THE BLOG

Was Your Mortgage Made In Bangladesh?

04/30/2013 08:19 EDT | Updated 06/30/2013 05:12 EDT
AP

News reports have been filled with horrendous scenes of victims being pulled from the rubble of a collapsed factory in Bangladesh. More than 370 have perished.

We are told that workers in these factories were making clothing for a major Canadian brand, among many others. Consumers in advanced countries enjoy cheap goods made for them in third world countries, often at great human cost.

The linkages go far beyond just cheap clothing. If you live in a shiny new condo on Toronto's waterfront, there is a good chance that the financial backing for your mortgage came from Bangladesh or some other Asian country. The near record low mortgage rates of the last few years come courtesy of the profits from these third world sweatshops.

Canada and the advanced countries spend more than they save, while much of Asia does the reverse. National savings in Bangladesh in 2011 exceeded national investment by 15 per cent according to data from the IMF. In Canada it was just about exactly the reverse.

What we have on a global scale is a massive amount of lending by the poor to the rich. Sounds crazy, doesn't it? Of course, it's not quite that simple. It's not so much the poor lending to the rich, as rich people in poor countries lending to the desperate middle class in the rich countries.

Rapid industrialization in south and east Asia has led to huge increases in wealth for the successful entrepreneurial class there. Industrial jobs have grown, but not fast enough to use up the huge rural population. Wages remain low, and working conditions are terrible.

World income inequality is a global phenomenon, tied in to this rapid integration of the rich and poor countries. In many advanced countries, the gap between the rich and the poor is the greatest it has been since the 1930s. Rapid communications have made possible a level of trade and outsourcing never before experienced. It's not just Canadian garment workers who have lost their jobs to Asia. Canadian university graduates also face high unemployment and underemployment, partly because educated jobs are being outsourced to Asia.

The huge disparities in income in the developing Asian countries mean that the billions of people who work in factories have too little to spend. They live precariously with few social programs to fall back on if they become disabled. A large proportion of wealth in those countries goes to a relatively few who have far more than they can spend, even though some do spend lavishly and conspicuously.

The net result is high savings rates in those countries, and a huge global imbalance in supply and demand. This is the root cause of the economic malaise that has plagued the developed world for the last several years. The developing countries tempt the rich countries to buy their cheap exports, but they don't buy enough in return.

To his credit, Fed Chairman Ben Bernanke was one of the first economists to identify this problem, way back in 2005. He called it a global savings glut. It has only gotten worse since then. It is responsible for your low mortgage rate, and also large deficits and high unemployment in the industrialized countries.

One of the best known parables from John Maynard Keynes is the paradox of thrift. When some people try to save more than others want to borrow, income and employment spiral downward. This has been happening on a global scale. One way to combat it is by government deficit spending, which we have at both the federal and provincial level in Canada. That is not an ideal solution, as it leads to the accumulation of unproductive debt. I have suggested that more could be done to insulate Canada from global pressures, through putting a cap on the value of the Canadian dollar.

Bangladesh has been in the news for its factory cave-ins and fires, but China and many other countries are not much better. There have been reports that factories in China have installed "suicide netting" to prevent stressed-out workers from jumping to their deaths.

In the wake of the factory collapse, there have been massive demonstrations in the streets. Will this lead to change? It is impossible to predict. At some point, there may be something like an "Asian spring" that brings radical reform to those countries. If there is a sudden change, the results could be quite jarring, including the impact on interest rates if the Asian sources of cheap money dry up.

The global paradox of thrift does nobody much good. Developing countries are making their workers sweat to accumulate money that nobody needs. It lies fallow, often parked in U.S. government bonds at near zero interest rates. Governments and consumers in advanced countries are borrowing, lured by these low interest rates.

In a better managed global economic system, imbalances of this magnitude would not be allowed to arise. At some point, a new balance will have to be reached. It is impossible to predict whether this will come about through gradual adjustments or some kind of sudden crisis. At the end of the day, real interest rates will be much higher than they are today.

Will this become a new trap, when credit dries up and interest rates jump the next time your mortgage is refinanced? It is something that anybody taking out a mortgage should worry about. House prices in Canada have soared. At current low mortgage rates, many Canadians with modest incomes think they can buy million dollar houses. The tumultuous events in Bangladesh are not as far away as you might think, and their effects on your well-being go far beyond cheap chic clothing.

GRAPHIC WARNING Bangladesh Factory Collapses