Take a moment to read Bank of Canada chief Mark Carney’s speech, Living with Low for Long. It gives some interesting perspective in terms of the macroeconomic and monetary policy side of the economy.
Export-related economies are “unsustainable” – this is a kick at China for sure:
This is an increasingly uneasy emergence. Growth strategies reliant on exports and excess national savings are unsustainable in the long term. In the near term, for many emerging economies, the limits to non-inflationary growth are approaching and the challenges of shadowing U.S. monetary policy are increasing.
US householders are still suffering:
Unfortunately, the best contemporary analogue to the Japanese zombie firms is probably the U.S. household sector. Problems with the foreclosure process, government programs and forbearance by lenders are all delaying the adjustments. Absent more aggressive restructuring, the impact of negative equity on one-quarter of U.S. homeowners will weigh on consumption for the foreseeable future.
Sensitivity of householders to rising unemployment is significant:
The Bank has conducted a partial stress-testing simulation to estimate the impact on household balance sheets of a hypothetical labour market shock. The results suggest that the rise in financial stress from a 3-percentage-point increase in the unemployment rate would double the proportion of loans that are in arrears three months or more. Owing to the declining affordability of housing and the increasingly stretched financial positions of households, the probability of a negative shock to property prices has risen as well.
Apparently if more people adhered to the following quotation, we might not have the 2008 financial crisis:
Similarly, financial institutions are responsible for ensuring that their clients can service their debts.
Makes you really wonder about who’s buying sovereign debt in countries clearly unable to pay it back.
And finally, when rates rise, they may rise very quickly, leading to:
More broadly, market participants should resist complacency and constantly reassess risks. Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.
An interesting speech. Nothing concrete, but you can infer what the Bank of Canada is guessing their tea leaves indicate.