There seems to be an assumption that debt levels can just rise and rise without consequence, but history shows that is never the case.
It has been said that history doesn’t repeat itself, but it rhymes, and there is sure a lot of rhyming going on right now.
Over human history, we have seen countless successful civilizations fall apart because people forget the connection between productivity and wealth.
People forget the work that went into building up a society and an economy, and start to push more and more magical economic theories.
Those theories can seem to work in the short term, because they burn through the surplus wealth created by true industriousness, but sooner or later reality reasserts itself.
Currently, we are seeing a rising push for a guaranteed basic income, and for modern monetary theory.
Both ideas are based in a grain of truth, those being that the current crisis showed the short-term importance of providing financial assistance to individuals who were locked down, and that countries with a sovereign currency can afford to go further into debt than those without it.
However, to turn either of those into permanent policies, and to pretend that economic rules no longer apply is a very dangerous game that will end in failure.
The problem with utopian schemes is that they fail to account for human nature.
Sure, the government could simply give out cheques to everyone every month, but that would simply cause prices to rise, and would almost certainly lower productivity. Not to mention that many people would resent working hard and seeing more and more of their tax dollars go to those who are not working. Whether that resentment is ‘fair’ or not is irrelevant in this case, what is relevant is that many would feel it.
Further, the idea that countries that print their own currency – like Canada – can’t default has been disproven over and over again throughout history. Venezuela, Germany, and Argentina are among the examples of nations that could print their own money and simply printed their currencies into worthlessness.
Now, it’s no surprise that politicians are pushing for these policies, because they feel that the price will be paid down the road when someone else is in office, who they can then blame.
Many politicians also have a utopian mindset, in that they really feel they are the special person who can save the world, rather than realizing their jobs is far more mundane – protecting individual rights and avoiding disastrous policy errors.
So, the idea that we can fix all problems by simply printing up more money and giving it away will always appeal to political leaders.
The more concerning aspect is how many central banks – including the Bank of Canada – are enabling this.
We seem to be witnessing a growing politicization of central banks, as they indulge governments by rapidly expanding the money supply and keeping interest rates low, thus enabling more and more debt accumulation.
Additionally, policies like the carbon tax and restrictions on the energy sector, while very damaging for the economy, have their true impact temporarily obscured in much of the country by the continued flow of easy money into the system.
Central banks and political leaders are moving in concert, when they should often be at odds, with central banks seeking to reign in the tendency of politicians to overspend.
Our society is becoming increasingly reliant on debt, rather than true productivity growth, and that never ends well.
If we keep kicking the can down the road, the inevitable economic damage will be even worse.