While the United States unravels it's debt death spiral, the imbalance between their economy and our economy will become much more noticeable. The U.S. has had several years now of real economic stagnation and the citizens have had to deleverage a significant amount. The result?
GM is moving production to Tennessee, where the average wage will be $14 per hour compared with $32 per hour in Oshawa. As much as some commentators want to label Dutch disease due to resource production as the cause, even if the dollar were at US80¢, a 20% decrease, the wage bill in Canadian would still be the equivalent of nearly $26 per hour before benefits, surely not low enough to stave off the job losses.All of it makes sense except the last portion. It is not the cumulative effects of the 'great recession' which leads to lower wages and lower housing values, it was the cumulative effect of bursting bubbles which sets the stage for lower wages due to lower housing costs which has resulted in the 'great recession'. We talk about recessions like we do about weather, as if it was inevitable and an act of God. It wasn't, it was an act of us, not identifying dangerous over-leveraged bubbles. In Canada now, we are repeating this recent history.
Turning back to wages, $14 per hour doesn’t sound like a lot. However, the median home price in Tennessee is now $145,000 (in the Oshawa-Durham region, it’s closer to $280,000) and non-transport energy costs are at historic lows. The cumulative effects of the Great Recession have ensured that it costs less to live in many parts of the U.S. than it used to.
If you were questioning it now, you shouldn't be any longer. Canada has a serious housing bubble on it's hands. It makes absolutely no sense that our prices and wages would be double that of the U.S. if manufacturing is moving there. The fact our housing bubble didn't collapse in 2008 along with the rest of the worlds has been touted as a good thing, yet now all we will discover is that our scale of value is not on the same levels as the rest of the world. We need the higher wages to pay for our higher housing costs and inflated prices which should have (but didn't) collapsed.
The service jobs these departing companies are "giving way" to were always here, and are becoming all that's left. Service jobs must serve somebody, they must serve somebody with wealth. You can not have a population servicing each other all around. Somebody must be providing the wealth to be serviced in the first place.
Just as the U.S. (and us) were bleeding jobs to the third world due to the lower wages there, the 'new third world' in the U.S. (and temporary foreign workers) will cause many of our high paying jobs here to bleed back down there. This has nothing to do with dutch disease, instead it is a direct and obvious result of the massively inflated bubbles sitting in economies world-wide. There is a very large imbalance between those economies that are already well into the global deflation and those (such as Canada) which believed they had avoided it through accounting tricks.
It is this imbalance which provides the context for Mark Carney's interest rate dilemma. It really is a catch-22 for us. Raising interest rates while that act in itself wouldn't be fatal to the housing market and would relieve upward pressure, would be fatal to trade with the U.S. and that would then come back around to damage incomes and then of course mortgage payments get missed, and the housing problem becomes front and center. If we leave interest rates low, we further inflate our housing bubble and the more it inflates the harder the crash is going to be when it comes. I still maintain that Canada is banking on the BRIC nations for trade should an interest rate rise happen.
Somehow we've gotten it in our heads that property and real estate not only is a storage for wealth, but somehow generates wealth. It's similar to the idea that somehow trading electronic signals generates wealth, it doesn't. All this does is create speculative bubbles, it's gambling and sooner or later free market forces will normalize the values of these bubbled assets and those left holding the bag pay the cost. Real wealth has to come from real production and if there is no production to account for the increase in wealth you can surely bet you're in bubble territory.
We should be taking note when manufacturing in the U.S. is offering half the wages we are that our economy is completely over-valued and this is a recipe for economic disaster.
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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading.