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August 27, 2020 | Freeconomics

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.

In 1993 I completely lost it and ran for the leadership of the federal Progressive Conservative party. That’s back when being a Con meant you worried more about finances than diddling. Socially liberal. Fiscally conservative. Worked for me.

Well, there was a big convention in Ottawa. Ten thousand people. And while my chances of winning were zero (Kim had it nailed) it was an opportunity to make a statement. So I did. After sweet-talking the Vancouver Board of Trade, they gave me their debt clock. I hauled that sucker to the nation’s capital and installed it in the lobby of the convention center, where it ticked ominously over the heads of delegates.

You know the rest. The PCs were annihilated in the next election. I lost my seat. The Chretien Libs kept the GST and finance minister Paul Martin attacked the deficit. In 1998 the debt clock was retired when the federal budget was balanced. And while I was not directly part of that effort, it felt close. Paul called me one day to say so. Classy.

My, oh, my. How things have changed. The national debt in 1993 was about $600 billion. By the time the credit crisis hit in 2008, it was down to $500 billion. Then the wheels came off. Since then nobody talks about the debt. Nobody cares. Now it’s $1 trillion. The Trudeau team is adding about $340 billion this year alone, and we’re apparently about to embark on a spending spree of Biblical proportions.

Capital Economics is calling it “Freeconomics” and the new architect is Chrystia. Now untethered to the pedantic pinstriped gray-hued Bay Streeter Bill Morneau, our prime minister is about to go nuts. Covid has morphed from a disaster into an “opportunity”, he says. The country’s about to get the kind of green new deal that Freeland was promoting just before being elected in 2013.

Say the economists:

New Finance Minister Chrystia Freeland has already shown her colours by ramping up fiscal spending after just one day on the job, and her previous calls for a “new New Deal” to address inequality suggest she may soon push for even greater spending. The opinion polls imply most Canadians would support this more activist approach and, despite record debt issuance already this year, the government can still essentially borrow for free in real terms. All this means the stage is set for sustained deficit spending in the years ahead, which could cause GDP growth to be higher than we currently assume.

Does any of this matter, except to paleo guys like me?

Nah. And T2 knows it. With interest rates in the ditch thanks to the virus, the Bank of Canada can push a few buttons, create billions more and fuel unfettered government spending. Of course all this money has to be backed by something, which will be a new mess of government bonds and (naturally) more tax revenues to service the debt.

Most recently Freeconomics has delivered another $37 billion in spending as CERB morphs into an expanded EI campaign. But unemployment is still over 10% nationally and expected to remain at elevated levels for months to come. So expect more income support payments. Then there are the hundreds of thousands of mortgage deferrals which will cease this autumn. The banks are reporting that between 12% and 18% of all home loans are not being serviced. So what happens when the clock runs out? Meanwhile businesses are hurting, and corporate tax revenues are falling along with revenues, which are down almost 12%.

 

Not that you care (I bet), but our debt is now equal to 50% of the economy. If we have another three or four years like 2020 in terms of federal deficits, that ratio will be 100%. (By the way, when provincial government debt is added we’re already at about 90%. And did you see the latest Alberta number? Ugh. Brutal.)

Is this sustainable?

If interest rates stay where they are, people get back to work, the economy reopens fully, businesses regain profits and the GDP swells, then we’re okay. But that won’t last. More economic growth brings expansion, wage pressures, rising prices and inflation. That means higher rates. Always. So the more debt that’s racked up now – even if it can be serviced handily  for a few years – locks in future generations to epic payments. When I hauled that debt clock across the country the feds were hobbled by handing over a third of all taxes collected in interest payments alone. Could happen again. Tell your kids.

Will the cost of money stay lower forever? Lots of people come here to say it will. They desperately need it to be so, for their own pooched finances. But it’s a gamble. The odds of losing the bet are high.

Soon the Freeconomics new deal will be here. Sources say Trudeau wants ‘to go big’.  He now has a willing, supportive sidekick in control of the purse strings. Will the majority of people even care? Or have we become a nation of people comfortable with endless debt and free cash flow?

Don’t bother. I know the answer.

Next week we’ll discuss how to prepare.

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August 27th, 2020

Posted In: The Greater Fool

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