canada ballooned 18 per cent.”
• “When a household’s debt-to-service ratio… breaks past the 40 per cent mark, it’s considered to be “financially vulnerable” to financial shock.  What the [central] bank found … was that if rates rose to [3.2 to 4.5 per cent], 9.6 per cent of households would find themselves in that danger zone… 4.5 per cent would still leave mortgage rates low by historical standards.”
• “Over the past two years, the [Credit Counselling Society of B.C.], which helps consumers resolve their debt woes, has seen more people coming in for help carrying more consumer debt—that is, non-mortgage debt—than ever before. “Five years ago it was common to see debt loads of $40,000, but this year we’ve seen people with $256,000,” says…a counsellor. $150,000 is very normal now.””
• “In all of 2008, more than 115,000 Canadians were insolvent.  By September of last year, we’d already blown past that number and when the final tally for 2009 is in, the number of Canadians who went broke could easily exceed 160,000.  And that’s with interest rates at nearly zero.”

There is debate in the media about Canada's housing and debt bubble:

• Globe and Mail, April 27, 2010:  “Report warns of housing bubble threat”
• Toronto Star, April 2, 2010 :  “…debt-to-income ratio…hit a record high"
• McLean’s, February 2, 2010 :   “Awash in a sea of debt”

According to the Canadian government (source), the far majority of household debt is in mortgages:

The chief executives of the big six Canadian banks pushed government to tighten mortgage rules (source).  Why did they, when they make a huge bulk of their profits from mortgages?  Is it possible that they are concerned about a housing bubble?  Why would a collapse of the housing bubble be bad for the banks?  The same reason it was bad for American banks.  In extreme cases, borrowers declare bankruptcy, default and walk away from their mortgages.  Banks are left holding the bag trying to sell homes that are worth less than the mortgage.

If the Canadian banks are concerned about lending money to borrowers who might default, then why don't they simply be more discriminate in who they lend to?  If they do this, they are concerned that they will lose those customers to a competitor for the long term.  They want the government to tighten mortgage rules for every bank.  This way, the bank does not lose market share to other banks.

We believe that Canada's housing bubble surpassed the peak of the U.S. housing bubble in 2010 when Canada's household debt to income ratio surpassed the peak of the U.S. ratio in 2010.  As mentioned above, Canada's ratio has continued soaring to 150%, past the American peak of 124%.  However, this is misleading.  For young couples who have to pay bubble prices, this ratio is much higher.  In the example below, it is 482%.

Example of 29 and 30 year old Canadian teachers

Gross Household Income:  $136,000  (average Canadian household makes approx. $80,000) 

Net (disposable) Household Income:  $98,520 ($8,210 x 12)  

Assets: 
House:  $426,000  (Bought in 2010.  House prices are higher now.)
Cash:  $1,300
TFSA:  $300
RRSP:  $1,800
Total:  $429,400  

Debts: 
Mortgage:  $410,380
Line of Credit:  $64,130
Total:  $474,510  

Negative Net-worth:  -$45,110 

Household Debt to Disposable Income Ratio:  482%  

Mortgage amortization is 35 years.  If they have a $410,360 mortgage, that means that their down payment was 3.7 percent.  This is Canada's version of the American subprime mortgage.  This couple has 96.3% leverage.  Many companies, with positive net worth and significant profits, try but cannot get leveraged anywhere near this.  If house prices come down, this couple will be crushed into financial ruin. 

As public sector workers, they get a pension at age 55, which the majority of Canadians do not.  This means that the majority of Canadians are even worst off.

The worst part of this bubble is that it was created and fuelled by the government by stealing money from children and non-homeowners and throwing it at housing, as explained in "Housing, the most manipulated market in the world".  If the bubble collapses, this stealing will go into overdrive, because CMHC will lose money due to mortgage defaults.  This loss will be taken by all taxpayers and children.  This is what happened in the U.S. with Fannie Mae and Freddie Mac.

This criminal, reckless, irresponsible mismanagement by the government is what makes people prosper in the short run, but makes the country poorer in the long run.

With 96.3% leverage, real estate is exorbitantly more volatile than the stock market.  If your stock goes to zero, you lose 100% of your investment.  If that couple's house goes to zero, that couple goes "underwater" and loses 2,727% of their investment.  (You are right that houses are not going to go to zero.  Neither do most stocks.  However, if the house price goes down by 3.7%, the couple loses 100% of their investment.  Also, house prices can go very low.  Houses in Cleveland are now selling for $28,000.)

Yet, the government (through CMHC) will force taxpayers and children to insure risky mortgages for bubble priced homes.  But they won't insure loans to buy stocks or Florida real estate selling for $40,000.

If you were an insurer, would you be willing to insure those teachers' mortgage?  No insurance company would ever touch a business with that kind of balance sheet and income statement.

