With a global debt load of $291 trillion, these are dangerous times - Macleans.ca
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With a global debt load of $291 trillion, these are dangerous times

Prudence demands that Canada’s governments get back to a financial position that would allow them to respond to the next financial crisis


 

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Scribes of my generation were programmed to keep numbers out of the first sentence of works of journalism. Now that we are in the second sentence, I can relay the Institute of International Finance’s latest tally of global debt: $291 trillion at current exchange rates. That’s the most ever, according to the IIF, the Washington-based lobby for big global banks and insurers.

What does one do with a number like that? Another contrivance of journalism is to convert big numbers into something concrete. So let’s see if that helps: the world’s governments, companies and households are on the hook for 18 million tonnes of loonies, which would be roughly equivalent to the weight of the 9.4 million cars and light trucks sold in Canada between 2013 and 2017. In other words, $291 trillion is a load.

But it doesn’t feel all that heavy, does it? Interest rates are low and global economic growth suddenly is pretty good. Last year was the best one for the global economy since before the Great Recession, and 2018 could be even better. Canada’s unemployment rate was 5.7 percent in December, the lowest on records dating back to 1976. The U.S. jobless rate was 4.1 percent, the lowest in 17 years.

It might not seem like it, but these are dangerous times.

The extraordinary policies that central banks and governments deployed to fight off a global depression finally are working. But those measures have been in place for so long, they now seem ordinary. Deficits and debt were something of an obsession during the 1990s and for most of the 2000’s. Not anymore. Donald Trump and his Republican enablers in Congress went ahead with their tax cuts even though every reputable forecast showed they wouldn’t pay for themselves. Canadian households are now among the most indebted in the world, despite repeated warnings from the Bank of Canada that their borrowing was getting out of control. The International Monetary Fund says China’s corporate debt has grown so large that it represents a threat to the global financial system.

READ: Congrats, Canadians: You’re world leaders in debt

It’s possible the post-crisis credit boom is peaking. The nominal size of any debt is less important than the debtor’s ability to keep up with payments. Stronger economic growth will make the burden easier, especially if interest rates remain relatively low. The IIF’s debt tally is the equivalent of about 318 percent of global gross domestic product, an incredible number. Still, the debt-to-GDP ratio has declined for four consecutive quarters, and 34 of the 47 countries in the survey have lower ratios than they had a year earlier. Corporate profits are strong, suggesting firms are in a position to reduce debt if they so choose. The Bank of Canada says stricter lending rules should stop Canadians from obtaining mortgages they can’t afford, while a strong labour market offsets the risk that real-estate bubbles in Vancouver and Toronto trigger a housing bust.

But there also are troubling signs. China seems wedded to its economic growth targets, even if that means financing unnecessary investment and allowing zombie firms to shuffle dangerously along. And then there is the United States. According to the Congressional Budget Office, the country’s debt-to-GDP ratio currently is about 91 percent, and Trump’s tax cuts will push that figure close to 100 percent. That’s a range that some economists say correlates with trouble. Jacob Lew, the previous U.S. treasury secretary, called the tax plan a “ticking time bomb.” Lew worked for Barack Obama, but worry over the U.S.’s finances is bipartisan. Only the purest ideologues think Trump’s legislative “victory” will be a win for the American economy over the longer term. The stimulus from lower taxes will put upward pressure on inflation, forcing borrowing costs higher. The federal government’s interest payments will rise, limiting Washington’s scope to finance infrastructure and other productive investments. Republicans will pursue spending cuts, which the Democratic minority will resist. Get ready for more years of gridlock and uncertainty in the world’s most important economy, all because Republicans wanted to secure a big corporate tax cut before an arbitrary deadline of Christmas 2017.  

There is a risk Trump’s indifference to debt will spread. The IIF says other countries could attempt to outdo the U.S. for competitive reasons, as they did when Republican presidents cut taxes in the 1980s and 1990s. The pressure is already building in Canada, with tax-cut advocates such as the University of Calgary’s Jack Mintz arguing that Canada has lost its competitive advantage in North America.

The federal government and the provinces are going to have to give some serious thought to taxes. But as they do so, they will have to weigh the merits of lower taxes against the competitive advantage that can be had from sound finances (lower interest rates, stable exchange rate) and a spending regime that addresses income inequality and encourages productivity. 

READ: On business tax, Liberals need to catch up to the U.S.

As this debate takes place, keep in mind that Canada’s debt problem is private, not public. Finance Minister Bill Morneau’s deficit of about $20 billion seems big, until you measure it against the size of the economy, when it becomes a meagre 0.9 percent of GDP. Net debt is about 30 percent of economic output, less than half of what it was in the mid-1990s. Five of 10 provinces have balanced budgets, including Ontario, Quebec and British Columbia. Saskatchewan thinks it will join that group by next year.

