Found via John Robb’s blog (of Global Guerrillas fame). He finally updated both sites after a couple of weeks of silence. Thankfully.
And a direct link to Thomas Palley’s blog can be found here.
Palley offers a short commentary on the perhaps unearned reputation central bankers have now obtained based on the observation of a few decades of ‘moderation’ (longer periods of economic growth, shorter periods of decline, and relatively low inflation). Despite its length, it manages to touch on a number of important factors in this attribution including, in my opinion, the most important and often underlooked: The beneficiaries of the past ~30 yrs of economic growth and the lack of growth in real wages among many despite productivity gains (as detailed here by the Wall Street Journal which is now behind a paywall, by way of Naked Capitalism).
Key quote from WSJ:
“Ms. Sawhill said several factors could explain the divergence: a growing share of income going to the highest-paid workers, or to profits…”
With the loss of consumer credit propping up a illusionary high standard of living (more about that can be found via Mish), I think we’re about to see this stagnant wage inflation become apparent. Working in mortgages, I was able to see firsthand (in a large volume, albeit in anecdotal accounts) how much the annual ~6% or so increase in real estate value in Canada was being treated as income through constant refinancings (RE/MAX offers a report that show homes in the top 5 appreciating regions in Toronto rising betwen 11% and 17% in value between 2006 and 2007). To provide an example, a middle-class white-picket-fence detached suburban home away from Toronto’s downtown core, in the suburbs and outside of any of the high crime areas, 2500 sq. ft., accomodating for a family of 4 to 5 or so, you would be spending about $450,000 right now. With an increase of 6% annually, it would be the equivalent of $27,000 per year of income if you were to use lines of credit or refinancings to draw money from your home value annually while maintaining the equity dollar value of your home. According to this link at Statistics Canada, the average Canadian family of 2 persons or more had a MEDIAN income of $54,100 after tax in 2004. The increase in property value, if tapped annually, would account for perhaps one third of a family’s total annual income. If that is to disappear in Canada, as many (myself included) expect, we will be looking at a 33% salary cut for many working Canadians. And there were MANY, from my experience, who used their home equity in this manner (once again, based on anecdotal firsthand evidence so I do not have any charts to post for you). Most did not appear to be tapping their equity every year, but whenever the bills piled up, credit card debt grew to large, or a new car was needed, refinancing at the relatively low mortgage rates that have been available these past few years was often the first option.
The combination of masked wage stagflation and freefalling real estate prices is going to manifest itself in a sudden rise in statistical poverty, and an even greater rise in perceived poverty in the US. And perhaps later in Canada as well.
ADD: One thing I saw a lot of as well was “doubling down”. Those who benefited from highly appreciating property values would be, even as late as 2008, intrigued by the paper profits and would draw down their home equity to purchase an investment property (or an additional investment property) effectively doubling down on their exposure to the real estate appreciation bubble. These people were often well into the middle/upper-middle class and with their extremely high exposure, could be wiped out entirely should a real estate decline occur anything like that in the US. Especially as their properties are, obviously, usually located in the hottest growing Canadian markets. Rather than have one drastically overvalued property they’re still paying a mortgage on, now they may have two or more.
(I apologize that some of the stats and estimates were taken from different years, however I believe I kept them all within a 2004-2007 window, so they should be highly relevant still).
… and the cow goes moo
