If people’s consciousness was constant and did not change with the conditions of material existence and social relationships or social life, then religious institutions and religious regimes would not need to impose limitations on social life and conducts and obstruct human consciousness. Their persistence on continuation of their methods simply shows that one does change with the other . On the same account, we may argue that every change in people’s consciousness also will cause change in their material existence, social relationships and social life.
Consciousness determines being through human action, directed by formation of ideas. Consciousness forms ideas and ideas form ideological convictions, which are basis for differences. It is a reflection on surroundings including the state of society. And because social relationships are products of individual reflections of social surroundings, therefore consciousness is a product of history of being, which has not stayed the same.
To hide their true nature and staying in power without having to face much opposition, religious regimes need to suppress people’s consciousness in order to control their actions. This is done by imposing on people false ideas and ideological convictions, influencing social surroundings and by presenting false history.
Religious states further obstruct human consciousness by means of limiting social relationships. They also restrict social life by creating a state of fear. In a country like Iran, where I come from, social relationships and interactions are limited by imposing restrictions on all aspects of social life as well as on the internet and social media.
One example of restriction of social relationships is segregation of the population based on sex and religious as well as political affiliations and ideological beliefs. Government positions and jobs in Iran are only given to those of particular faith (Shiite Islam) who publicly pledge their alliance to the regime and its leader. Schools are also segregated not only based on sex, but also based on religious affiliations. This segregation is recently being even expanded to the universities.
Therefore, Change in social relationships and social life is particularly a big threat to religious totalitarian regimes like the Islamic “Republic” in Iran. Because any change of that sort will weaken the regime’s columns by undermining the role of religion and the clergy in the Iranian society. Monopolizing the authority on social contracts such as marriage by religious institutions is another example of controlling social relationships.
On one hand totalitarian regimes restrict free flow of information to suppress people’s consciousness and on the other hand they try to fill the gap with rhetorical slogans and misinformation and promoting lumpenism among the population. For many years, not only the spread of hatred has been the main point in the official rhetoric through state controlled mass-media in Iran, but also malicious prejudgments about different cultures and peoples are a part of school curriculums. During my high school years we as students were being lined up every morning in the school yard and after forcefully listening to a lengthy propaganda speech, had to repeat chanting of “death to America” and “death to Israel” and death to a few others before being let go to our classrooms.
Marx defines term “‘lumpen’ or ’lumpenprolteriat’ as “segment of the working class that would never achieve class consciousness, and therefore are considered worthless in the context of revolutionary struggle”. According to Marx they consist mainly from “swindlers, confidence tricksters, brothel-keepers, rag-and-bone merchants, beggars”.
Promoting “lumpenism” is one of the dominant characteristics of a religious state. The cycle of obstruction of information and consciousness by religious state leads to intentional creation of an ever-expanding under privileged and uneducated segments of society. Religious state then can mobilize them as its missionaries at its discretion to act as its coercive force to suppress its opponents. Dominant lumpenprolteriat requires lumpen literature of interaction, which is today an accepted norm in the daily political interactions in the media in Iran and also manifests itself in the official views of the state in its international affairs.
Hence to prevent change in social relationships and social life and to manipulate minds and confuse the masses, religious states in their every day affairs resort to their invented way of life based on submission. To preclude people’s consciousness and misrepresentation of the truth they directly control the media to prevent the free flow of information through censorship. They also resort to tampering with the contents of the text books and distortion of history among their other means to redirect people’s mindsets and obstruct their consciousness.
The fact that religion institutions in general and totalitarian regimes in particular throughout the history to the present time have emphasized so much on the control of the material existence and social relationships as well as social life, and in this relentless struggle for power and control, they have not hesitated to resort to any means, from prosecutions to obstruction of science and information, shows that in fact consciousness does changes with every change in the conditions of material existence, in social relationships and in social life.
Subscribe To
Posts
All Comments
Tuesday, July 19, 2011
Friday, May 6, 2011
Is our economic system sound?
Written by: Shahrokh Afrasiabi
A relation between savings and investment is employment, according to Keynes. Also there must be employment so there would be savings. Keynes knew that unemployment or employment is the key factor. According to Keynesian Macroeconomics theory, based on traditions in economic theory before him, mainly by Adam Smith and David Ricardo; the level of total capital expenditure (Investment) determines the rate of expansion and economic condition in a market society. When this level is high it means high employment, therefore high purchasing power and high consumption. When the level of total expenditure is low, it means lower employment and lower purchasing power and therefore lower level of consumption. Keynes in his General theory of Employment, Interest and Money challenged his predecessor’s notion who believed that government should not interfere with the market because economy would correct itself in the long run. He responded to this notion by saying: “In the long run, we are all dead”.
Instead Keynes argued that when the level of total capital expenditure is not sufficient to ensure economic growth and there is unemployment because of shortage of private investment, then government should step in temporarily by injecting investment to substitute for the shortage until the economy could rebound itself. In addressing the economic downturn of the 1930’s when the fall of overall capital expenditure among other factors had created huge unemployment and economic recession in the U.S, even though Keynes was aware that these interventions could increase government deficit and inflation, he argued that government deficit could be carried forward like corporate debt and the recovery of the economy and eventual rise of wages could correct the inflationary effect. Keynes also suggested that macroeconomic should be used as well as playing with people’s expectations. According to him, irrationality comes from that people act on both positive and negative wishes based on their level of fear; then Keynes introduced the principles of mass psychology based on people’s “lack of rational”. Keynes believed that market worked on “the psychology of fear and expectations”; Bad news in the market creates fear among investors causing them to withdraw their investments which can multiply the effect of an economic downturn. Positive signs create expectations of profit which in turn will encourage people to invest their savings in the market and make the economy boom.
The phrase Stagnation is referred to slow or negative economic growth measured by GDP. Gross Domestic Product (GDP) or national income based on Keynes Macroeconomic theory is a measure of economic well being and when measured per capita, of its individuals. It is consisted of the sum of domestic consumption, gross private Investment, total government spending and net export (Y=C+I+G+NX). GDP is positively affected by change of each of its components and each component responds differently to change in interest rate in addition to affecting interest rate itself. They are also interrelated with other factors like exchange rate which directly determines the demand for export and employment among other factors. All of which can be explained through the mechanism of demand and supply.