TIMING

We know that it is impossible for house prices to continue rising faster than household income forever.  What is not certain is the exact time that price stops rising.

We know that there is a probability that speculators will lock in profits by selling, when they see prices flatten.  What is not certain is when they will do this after prices flatten.

We know that the U.S. government wants to keep interest rates near zero.  We do not know when interest rates will change, so home prices can continue rising.  However, we know that there is a good probability that nominal interest rates will eventually rise, since it cannot go below zero.  Also, what the government wants and what it gets are not necessarily the same thing.  Because Canada does not want an expensive Canadian dollar vis-a-vis the U.S. dollar (to help Canadian exporters), the Canadian interest rates are low because the U.S. rates are low.  (High interest rates pulls up the country's currency.)  The U.S. has been on a spending and borrowing binge.  To borrow, they have to auction a good portion of their T-bills and T-bonds to foreigners, such as Japan and China, the two largest holders of U.S. debt.  If Japan and China feel gorged on U.S. debt and does not want to buy anymore, especially at such low interest rates, the U.S. may have to offer higher rates to attract buyers.  When this happens, U.S. interest rates go up and then Canadian interest rates go up.  We know that rising interest rates may cause home prices to drop.

If Canada goes into another recession, this may cause prices to drop.  In the last recession, the continued rise in Canada's housing bubble helped support its fake economy.  If the bubble does not hold in the next recession, this could exacerbate the recession, which could in turn push house prices down further.

Astute speculators know that there is limited upside potential in real estate and significant downside potential.  They are monitoring real estate very closely and will try to time the market by cashing out when they think it has peaked.

It will be very interesting to see how the Canadian housing bubble plays out.  Hopefully, millions of Canadians will not be driven to financial ruin as in the U.S.  Since it takes many years for bubbles form, it is mainly the older generation that benefits.  Even if the bubble does not collapse, it is a huge injustice as it is a massive transfer of wealth from the younger generation to the old, making most young home-buyers much poorer.

Read more:

Housing, the most manipulated market in the world

Real Estate - Ponzi Scheme?

Housing:  After the Bubble Bursts

News Media's influence over Voters

The News Media have, arguably, one of the most important tasks of democracy. It:

• disseminates information to the voters. Without this information, voters would be in the dark and would not be able to make an informed vote.
• is the gate-keeper to information. It can decide what information to give the public and what not to give.

If a voter is asked to vote on two candidates and the only information that the voter gets about these candidates is from the News Media, the News Media has an enormous responsibility to ensure that the voter gets accurate information.  Without accurate and honest information, the democratic process breaks down.

This means that the News Media has enormous power and is able to influence, sway and manipulate voters and therefore, shape politics and policies.

The challenge is that every TV network, newspaper or magazine are controlled by humans and every human has their own political biases and beliefs.  Sometimes, the bias is so obvious that it is blatant, such as Fox's conservative views.  If you owned a TV network and you are pro-choice, you would tend to lean that way with your news reporting.  Every media has their own hidden-agenda.  That is a fact of life.

Noam Chomsky claims that the elite institutions, which includes the government and large corporations, are able to "manufacture consent ".  If the institutions want their own specific policy, they can manufacture consent from the public for their policy, by controlling the information that is disseminated to the public.  At first, this sounds like a far-fetched conspiracy theory.  However, the Iraq war proved that this "manufacturing consent" works.  According to CNN in 2004, 70% of Americans believed that Saddam Hussein and Iraq were involved in 9/11, which is completely un-true especially when Saddam Hussein hated Al Qaeda.  Through ingenious spin, the elite American institutions were able to manufacture consent to attack Iraq by associating Iraq with 9/11 and terrorism.

Almost every major TV network were beating the drums to war in 2003, with the exception of CBC.  They helped the government manufacture the consent to attack Iraq.  This has led to huge ramifications for Iraqis, Americans and many other countries including Canada.
 After it became obvious that the Iraq war was a blunder and it became impossible to hide this, CNN adopted a new slogan in 2007:  "Keeping Them Honest", where they attempt to investigate politicians and try to show the viewers that CNN is "keeping them honest".  This is a joke.  Where were they in 2003?  They were four years too late.

CBC is one of the only News networks that was critical of the Iraq war from the beginning.  It is possible that CBC maintained integrity because it is not as dependent on income from corporate advertisers and therefore cannot be as easily bought.

This seemed to be true with the internet, which seemed to have provided more accurate information than the mass media with regards to the Iraq war and George Bush.  TruthUncovered.com is a good example.  Everything they said in their 2003 documentary proved to be true.  Almost everything the major news networks said about Iraq war proved to be false.

The News Media are such large conglomerates and control so much power, that they can control politics.  This has proven to be very dangerous to the democratic process and their control of voters' information can easily thwart democracy again.  We believe that people need to be educated to the biases of the News Media.

Read more:

Democracy is a Myth