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Friday, April 10, 2015

Harper: Economy is out of his realm of competence

Why Canada’s economy is headed off the cliff

Editor’s Note: When we think of economic crisis, we think Greece. And maybe, closer to home, the collapse of Lehman Brothers or Florida’s overleveraged housing market. But rarely do our neighbors to the north come immediately to mind.

Just back from Canada, Vikram Mansharamani argues that they should. Mansharamani, a lecturer in the Program on Ethics, Politics & Economics at Yale University and a senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, is concerned about rising home prices and falling oil prices. The author of “Boombustology: Spotting Financial Bubbles Before They Burst,” he’s also written for Making Sen$e about random class admissions at Yale.
A version of today’s column first appeared on his website, where you can subscribe to his mailing list or read his weekly commentary. Follow him @mansharamani.

— Simone Pathe, Making Sen$e Editor

Canada is in the midst of an unprecedented housing boom that seems likely to bust. I was recently in Canada and noticed a schizophrenic oscillation between housing exuberance and oil-price despair. What did it mean for the Canadian economy’s outlook? Upon returning to the U.S., I did some research. What I found leads me to the conclusion that Canada is now among the most vulnerable large economies in the world. Here’s why.

First, household credit. The seemingly conservative Canadian population has been voraciously consuming debt at a breakneck pace. Total household debt (C$1.82 trillion) now exceeds GDP (C$1.6 trillion), approximately C$1.3 trillion of which was for residential mortgages. Further, household debt is now greater than 160 percent of disposable income – meaning it would take about 20 months for a family to pay off its debt if interest rates were 0 percent and they spent 100 percent of their disposable income to do so. Uh oh! The consumer clearly seems stretched, so much so that McKinsey recently suggested Canadian financial instability driven by a rapid consumer slowdown was not unlikely. By the way, that’s exactly what happened here in the United States when the debt music stopped and there weren’t enough consumer chairs to go around.

READ MORE: http://www.pbs.org/newshour/making-sense/why-canadas-economy-may-be-headed-off-the-cliff/

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