Windsor and Detroit: What’s the Difference?

Detroit has declared bankruptcy. The images and descriptions of the city evoke a wretched ghetto. Meanwhile, if you cross the border to Windsor, Ontario you find a relatively nice place.

Both cities have economies heavily invested in automobile manufacturing. Both cities also have various welfare systems available. They are both rife with municipal regulations. Canadian and American cultures are fairly similar.

So what’s the big difference?

Detroit’s bankruptcy filing lists about $18-20 billion worth of debt. Even if you low-ball it, this amounts to debt of about $26,000 for everyone in Detroit. This is a city where the average per capita income is a pathetic $14,700 per year.

Windsor’s debt is around $115 million. They have about a third of Detroit’s population. Windsor’s debt per capita is $545 only.

Debt is not bad. The key is to use the debt for something productive. Since all government spending is inherently wasteful, cities should spend as little as possible and minimize their debts. Otherwise they will become Detroit.

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Yield on Canadian Government Bonds Rising

About three weeks ago, I speculated that the bottom on interest rates had come and gone, and interest rates were rising.

This now seems more and more certain. Because of Abenomics, yields on Japanese government bonds have shot up and set off an ugly chain reaction. Bond prices are falling and yields are rising. Rather quickly, I might add.

Take a look at these charts of yields for selected Canadian government bonds. Pay extra attention to the longer-term bonds.

First, marketable bonds. The average yield on 1-3 year bonds:

Government of Canada marketable bonds - average yield - 1 to 3 year

Now 3-to-5 year bonds:

Government of Canada marketable bonds - average yield - 3 to 5 year

5-10 year:

Government of Canada marketable bonds - average yield - 5 to 10 year

Here’s the average for 10+ year bonds:

Government of Canada marketable bonds - average yield - over 10 years

Now the benchmark bonds.

First, the 2-year:

Government of Canada benchmark bond yields - 2 year

The 3-year:

Government of Canada benchmark bond yields - 3 year

The 5-year:

Government of Canada benchmark bond yields - 5 year

The 7-year:

Government of Canada benchmark bond yields - 7 year

The 10-year:

Government of Canada benchmark bond yields - 10 year

Long-term benchmark bonds:

Government of Canada benchmark bond yields - long-term

Here’s the long-term real return bond yield:

Real return bond - long term

You can draw your own conclusions from this data, I’m sure.

Nothing can save Europe.

There is no way that Europe can bail itself out. This guy makes the case with four facts:

FACT #1: Europe’s entire banking system is leveraged at 25 to 1.

This is nearly two times the US’s leverage levels. With this amount of leverage you only need a 4% drop in asset prices to wipe out ALL equity.These are literally borderline-Lehman levels of leverage (Lehman was 30 to 1).

Mind you, these leverage levels are based on asset values the banks claimare accurate. Real leverage levels are in fact likely much MUCH higher.

KA-BOOM.

FACT #2: European Financial Corporations are collectively sitting on debt equal to 148% of TOTAL EU GDP.

Yes, financial firms’ debt levels in Europe exceed Europe’s ENTIRE GDP. These are just the financial firms. We’re not even bothering to mention non-financial corporate debt, household debt, sovereign debt, etc.

Also remember, collectively, the EU is the largest economy in the world (north of $16 trillion). So we’re talking about over $23 TRILLION in debt sitting on European financials’ balance sheets.

Oh, I almost forgot, this data point only includes “on balance sheet” debt. We’re totally ignoring off-balance sheet debt, derivatives, etc. So REAL financial corporate debt is much MUCH higher.

KA-BOOM.

FACT #3: European banks need to roll over between 15% and 50% of their total debt by the end of 2012.

That’s correct, European banks will have to roll over HUGE quantities of their debt before the end of 2012. Mind you, we’re only talking aboutmaturing debt. We’re not even considering NEW debt or equity these banks will have to issue to raise capital.

Considering that even the “rock solid” German banks need to raise over $140 BILLION in new capital alone, we’re talking about a TON of debt issuance coming out of Europe’s banks in the next 14 months.

