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Wednesday, June 09, 2010

Canada's looming fall from grace

2028_picture_of_a_nervous_man_sinking_into_the_quicksand_of_debtWho would have thought, that all these years later, a libertarian capitalist like myself could long for the days of the Chrétien Liberal's? It's not an endorsement of the consummate Liberal platforms of yesteryear, but a culture of fiscal austerity -- although, not far enough did it go -- that incontrovertibly laid the foundations to Canada's relative strength in the world today.

Certainly, there was waste in government. Certainly, the Liberal Party had it's objectionable policies for both conservatives and libertarians. But the idea that Canada's position has strengthened under the Conservative Party is a myth. We live in the afterglow of the competitive foundations that were laid in the 1990s and early 2000s.

Stephen Harper's Conservatives have managed to come within a swinging distance of out-doing Pierre Trudeau's increase in the size of government. By sheer numbers, the Harper Conservatives have increased the size of government since they took power by somewhere in the range of 26%. And they are also running the largest deficit in Canadian history, to boot. Adding insult to injury, conservatives have made a wholesale embrace of neo-Keyensianism, kicking fiscal conservatives and libertarians to the curb. Literally.

The running story amongst conservatives is that the situation would have been far worse under the "tax and spend" Liberals. And they may be right. It does seem that fiscal responsibility has lost it's sheen in the Liberal Party. Indeed, the Grits believed that Canada's Economic Action Plan(tm) didn't go far enough; they would have preferred much higher spending (read deficits) levels than Jim Flaherty was pushing for.

The problem for Canada is now daunting. Neither the Conservatives or the Liberals have any genuine interest in fiscal responsibility anymore. At least, not if it gets in the way of their political agenda.

Canada's economic performance and "relative" health of it's public finances, sans provincial debt, has led many to believe that fiscal responsibility is no longer a priority. It won't be treated as a priority and it is unlikely that you will again see balanced budgets in Canada again for over a decade.

The reality is, that a united left is becoming a political necessity for the Liberal Party, and as a party that is more addicted to power than principle, it's move to the left and eventual merger with the NDP is, despite current appearances, all but inevitable within the next few years.

A united left would waste no time in fast-tracking their social justice pet projects, such as national universal daycare, which will add tens of billions of dollars to government program expenditures. They mistakenly reason this will actually improve the economy, and therefore, pay for itself. Like in Quebec, where, it actually hasn't paid for itself. In fact, Quebec's fiscal position is worse than Spain's, sporting an impressive 94% Debt-to-GDP ratio, with apparently no end in sight for it's ever increasing debt load.

Couple all this with average household debt in Canada rounding out the worst in the OECD, coming it at around $42,000 and the available fiscal room for the necessary tax increases to balance out a "progressive agenda" is questionable at best.

Today, Canada's future is not bright. Rather, it's living in the afterglow of yesterday's prudence. We are now a nation of both public and private excess, of debt and a complete lack of appreciation for the risks associated with the future. Think of Canada as the Western world's last gasp.

Posted by Mike Brock on June 9, 2010 | Permalink

Comments

The next financial "bubble" that bursts is going to be the bubble in government debt. It remains to be seen whether Canada will be immune from the effects of that bursting. Much depends on what we do from here on.

For the most part, I think that Canadian governments at all levels will continue to borrow and spend much as they are today. Maxime Bernier seems to be one of the few Canadian politicians who are genuinely concerned about these trends, but I wonder how long it will be before Harper kicks him to the curb too.

The basic cause of the financial collapse that got underway in 2008 was criminally loose monetary policy that fostered unsupportable debt levels. I always found it preposterous that the "cure" touted for this disease, even by politicians who should have known better, was even looser monetary policy and even greater indebtedness. This is like injecting a tuberculosis patient with more tuberculosis.

Things are going to get much worse before they get any better, folks.

Posted by: Dennis | 2010-06-09 12:00:18 PM


I have an idea: sell Ontario to China.

Posted by: Zebulon Pike | 2010-06-09 12:04:26 PM


Great analysis Mike.

Now, where is the party of fiscal prudence in Canada?

Well there isn't one unless we all suddenly vote for the Libertarian Party.

Or better yet, stop voting, stop paying taxes and stop obeying their stupid laws...

Yeah, I know I may scare some with my voluntaryist, market anarchist talk, but they can't rule you without your consent. Don't give it to them.

Otherwise there will never be any change....

Posted by: Mike | 2010-06-09 12:42:16 PM


Actually, the commercial real estate bubble will most likely be the next to pop. Governments can just keep printing money, and when that goes south, they will just bring in the military. That's a bit of glossing over, but that is most likely what will happen.

