“We took on debt so Canadians didn’t have to.” That was the message from PM Trudeau following the latest figures which show direct federal aid to individuals and businesses as a result of COVID-19 has now reached $212 billion. Of which, $55B has gone directly to the pockets of 8.25 million Canadians who have collected a CERB cheque.

Indeed the numbers are head turning, The federal government now expects to post a $343-billion deficit in 2021. And while these figures are pause for concern, the current economic outlook provides very few options. Private sector balance sheets in Canada are a mess, private sector debt to GDP sits at just over 260%, one of the highest in the G-20. Years of borrowing in the household and corporate sector have left the Canadian economy in a vulnerable scenario, one which now requires the public sector to fill the void.

Left unchecked, the demand destruction could sew the seeds of a private sector debt crisis. Economic studies are mounting regarding the perils of private sector debt. Ex banker Richard Vague, in his most recent book ‘A Brief History of Doom’ highlights this relationship. Every economic crisis over the last 150 years has manifested: the combination of private debt to GDP of 150% or more and an increase in the ratio over a 5 year period of 17% or more. Until the moment of reckoning, things may seem wonderful. Rapid private-debt growth fuelled what were viewed as triumphs in their day—the Roaring Twenties, the Japanese “economic miracle” of the ’80s, and the Asian boom of the ’90s—but these were debt-powered binges that brought these economies to the brink of economic ruin.

This places Canada squarely in the danger zone, having hit all of these milestones. Hence the rapid intervention from the Federal Government to spend into oblivion.

However, like everything in life, for every action there is a reaction. The recent downgrade of Canada’s credit rating may be the first of many according to David Rosenberg, one of Canada’s most respected economists. Adding, Canada’s 350 per cent total debt-to-GDP ratio compares to 330 per cent in the U.S. — the latter having the most powerful army in the world and the world’s reserve currency which means the Fed has the largest printing press of all and it gets its ink for free. Italy’s debt ratio is 360 per cent and its credit rating is BBB. Greece is 340 per cent and it is rated BB-. Spain’s debt ratio is 360 per cent and it has a BBB- ranking. And China is at 290 per cent and has an A+ rating by S&P. So Canada, even as it stands, deserves a AAA sovereign rating based exactly on what criteria?

Once again, there is no easy way out. Without fiscal spending the crushing debt loads in the private sector would surely cripple the economy. It’s a case of damned if you do, damned if you don’t. Fiscal spending will blow-out to new heights, buckle up.

Three Things I’m Watching:

1. Private sector debt growth in Canada places it in the danger zone.

2. The Canadian economy added nearly 1million jobs in June. However, there’s still a long ways to go.

3. Canada’s Federal deficit is expected to hit nearly $350B in 2021.

1 COMMENT

  1. > Adding, Canada’s 350 per cent total debt-to-GDP ratio compares to 330 per cent in the U.S. — the latter having the most powerful army in the world and the world’s reserve currency which means the Fed has the largest printing press of all and it gets its ink for free.

    The US as a reserve currency does help with some international trade issues, but that’s not the reason the US gets to print its currency for free. Canada does this as well, as does Japan, China, Australia, the UK, and other sovereign currencies. The Euro nations have relinquished theirs which make them standouts.

    The Canadian Federal Government doesn’t borrow CAD from the private sector before spending. How could it? The BoC is the only institution legally able to print CAD, so any dollar in circulation must have come from federal spending. When it needs money, it prints it. It cannot possibly default on any debt denominated in CAD regardless of how large the federal debt may be.

    > Italy’s debt ratio is 360 per cent and its credit rating is BBB. Greece is 340 per cent and it is rated BB-. Spain’s debt ratio is 360 per cent and it has a BBB- ranking. And China is at 290 per cent and has an A+ rating by S&P. So Canada, even as it stands, deserves a AAA sovereign rating based exactly on what criteria?

    Italy and Greece do not have a sovereign currency any more so they are more comparable to a provincial or state government where they must borrow in a currency they do not control. Taxes truly do fund their spending, unlike in Canada or China. Saying that Canada can ever have a risk of involuntary default on our bonds is lunacy, totally impossible. Maybe political risk (like when the US engages in voluntary default with their deficit ceiling debates), but that seems hard to believe.

    For us and similar countries, federal debt is really just a record of the amount of savings in the private sector. A large deficit means that the private sector savings has increased.

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