Saturday, June 22, 2013

Krugman: "I believe in the debt overhang story enough to be worried"

Paul Krugman:
Canadian household debt has kept rising even as the US level has declined:
So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

I’m not exactly making a prediction here; but I guess I believe in the debt overhang story enough to be worried, and Canada is certainly an important test case.

Okay... And then from the Conference Board of Canada, there's this

and this

Think of the world in terms of cost.

The growth of debt is a cost. If that cost goes high enough, it breaks the economy.

Income inequality is a cost that drains spending power from the 99%. If income inequality is a little higher in the US than Canada, the cost is higher, too.

Combine the higher cost of debt in the US with the higher cost of inequality in the US, and you can see why the US economy broke and the Canadian economy didn't.

Can we put it all into a formula and predict the day Canada's economy breaks? I wouldn't even try. But I'll tell you this: The object is not to get just as close as we possibly can to the breaking point.

Our economy was good in the 1960s. That's the target. We ought to shoot for a level of debt like we had in the 1960s, and a level of inequality like we had in the 1960s. That's the target.

It's a start.

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