Posted by: Steve Bottrell | 2010-06-09 4:40:21 PM


The NDP is the party with the best record of balanced budgets for provincial governments... perhaps critical reflection on the 'fiscal irresponsibility' tag is in order across the board, no?

Posted by: BCer_in_Toronto | 2010-06-09 9:23:39 PM


The NDP is the party with the best record of balanced budgets for provincial governments.
Posted by: BCer_in_Toronto | 2010-06-09 9:23:39 PM

A joke...Right ???.

Posted by: peterj | 2010-06-09 11:43:17 PM


@peterj 2010-06-09 11:43:17 PM

No sir, not a joke at all. In terms of the percentage of years in power, across provincial governments in Canada, that party has the best history of balancing annual budgets.

http://www.ndp.ca/press/report-shows-ndp-has-best-balanced-budgets-record

Not particularly a supporter of that party. Simply a call for critical reflection at where we are. Looking more and more seriously at 'funny money' social credit ideas myself. Interest is theft, and all that.

Posted by: BCer_in_Toronto | 2010-06-10 12:02:14 AM


Charging interest on borrowed capital is not theft.

Capital has to be created by someone, by some means. It cannot be conjured up out of thin air. Those who create capital are its owners, not those who desire to loot it.

Posted by: Dennis | 2010-06-10 7:39:13 AM


@Dennis 2010-06-10 7:39:13 AM

I'm somewhat rusty on my monetary theory. Perhaps you can explain to me how the creation of financial capital works in a way that it is not 'conjured out of thin air'?

"Each and every time a bank makes a loan (or purchases securities), new bank credit is created — new deposits — brand new money... Broadly speaking, all new money comes out of a Bank in the form of loans... As loans are debts, then under the present system all money is debt."
Graham Towers, Governor of the Central Bank of Canada 1934- 1955

Posted by: BCer_in_Toronto | 2010-06-10 1:15:06 PM


"Today, Canada's future is not bright. Rather, it's living in the afterglow of yesterday's prudence. We are now a nation of both public and private excess, of debt and a complete lack of appreciation for the risks associated with the future. Think of Canada as the Western world's last gasp"

Nicely put - sums it up

Posted by: JC | 2010-06-11 12:13:22 AM


BCer in Toronto,

You should start reading the Von Mises website regularly. They've got lots of articles explaining how real capital is created in the first place and the problems that result from central banks "pyramiding" that capital.

www.mises.org

Posted by: Dennis | 2010-06-11 7:12:33 AM


BCer,

It's very simple. When you save your money, invest it, and receive interest; that is real capital (and you therefore deserve every penny of the interest/profit). When a central bank or a regular bank creates it "out of thin air" and lends it out for interest; that's where the problem lies.

Posted by: Charles | 2010-06-11 9:48:37 AM


Well, insofar as a fiat system should be run, say according to the monetarist school, the central bank should charge interest on newly created money to temper it's inflationary effects.

The problem is that the central banks are not following a monetarist prescription, but rather a Keynesian one.

I have no problem with monetarism, in theory. In fact, the only reason I sway towards commodity-backed currencies is because I don't trust politicians to keep their grubby hands off the process. Experience has born this out.

Posted by: Mike Brock | 2010-06-11 10:12:57 AM


Gotta disagree on you regarding monetarism Mike. It doesn't work in theory, nor does it work in practice.

1) As soon as the central bank or bank creates the new money (out of nothing) and lends it out, interest rates are altered. This messes up the entire structure of production. Lowered interest rates will encourage long term capital projects over short term ones. Simulate any NPV project and see what happens to the outcome when you lower the discount rate. This whole process is not sustainable and leads to "malinvestments".

2) The whole concept of MV = PY is illogical and flawed. The concept of "velocity" is especially flawed. If you're interested, I'll try and find an Internet reference. If not, Mises did a pretty good job demolishing it. So did Rothbard (I can't remember if Hayek ever addressed the subject).

3) When the banks lend out the new money, the general population does not have the savings to buy the future production. Once this reality is exposed, you get a crash and the "malinvestments" must be cleaned up.

4) Inflating the money supply leads to an increase in the demand for money. Which, according to monetarist theory, should be followed by more inflation of the money supply. Investors will flood out of your jurisdiction or into gold if they think you're inflating their savings away. Which leads to a vicious cycle.

5) Monetarists believe that money is neutral in terms of the business cycle. You simply cannot be an "Austrian" and believe that monetarism works in theory.

Posted by: Charles | 2010-06-11 12:01:56 PM


Oh yeah ... and monetarists model the economy using an assumption that there is no uncertainty (i.e. efficient market hypothesis). The EMH is utter nonsense.

Posted by: Charles | 2010-06-11 12:04:04 PM



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