ACT 36 - This Time is Different

Canada's Liberal government released their budget yesterday, and I've included some highlight that will be of interest to Accredited Canadians. 

Happily, there was no significant tax increases. No increase in capital gains, no wealth tax, no tax on the sale of a principal residence, and no large increases to income taxes. There is however a 10% tax on vehicles and airplanes over $100,000, and boats over $250,000.  There is a lot of spending announced, with pundits calling this an election budget.  I watched with interest Pierre Poilievre's reaction to the budget and as usual learned interesting history and facts. I had the pleasure of meeting Pierre at a wine and cheese last year and we debate the merits of universal basic income.  What stood out to me in his speech yesterday was the following points:

Drs. Reinhart and Rogoff from Harvard are the authors of the widely acclaimed book on the history of financial crises going back 800 years, the book is called, This Time is Different. Pierre goes through the five leading indicators of a debt crisis and how they relate to Canada now. He says:

Number One: Canada has declining output, last year we lost 120B in GDP

Number Two: Large and sustained current account deficits (net importer of goods), yes for the last 5 years Canada has had $300B in current account deficits  

Number Three: Asset Price Inflation - Canadian housing has been up over 20% in many markets where the income has dropped.  Vancouver and Toronto are among the top 10 most expensive housing markets on the entire planet. 

Number four: Rising houshold leverage ie. $1.75 of debt for every dollar of take home pay, the highest ratio in the G7 and nearly a recording in Canadian history.

Number five: A rise in the overall debt across the economy. Last year the debt was equal to 17% of GDP, the largest single amount since WW2. As a share of GDP the debt was 2x the size  than in WW1, 3x the size as the great depression, and 4x the size it was in the great global recession. 

All leading indicators are satisfied, and Pierre Poilievre says that this time is NOT different, even though we want to believe it is.  Pierre argues we have been here before in the 1980s under Prime Minister Pierre Trudeau, back then he was running a deficit of 11% of GDP compared to a deficit of 17% of GDP in 2020.   Back then there was money printing, also known as an increase of the M2 money supply, the printing was 15% compared 13% now. Back then Federal Government spending was over 20% of GDP, now it is almost 30%.  We had stagflation in the early 1980s, there were 650,000 more Canadians in poverty over 4 years, a 25% increase in poverty from 1980 to 1984.  Inflation hit 12%, and unemployment hit 12%, both all time highs. There was also an all time high in interest rates at 18%. 

Pierre brings up the terrible outcome that could await Canadians, and brings up the Misery Index where unemployment and inflation are added, and shares that when the Misery Index increases, suicides go up. In the 1980s Canada saw the highest incidence of suicide ever at about 15 people per 100,000.  Data around the world shows financial crisis cause on average the unemployment rate to rise 7%, and according to the University of Calgary for every 1% increase in unemployment there is a corresponding 2% increase in the suicide rate. 

 

(To be fair, R&R's findings, methods and rationale are disputed and for good reason, read this article to learn more: https://www.theguardian.com/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause)

I don't agree with Pierre's recommendation to harken back to the 1940s era where the silent generation worked off the WW2 war debt by 1947, and the economy grew by 35% per year from the end of the war to 1973. This was largely due to industrialization and increased production, coupled with an explosion in population known as the baby boomer generation. 

 

While Pierre is right that we have a technological revolution happening now that will enrich everyone, technology is in fact deflationary as I covered in Podcast episode 9 where I reviewed Jeff Booth's book. 

I think the best model for our future is actually the 1995 budget, a Liberal government where Jean Cretien and Paul Martin were leading.   The budget in 1995 involved modest cuts to government and programs that didn't impact average Canadians, and this was supported by Canadians of every stripe.  We also need to either have a ton of babies, or allow a lot more immigration of people under 45 so we can get back to a healthy consumption led economy. 

Regardless what I think, that increasing the money supply by printing dollars isn't a great solution, it looks like this is exactly what Liberals want to try doing right now.  Spending a record level to stimulate the economy and buy votes, and printing like mad to monetize the debt looks attractive, but in fact it steals productivity from hard working Canadians. 

I don't know what the future holds, but the fact a Canadian politician like Pierre is speaking about this debt crisis in the house of commons lifts up my spirits, it means even politicians who are clueless about what they are doing to Canadians by printing so much money are at least hearing this point of view, and may take pause before voting in free stuff so fast that the system collapses.  It looks like we have another year before large tax hikes, so the takeaway now is to prepare for future tax increases, and consider taking some money off the table in markets that have raced higher and faster than we've seen in a long time. You may soon be able to redeploy the investment in growth markets,  or to be ready to snap up discounts and weather the storm if and when it arrives.