Friday, December 22, 2006

regional economies, national policies

I've been thinking of the different economies in Canada, and the universality of interest rates. RBC Economics has a report on the economies that reveals a polytomous disparity in those economies, yet one will be afforded the relatively identical interest rate whether in Calgary, Toronto, or Corner Brook, NFLD. The Bank of Canada sets the benchmark, and the chartered banks and credit unions tack on their percentage.

As the larger economy(s) of Ontario (and Quebec) contracts, the BoC hints at cutting rates, but as they do so, they stand to further stimulate the hot economies of Alberta and BC. Being that the BC economy is largely driven by construction (as of late), will this stimulate more building (and buying)? Will this drive RE prices up further in BC?, or has the limit been reached (read - surpassed)?

But the BC economy seems to be feeding on itself. As lumber, oil and gas, and metals (copper) see less demand, how can that idea be supported? An economy built on construction (no pun intended). What could possibly sustain it - other than construction itself? Greater and bigger fools?

I think that things have become so surreal, that we cannot even guess at what will transpire. It seems to me that as the central government tries to maintain equilibrium, it creates a greater imbalance. Order out of chaos, and order begets chaos.

So what is the answer? Regional interest rates? How could that be engineered? Maintained? Sublimation of the nation into distinct regional societies?

There is a growing trend away from globalization/conglomeration, micro-credit is filling the void left by larger institutions, large corporations are being riven by anti-trust type rulings, citizens are turning inward, and reclaiming community, federal gov't off-loads responsibilities to provincial gov'ts, which in turn, off-load responsibilities to municipal gov'ts, which in turn, off-load to the denizens of the cities.

For those familiar with the Peter Principle (The implication of the Peter Principle for an organization as a whole is that the organization is prone to collapse when the number of incompetents among its ranks reaches a critical mass, resulting in the inability of the organization to perform its functions.), it would seem that we, as a society, have reached a critical mass.

The only conclusion that I can reach is that "the system" is primed for collapse.



Anonymous said...

The BOC's mandate is consumer price stability. Now of course due to regional variations the inflation rate varies in different parts of the country. One big reason is that the purchase cost of housing is a component of the CPI (which I disagree with).

Thus interest rate policy, which is aimed at national price stability, will be too cold for part of the country and too hot for the rest.

I think the BOC really has to stick with consumer price stability. Current fiscal policy (equalization and social benefits) evens out regional variations to some extent. Using interest rate policy to target asset bubbles would be nonoptimal for the economy as a whole. Tax policy could be much better targetted to discourage asset speculation (it isn't due to lack of polical will), and in the long run Mr. Market will take care of it anyway.

Tulip Mania said...

Soli:” The only conclusion that I can reach is that "the system" is primed for collapse.”

The regional disparity issue is as old as Canada. And during the “unite Europe” debate, those who were opposed to uniting Europe pointed out the one size fits all monetary policy would destroy the regional economies.

It has in fact created problems, the low interest rates was a catalyst in creating a bubble in Spain, but not in Germany. So why a bubble in UK and Spain but not in Germany?

I think that interest alone cannot create the bubble; artificially low interest rates have to meet up with other factors.

The bubble might yet be pumped up a bit more, but as I always say:

Tick Tock, Tick Tock.

Anonymous said...

So why a bubble in UK and Spain but not in Germany?

First of all Germany does not have the social bias toward ownership that the English-speaking countries have. So the Germans just won't pay to buy at prices out of line with rents.

Second I think the fiscal burdens of reunification in Germany took a lot of cash off the table which I think deadened speculation.

I think the launch for the bubble in Spain came with the big drop in interest rates when the peseta was pegged to the Euro (this was before the Euro actually came into circulation). And of course there was active participation by the bubblemasters, the Brits.

Tulip Mania said...

I think I have it:

E+ A+ US+L=B

English Culture
Asian Culture
Usual suspect’s hype
Low interest rates

And therefore

B(t) = BB

Bubble x time = bubble burst

Freako said...

"One big reason is that the purchase cost of housing is a component of the CPI (which I disagree with)."

But CPI excludes the land value, so the impact of RE bubble on CPI isn't as much. I am fairly sure that we had a debate about the fact that CPI calculated ownership costs actually dropped during this bubble. But perhaps my memory fails me. In either case, RE prices as measured by REGV benchmark ARE NOT part of Canadian CPI calculations.

rentah said...

freako: your posts about density over the months have been insightful, and I've found them helpful as they added that variable to my informal 'equation'.
Have you discussed the recent news about westside possibly being rezoned to multiple dwellings per plot? If you have, refer me to the thread, please.