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March 9, 2016 | The stimulators

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Bank of Canada to Trudeau: now it's over to you, dude

There never was any drama expected Wednesday morning. The nation’s central bankers, ferried around Ottawa in their dark cars, have no intention of lowering interest rates. Not now. Not ever if they can help it.

So the Bank of Canada level stays at one half of one percent. Chartered bank primes are stuck at 2.7% and five-year mortgages are a tad under three  – but with an upward bent once the spring housing market abates. All that talk about negative interest rates for the country is just that. Wind. Won’t happen. Even those waiting for Armageddon will be bitterly disappointed. No locusts. Nor squirrel stew.

In recent weeks a lot has changed. The dollar rebounded to 75 cents and oil – still volatile – has surged. (WTI touched $38 on Wednesday – a monumental advance of 30% in less than a month.)  Suddenly Bay Street’s not so slippery with gore. The TSX is a star performer, positive for 2016 while US markets still struggle in the red. The snap-back this blog talked about in January, as commodity prices tested 20-year lows, is here. At least for now. But it’s looking more and more like most heartache’s in the rear view.

Did I mention exports have increased, despite the oil disaster? Plus America (despite Trump) is on a roll. The latest jobs numbers killed it, and the Fed will be increasing its rate once or twice (so markets think) in 2016. Inflation’s back, which means deflation isn’t. And the global economy is, like me, tepid but compelling. Besides, it’s spring. Bunnies. Ponies. Asparagus. Less Adele. So much to rejoice.

Mostly, though, the Bank of Canada has Trudeau. The banker dudes are so happy to be laying it all at the feet of the coming budget and the ocean of red ink our hot PM is about to unveil. The latest consensus estimates are for a deficit of between $18 billion and $22 billion this year – despite  the new soak-the-rich tax, neutering of TFSAs and the expected anti-corp Doctor Tax to be unveiled on March 22nd.

When government purposefully spends more money than it takes in it’s called ‘fiscal stimulus’. This is different from the engineering down of interest rates (by the central bank). That’s ‘monetary stimulus.’ As of the end of this month, we’ll have both. Doesn’t happen often, and results this time from weak business investment in Canada and mountains of accumulating household debt. Those are the things Ottawa sweats over.

When I was interviewed by the 30-something rebel, Jesse Brown, who runs that infamous Canadaland site on Wednesday he said, “So what? Why should anybody care about how much government spends when it accomplishes good stuff like building bridges and putting people to work?”

Lots of T2 supporters think this way. They like tax-and-spend politicians as much as they abhorred Harper-style neocon austerity. So when the March budget happens, all that spending will be applauded – by the unions, the CBC (big budget boost coming there), aboriginal groups, environmentalists, and a rainbow of special interest groups. It’ll also play to Liberal supporters, and the young. There are a ton of people who don’t recognize that today’s deficits are tomorrow’s taxes.

As the comment section here so richly evidences, they also like taxes. They wish this was Norway, with its 50% average income tax, 25% GST and corporate levies ranging as high as 78%. By the way, the basic guaranteed public pension in Norway (available at age 67) is 88,730 krone, or about $14,000 Canadian. Maybe this is why you’ve never seen a retired Norwegian tourist in Canada…

While we’re on the topic, Norway taxes capital gains like all other income. And there’s a wealth tax, too. So if you have a net worth of $250,000 or more (in CAD), there’s an annual payment equal to .85% of it. Oh yeah, and your taxes are posted online, for your employees or ex-wife to ogle.

It’s worth mentioning this because once government – supported by a pliant or naïve public – starts moving down the tax-and-spend, cradle-to-grave path of ‘progressive’ change, it’s hard to stop. Taxing success (our new upper bracket), making it harder to save (the TFSA cut), discouraging investing (upping capital gains taxes) or whacking risk-taking entrepreneurs (new regs for corps) suggest we’re already on this journey. Running fat deficits so government can bloat does the same.

Promising everything to everyone is easy. But math is still hard. Careful what you wish for.

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March 9th, 2016

Posted In: The Greater Fool

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