[Canada] Canadian Politics Redux

[Sheilbh]

Sure.  But again I don't think your assumption that risk assessment does not account for the possiblity of changes in the macro environment is warranted.  To me it's self evident in the bond market; longer duration bonds carry a higher yield because there is more uncertainty.

I'm not making that assumption - my point is just that it's based on a projection, reality may be different and that risks are different (and priced differently) through time. I don't really understand how this is controversial. 

Youo might be pricing in certain risks that never materialise but absolutely blind to ones that emerge over the life of a loan - or actually the risk is a dodgy takeover your bank leadership is planning but you can't know about it because it's market sensitive etc.

There's some cases where there are risky loans that are not prudent to give - that's often the case in a bubble. But I don't think you can just apply hindsight from a loan failing back to the point it was taken/issued.

[Admiral Yi]

Well, as I understand it it's not based on a projection i.e. growth will be exactly 2.2% a year for the next 30 years and inflation will be exactly 3.1% but rather a frequency distribution of different future paths.  Growth will soar to 20%/yr with probabilty X or 90% of the human species will be wiped out with probability Y.

You seem to be touching on the notion of black swans.  As an aside, I think the people who ascribe the subprime to a black swan event are full of shit.  It was based on faulty pricing of the asset class.

Can you name a legitimate black swan in economic history?  Nothing comes to my mind.

[Barrister]

I accept the premise that the scale and nature of a nation's private debt burden could be such that prudent management of a nation's financial system requires some sort of intervention. I think the argument for it would be fairly technical in nature, and have yet to be persuaded that it's a major problem in Canada.

I think adding consumer debt + corporate debt + public debt to arrive at some total scary number (which is apparently what Poilievre is doing?) is disingenuous, runs the risk of derailing the substance of the debate, and creates a real risk of generating misapplied policy to generate headlines to address a chimerical problem. The nature, associated risk, and possible remedies for each of those debt numbers are very different and require separate policy IMO.

Certainly, "debt bad" doesn't inspire confidence in the Conservatives fiscal acumen or responsibility. It comes across as a rationalization for cutting spending on ideological grounds.

So certainly you don't have to watch any video you don't want to watch, but it's kind of difficult to engage with you talking about a video you won't watch. 

Yes, Poilievre's video gives a combined public plus private number for debt, but there's nothing disingenuous about it - it is VERY clearly labelled that way.

And again - the video certainly doesn't say "debt bad", and there's hardly some "rationalization for cutting spending on ideological grounds" other than balanced budgets are good.

[Barrister]

Watched the video.  Didn't see any obvious lies in there.  As a rabid deficit fighter I am pleased.  As a realist I don't think it's a winning political formula.  There is no political constituency for reducing spending and raising taxes.

The rise in personal debt could also explain the rise in housing prices relative to income.

Do you think it is the role of government to reduce private business debt?  Or to put it another way is it a valid argument to say that all debt, including debt business take on, should be reduced?

And if so what does that do to research and innovation in the private sector?

I mean - yes.  private indebtedness can definitely act as a serious drag on the economy, in particular once interest rates rise, and that is something governments should be concerned about and make policy decisions to try and limit.

I didn't think this was a particularly controversial statement.

[Jacob]

I disagree.  The logic of aggregating the numbers is that they are all repaid out of the same pool of individual income.  In the case of household debt the relationship is direct.  In the case of government debt the relationship is at one remove, since government debt is financed by taxes, which are paid by households out of individual income.  In the case business debt there is another remove because that debt is financed out of revenue, which is derived from household consumption.

This last bit is only true if you assume that there is no such thing as foreign trade and no value increase from B2B transactions.

[Admiral Yi]

This last bit is only true if you assume that there is no such thing as foreign trade and no value increase from B2B transactions.

Concede the exports part, but even B2B relies on a consumer at point in the chain.

[Sheilbh]

Well, as I understand it it's not based on a projection i.e. growth will be exactly 2.2% a year for the next 30 years and inflation will be exactly 3.1% but rather a frequency distribution of different future paths.  Growth will soar to 20%/yr with probabilty X or 90% of the human species will be wiped out with probability Y.

You seem to be touching on the notion of black swans.  As an aside, I think the people who ascribe the subprime to a black swan event are full of shit.  It was based on faulty pricing of the asset class.

Can you name a legitimate black swan in economic history?  Nothing comes to my mind.

I think we're talking past each other because I'm not thinking of black swans or anything like that.

My point is simply that taking/issuing a loan can be prudent in 2023 and a fuck up in 2028. Many possibilities can be priced into that, but not the exact ones that will happen in the next 5 years which will impact the loan.

I think you maybe made a few assumptions about what I'm thinking, so freighted "justified" with lots of meanings. I simply meant from an individual or business perspective that they think what they're spending the loan on will benefit them and that they can afford it; and from the lender's perspective that they'll get a return and it's an acceptable risk. You're justified in taking/giving it but it could go wrong.

As I say in CC's example - each individual loan taken on its own terms as a separate transaction could be justified. But aggregated either as a bank (especially with multiple lending entities in multiple locations) or an economy there could be new risks arising from them (which may in turn impact the individual loans).

I don't understand what the objection to that could be - I'm very confused what the alternative is.

