GDP, Debt, and the FIRE Sector.

To correct the abysmal dysfunction of the Canadian economy, it is necessary to understand how we arrived at the dilemma with which we are faced.

The dilemma is that rather than for the surplus created by Canada's productive economy during the last 40 years to have been invested in expanding educational facilities to train medical personnel, tradespeople, teachers, and other skilled, including marine, workers; financing the construction of abundant, affordable, stable and secure workforce housing; and properly staffing social services to provide care and rehabilitation to addicted, mentally ill, and other low-functioning members of society living horrible lives in parks and on city streets, virtually all of that surplus has been sucked out of the economy into the FIRE sector (Finance, Insurance, and Real Estate), whose business model is to absorb an ever-increasing share of that surplus by issuing debt and extracting economic rents.

According to the Conference Board of Canada, "Canadian financial institutions and pension funds held $7.8 trillion in assets at the end of 2018."

Meanwhile, in August, 2022, mortgage debt in Canada reached $2.06 trillion. (Mortgage debt in October, 2000 was $418 billion.) Non-mortgage household debt in August, 2022 was $724.2 billion.

For comparison, Canada's nominal GDP in 2022 was $2.14 trillion. (Real GDP, expressed at 2012 prices, flattening inflation, was $1.74 trillion.)

Canadians' total household debt is almost 110% of Canada's GDP

The enormity of the holdings by the FIRE sector is due to an exponential rise in house prices which occurred because treating houses as financial assets as opposed to infrastructure in which people dwell subjects house prices to the inflation that results from financial asset prices being determined by a "market," not by how much it cost to produce them.

If publicly financed housing, rather than so-called "market rate" housing, had been built since 1980 (the lion's share of the houses sold since 2000 were built prior to 2000 and resold at least once), $2.06 trillion of debt would vanish from the Canadian population's balance sheet. This is because publicly financed housing – "social" housing – is not treated as financial assets but is administered as a public utility and therefore does not escalate in price.

Absent this gargantuan debt burden, painless tax increases to pool money for investment in public goods could have resulted in: an adequate number of doctors and nurses, clinically optimal staffing of health facilities, no burned-out medical personnel or ER closures; fewer young people shuffling numbers in financial institution back-offices or manipulating the public with financial PR and marketing campaigns, and more performing useful work in research, education, manufacturing, trades, technology, the arts, and public service; no homeless people suffering horrible deprivation on our city streets; and capitalists and entrepreneurs, lacking the option of money-for-nothing in the housing sector, investing in producing goods and services with tangible value in the world economy.

In the productive economy, when demand for a product or service increases, the business that provides that product or service increases production, otherwise known as supply, to satisfy it. A popular restaurant opens another location. A widget manufacturer makes more widgets, sells more widgets, and makes more profit because it pays its suppliers less for component parts by buying in bigger quantities.

In finance, my asset is someone else's debt, meaning the bigger the mortgage I sell, the deeper in debt the buyer goes. I am able to sell bigger mortgages when house prices go up. There is thus no incentive for me to build more houses, and I do not build houses anyway. I make money selling mortgages. It is in my interest for house prices to increase.

Rental housing works the same way because demand in the financial world does not incentivize increasing supply. It disincentivizes it. Property holders do not have to make or do anything to demand higher rents. Profit increases magically, more rapidly than costs, which ideally, if all I hold is paper, do not increase at all. This is the definition of economic rent.