Prior to this theory, market thought to be a self correcting mechanism in which government should not interfere. This was based on the Adam Smith’s concept of “invisible hands” which stated that the market would eventually correct itself with no state interference. Even though the role of state according to Smith was only to ensure the competitive nature of the market, he also had mentioned that government should undertake large public projects that private sector is unable of doing, while he did not think of its overall stimulus impact on the economy. This view however proved to be inadequate following the great depression and failure of the U.S. economy to rebound on itself for a lengthy period of time. The stock market crash of 1929 was caused by a series of factors including but not limited to problems with credit market, agriculture and technological change. Credit market freeze partly was caused by speculation in the stock markets, by banks and trust companies as well as other investors. Problem in agriculture and weakness of farms was also linked to lack of funding and uncompetitiveness of traditional farms. Also effects of technological change on employment and increased disparity between rich and poor were among other reasons. These factors among others contributed to crash of the stock market in late 1929 when the market suddenly lost a great portion of its value and brought the U.S. economy to a near standstill.
Stock market is based on profit of its underlying stocks. Stock market is a place where shares or ownerships of companies are bought and sold. Problem arises when the underlying companies are not productive, meaning that they do not generate profit or meet the expectations of the investors. Following the industrial revolution, capital entrepreneurs had an irrational desire to accumulate wealth where dummy companies and pyramid skims were a common phenomenon. These companies had no real business activity but instead they pretended to be profitable. Since stock market is fueled by speculation, high returns would push their stock prices further up until the pyramid would come down and all their stock values would be lost. As a result investors would lose either all or a great part of their investments. To cut their losses or in pursuit of a better return for their investments, they were likely to sell their shares. However this was only possible with a loss, meaning that they would receive an amount less than what they paid for those shares initially. Since most of the investors invest with borrowed money, it meant that even after selling their shares with a loss they were still expected to pay back their loans. Investor’s inability to pay back loans eventually created problem for the credit markets and lending institutions. From 1925 onward leading up to the great depression, banks were going out of business at the rate of almost two per day.
Other reasons for failing banks were problems in the agriculture sector. Following the industrial revolution, application of technology spread to agriculture sector among other industries. While this modernization due to development of new fertilizers and pesticides as well as machinery and automation drastically increased productivity in agriculture, it had its disadvantages too. An increasing number of people working on farms became unemployed as a result of this automation and modernization. Also due to inelastic nature of the agricultural products more production and lower prices did not mean more consumption. Low prices translated to less money in farmer’s pocket while their taxes increased and like all other borrowers, they had to make payments their financed equipments. As farmer’s income dwindled, they felt the need to produce more, and the more they produced, prices further dropped and it further worsened their situation, to the point that they were no longer able to meet their obligations. Therefore, perishable nature of farm products and lack adequate storing and transportation and over production and decrease in prices in places of production on one hand and a great number of work force previously employed in agriculture becoming unemployed on the other hand contributed to the problem in agriculture.
Following the industrial revolution and continued technological change, the trend towards automation substituted more and more men with machine in the production process. Therefore as technology advanced more, more workforces became unemployed. This was mainly the case with manufacturing and farming industries. Increase in productivity thanks to technological change from one hand required more consumers, but as more labors lost their jobs due to the same process, they could afford less to buy products. Technology therefore negatively affected the demand for labour and created unemployment.
Running up to the 1929, uneven distribution of income had concentrated a high percentage of wealth in the hands of a few who could not spend it all on consumer’s goods and saved their excess income. This saved portion did not contribute to the consumption demand. Therefore unemployment and uneven distribution of income both contributed to low consumption demand.
We know that the bulk part of total capital expenditure in a capitalist market society consists of consumption. It is the level of consumption that sustains production and encourages private capital investment in production. As unemployment rises, people have less income to spend and can consume less. Less consumption means less demand for production. Low demand in turn forces more production facilities to closure and therefore pushes more people out of work. This ripple effect further reduces the consumption level and leads to an even lower demand. This cycle if continued will lead to an economic stagnation, as it did in 1929.
As Karl Marx had predicted some years before the great depression, capitalist system tends to monopolization and convergence of the supply. The more application of technology becomes essential in the competition, only leading firms are able to increase their productivity and undersell all competitors. This process slowly forces smaller firms out of the market and creates further unemployment, diminishing the demand for products. Monopolization and decline in demand also pushes the prices higher. Therefore, prices don’t go down as much relative to the increase in productivity.
More unemployment also means higher demand for employment which can be translated to the labour accepting lower wages and as a result wages don’t rise at the same level and don’t match the rise in prices. A combination of rising prices and fall in income effects consumption level even more negatively.
Keynes suggested that there must be a macroeconomic solution to this problem, but didn’t see the government’s role in the economy as a permanent one. Keynes solution to this clog in expansion of the economy was to create more expansion with the help of the government. To ease the flow of funds in the credit market, government was to inject investment into the economy. It did so by undertaking public projects as well as altering country’s money supply by buying or selling government debt. These measures were later called fiscal and monetary policies. Fiscal policy would mean that the government by undertaking large projects such as in country’s infrastructure creating employment and income for a large number of people. Income in turn can increase consumption and savings. Savings then would promote new private investments and capital expansion when invested, which can stimulate production and create more employment. Monetary policy on the other hand meant altering the monetary base in the economy by the central bank. Increase in the supply of money relaxes the interest rate and makes more credit available for private sector to be invested in capital expansion which can also create employment. The common effect of both policies on the economy in addition to the budget deficit for the government is inflation.
Keynes revolutionized the economics by introducing monetary and fiscal policy as tools for directing the economy. This brought forward the rise of public sector and emboldened the role of government in the capitalist system more than ever. Government interventions were mainly in areas that the free capital system on its own had failed to address. The New Deal Started by Roosevelt represented a tremendous amount of state legislations and emergency acts such as banking act, mortgage act, wage act and bare labour standard act to protect labour unions, setup minimum wage and maximum working hours and to eliminate child labour.
President Roosevelt upon his presidency in 1933 introduced some fifteen major bills to address all possible areas which had failed and caused the American economy to a recession. They included measures to supervise bank activities and to regulate the stock market. These bills also included antitrust laws and were intended to limit the formation of cartels and collusion in the market place. They also included in addition to acts for protection of labour unions and youth employment, some measures to ease credit flow for farmers to address problems in agriculture sector.
Keynes’s Monetary and fiscal policies despite being inflationary are to this day being implemented mainly to tackle unemployment and sluggish economy. It is however interesting to observe that expansionary policy’s direct result which is inflation, as we will further examine is the main case for unemployment and decrease in total capital expenditure in the economy! That may be one of the reasons why capital economies since the great depression have gone through such frequent cycles of booms and busts.