And this is happening in an environment prone to riots, bank runs, and failed bond auctions (Germany just had a failed bond auction yesterday).

KA-BOOM

FACT #4: In order to meet current unfunded liabilities (pensions, healthcare, etc) without defaulting or cutting benefits, the average EU nation would need to have OVER 400% of its current GDP sitting in a bank account collecting interest.

This last data point comes from Jagadeesh Gokhale, Senior Fellow at the Cato Institute, former consultant to the US Treasury, and former Senior Economic Advisor to the Federal Reserve Bank of Cleveland.

This is a guy who’s worked at a very high level on the inside studying sovereign finance, which makes this fact all the more disturbing. And he knew this as far back as January 2009!!!

Folks, the EFSF, the bailouts, China coming to the rescue… all of that stuff is 100% pointless in the grand scheme of things. Europe’s ENTIRE banking system (with few exceptions) is insolvent. Numerous entire European COUNTRIES are insolvent. Even the more “rock solid” countries such as Germany (who is supposed to save Europe apparently) have REAL Debt to GDP ratios of over 200% and STILL HAVEN’T RECAPITALIZED THEIR BANKS.

If Europe is to get out of this disaster, the answer is not bailouts. The mammoth debt must be liquidated. Big banks who made bad loans to profligate governments need to take their losses and go bankrupt. Anyone who is holding out, expecting some kind of economic voodoo miracle, needs to take their head out of the sand and recognize that solving the European debt crisis with bailouts is impossible.

— Read more at Phoenix Capital Research — 

Bank of Canada — engine of too much debt — warns about too much debt.

The Bank of Canada is warning Canadians about too much debt.

Experience suggests a long period of very low interest rates may be associated with excessive credit creation and undue risk-taking as investors seek higher returns, leading to the underpricing of risk and unsustainable increases in asset prices.

This is a remarkable statement, really — it reveals that the Bank of Canada’s economists either don’t know economics, or they pretend not to know. The issue should not be about how low interest rates “may” be associated with excessive credit and excessive risk. Rather, there is a direct causal relationship here.

Mises wrote:

If there is credit expansion [by the central bank], it must necessarily lower the rate of interest. If the banks are to find borrowers for additional credit, they must lower the rate of interest or lower the credit qualifications of would-be borrowers. Because all those who wanted loans at the previous rate of interest had gotten them, the banks must either offer loans at a lower interest rate or include in the class of businesses to whom loans are granted at the previous rate less-promising businesses, people of lower credit quality.

This is not rocket science. It is not a complex relationship to understand at all — if interest rates rise, there will be fewer risky loans than there would be otherwise; if interest rates falls, there will be more risky loans than there would be otherwise.

But if you have a PhD in economics, like our ex-Goldman central planner at the BoC, Mark Carney, you probably are incapable of understanding this, and would say something inane like, “In light of the high level of indebtedness of Canadian households, some caution in banks’ lending to households is warranted.”

Carney does not realize that lending standards are directly related to the ease with which credit is made available. Talk is cheap. If Carney jacked up interest rates to 10% tomorrow, that would have a dramatic impact on lending standards, much more so than his oracular admonitions about risky lending.

On the other hand, what would happen if Carney decided the economy was too weak, and he cut interest rates down to zero? Then we can rightly expect that more loans would be made to those businesses and individuals would have been previously deemed unworthy of credit. 

A lot of Canadians like to think we breezed through the financial crisis without too much pain and suffering — “our banks didn’t need a bailout,” and that we are leading the way out of economic ruin.

All is not well, however. The mammoth growth of consumer debt in this country, the worst of all OECD countries at about 140% debt-to-asset levels, is a very serious problem . With our housing market still in bubble territory, unemployment relatively low, and implausibly low interest rates, Canadians have been piling on more and more debt.

It’s so bad, even the banks — you know, the ones making all these questionable loans to Canadians mired in debt — are raising concerns. You have to acknowledge this is a bit rich — but don’t worry big Canadian banks — I am sure you can keep making your risky loans and if (when) things turn ugly, someone will bail you out.

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