Weekend Reading: $343 Billion Deficit Edition

When the global pandemic became a reality for Canadians in mid-March, the federal government introduced a host of measures to respond to the crisis, including the Canada emergency response benefit (CERB) and Canada emergency wage subsidy (CEWS). The result was a massive spending increase as more than 8 million unique CERB applications were filed and the feds issued more than $13 billion in payroll help for businesses.

What was the cost of these support programs? The federal government released a fiscal snapshot this week that projected an eye-popping $343 billion deficit for 2020. It’s an almost unfathomable figure – 10x the already controversial pre-pandemic projection.

The government has correctly prioritized public health over the economy and used its fiscal capacity to help individuals and businesses stay afloat during this unprecedented crisis. Never mind the fact that we still may very well be in the early stages of the pandemic and will require much more spending to get us to the other side of it.

But, staring in the face of a $343 billion deficit, the question on everyone’s mind is, “how will we pay for this?” 

The magnitude of government deficits and debt is not something Canadians are used to, but public deficits have become the norm in Europe, Japan, the United States, and all around the world ever since the global financial crisis in 2008-09.

Now Canada is finally getting in on the act. As part of its pandemic response, the Bank of Canada has pledged to buy at least $5 billion in federal debt every week, and has pledged to do so until the economy is well into its recovery. In addition to federal bonds, the BoC is also buying provincial bonds and corporate equities. 

Critics of this type of stimulus argue that it will lead to inflation in the short term and unsustainable debt in the long term that future generations will need to pay off.

Those voices are wrong, according to Dr. Jim Stanford, an Economist and Director of the Centre for Future Work. Dr. Stanford appeared as a guest on the latest episode of the Rational Reminder podcast and provided a fascinating argument for increased government spending even as we move past the pandemic and the economy begins to recover.

I think we’re going to need a similar, probably 10 year reconstruction vision to rebuild after our war against COVID-19.

It’s going to require not just the short term debts that government ran up to help people through the pandemic and the lockdowns, it’s going to require a long term commitment to mobilizing resources, in infrastructure, in expanded public services, in community services, in direct public sector hiring in order to get back to a place where economic growth can be sort of self sustaining again.

Dr. Stanford argues that the federal government has to finance a long run process of reconstruction, and with its deep pockets likely needs to support the provinces and even municipalities.

He says that old economic theories about inflation are wrong and points to Japan, whose public debt is 250% of GDP, as a country that should have had hyper-inflation and a collapse of its financial system, but in reality has been able to keep inflation in check with near-zero interest rates.

The Bank of Canada is creating money and facilitating government borrowing and spending, which Stanford argues is critical to both the immediate emergency and the long run reconstruction that’s going to be required.

“Every $100 billion of federal debt, and the other side of it is $100 billion that was invested to help people through the pandemic and help the economy to rebuild. In that regard, more debt is a good thing, not a bad thing.”

The podcast episode is a must-listen to better understand what’s happening in the economy, why deficit spending is not necessarily a bad thing (if used right), why quantitative easing doesn’t cause inflation, and what a post-Covid economy might look like.

This Week’s Recap:

I am incredibly excited to join the board of directors at FAIR Canada. FAIR is the Canadian Foundation for Advancement of Investor Rights. I look forward to helping the organization continue its mission to advocate for Canadian investors.

This week I wrote about sticking to your financial goals during the pandemic. Having multiple savings accounts and an emergency fund certainly helped us.

Promo of the Week:

I’ve helped many clients analyze their investment portfolios and I’m appalled almost every single time.

One portfolio I recently looked at held mutual funds with management expense ratios (MERs) greater than 3%. Many portfolios have duplicate or overlapping funds, others have a dangerously small number of individual stocks – including cannabis and bio-tech plays, while most are simply filled with too expensive mutual funds.

Investors are starting to catch on that they’re paying too much for investment products while receiving little to no advice. Many are afraid to move to a DIY solution because they’re not confident in their ability to manage their own portfolio. 

A better solution is often to invest with a robo-advisor. I’ve profiled Wealthsimple many times because it comes with lower costs (0.40% management fee for portfolios greater than $100,000), and can include advice from a portfolio manager who has a fiduciary duty to look out for your best interests.

Wealthsimple investors will also pay for the costs of the ETFs held in their portfolio, but that comes in around 0.15% or so. That’s a total all-in cost of just 0.55% for Wealthsimple Black clients (the ones with $100,000+). The fees are 1/4 the cost of a bank managed portfolio of mutual funds. And while the advice may be limited in terms of access, you can always pair the robo-advisor investment solution with a fee-only advisor to get a comprehensive financial plan or retirement plan.

