The Great Illusion

“No matter how you slice it, Canada has been entirely dependent on a debt binge to create the illusion of a strong economy.” That was how David Rosenberg put it the other day. David is the chief economist and strategist for Gluskin Sheff. David is one of the best minds in the investment industry.

In retirement, our standard of living is closely tied to the underlying performance of the Canadian economy. Although we could live solely off our pension income, our investment income allows us to enjoy a wonderful retirement experience roaming around the country in our Motorcoach and staying at some amazing resort properties.

An economic collapse, similar to what happened in 2008/2009, would not be much fun. And yet the Canadian government seems intent on pursuing a controversial economic policy known as Modern Monetary Theory (MMT). MMT is also being advocated by the left-wing of the Democratic Party in the United States.

MMT proposes that a country with its own currency, such as Canada or the United States, doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. The only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there is enough labour to meet demand without stoking inflation, a government can spend what it needs to maintain employment and achieve its spending goals.

The Canadian government will make no attempt at balancing the financial books of the government. Projections show that our government will remain in a state of perpetual deficit spending over the coming decades, compounding the overall debt of the country.

The Liberal party in Canada, having moved strongly to the left, has embraced the theory that deficits are harmless, healthy and promote economic growth and expansion especially when interest rates and inflation are low. Governments can just print money, distribute it fairly and people will spend more and create prosperity.

And yet, there are so many risks to this approach, especially the risk of unsustainable debt.

Canadian households are in no position to be exposed to the downside risk of MMT.

Canadian households are already at historic levels of debt.

Compared to U.S. households (note how Canadian households are now above the level of U.S. households from the great economic collapse in 2008/2009):

Uncharted territory and, sadly, most Canadians have little or no knowledge of the underlying economic theories being pursued by the politicians on the left.

This could end very badly for Canada. But there is a bright spot. Our housing market <sarcasm>. We have the least affordable housing in the world. Perhaps the Canadian government can also provide a house for every citizen. All they need to do is print some more money. And tax the so-called rich. But they already do a pretty thorough job on that front.