Expansionary policies have their pros and cons. On the plus side these measures in the short run help stimulating the economy by creating employment. Higher employment creates positive outlook of the economy which promotes more inflow of investment in anticipation of profit as Keynes had predicted. Inflationary side effects however cannot sustain a low unemployment rate in the long run.
William Philips (1914-1975) explained how inflation and unemployment are in negative relationship in short run:
This is known as Philips curve. It shows that the lower the unemployment in an economy, the higher the rate of inflation. While it is the case that there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run as wages don’t tend to match the rising prices. This is the case when inflation and unemployment rates remain high at the same time to create a condition called Stagflation.
Another problem arising from expansionary economic policies which to this day remain the only tools available to the governments is that inflation created by these policies is negatively related to the level of savings and consumption. A decrease in the amount of goods and services that consumers can consume as a result of increase in prices relative to their income means above all less consumption. Consumers after paying for their essential goods are left with little or nothing to save. In additions, consumers when facing with the rising prices choose to consume in the present period as oppose to save for the next period. Less incentive to save and less money to spend means less private investment in the first period. It also means less consumption in the next period. Lack of investment freezes capital expenditure which in turn causes a downturn in the economy and unemployment again.
Among other disadvantages of expansionary policies apart from inflation of which we spoke before is that they create government budget deficit. To balance the budget governments have to cut their services to the public which they usually include essential services such as education and healthcare as well as social security. Cutting these services further contributes to disincentive for employment as well as higher rate of unemployment in the future periods which sets the condition for a higher frequency of recessions in the future.
Keynes knew that unemployment or employment is the key factor to the economic expansion but we know today that application of expansionary economic policies are only quick fixes that in fact can only postpone today’s structural economic problems to a time in the future. This however does not come without a cost. As we can observe today, the cycle of boom and bust has repeated itself numerous times since its first occurrence during the great depression. As our brief examination of the dynamics of the components of growth in a capital market society reveals, in many cases short term results can be very different from those in the long run. Further we have not taken to account the rise of the price of energy and oil. According to another Philips curve, rise in the price of energy reduces the total capital expenditure or GDP and reduces profit which in turn means less employment. Given the current level of unemployment and the current prices of energy, it is not hard to observe a state of stagflation in the U.S. This situation combined with a huge budget deficit leaves little choice for the U.S than to engage in yet another conflict to consume its expensive military hardware in an attempt for another economic recovery.
Sources:
1. The Making of Economic Society, Robert Heilbroner& William Milberg
2. The Worldly Philosophers, Robert L. Heilbroner
A relation between savings and investment is employment, according to Keynes. Also there must be employment so there would be savings. Keynes knew that unemployment or employment is the key factor. According to Keynesian Macroeconomics theory, based on traditions in economic theory before him, mainly by Adam Smith and David Ricardo; the level of total capital expenditure (Investment) determines the rate of expansion and economic condition in a market society. When this level is high it means high employment, therefore high purchasing power and high consumption. When the level of total expenditure is low, it means lower employment and lower purchasing power and therefore lower level of consumption. Keynes in his General theory of Employment, Interest and Money challenged his predecessor’s notion who believed that government should not interfere with the market because economy would correct itself in the long run. He responded to this notion by saying: “In the long run, we are all dead”.
Instead Keynes argued that when the level of total capital expenditure is not sufficient to ensure economic growth and there is unemployment because of shortage of private investment, then government should step in temporarily by injecting investment to substitute for the shortage until the economy could rebound itself. In addressing the economic downturn of the 1930’s when the fall of overall capital expenditure among other factors had created huge unemployment and economic recession in the U.S, even though Keynes was aware that these interventions could increase government deficit and inflation, he argued that government deficit could be carried forward like corporate debt and the recovery of the economy and eventual rise of wages could correct the inflationary effect. Keynes also suggested that macroeconomic should be used as well as playing with people’s expectations. According to him, irrationality comes from that people act on both positive and negative wishes based on their level of fear; then Keynes introduced the principles of mass psychology based on people’s “lack of rational”. Keynes believed that market worked on “the psychology of fear and expectations”; Bad news in the market creates fear among investors causing them to withdraw their investments which can multiply the effect of an economic downturn. Positive signs create expectations of profit which in turn will encourage people to invest their savings in the market and make the economy boom.
The phrase Stagnation is referred to slow or negative economic growth measured by GDP. Gross Domestic Product (GDP) or national income based on Keynes Macroeconomic theory is a measure of economic well being and when measured per capita, of its individuals. It is consisted of the sum of domestic consumption, gross private Investment, total government spending and net export (Y=C+I+G+NX). GDP is positively affected by change of each of its components and each component responds differently to change in interest rate in addition to affecting interest rate itself. They are also interrelated with other factors like exchange rate which directly determines the demand for export and employment among other factors. All of which can be explained through the mechanism of demand and supply.
Prior to this theory, market thought to be a self correcting mechanism in which government should not interfere. This was based on the Adam Smith’s concept of “invisible hands” which stated that the market would eventually correct itself with no state interference. Even though the role of state according to Smith was only to ensure the competitive nature of the market, he also had mentioned that government should undertake large public projects that private sector is unable of doing, while he did not think of its overall stimulus impact on the economy. This view however proved to be inadequate following the great depression and failure of the U.S. economy to rebound on itself for a lengthy period of time. The stock market crash of 1929 was caused by a series of factors including but not limited to problems with credit market, agriculture and technological change. Credit market freeze partly was caused by speculation in the stock markets, by banks and trust companies as well as other investors. Problem in agriculture and weakness of farms was also linked to lack of funding and uncompetitiveness of traditional farms. Also effects of technological change on employment and increased disparity between rich and poor were among other reasons. These factors among others contributed to crash of the stock market in late 1929 when the market suddenly lost a great portion of its value and brought the U.S. economy to a near standstill.
Stock market is based on profit of its underlying stocks. Stock market is a place where shares or ownerships of companies are bought and sold. Problem arises when the underlying companies are not productive, meaning that they do not generate profit or meet the expectations of the investors. Following the industrial revolution, capital entrepreneurs had an irrational desire to accumulate wealth where dummy companies and pyramid skims were a common phenomenon. These companies had no real business activity but instead they pretended to be profitable. Since stock market is fueled by speculation, high returns would push their stock prices further up until the pyramid would come down and all their stock values would be lost. As a result investors would lose either all or a great part of their investments. To cut their losses or in pursuit of a better return for their investments, they were likely to sell their shares. However this was only possible with a loss, meaning that they would receive an amount less than what they paid for those shares initially. Since most of the investors invest with borrowed money, it meant that even after selling their shares with a loss they were still expected to pay back their loans. Investor’s inability to pay back loans eventually created problem for the credit markets and lending institutions. From 1925 onward leading up to the great depression, banks were going out of business at the rate of almost two per day.
Other reasons for failing banks were problems in the agriculture sector. Following the industrial revolution, application of technology spread to agriculture sector among other industries. While this modernization due to development of new fertilizers and pesticides as well as machinery and automation drastically increased productivity in agriculture, it had its disadvantages too. An increasing number of people working on farms became unemployed as a result of this automation and modernization. Also due to inelastic nature of the agricultural products more production and lower prices did not mean more consumption. Low prices translated to less money in farmer’s pocket while their taxes increased and like all other borrowers, they had to make payments their financed equipments. As farmer’s income dwindled, they felt the need to produce more, and the more they produced, prices further dropped and it further worsened their situation, to the point that they were no longer able to meet their obligations. Therefore, perishable nature of farm products and lack adequate storing and transportation and over production and decrease in prices in places of production on one hand and a great number of work force previously employed in agriculture becoming unemployed on the other hand contributed to the problem in agriculture.
Following the industrial revolution and continued technological change, the trend towards automation substituted more and more men with machine in the production process. Therefore as technology advanced more, more workforces became unemployed. This was mainly the case with manufacturing and farming industries. Increase in productivity thanks to technological change from one hand required more consumers, but as more labors lost their jobs due to the same process, they could afford less to buy products. Technology therefore negatively affected the demand for labour and created unemployment.
Running up to the 1929, uneven distribution of income had concentrated a high percentage of wealth in the hands of a few who could not spend it all on consumer’s goods and saved their excess income. This saved portion did not contribute to the consumption demand. Therefore unemployment and uneven distribution of income both contributed to low consumption demand.
We know that the bulk part of total capital expenditure in a capitalist market society consists of consumption. It is the level of consumption that sustains production and encourages private capital investment in production. As unemployment rises, people have less income to spend and can consume less. Less consumption means less demand for production. Low demand in turn forces more production facilities to closure and therefore pushes more people out of work. This ripple effect further reduces the consumption level and leads to an even lower demand. This cycle if continued will lead to an economic stagnation, as it did in 1929.
As Karl Marx had predicted some years before the great depression, capitalist system tends to monopolization and convergence of the supply. The more application of technology becomes essential in the competition, only leading firms are able to increase their productivity and undersell all competitors. This process slowly forces smaller firms out of the market and creates further unemployment, diminishing the demand for products. Monopolization and decline in demand also pushes the prices higher. Therefore, prices don’t go down as much relative to the increase in productivity.
More unemployment also means higher demand for employment which can be translated to the labour accepting lower wages and as a result wages don’t rise at the same level and don’t match the rise in prices. A combination of rising prices and fall in income effects consumption level even more negatively.
Keynes suggested that there must be a macroeconomic solution to this problem, but didn’t see the government’s role in the economy as a permanent one. Keynes solution to this clog in expansion of the economy was to create more expansion with the help of the government. To ease the flow of funds in the credit market, government was to inject investment into the economy. It did so by undertaking public projects as well as altering country’s money supply by buying or selling government debt. These measures were later called fiscal and monetary policies. Fiscal policy would mean that the government by undertaking large projects such as in country’s infrastructure creating employment and income for a large number of people. Income in turn can increase consumption and savings. Savings then would promote new private investments and capital expansion when invested, which can stimulate production and create more employment. Monetary policy on the other hand meant altering the monetary base in the economy by the central bank. Increase in the supply of money relaxes the interest rate and makes more credit available for private sector to be invested in capital expansion which can also create employment. The common effect of both policies on the economy in addition to the budget deficit for the government is inflation.
Keynes revolutionized the economics by introducing monetary and fiscal policy as tools for directing the economy. This brought forward the rise of public sector and emboldened the role of government in the capitalist system more than ever. Government interventions were mainly in areas that the free capital system on its own had failed to address. The New Deal Started by Roosevelt represented a tremendous amount of state legislations and emergency acts such as banking act, mortgage act, wage act and bare labour standard act to protect labour unions, setup minimum wage and maximum working hours and to eliminate child labour.
President Roosevelt upon his presidency in 1933 introduced some fifteen major bills to address all possible areas which had failed and caused the American economy to a recession. They included measures to supervise bank activities and to regulate the stock market. These bills also included antitrust laws and were intended to limit the formation of cartels and collusion in the market place. They also included in addition to acts for protection of labour unions and youth employment, some measures to ease credit flow for farmers to address problems in agriculture sector.
Keynes’s Monetary and fiscal policies despite being inflationary are to this day being implemented mainly to tackle unemployment and sluggish economy. It is however interesting to observe that expansionary policy’s direct result which is inflation, as we will further examine is the main case for unemployment and decrease in total capital expenditure in the economy! That may be one of the reasons why capital economies since the great depression have gone through such frequent cycles of booms and busts.
Expansionary policies have their pros and cons. On the plus side these measures in the short run help stimulating the economy by creating employment. Higher employment creates positive outlook of the economy which promotes more inflow of investment in anticipation of profit as Keynes had predicted. Inflationary side effects however cannot sustain a low unemployment rate in the long run.
William Philips (1914-1975) explained how inflation and unemployment are in negative relationship in short run:
This is known as Philips curve. It shows that the lower the unemployment in an economy, the higher the rate of inflation. While it is the case that there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run as wages don’t tend to match the rising prices. This is the case when inflation and unemployment rates remain high at the same time to create a condition called Stagflation.
Another problem arising from expansionary economic policies which to this day remain the only tools available to the governments is that inflation created by these policies is negatively related to the level of savings and consumption. A decrease in the amount of goods and services that consumers can consume as a result of increase in prices relative to their income means above all less consumption. Consumers after paying for their essential goods are left with little or nothing to save. In additions, consumers when facing with the rising prices choose to consume in the present period as oppose to save for the next period. Less incentive to save and less money to spend means less private investment in the first period. It also means less consumption in the next period. Lack of investment freezes capital expenditure which in turn causes a downturn in the economy and unemployment again.
Among other disadvantages of expansionary policies apart from inflation of which we spoke before is that they create government budget deficit. To balance the budget governments have to cut their services to the public which they usually include essential services such as education and healthcare as well as social security. Cutting these services further contributes to disincentive for employment as well as higher rate of unemployment in the future periods which sets the condition for a higher frequency of recessions in the future.
Keynes knew that unemployment or employment is the key factor to the economic expansion but we know today that application of expansionary economic policies are only quick fixes that in fact can only postpone today’s structural economic problems to a time in the future. This however does not come without a cost. As we can observe today, the cycle of boom and bust has repeated itself numerous times since its first occurrence during the great depression. As our brief examination of the dynamics of the components of growth in a capital market society reveals, in many cases short term results can be very different from those in the long run. Further we have not taken to account the rise of the price of energy and oil. According to another Philips curve, rise in the price of energy reduces the total capital expenditure or GDP and reduces profit which in turn means less employment. Given the current level of unemployment and the current prices of energy, it is not hard to observe a state of stagflation in the U.S. This situation combined with a huge budget deficit leaves little choice for the U.S than to engage in yet another conflict to consume its expensive military hardware in an attempt for another economic recovery.
Sources:
1. The Making of Economic Society, Robert Heilbroner& William Milberg
2. The Worldly Philosophers, Robert L. Heilbroner
Wednesday, April 6, 2011
Bubble In Canadian Housing Market?
Speculative Bubbles in Housing Markets
The phenomenon of a rapid and unsustainable rise in the price of real properties locally or globally, that is incoherent with other economic indicators such as real income level and other affordability indicators, following a substantial drop in their values are referred to as property or housing bubble.
The purpose of this paper is to study the general phenomenon of housing bubble by looking at its economic preconditions as well as economic impacts. Further we will use some economic indicators of the past property and housing bubbles in an attempt to possibly identifying their occurrences in the future housing markets.
Whether or not real estate bubbles can be identified or should be prevented is a subject of debate between different schools of economic thoughts around the world. However the global economic recession of 2007-2010 is believed to be greatly linked to the burst of housing bubble mainly in the United States. Some argue that economic indicators can be used in identifying bubbles while they are being inflated, and central banks should take steps to prevent their course. Others argue that it is a natural course of markets which eventually leads to a redistribution of wealth and central banks role should be only to clean up their aftermath.
In this paper we will go through relevant topics in the following order:
• Housing market indicators
• Macroeconomic and market Preconditions
• Past &present real estate bubbles
• Analysis of the current housing market data in Canada
• Assessments and conclusion
Housing Market indicators
In identifying a bubble, one can make an educated guess using relevant financial ratios as well as observe economic indicators to compare current market trends with those in previous bubble occurrences. These financial ratios and indicators mainly compare valuation and debt level in different periods to determine the surge in housing prices with respect to the average income (affordability) and to determining people’s level of debt (leverage) as well as lending institution’s exposure as a result of providing mortgages to home buyers.
Valuation & Debt Measures
First proxy indicator of a bubble is when house prices grow faster than the incomes or if prices are running ahead of incomes. This condition can be caused either by inability of housing supply to match the rise in demand or, that with respect to rise in income, the extent that demand for housing rises is too high.
Several measures are used in testing the valuation and debt component of real estates, of which the most common are the followings:
1. Price to income ratio
2. Price to rent ratio
3. Housing debt to income ratio
4. Housing debt to equity ratio
Price to Income Ratio
Price to income ratio is a measure of affordability which is obtained by dividing median incomes by median house prices. In other words it is the ratio of median house prices to median household disposable income. In addition of it being an overall affordability measure, it is used by lending institutions to determine the degree of affordability of loans to mortgage applicants. In Toronto area based on the data released by real estate boards this ratio on average was 5.1 in 2010 and 5.5 in 2011. This chart shows how price to income ratio for existing properties changed in Canada between 1988 and 2010.
Price to Rent Ratio
Price to rent ratio is the average cost of ownership divided by the received rent income or estimated rent that would be paid if renting. It measures how much the buyer is paying for each dollar of received rent income. Given that rent is similar to corporate and personal incomes, in additions to government rent control provisions it is bound by supply and demand mechanisms and is unlikely to be unsustainable, a rapid rise in house price combined with flat renting market can be an indication of a bubble. This chart shows an overall raise in price to rent ratio in Canada from 1980 to 2008.
Housing debt to income ratio
Housing debt to income ratio or debt-service ratio is the ratio of mortgage payments to after tax or disposable income. When this ratio gets too high, households become increasingly dependent leveraging on their growing house prices. Using this ratio, it is also possible to determine total cost of home ownership when including utilities and property taxes. This chart shows in overall how Canadian household’s savings been fluctuating from 1929 to 2009.
Housing Debt to Equity Ratio
Housing debt to equity ratio or loan to value ratio is an expression of ratio of the mortgage debt to the value of the underlying property. In other words this ratio is also referred as financial leverage. A debt to equity ratio of 1 indicates 100% financing and ratios of higher than 1 means a mortgage amount greater than the value of the underlying property. Following a bubble burst and properties losing their value, given that mortgage obligations are intact, debt to equity ratios higher than 1 are often observable.
Macroeconomic and Market Preconditions
Although Housing market dynamics similar to other commodities react to supply and demand forces, it also has some unique characteristics. Given that houses are fixed in location, their markets are shaped by local housing markets and an aggregate study could be less reflective of the reality in smaller local markets. Based on a simple supply and demand model and under perfect market conditions, a rise in demand would have to signal to the supply side to supply more housing stocks. But, given that houses relatively take a long time to build, we consider the short run supply of housing stocks to be fixed. Therefore a small shift in the demand for housing, depending on the elasticity of demand, can raise the housing prices substantially.
In reality supply and demand for housing are affected in addition to the market forces, also by macroeconomic conditions as well as government policies. Taking to consideration that house purchases are mainly financed by financial intermediaries, and given the household’s budget constraint, a change in lending rates by the central bank can substantially affect both demand and medium and long term supply of housing.
In addition to interest rates, overall condition of the stock markets and economy can also be an important factor in the demand for the housing. Purchasing a house above all is an investment decision. If there are more opportunities for capital gain in other sectors, it is more likely that the flow of investment be directed to a different direction than housing. On the other hand if other markets remain stagnant, and there is a trend in rise in house prices, it is more likely that the flow of investment be directed towards housing and cause a boom in the housing sector.