Check out Wealthsimple and get a $50 cash bonus when you open up a new Wealthsimple account and fund it with $500 within 45 days. 

Weekend Reading:

Another excellent podcast this week was from Freakonomics – Remembrance of economic crises past.

The Credit Card Genius blog looks at the best options to replace your devalued Capital One Aspire Travel World MasterCard.

Here’s the latest episode of SPENT, which looks at the effect of Covid-19 on credit card balances and payment behaviour:

Financial planning advice is often catered to wealthier Canadians. But what can retirement look like for those with little to no savings to draw on?

Millionaire Teacher Andrew Hallam says to ignore experts who are building coffins for the 60/40 investment portfolio.

Michael James on Money looks at the limits of offering investment help to friends and family.

Late last year the Canadian Securities Administrators proposed to ban deferred sales charges on mutual funds. Ontario stubbornly refused to adopt these measures, caving to industry lobbyists looking to maintain the status quo. Dale Roberts nicely explains why there’s no need for DSC mutual funds.

My Own Advisor Mark Seed shares two expenses that are stealing your early retirement dreams (hint: it’s not coffee).

Rob Carrick answered a number of personal finance questions on Reddit this week, including his biggest financial mistake.

Mr. Carrick also shared how to get from zero to knowledgable on mortgage rates in 15 minutes:

“A low rate is the foundation of a good mortgage, but you should also look into how much you’re allowed to pay down the mortgage every year and penalties for breaking the loan before it comes up for renewal.”

Morgan Housel says to follow these five money rules while you’re still young, or regret it later in life.

Finally, a smart look at how extending free childcare could fuel a huge boost to the economy. Economists must be salivating over the number of real-life experiments playing out in response to the pandemic.

Have a great weekend, everyone!

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23 Comments

  1. Maria @ Handful of Thoughts on July 11, 2020 at 2:40 pm

    With all of the debt that government is taking on I have been very curious as to the repayment plant. Thank you for the Rational Reminder podcast recommendation. I will have to add it to my queue.

    Congrats on the board position. You are and will continue to be a great advocate for investor rights.

    • Enigmatic Lips on July 11, 2020 at 5:34 pm

      “With all of the debt that government is taking on I have been very curious as to the repayment plant.”

      Unlike the rest of us, national governments never repay their debts. This can be maintained as long as:
      1) they issue their own FIAT currency
      2) maintain a floating exchange rate
      3) issue ‘debt’ in their own currency

      The federal government can never run out of its own currency, cannot be forced to default on its ‘debt’, and it is not affected by credit ratings or credit markets. The risk is INFLATION; not fiscal capacity.

      At the moment, inflation is the least of our worries.

      • Rob in Germany on July 12, 2020 at 7:50 am

        Been following this debate for a while and I personally lean towards MMT but following this brings up two questions. How is inflation created. Everyone says it’s due to printing money but as Robb points out, central banks have printed trillions of dollars and will, for the foreseeable future continue. Second one is currency crisis, why can Japan print mowny but no Argentina can’t.

        • Robb Engen on July 12, 2020 at 8:16 am

          Hi Rob, here is Dr. Stanford’s explanation:

          There’s lots of things that cause inflation.

          The amount of total money in society can be a factor, there’s no doubt about it. So this is why you watch credit creation indicators as a sign of what’s happening, both in the real economy and with inflation. Remember, the quantitative easing that we’re seeing from the Central Bank and the money that’s created with it is not even offsetting the money that’s being destroyed through the contraction of private credit, because of the downturn and the loss in incomes and the canceled investment plans, and so on.

          On the net basis, the total amount of credit in the economy is not going anywhere. There’s huge excess capacity in industries, and that combined with competition, is going to keep a lid on prices. You have seen very weak indicators from consumer prices from wages and other things. So the idea that this will inevitably lead to inflation is wrong, both by looking at the current macroeconomic conditions, and looking at the experience of other countries that have been doing this for decades, and still haven’t ended up like Zimbabwe.

          It’s not to say that you can’t end up like Zimbabwe, you can, but what the central bank is doing now has nothing to do with that.

        • Enigmatic Lips on July 12, 2020 at 7:58 pm

          “How is inflation created.”
          In general, inflation occurs when NEW money is NOT used to create new goods and services.

          Banks create money out of thin air whenever they issue ‘loans’–see Bank of England (Money Creation in the Modern Economy, 2014). This process normally creates 20x more money than the federal government. So consider a mortgage used to purchase a house under the following conditions:
          1. Newly built house (new product created, GDP increases)
          2. Pre-existing home (change of ownership rights, nothing produced, no increase in GDP)
          Prof Richard Werner disaggregates credit into credit for the real economy (increases GDP) and credit for financial transactions (asset inflation).

          The founders of MMT are interested in full employment so they typically analyze government spending programs in terms of excess production and labour capacity to estimate its effect on inflation.

          BTW, countries like Argentina, Venezuela, and Zimbabwe invariably run into trouble for one or both of the following:
          1. fixed exchange rate
          2. borrowing in foreign currency
          Both promise force the government to produce something over which it has no control–another country’s currency.

          • Rob in Frankfurt on July 13, 2020 at 8:00 am

            Thanks Robb Enigmatic Lips (love that name – I need something more original LOL) but after posting that comment I listened to the podcast and he is a fantastic communicator, will definitely buy his book.

            I think where MMT could run into problems would you average low information voter caught wind of the idea we can print money endlessly and than elected an NDP government who ran the “printing presses” or should I say, hit enter on a PC, and started creating money. UIB of 2000 a month, 10 a month day care, drug benefit plan, more money for provinces and cities etc etc. Suddenly 500 billion dollar deficits become the norm.

            Not original with me but someone tweeted “well if we can just create money why do we need taxes?” good question.



        • Enigmatic Lips on July 13, 2020 at 4:49 pm

          “well if we can just create money why do we need taxes?”

          TAXES DRIVE THE CURRENCY
          National governments create new FIAT money out of thin air to purchase goods and services from the private sector. But since FIAT currency has no inherent value, why should be accept the government’s money??? The government imposes mandatory tax obligations payable in its currency. So we have to earn the government’s otherwise worthless money to pay our tax obligations.

          Monarchs invented FIAT currency and taxes so that we would willingly sell them our goods and services for their ‘worthless’ tokens–it’s the biggest, most brilliant scam ever invented!

          In addition, the financing of WWII taught central bankers that taxes serve a number of other useful purposes.
          TAXES FOR REVENUE ARE OBSOLETE
          Beardsley Ruml, Chairman of the Federal Reserve Bank of New York (1946)
          1. To prevent inflation (by destroying money previously created by the government);
          2. To redistribute wealth and income (actually destroying money and selectively distributing new money);
          3. To change public behaviour (e.g. alcohol, cigarette, carbon taxes);
          4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

  2. Gail Bebee on July 11, 2020 at 3:04 pm

    The economist you mentioned above is the same Dr. Jim Stanford who was the economist and policy director for Unifor (and formerly for the Canadian Auto Workers) for many years. He will have a certain point of view on deficits. How about covering an economist with a different point of view on deficits?
    Hearing both sides of an issue is usually very instructive for the lay person.

    • Gary on July 11, 2020 at 4:12 pm

      What a surprise that anyone with ties to Unifor wants more public hiring. Support private enterprise for a true recovery. The private sector bore the brunt of this mess and need to lead the recovery

    • Robb Engen on July 11, 2020 at 5:04 pm

      Hi Gail, sure there’s a certain point of view coming from Dr. Stanford but it doesn’t mean he’s wrong. Most economists seem to be in favour of deficit spending during a recession or crisis. The Freakonomics podcast I linked to featuring professor Christina Romeri (an expert on the Great Depression) also supported greater deficit spending and indicated that federal governments have not gone far enough in supporting workers, business, and states during the pandemic.

      I’m all for different points of view, but I think the days of austerity and trickle down have largely passed us by.

    • Enigmatic Lips on July 11, 2020 at 5:41 pm

      “How about covering an economist with a different point of view on deficits?”

      “[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
      Alan Greenspan, Governor of US Federal Reserve (1997)

    • Bruce Clarke on July 11, 2020 at 6:16 pm

      True. One would be hard pressed to find a more left leaning socialist economists. One could find hundreds of economists that refute strongly that you can spend your way indefinitely out of any crisis. The Japanese example is a very poor one as that economy has had enormous innovation and GDP growth per capita. Look where Canada lies on the list of innovative countries and On productivity per capita and you will see that there is no comparison between the two countries. We will be paying for this spending spree for generations.

      • Robb Engen on July 11, 2020 at 6:28 pm

        Hi Bruce, the problem with politicizing and calling this a “spending spree” that our grandchildren will have to pay for is it diminishes the crisis and the need for a strong government response at the time.

        What alternative would you have proposed? One could easily argue that governments didn’t go far enough in their response to the crisis.

        Again, in the Freakonomics podcast, they indicated something like 90% of economists believed the Recovery Act (from the global financial crisis) helped the economy get back on track.

        I’m not saying we won’t see an increase in taxes to help get the debt under control – eventually.

        But I don’t think it’s fair to just kick and scream at the enormous deficit number while ignoring the fact that a tremendous response was needed to protect our health and livelihoods, and the alternative would be … what, exactly?

  3. Linda on July 11, 2020 at 6:29 pm

    Hi I am wondering if you have read this book: The Price of Tomorrow: Why Deflation is the Key to an Abundant Future? I watched a webinar with Jeff Booth, thought provoking.

    • Enigmatic Lips on July 11, 2020 at 8:25 pm

      “The Price of Tomorrow: Why Deflation is the Key to an Abundant Future?”

      Deflation is great for savers but a death sentence for borrows. And most people are debtors.

      I think that the author is confusing the benefits that come from real goods and services with FIAT money which is just a bookkeeping entry.

  4. Kent on July 11, 2020 at 7:19 pm

    Good luck to all if you really believe debt does not matter. Name a country that keeps doing this successfully over the long term. Canada went through it in 1993 and Sask could not raise money. Japan will get there as well. If this was truly the case then we should just give everybody in Canada a million dollars. Debt always has a day of reckoning. Think for example what negative interest rates really mean. We will not like this but it my take longer than we think.

    • Enigmatic Lips on July 13, 2020 at 1:59 pm

      “Good luck to all if you really believe debt does not matter. Name a country that keeps doing this successfully over the long term.”

      Perhaps. But FIAT money has only been working for the past 4000+ years. By contrast, gold standards typically fail within a generation. (e.g. Bretton-Woods: 1944-1971).

      FIAT money is just the federal government’s IOU (debt). You can’t borrow your own debt and you can’t run out of your own IOUs. These are the inherent features of all FIAT currencies. The risks are devaluing the exchange rate and inflation. But we’ve got bigger problems.

  5. Nancy on July 11, 2020 at 10:38 pm

    Someone will have to pay for all this debt in order for the economy to fully recover. I am expecting that the Government will lower the capital gains exemption to help pay for this debt probably sooner than later. It will be hard to increase taxes when we are already highly taxed.

  6. JG on July 12, 2020 at 6:34 am

    You’re right. Governments had no choice in this matter. Mind you people sitting at home making more money than they do on the job isn’t helping the problem.

    The mistakes were made prior to the pandemic. Recessions typically happen every 8-10 years. For the last decade western governments have not been preparing for the inevitable rainy day….and here we are now as a result. You just know that we who have made the financial sacrifices over the years will now have to make yet even more sacrifices.

  7. Rob in Frankfurt on July 13, 2020 at 9:52 am

    Doug Hoyes did a really good podcast on this, good counterpoint to his comments. If you have 30 mins I highly recommend it

    https://www.youtube.com/watch?v=TMGDaTGx3V4&feature=youtu.be

    • Robb Engen on July 13, 2020 at 11:06 am

      Hi Rob, I listened to the podcast but was not very impressed with the counter arguments of someone who is not an economist or public policy expert. All I heard was the same tired arguments about inflation, Venezuela, and that hiring a lot of people is “hard”.

      MMT is not just a license to print and spend money. It’s about using the federal government’s enormous fiscal capacity to create jobs and keep the economy going in bad times. It doesn’t work if spending is reckless or misplaced.

      As Dr. Stanford said,

      “Every $100 billion of federal debt, and the other side of it is $100 billion that was invested to help people through the pandemic and help the economy to rebuild. In that regard, more debt is a good thing, not a bad thing.”

  8. Robb Engen on July 13, 2020 at 11:00 am

    @Rob in Frankfurt – Ben Carlson just wrote a piece on that topic (why do we have to pay taxes if we can just print our own money without consequences). There were four reasons why, and here’s one of them:

    “Taxes act as a restrictor of sorts in that they can help keep inflation from getting out of control.”

    https://awealthofcommonsense.com/2020/07/if-we-can-print-our-own-money-why-do-we-have-to-pay-taxes/

    • Rob in Frankfurt on July 15, 2020 at 2:25 pm

      Thanks, as mentioned, once people get used to the idea we can just “print money” The temptation to do so will be there.

      Also I’d recommend adding crusoeeconomics.com/ to your reading list. He’s quite good at explaining complicated economic problems in laymens terms

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