With vast indebtedness among individuals, businesses, and governments, Canada is seriously vulnerable to higher interest rates.
One point I’ve tried to make about how concerning a situation Canada finds ourselves is in that we are seeing something that hasn’t been seen before:
Governments massively expanding debt while simultaneously seeking to restrict growth.
And while they will claim otherwise, they know that many of the policies they seek to implement under the ‘green economy’ justification are really about limiting economic growth and keep our standard of living stagnant.
That’s what carbon taxes are doing, making life more expensive and incentivizing economic activity to move out of Canada.
Restrictions on energy sector projects and the prospect of increased regulations also drive investment, and thus jobs, out of Canada.
Add on to this the willful destruction of countless Canadian small businesses – while big box stores remained open – and we have a situation where governments are actively seeking to restrict real growth (based on productivity not just massive increases in money creation), from taking place.
Again, we haven’t seen this before.
Following past recessions, and in periods of economic change, governments sought to unleash every productive capacity in all sectors of the economy.
This led to rising real growth, which is the only way that a large surge in debt can be made manageable.
But now, Canada faces the prospect of being a deeply indebted economy with no real GDP per capita growth, along with a more heavy-handed government restricting economic activity.
And now, we may soon be adding rising interest rates to that.
Economists are warning that interest rates could rise sooner rather than later, particularly with a surge in government spending creating a short-term sugar high for the economy.
In short, the government has not only spent massively this year, but is also planning further large deficits in the years to come, all while maintaining their high-tax policies.
As a result, Canada’s economy becomes more and more reliant on federal stimulus funding, rather than real productivity growth in the private sector.
Yet, as many have warned, this can’t go on forever. There is only so much that can be done with government borrowing and moving money around before people start to realize that things don’t add up.
And higher interest rates are how excessive borrowing is discouraged.
Unfortunately, that will have a huge impact on the country, because Canadian individuals, families, businesses, and governments of all stripes are heavily indebted, with government debt in particular surging amid the crisis.
This has been backstopped by a huge increase in the balance sheet of the Bank of Canada.
Now, some people may be thinking whether there is even really a problem here.
Surely the government can keep borrowing and spending to take care of the debt problem by growing the size of the economy, right?
Well, it may sound good at first measure, but when you really think about it you can see the problem.
The more the government borrows, and the more Canada’s per capita GDP remains stagnant, the more unbalanced the economy becomes. Rather than a bottom-up approach of growth coming from real productivity in the private sector across the nation, the government seeks a top-down approach, where they borrow vast sums of money and distribute it across the country on an ongoing basis.
However, the government can only get that money from taking it through taxes, and by borrowing.
The more they borrow, the more interest rates will start to go up, causing problems for Canadians who are already deeply in debt.
And, we are already seeing diminishing returns on government stimulus – as we would expect with so much money being created in such a short amount of time.
These trends will then lessen the amount of real economic activity, as more will go towards debt repayments, meaning less money for the government.
The government then gets caught in a cycle of trying to borrow more money, but having to pay higher interest, and watching the economy still weaken because true productive activity lessens.
The fact is, without strong, sustained, real productivity growth in the private sector, Canada cannot manage our debt.
We need the government to move out of the way, and allow Canadians to unleash the true potential and capacity of our nation before it’s too late.
Spencer Fernando
