Debt | - Part 4

According to stories like Too many condos? Canada’s housing growth ‘sustainable’: BMO along with Bubble? What bubble? Toronto condo sales booming once again, both at the Globe & Mail, Canada’s housing market is not a bubble waiting to pop.

But you’d think that something’s got to give at some point after looking at the chart below from this item at the Economist as there has been no real let up in the amount of household debt our neighbors to the north have been willing to take on.

This is a relatively new phenomenon as, based on a cursory review of charts available on the subject, Canada has trailed us spendthrift Americans by a fairly wide margin indebtedness-wise going back at least 25 years.

How this ends up is anyone’s guess, but you’d think that both of those red curves above will, someday, see a major correction that will not be pleasant.

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It’s probably not such a bad thing that, in recent years, it has become much more expensive to get a law degree here in the U.S., at least based on the graduate school debt levels reported in this Wall Street Journal story the other day in the graphic below, but the idea that some of that law school debt may end up being forgiven is somewhat troubling.

Based on the WSJ story, there has recently been a sharp increase in college loans that have built-in maximum payment/long-term forgiveness features and these now account for almost 10 percent of the nation’s $1+ trillion in outstanding student loans.

Also see this commentary on the subject by Megan McCardle at Bloomberg.

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The “Nice Phase of Minsky’s Cycle”

It’s kind of ironic to think of all the time and money that went into all those high frequency trading computers (i.e., the hardware design and the software development that must have both been cutting edge) that have been the subject of much debate at 60 Minutes and CNBC over the last few days, that is, when you think of them in relation to the U.S. economy.

Yes, that computer hardware and software added to the nation’s economic output as did all the talk on TV, but it’s all part of the recent epidemic of unhealthy growth that constitutes the current “recovery” as NYSE margin debt seems to make new all-time highs with every passing week and analysts hail the return of higher levels of borrowing by consumers.

In this Business Spectator report, Steve Keen reminds us why we “can’t escape Minsky” and why reality is different than perception.

It might be felt that Minsky is irrelevant, now that the economy has begun its recovery from this crisis. But in fact this period — in the immediate aftermath to a crisis, when the economy is growing once more, and debt levels are only just starting to rise — is precisely the point from which Minsky developed his explanation of economic cycles.

Minsky’s message is for the whole financial cycle, not just the moment when it turns nasty. At the moment, we’re in the nice phase of Minsky’s cycle, when it pays to lever. Leverage is clearly on the rise, as Figure 1 indicates.

The acronym “DCED” stands for debt contribution to effective demand and measures the annual change in private debt divided by GDP.

There are a couple more charts that are both pretty interesting and some commentary about why the last “Minsky cycle” started in the early 1990s rather than a decade ago.

You can see this in the chart above where overall debt-to-GDP really didn’t dip much in the early-2000s because the American consumer quickly picked up where corporate American left off reckless-borrowing-and-spending-wise.

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Via this item at where someone took the time to read through this report from the World Gold Council on the subject of risk management and capital preservation comes the chart below where, clearly, they’ve got the correct caption.

I’d read about gold’s share of financial assets then and now (i.e., back in 1980 as compared to today), but this is the first time I’ve seen it in chart form and it’s a real eye-opener.

Once again, this reinforces the little acknowledged fact that the financial world has changed rather dramatically in recent decades (and perhaps not for the better given that booms and busts seem to be a regular part of the landscape).

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