Apart from signs and indicators for housing bubbles, there are different economic schools of thoughts who explain bubble phenomenon in a different ways. Keynesians argue that housing market like any other market is derived by a psychology of fear and expectations. When prices are rising and people experience capital gains, they become overconfident and inject more capital into the housing market in expectation of higher capital gain. As people increase their demand, they also drive the prices higher and at the same time growing their risk exposure. Paul Krugman, who is an economics professor at Princeton University, also a writer for the New York Times, makes a parallel between housing bubbles in the US with previous market meltdowns:
In parts of the country there’s a speculative fever among people who
shouldn’t be speculators that seem all too familiar from past bubbles—the
shoeshine boys with stock tips in the 1920’s, the beer-and-pizza joints
showing CNBC, not ESPN, on the TV sets in the 1990s. (New York Times, 5.27.05)
Further, similar to stock market bubble of 1990’s Krugman identifies the expectation of capital gain as the main reason for housing bubbles:
So when people become willing to spend more on houses, say because of a
fall in mortgage rates, some houses get built, but the prices of existing
houses also go up. And if people think prices will continue to rise, they
become willing to spend even more, driving prices still higher, and so
on…prices will keep rising rapidly, generating big capital gains. That’s
pretty much the definition of a bubble.(New York Times, 8.8.05)
On the other hand, Austrian economic school of thoughts takes the supply side view and blames government’s monetary policy as a cause for oversupply in the housing market. It argues that the application of monetary policy and lowering of interest rates by government and central banks that are intended to boost the economy and increase the capital expenditure in order to stimulate consumption and output, makes it too easy for households to enter the housing market. Based on this theory, as a result of monetary policy, commercial banks due to their increased reserves are able to provide more mortgages on easier terms. As more funds are directed towards the housing market, too many houses are built which results in too many recourses being wasted in building unneeded buildings. In this school of thought housing bubbles are seen as an example of credit bubble, since property owners generally use borrowed money to purchase property. Bursting housing bubble in addition to loss of property value causes unemployment in the construction sector as well as other related service industries. This chart illustrates how employment in construction sector has been affected during past recessions in U.S.
The post Keynesian theory on the other hand takes the demand side view and argues that with the rise of real estate prices, property owners feel richer and are more likely to borrow against their homes for consumption or to speculate further in the property market with borrowed money. After the bubble bursts, property values declines while their level of debt remains intact. The aggregate effect of the inability of borrowers to meet their obligations creates pressure on lending institution and the whole economy. Therefore one indication of a housing bubble being created is a surge in household’s liabilities or debt to income ratio. Below is an illustration of the trend of debt level in U.S.
Past & Present Real Estate Bubbles
According to an IMF report published in January 0f 2002 on 1990’s Asian housing crisis, which sent shock waves to financial markets around the world, liberalization of financial institutions and ease of flow of credit has been identified as main causes for creation of financial cycles which in turn have contributed to inflation in housing markets leading up to bubble creations:
The 7th Annual Demographia International Housing Affordability Survey which was published in 2011, has rated housing affordability in major metropolitan areas in Australia, Canada, Ireland, New Zealand, United Kingdom, United States and China (Hong Kong). Based on affordability measures, it is believed that at the present time there are perhaps several housing bubbles in the making. By a quick review of the data provided in this bulletin, it is not difficult to observe a decline in affordability indices as a result of disproportional and constant hike in real estate prices in some of these metropolitan areas. This report places Vancouver BC only after Hong Kong as the most unaffordable cities and also Toronto and Montreal among the severely unaffordable markets.
Analysis of the current housing market data in Canada
By a brief analysis of the available data in the Canadian housing market, especially in the larger metropolitan areas, base on price indices, affordability measures as well as a broader look at macroeconomic conditions, it is possible to come to the following conclusions:
o Prices of housing stocks have been rising disproportionate to the overall inflation rates.
o Price to income ratio of housing stock has been on the rise since 2001, except for a short decline from 2008 to2009, it has been increasing again since 2009.
o Price to rent ratio in major Canadian metropolitan cities with the exception of the period from 2008 to 2009, have steadily been rising since 2001 to the present time and now stand at a record level of close to 5.5.
o A report recently released in the media revealed that the level of household debt in Canada which has been rising since 1999 now stands at its record level. According to this report, debt to income ratio in Canada on average has now risen to close to150% in 2011.
o Housing debt to equity ratio in Canada have risen mainly due to favorable interest rates and the steady rise of property prices:
"There is understandable concern about the rapid rise in borrowing, and the buoyant housing market in particular, that has pushed Canadian household debt leverage to new records," said Warren Jestin, Chief Economist, Scotiabank
o Bank of Canada in risk to the outlook section of its 2011 Monetary Policy Report emphasizes on the risk of consumer’s over spending and that a reduction in real estate prices can negatively affect the Canadian economic growth:
“With household expenditures in Canada significantly above their historical
average as a share of GDP, growth in household spending might
decelerate more rapidly than is currently anticipated. Relatedly, if there
were a sudden weakening in the Canadian housing sector, it could have
sizable spillover effects on other areas of the economy, such as consumption,
given the high debt loads of some Canadians.”
Assessments and conclusion
According to CHMC 2010 reports, one fifth of the 2009 total Canadian GDP was comprised of housing sector and its related trades. Bank of Canada through its monetary policy has been effectively involved in Canadian economy for most of the recent history. An expansionary monetary policy by the Bank of Canada intended to boost the economy and to cap unemployment makes plenty of credit available at low cost. Availability of low cost credit encourages potential home buyers to enter the market. This increases the demand for housing which will push the prices up. In addition to a boost in housing market it also creates a boost in construction jobs and employment in related industries. Low interest rates combined with expectations for capital gain in the absence of alternative profitable investment options draw more households as well as speculators in to the housing market and drive the housing prices up irrationally. Low interest rates also encourage existing home owners to borrow against their home equities to spend on consumption goods or to further invest in lucrative housing markets. While interest rates are kept low, we may see slight economic growth and a decline in unemployment rates due to a rallying housing sector. Incomparable capital gain opportunities combined with preferable tax treatment by the government on capital gain on the real estate attract further recourses from less profitable industries and causes further unemployment and loss of productivity as well as further inflation (state of inflated housing bubble). At this stage a slight increase in interest rates or some bad market news can potentially cool the housing market off and bring the prices down or so called burst the housing bubble. As a result, high leveraged households faced with a negative debt to equity ratio are unable or unwilling to meet their obligations. In addition to a rapid rise in unemployment in housing related service industries, the aggregate effect of mortgage defaults creates further problems for the banks and can lead to an overall economic slowdown. A condition when due to reduction in output, inflation and unemployment occur at the same time.
Whether or not a housing bubble is forming in major Canada’s metropolitan areas is perhaps subject to a more thorough investigation. One thing however is clear that all primary preconditions for a housing bubble are currently present in Canadian housing markets. This, further suggests that if timely and proper measures are not taken by the Bank of Canada, it could burst in a foreseeable future.
