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Watching the Economy by Clint Burdett CMC® FIMC

December 2011

Mark Carney, Governor of the Bank of Canada
warns of trying times ahead. (speech PDF)

In our largest trading partner, households are undergoing a long process of balance-sheet repair. Partly as a consequence, American demand for Canadian exports is $30 billion lower than normal.

In Europe, a renewed crisis is underway. An increasing number of countries are being forced to pay unsustainable rates on their borrowings. With a vicious deleveraging process taking hold in its banking sector, the euro area is sinking into recession. Given ties of trade, finance and confidence, the rest of the world is beginning to feel the effects.

Most fundamentally, current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over. The direction may be clear, but the magnitude and abruptness of the process are not. It could be long and orderly or it could be sharp and chaotic. How we manage it will do much to determine our relative prosperity.

Two charts from his speech inform us about the political debates in 2012 (but we already know this):

First, how the US has performed since Nov 2008 relative to its other recoveries, in line with modern the five modern financial crisises since Great Depression (red v blue line). We doing ok, or better said, as well as can be expected.

Bank of Canda chart recovery since Great Depression
Click chart to go to Bank of Canada source

Second, how households versus government has performed since 2007 managing debt. Oh dear ...

Remember as GDP growth "stalls" or decreases, government debt as % of GDP will increase, even with normal borrowing. Two proven ways to decrease the debt burden: increase GDP or inflate currency to deflate the debt.

Individual v Government % change in debt 2007 - 2010
Click chart to go to Bank of Canada source

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