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.
- Using a robo-advisor in retirement
- Tackling changes to your retirement income plan
- Tax loss harvesting at work
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!