List of sources
Bank of Canada Monetary Policy Report January 2011
IMF working paper, Lending Booms, housing bubbles and Asian crisis January 2002C
New York Times 5.27.2005, 8.8.2005
http://en.wikipedia.org/wiki/Economic_bubble
http://www.cmhc-schl.gc.ca
http://canadabubble.com/charts/
http://www.demographia.com/
http://www.scotiacapital.com/
http://www.statcan.gc.ca/
http://www.jeffreyteam.com/blog
The phenomenon of a rapid and unsustainable rise in the price of real properties locally or globally, that is incoherent with other economic indicators such as real income level and other affordability indicators, following a substantial drop in their values are referred to as property or housing bubble.
The purpose of this paper is to study the general phenomenon of housing bubble by looking at its economic preconditions as well as economic impacts. Further we will use some economic indicators of the past property and housing bubbles in an attempt to possibly identifying their occurrences in the future housing markets.
Whether or not real estate bubbles can be identified or should be prevented is a subject of debate between different schools of economic thoughts around the world. However the global economic recession of 2007-2010 is believed to be greatly linked to the burst of housing bubble mainly in the United States. Some argue that economic indicators can be used in identifying bubbles while they are being inflated, and central banks should take steps to prevent their course. Others argue that it is a natural course of markets which eventually leads to a redistribution of wealth and central banks role should be only to clean up their aftermath.
In this paper we will go through relevant topics in the following order:
• Housing market indicators
• Macroeconomic and market Preconditions
• Past &present real estate bubbles
• Analysis of the current housing market data in Canada
• Assessments and conclusion
Housing Market indicators
In identifying a bubble, one can make an educated guess using relevant financial ratios as well as observe economic indicators to compare current market trends with those in previous bubble occurrences. These financial ratios and indicators mainly compare valuation and debt level in different periods to determine the surge in housing prices with respect to the average income (affordability) and to determining people’s level of debt (leverage) as well as lending institution’s exposure as a result of providing mortgages to home buyers.
Valuation & Debt Measures
First proxy indicator of a bubble is when house prices grow faster than the incomes or if prices are running ahead of incomes. This condition can be caused either by inability of housing supply to match the rise in demand or, that with respect to rise in income, the extent that demand for housing rises is too high.
Several measures are used in testing the valuation and debt component of real estates, of which the most common are the followings:
1. Price to income ratio
2. Price to rent ratio
3. Housing debt to income ratio
4. Housing debt to equity ratio
Price to Income Ratio
Price to income ratio is a measure of affordability which is obtained by dividing median incomes by median house prices. In other words it is the ratio of median house prices to median household disposable income. In addition of it being an overall affordability measure, it is used by lending institutions to determine the degree of affordability of loans to mortgage applicants. In Toronto area based on the data released by real estate boards this ratio on average was 5.1 in 2010 and 5.5 in 2011. This chart shows how price to income ratio for existing properties changed in Canada between 1988 and 2010.
Price to Rent Ratio
Price to rent ratio is the average cost of ownership divided by the received rent income or estimated rent that would be paid if renting. It measures how much the buyer is paying for each dollar of received rent income. Given that rent is similar to corporate and personal incomes, in additions to government rent control provisions it is bound by supply and demand mechanisms and is unlikely to be unsustainable, a rapid rise in house price combined with flat renting market can be an indication of a bubble. This chart shows an overall raise in price to rent ratio in Canada from 1980 to 2008.
Housing debt to income ratio
Housing debt to income ratio or debt-service ratio is the ratio of mortgage payments to after tax or disposable income. When this ratio gets too high, households become increasingly dependent leveraging on their growing house prices. Using this ratio, it is also possible to determine total cost of home ownership when including utilities and property taxes. This chart shows in overall how Canadian household’s savings been fluctuating from 1929 to 2009.
Housing Debt to Equity Ratio
Housing debt to equity ratio or loan to value ratio is an expression of ratio of the mortgage debt to the value of the underlying property. In other words this ratio is also referred as financial leverage. A debt to equity ratio of 1 indicates 100% financing and ratios of higher than 1 means a mortgage amount greater than the value of the underlying property. Following a bubble burst and properties losing their value, given that mortgage obligations are intact, debt to equity ratios higher than 1 are often observable.
Macroeconomic and Market Preconditions
Although Housing market dynamics similar to other commodities react to supply and demand forces, it also has some unique characteristics. Given that houses are fixed in location, their markets are shaped by local housing markets and an aggregate study could be less reflective of the reality in smaller local markets. Based on a simple supply and demand model and under perfect market conditions, a rise in demand would have to signal to the supply side to supply more housing stocks. But, given that houses relatively take a long time to build, we consider the short run supply of housing stocks to be fixed. Therefore a small shift in the demand for housing, depending on the elasticity of demand, can raise the housing prices substantially.
In reality supply and demand for housing are affected in addition to the market forces, also by macroeconomic conditions as well as government policies. Taking to consideration that house purchases are mainly financed by financial intermediaries, and given the household’s budget constraint, a change in lending rates by the central bank can substantially affect both demand and medium and long term supply of housing.
In addition to interest rates, overall condition of the stock markets and economy can also be an important factor in the demand for the housing. Purchasing a house above all is an investment decision. If there are more opportunities for capital gain in other sectors, it is more likely that the flow of investment be directed to a different direction than housing. On the other hand if other markets remain stagnant, and there is a trend in rise in house prices, it is more likely that the flow of investment be directed towards housing and cause a boom in the housing sector.
