The Phaserl


The U.S. Economy Is About to Face Its Biggest Test in Years

by Justin Spittler, Casey Research:

Investors beware: the U.S. economy is in for a huge shock.

This shock won’t start with auto loans…student loans…or even U.S. corporate debt.

It will begin north of the 49th parallel.

That’s right. Canada will soon put the U.S. economy to the test.

Regular readers know where I’m headed with this.

In short, Canada has a gigantic housing bubble on its hands. And it looks like that bubble is finally about to burst.

When it does, Canada will have serious problems. It could even have a recession or a full-fledged banking crisis.

• And yet, you’re probably not too worried about this…

That’s because, if you’re like most Dispatch readers, you live in the United States…not Canada.

This makes it easy to assume that Canada’s housing crisis isn’t your problem. But that’s a very dangerous assumption.

You see, financial crises almost never stay in one place. Instead, they move from country to country like a plague of locusts.

Investors learned this the hard way in 2007 when a U.S. housing crisis turned into a global financial crisis almost overnight. By the time the dust settled, investors from Tokyo to London were sitting on huge losses.

I’m reminding you of this because Canada’s housing crisis could trigger the next global economic meltdown.

I’ll show you why in a minute. But let’s start by looking at why Canada’s economy could unravel soon.

• Housing is the heart of Canada’s economy…

Real estate and related financial services industries account for almost a quarter of Canada’s economic output. That’s the highest level since at least the 1960s.

In British Columbia, real estate, construction, and related industries make up 40% of the economy.

But housing isn’t just a key pillar of Canada’s economy. It’s also about the only thing holding up Canada’s economy right now.

According to Bloomberg Markets, Canada’s economy would have actually shrunk in February were it not for the country’s red-hot housing market.

• Canada’s housing boom has also lifted other parts of the economy…

According to the Toronto-Dominion Bank, the housing “wealth effect” has driven one-fifth of Canada’s consumer spending since 2001.

In other words, rising housing prices have made Canadians feel richer. And that’s led them to spend more money on other things.

That may seem like a good thing. But you have to understand something about the wealth effect. It slices both ways.

This means Canadians are going to feel less rich when housing prices inevitably crash. They’re going to eat out less…visit the mall less often…and take fewer vacations.

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