[Admiral Yi]

We are talking past each other.  Cheers.

[viper37]

Do you see Trudeau (or Singh) putting out arguments with this kind of detail or statistics?

No, you do not.

Their supporters wouldn't listen, it's all witchcraft to them.

If it's not what they want to hear, it's a conspiracy theory to privatize public services.

They are both leftwing populists, while PP is a rightwing populist.  Invoking bogus stats does not change it.

[viper37]

The CBC is cancelling the New Years Eve show due to financial restraints.

I did not know the CBC had a NYE tv show. 

Oh well.  I'll be asleep.

[Josephus]

The CBC had a NYE TV show?

[crazy canuck]

Do you think it is the role of government to reduce private business debt?  Or to put it another way is it a valid argument to say that all debt, including debt business take on, should be reduced?

And if so what does that do to research and innovation in the private sector?

Not always, but it can be.

A large part of the global financial crisis which was driven by private sector debt but resulted in huge impacts on the government from having to save the banks (even if that debt wasn't always just directly taken on). To the extent the state acts as the ultimate backstop for the financial sector or guarantees any mortgages it has an interest private sector debt.

Obviously each item of debt on its own could be fully justified but, in the aggregate, a risk for the whole economy. Not sure if it's necessarily the case in Canada that there's a risk - although I believe Canada have some of the highest levels of household and corporate debt in the G20 (seem to remember an Economist piece on it). That seems to me like probably something government should be interested in - it's not necessarily bad but that it is likely a risk.

Do you see a meaningful distinction between the sort of debt that caused the sub-prime melt down and other forms of private sector debt, or based on your answer, is all private sector debt equally bad?

There is an interesting political question here regarding the role of financial regulation.  And an interesting convergence of the left and right regarding the causes of the financial crisis.  PP's piece would never venture into the questions of regulatory failures related to the crisis he discusses-that would imply the answer is a role for government and he is all about removing gate keepers.

The question for PP then is if all private sector debt is bad, how does a government that removes regulation also crack down on private sector debt?

[crazy canuck]

Watched the video.  Didn't see any obvious lies in there.  As a rabid deficit fighter I am pleased.  As a realist I don't think it's a winning political formula.  There is no political constituency for reducing spending and raising taxes.

The rise in personal debt could also explain the rise in housing prices relative to income.

Do you think it is the role of government to reduce private business debt?  Or to put it another way is it a valid argument to say that all debt, including debt business take on, should be reduced?

And if so what does that do to research and innovation in the private sector?

I mean - yes.  private indebtedness can definitely act as a serious drag on the economy, in particular once interest rates rise, and that is something governments should be concerned about and make policy decisions to try and limit.

I didn't think this was a particularly controversial statement.

No, I didn't think you did, but perhaps you could address the question of what role government has to regulate private sector debt.

[Sheilbh]

Do you see a meaningful distinction between the sort of debt that caused the sub-prime melt down and other forms of private sector debt, or based on your answer, is all private sector debt equally bad?

I think the sub-prime mortgage crisis is a part of the global financial crisis - but it is one of several moving parts, in my view. It's also not what I was thinking of when I mentioned the global financial crisis and private sector debt. But with you and Yi making that connection I think there may be a bit of a Euro-North America divide (which would make sense) - I think it's a little like the "cause" of WW1 where there'll be valid alternative interpretations forever.

I don't think private (or public) sector debt is good or bad. I think it's basically neutral and value free. I think excessive debt (private or public sector) can cause issues for the wider economy - and while from the perspective of each counterparty it may be a perfectly reasonable and rational deal, in the aggregate it could be a problem in the wider economy. Without being good or bad I think there's always risk with debt and that also it can either indicate (bubbles) or perhaps hide (stranded assets) other risks.

In the case of Canada I've read multiple pieces from different insitutions that have identified Canada as having one of the most bubble-y real estate markets, which will be debt driven. Simmilarly as I say in the G20 I think Canada has either the highest or second highest levels of household and corporate debt - the other country is Australia which suggests to me that part of that is probably raw material/extraction fuelled. Related to that I think Canada is probably more exposed to stranded asset risk than average. I don't know eough to say that there is a real risk but my general instinct is if you're at one end or the other (and Canada is) that might be an indicator. As I say I don't think it's good or bad - but in the context of fears about a real estate bubble, comparatively high levels of private sector debt (both household and corporate) and energy transition risk, it doesn't seem unreasonable to have concerns about debt levels.

Although where there is probably simple overlap is that my understanding is that Canada's economy has been growing pretty well. In that scenario I'd expect government debt to be falling as a share of GDP and hopefully monitoring the private sector for over-exuberance to try and get ahead of the fall (this is obviously impossible).

[Admiral Yi]

I remember when I was working in the IMF and the Asian debt crisis began an economist I knew made the remark that it was kind of sad because Asians were doing a good thing by funneling capital to the business sector, the implicit value judgement being that borrowing for the sake of creating more goods and services and more jobs a good thing relative to the value of borrowing to increase the quality of your life.

This same economist also said my mom should liquidate anything she had in the Korean stock market.  I did pass the message on to my mom (she told me she had sold out a while ago) so I imagine I have participated in a kind of insider trading.