Can Canada regain its lost wealth sooner than the United States? The Bank of Canada has now confirmed that we will stop losing wealth sooner - but not getting poorer isn't the same thing as getting richer. Bank of Canada Governor Mark Carney is prudent to anticipate "a long road" to recovery. The route wends its way through many cross-border byways, foremost among them the rising unemployment in the United States, the long decline in U.S. home prices and the reckless rise in U.S. national debt.
In their 2008 analysis of financial meltdowns around the world since the Second World War, economists Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard University) concluded that the average meltdown produces abnormally high rates of unemployment for four years, causes house price declines of 35 per cent and results in a near doubling (increases of more than 80 per cent) of national debt.
By these criteria, the U.S. recession already approaches this "average" - but with perhaps the worst still to come. The unemployment rate has some room to rise, perhaps to 11.5 per cent, from the current 9.5 per cent. (The Reinhart-Rogoff analysis indicates that the average meltdown increases jobless rates by seven percentage points; the pre-recession U.S. rate was 4.5 per cent.) The Houston-based Financial Forecast Center, an independent economic research company, anticipates that unemployment will hit 11.2 per cent by December.
An official unemployment rate of 12 per cent actually means an unofficial unemployment rate of 19 per cent or more. (The U.S. Bureau of Labour Statistics says that 7 per cent of the work force, which it defines as "discouraged," has stopped looking for work; it does not count these people as unemployed.) Using only the nominal unemployment rate, a mass of people equal to the combined populations of New York, Los Angeles and Chicago - 14.7 million people - are already without work.
House prices are probably already at the bottom of the price trough or close to it - with a 32.5-per-cent average decline since they peaked in mid-2006. According to Yale University economist Robert Shiller (co-founder of the Case-Shiller Index of U.S. house prices), prices have fallen further than they did in the Depression and could remain depressed for years to come. They could, indeed, fall further.
Why so pessimistic a prediction? Prof. Shiller says house prices always return to a historic norm that hasn't changed in more than 100 years; the extraordinary house-price spiral of 2000 to 2006 was an aberration.
For people who think that it's time to buy a house as an investment, Prof. Shiller advises that they aren't a particularly good investment over long periods of time - and a risky investment over short periods of time.
"Do [inflation-adjusted]home prices have a substantial long-term uptrend?" he wrote in 2006. "The [data]suggest not. ... [U]til the recent explosion in prices, real home prices in the United States were virtually unchanged from 1890 to the late 1990s." In the exceptional boom of 2000-2006, the average U.S. house price soared by 70 per cent. The price retreat in the past two or three years has merely returned prices to 2003 levels - halfway back toward the 20th century norm.
The historic price norm apparently goes back as far as 17th century Amsterdam, he notes: "The price data shows lots of ups and downs but only the slightest hint of a [permanent]uptrend."
In Norway, house prices have risen annually by a mere 1.3 per cent since 1819. Houses, Prof. Shiller notes, are "a manufactured good," subject to depreciation - which is why you can now buy house price futures on the Chicago Mercantile Exchange to protect yourself from price turbulence ahead. (The least expensive housing over the long term? Prof. Shiller says that historically it's rental housing. In real dollars, rents have fallen by 50 per cent since 1913.)
But the most difficult barrier to economic recovery will probably be the increase in the U.S. national debt - which will double to $20-trillion (U.S.), equalling the Reinhart-Rogoff average increase in debt from financial meltdowns. The absolute amount of money is impressive. It will equal 100 per cent of GDP during the presidency of Barack Obama, assuming he remains in office for two full terms. (In the Second World War, U.S. debt reached 120 per cent of GDP.)
It's not so much the number of dollars. The United States is an extremely wealthy country, capable of making interest payments on an enormous debt. It's more the uncertainty that the spiralling debt precipitates. Already, financial markets are getting nervous - and the country's debt explosion has barely begun. In May, the White House announced that the deficit for 2009 alone would probably exceed $1.8-trillion, a sum significantly greater than Canada's entire GDP.
Mr. Obama has described this debt increase as "unsustainable" and has warned that it could cause interest rates to skyrocket. He should know. Just as Mr. Carney did last week, the President has described the path to recovery as "a long road." This is the Canadian point precisely. We're travelling the same road, perhaps to the same destination - but the United States sets the speed limit and determines the detours.