By Travis Fast
I encourage everyone to watch this clip of David Dodge. In his estimation commodity prices will remain high and as such fuel higher incomes which taken together with the paltry one cent reduction in the GST will be sufficient to keep domestic demand growing strong.
There are two bets here, both of which are far from a sure thing.
I am not convinced that high commodity prices are a sure thing nor am I convinced that even at present levels they will be sufficient to drive enough investment to pick up all the slack created by a high dollar and declining exports to the US.
The more likely scenario is that the recession in the US will drive down commodity prices along side declining demand for Canadian exports and there will thus be a double demand shock to the Canadian economy. That leaves the one cent decrease in the GST to do all the heavy demand lifting.
I do not know about you, but the 1 dollar savings per 100 is not a sufficient inducement for me to rack up more debt on my credit cards. Nor is the ¼ point reduction of interest rate any great inducement either. So that leaves big durable ticket items like cars and houses.
What Dodge must think is that decreased interest rates in tandem with a diminished GST will be sufficient to keep demand for housing and complimentary durables chugging along. The problem is that housing mortgages are not just determined by interest rates but also by credit worthiness. How many more credit worthy buyers are out there especially given the cost of housing in the strongest markets? I think the supply of worthy borrowers has almost run its course.
So unless a lot of hot money starts flowing in and credit conditions are relaxed—i.e., the conditions necessary to create a bubble—the real estate party might just be over in Canada too. But who knows? The Americans seem determined to open the spigots and let the easy money flow and thereby re-inflate the bubble. This can only prolong the inevitable fall.
Relentlessly Progressive Political Economy 