...against fictions and other tall tales

Friday, 22 March 2013

Is there a trade-off between employment and the household sector financial balance?

As Canadian policymakers try to get the household sector out of its financial deficit position, it's important to keep in mind that households are the sector that has been doing a lot of the heavy lifting in terms of boosting demand in recent decades.

Policymakers can attempt to get households to borrow less, but unless they can think of a way for another sector to offset the resulting reduced demand, it seems unlikely that the unemployment rate will remain at current low levels once households decide to reduce their net borrowing.

I posted these charts before but it's worth posting them again:

As household net borrowing increases, the rate of unemployment declines

A closer view of recent years

7 comments:

  1. No, of course not. Both trend lines follow one another...

    The coming export boom will take care of the rest. Canadian oil, lumber...

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    1. Anon: That's the point. The chart shows that as the HH sector's financial balance deteriorates, the unemployment rate improves. A boom in exports could help to offset any possible return to a HH net lending position, but it's not clear that this will occur.

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    2. So you don't think Canada can eliminate its trade deficit??

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    3. Well, to the extent that the government budget gets balanced in a manner that reduces private sector income and reduces imports by a sufficient amount, it's quite possible that Canada could return to a positive current account balance. I certainly don't deny that possibility.

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  2. Excellent post as always.  I don't know where export demand is to come from. Not from Europe.  Warren Mosler recently posted encouraging growth projections for the US, but was at pains to note that these were pre- sequestration, which could wipe out half the projected growth.  The YEN is declining in value. I guess China will still need some resources, but the natural resource bubble is bursting.

    So if I am reading you correctly, Circuit, we might have a trade surplus if we contracted the economy sufficiently?

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    Replies
    1. Thanks Tom. Apologies for the delay. I think significant export growth is unlikely. Current Canadian exports are overwhelmingly (over 80%) directed toward slow growth countries such as the US, UK, Italy, Japan. I can't think of of a scenario where growth in any of these nations could lead to an export boom anytime soon.

      As for the current account balance, most forecasts show it remaining negative for the next few years. I suppose a rebalancing *could* happen with further deceleration in consumer spending combined with reduced investment and increased austerity at both levels of governments. Though I think this outcome is unlikely. That said, in terms of growth for Canada, increased exports should provide a boost amidst the expected slowdown in household and government spending.

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  3. Circuit, it official: you must run for public office!! You are among the few who understand the unemployment problem facing Canada. Any of the dominant parties would welcome someone of your calibre in their ranks.

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