Apart from signs and indicators for housing bubbles, there are different economic schools of thoughts who explain bubble phenomenon in a different ways. Keynesians argue that housing market like any other market is derived by a psychology of fear and expectations. When prices are rising and people experience capital gains, they become overconfident and inject more capital into the housing market in expectation of higher capital gain. As people increase their demand, they also drive the prices higher and at the same time growing their risk exposure. Paul Krugman, who is an economics professor at Princeton University, also a writer for the New York Times, makes a parallel between housing bubbles in the US with previous market meltdowns:
In parts of the country there’s a speculative fever among people who
shouldn’t be speculators that seem all too familiar from past bubbles—the
shoeshine boys with stock tips in the 1920’s, the beer-and-pizza joints
showing CNBC, not ESPN, on the TV sets in the 1990s. (New York Times, 5.27.05)
Further, similar to stock market bubble of 1990’s Krugman identifies the expectation of capital gain as the main reason for housing bubbles:
So when people become willing to spend more on houses, say because of a
fall in mortgage rates, some houses get built, but the prices of existing
houses also go up. And if people think prices will continue to rise, they
become willing to spend even more, driving prices still higher, and so
on…prices will keep rising rapidly, generating big capital gains. That’s
pretty much the definition of a bubble.(New York Times, 8.8.05)
On the other hand, Austrian economic school of thoughts takes the supply side view and blames government’s monetary policy as a cause for oversupply in the housing market. It argues that the application of monetary policy and lowering of interest rates by government and central banks that are intended to boost the economy and increase the capital expenditure in order to stimulate consumption and output, makes it too easy for households to enter the housing market. Based on this theory, as a result of monetary policy, commercial banks due to their increased reserves are able to provide more mortgages on easier terms. As more funds are directed towards the housing market, too many houses are built which results in too many recourses being wasted in building unneeded buildings. In this school of thought housing bubbles are seen as an example of credit bubble, since property owners generally use borrowed money to purchase property. Bursting housing bubble in addition to loss of property value causes unemployment in the construction sector as well as other related service industries. This chart illustrates how employment in construction sector has been affected during past recessions in U.S.
The post Keynesian theory on the other hand takes the demand side view and argues that with the rise of real estate prices, property owners feel richer and are more likely to borrow against their homes for consumption or to speculate further in the property market with borrowed money. After the bubble bursts, property values declines while their level of debt remains intact. The aggregate effect of the inability of borrowers to meet their obligations creates pressure on lending institution and the whole economy. Therefore one indication of a housing bubble being created is a surge in household’s liabilities or debt to income ratio. Below is an illustration of the trend of debt level in U.S.
Past & Present Real Estate Bubbles
According to an IMF report published in January 0f 2002 on 1990’s Asian housing crisis, which sent shock waves to financial markets around the world, liberalization of financial institutions and ease of flow of credit has been identified as main causes for creation of financial cycles which in turn have contributed to inflation in housing markets leading up to bubble creations:
The 7th Annual Demographia International Housing Affordability Survey which was published in 2011, has rated housing affordability in major metropolitan areas in Australia, Canada, Ireland, New Zealand, United Kingdom, United States and China (Hong Kong). Based on affordability measures, it is believed that at the present time there are perhaps several housing bubbles in the making. By a quick review of the data provided in this bulletin, it is not difficult to observe a decline in affordability indices as a result of disproportional and constant hike in real estate prices in some of these metropolitan areas. This report places Vancouver BC only after Hong Kong as the most unaffordable cities and also Toronto and Montreal among the severely unaffordable markets.
Analysis of the current housing market data in Canada
By a brief analysis of the available data in the Canadian housing market, especially in the larger metropolitan areas, base on price indices, affordability measures as well as a broader look at macroeconomic conditions, it is possible to come to the following conclusions:
o Prices of housing stocks have been rising disproportionate to the overall inflation rates.
o Price to income ratio of housing stock has been on the rise since 2001, except for a short decline from 2008 to2009, it has been increasing again since 2009.
o Price to rent ratio in major Canadian metropolitan cities with the exception of the period from 2008 to 2009, have steadily been rising since 2001 to the present time and now stand at a record level of close to 5.5.
o A report recently released in the media revealed that the level of household debt in Canada which has been rising since 1999 now stands at its record level. According to this report, debt to income ratio in Canada on average has now risen to close to150% in 2011.
o Housing debt to equity ratio in Canada have risen mainly due to favorable interest rates and the steady rise of property prices:
"There is understandable concern about the rapid rise in borrowing, and the buoyant housing market in particular, that has pushed Canadian household debt leverage to new records," said Warren Jestin, Chief Economist, Scotiabank
o Bank of Canada in risk to the outlook section of its 2011 Monetary Policy Report emphasizes on the risk of consumer’s over spending and that a reduction in real estate prices can negatively affect the Canadian economic growth:
“With household expenditures in Canada significantly above their historical
average as a share of GDP, growth in household spending might
decelerate more rapidly than is currently anticipated. Relatedly, if there
were a sudden weakening in the Canadian housing sector, it could have
sizable spillover effects on other areas of the economy, such as consumption,
given the high debt loads of some Canadians.”
Assessments and conclusion
According to CHMC 2010 reports, one fifth of the 2009 total Canadian GDP was comprised of housing sector and its related trades. Bank of Canada through its monetary policy has been effectively involved in Canadian economy for most of the recent history. An expansionary monetary policy by the Bank of Canada intended to boost the economy and to cap unemployment makes plenty of credit available at low cost. Availability of low cost credit encourages potential home buyers to enter the market. This increases the demand for housing which will push the prices up. In addition to a boost in housing market it also creates a boost in construction jobs and employment in related industries. Low interest rates combined with expectations for capital gain in the absence of alternative profitable investment options draw more households as well as speculators in to the housing market and drive the housing prices up irrationally. Low interest rates also encourage existing home owners to borrow against their home equities to spend on consumption goods or to further invest in lucrative housing markets. While interest rates are kept low, we may see slight economic growth and a decline in unemployment rates due to a rallying housing sector. Incomparable capital gain opportunities combined with preferable tax treatment by the government on capital gain on the real estate attract further recourses from less profitable industries and causes further unemployment and loss of productivity as well as further inflation (state of inflated housing bubble). At this stage a slight increase in interest rates or some bad market news can potentially cool the housing market off and bring the prices down or so called burst the housing bubble. As a result, high leveraged households faced with a negative debt to equity ratio are unable or unwilling to meet their obligations. In addition to a rapid rise in unemployment in housing related service industries, the aggregate effect of mortgage defaults creates further problems for the banks and can lead to an overall economic slowdown. A condition when due to reduction in output, inflation and unemployment occur at the same time.
Whether or not a housing bubble is forming in major Canada’s metropolitan areas is perhaps subject to a more thorough investigation. One thing however is clear that all primary preconditions for a housing bubble are currently present in Canadian housing markets. This, further suggests that if timely and proper measures are not taken by the Bank of Canada, it could burst in a foreseeable future.
List of sources
Bank of Canada Monetary Policy Report January 2011
IMF working paper, Lending Booms, housing bubbles and Asian crisis January 2002C
New York Times 5.27.2005, 8.8.2005
http://en.wikipedia.org/wiki/Economic_bubble
http://www.cmhc-schl.gc.ca
http://canadabubble.com/charts/
http://www.demographia.com/
http://www.scotiacapital.com/
http://www.statcan.gc.ca/
http://www.jeffreyteam.com/blog
Subscribe to:
Posts (Atom)