As Interest Rates Rise, Canada Will Witness The Cost Of Basing ‘Growth’ On Debt, Rather Than Productivity

The governments that played a big role in causing the problem remain unwilling to acknowledge the damaging impact of their policies.

Well, the inevitable has happened.

The Bank of Canada, which for a long-time enabled large budget deficits by printing (digitally creating) vast amounts of money and keeping interest rates low, has finally reached their limit.

Unable to pretend that inflation is ‘minimal’ or ‘transitory,’ they have begun large interest rate hikes.

Interest rates rose by 50 basis points 0.5%, bringing the benchmark interest rate to 1%.

The interest rate hike is the biggest increase in 22 years, and is being dubbed a ‘jumbo rate hike.’

In their statement on the rate hike, the Bank of Canada expressed concern that higher inflation expectations could become ‘entrenched’:

“CPI inflation in Canada is 5.7%, above the Bank’s forecast in its January Monetary Policy Report (MPR). Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand. Core measures of inflation have all moved higher as price pressures broaden. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.”

The Bank of Canada has said they want interest rates to return to historical norms, meaning around 2-3%. As a result, more rate hikes are expected.

It’s no surprise that the Bank of Canada eschews remarking upon their own role in driving up inflation, and chooses not to take the federal government to task for inflationary fiscal policy.

Yet, even acknowledging the concern that inflation expectations will become baked in is significant. Not long ago, we remember when the Bank of Canada was claiming that higher inflation would be ‘transitory,’ a claim which has been utterly disproven.

And it’s not only inflation where Bank of Canada/federal government policy has exacerbated Canada’s problems.

Canada’s out-of-control housing market has been heavily influenced by the actions of the Bank of Canada, a point made by Bank of Montreal senior economist Robert Kavcic:

“BMO said what everyone is thinking — the BoC just sent homebuyers on a FOMO-driven spree. Kavcic attributes the current acceleration of home buying to the BoC. He wrote, “a surge in demand started by the pandemic, but now set ablaze by the promise of low-for-very-long interest rates.”

By setting this expectation, the central bank has panicked a busy market into a reckless one. Buyers are now buying as much house as possible, as quickly as possible. The organization’s statement sparked a “fear of missing out on widely expected price gains,” says Kavcic. Adding, “and probably the increased speculation that those expectations bring.” If the BoC is saying they’ll give people cheap debt for a long time, it’s hard to argue against speculation.”

It was always unsustainable

When we look at Canada’s ‘growth’ over the past decade or so – particularly since the Trudeau government took power – we can see that it has been based upon four pillars:

Population increase.

Government spending.

Money printing.

Rising property values.

Take note of what is missing here:


Unfortunately, the one thing that really generates true growth and true improvement in our standard of living is what has been absent from Canada’s ‘growth’ story in recent times.

Any economy can look ‘bigger’ if the population goes up dramatically, if the government borrows heavily and increases spending, if the central bank rapidly expands the money supply, and if much of that newly created money is funneled into a housing bubble.

But none of that is sustainable. Growth based on those four factors generates the conditions that lead to the unwinding and reversal of that growth.

For example, basing growth on higher and higher population increases leads to conditions that disincentivizes people from wanting to move here, and that causes difficulties for those already here – as can be seen in the many new Canadians who are considering leaving, or who are struggling financially.

Basing growth on government spending is also unsustainable, as it is less efficient than private sector growth, and is financed by debt.

Much of that debt accumulation has been enabled by the Bank of Canada, which prints more money and thus drives down the value of our currency, causing prices to rise.

And those rising prices are witnessed most dramatically in Canada’s absurd housing sector, where large segments of an entire generation are being locked out of the dream of home ownership.

Now, as interest rates rise, the cost of debt-fuelled growth will become more and more clear.

Debt service costs will take up more and more of our budget, and Canadians who were pushed into taking on debt in order to try and maintain their standard of living will find themselves in even more financial difficulty.

Canada’s dreams require per-capita GDP growth

This is where we come to the core issue:

Without rising productivity, without Canada generating strong per-capita GDP growth, our dreams as individuals, families, and as a nation will get further and further out of reach.

There is no real way to make significant progress without a higher and higher per capita GDP.

Consider a utopian society like that of Star Trek, where everyone can replicate nearly every consumer good or item. Such a society would have such massive per-person productivity, and such high per capita GDP that money would seem almost meaningless since prices would be so low. After all, if governments and central banks weren’t interfering to such a dramatic degree, technological advancement would be generating significant deflation, rather than inflation.

Any movement towards such a utopian, post-scarcity society requires higher and higher per capita GDP, and growth that exceeds the rate of inflation, because to make real progress we need to produce more value per person.

Yet, as the trend lines demonstrate, Canada is lagging when it comes to future GDP per capita growth:

“Federal #Budget2022 shows Canada dead last in per capita GDP growth for the coming decades. Per capita GDP is a powerful metric for our individual and collective national wealth relative to our peers. This chart is major wake up call. Canada is at real risk of immiseration.”

With interest rates rising, more and more Canadians will see that rising productivity and rising per-capita GDP is the only type of economic growth that is actually real, which will make it even more clear how wrong-headed and regressive the economic policies of the Liberal government have been.

Spencer Fernando

Photo – YouTube


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