That isn’t an argument for complacency. Prime Minister Justin Trudeau and some of the provinces were able to offset the commodity-price crash of 2014-15 with deficit spending because Canada’s public finances were in excellent shape. Now that the economy has rallied for more than a year, governments should be making—and publishing—plans to reduce debt.

They need to do so not because Canada’s public finances represent a threat. Rather, fiscal stability will be an advantage at a time when so many economic actors will be weighed down by past borrowing. At a minimum, prudence demands that Canada’s governments get back to a financial position that would allow them to respond to the next financial crisis, which could be triggered by U.S. politicians, Chinese executives, or Canadian homeowners.  

WATCH: How to keep from drowning in credit card debt

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With a global debt load of $291 trillion, these are dangerous times

  1. Cancel all debts ……start over.

    • You are so cute when you are naive – at this point the government owes me over $50,000 for a contract I completed for them. So you would have that debt cancelled for what? All that would happen is that I would push off paying my debts and over time no one would extend me credit to run my business and I would go out of business. Repeat that situation a couple of thousand times and you have crippled whatever economy we have left. The government can pretend to start over but like people who go bankrupt, unless they have committed to changing their spending habits, they will quickly run up more debt once discharged.

      • Even funnier when you consider Emily is a senior. Does she realize how many bonds are held in pension funds? In the CPP fund? Does she realize that if all debts were cancelled, every insurance company the world over would be instantly insolvent, so all insurance would be cancelled as well? No, she doesn’t. She is a true believer in the powers of government to make everything better with no pain or hardship. That’s the view from the trailer park I guess.

  2. Considering that every economy is nothing more than a man made model to organize work and resources for the betterment of society, isn’t it odd that ours is so fraught with dangers and crises?

  3. “Prime Minister Justin Trudeau and some of the provinces were able to offset the commodity-price crash of 2014-15 with deficit spending because Canada’s public finances were in excellent shape.”

    Thank-you Mr. Harper.

  4. This is rich coming from the MSM who acted as head cheerleader for the Trudeau cabel who promised to to run up the deficit and debt during the election and have gone into overdrive after the election. This is rich coming from the MSM that have been cheerleaders for every climate change/global warming/push for electric cars/push for solar and wind power which have done nothing to add to government debt (which is really taxpayer debt) to the point that we really can’t even pay for the day to day essentials that Canadians expect their governments to provide,

    At the local government level roads are falling apart at every street level, water mains and sewer lines are crumbling and the solution is always to increase property taxes – the number of people that could be staying in their homes as they age are making the decision to leave because property taxes are going up and up and up and on a fixed income they can no longer pay it. Guess what – the house is not being bought for the owner to live in, but to rent (and to cram as many people in as possible to pay the expenses. In my 1960s suburb, in the last year at least 4 houses have been bought from older residents and converted to essentially a boarding house with the problems that it brings – if you have 5 guys living in the house you have 5 cars parked on narrow streets and they have 5 girlfriends who also park they cars on the street when they stay over. At the provincial levels health and education is suffering – waitlists are manipulated to make it appear to be shrinking, but that only thing that is happening is that the knee replacement list goes down, but cataracts go up. Education is a mess with bureaucrats trying anything and everything since they have no real information to decide what might work except teacher unions that are harping on about smaller class sizes. And at the federal level they are just throwing money away on any project that JT seems to give the nod too – bring in more refugees which is a life long support program for most who will never contribute to the country’s finances.

    Here’s some solutions that the MSM could use to regain some credibility over the next few years. Do real reporting on what the cost of government spending is. Which means you might have to have real journalists become familiar with little things like understanding numbers, understanding what the scope of government responsibilities are – should the federal government be doing this program, why is the local government spending millions on renovating a building for a program they are not responsible for. Politicians at all levels and all political views need the heat put on them to be accountable and responsible That is the real job of the media – something that they have omitted for the last couple of decades as they reach of headline grabbing news. Only busybodies care if Donald and Melenia sleep in separate rooms – lots of married couple do because they want a good night’s sleep – THAT IS NOT HEADLINE NEWS!!!!

  5. What I don’t understand is who are these debts owed to? The fine article doesn’t address that, but I think that’s an important part of the equation.

    • Any person or company or government who holds a bond, that’s who. Granny with her Canada Savings bonds. Uncle Joe with his T-bills. Mom with her money market mutual fund. Pension plans, both public and private, including the CPP. Insurance companies. All hold debt, and all would be instantly insolvent if suddenly debts were wiped out.

      Any entity – be it a business or a human being – who purchases a bond or invests in a money market fund, or an “income” mutual fund or balanced mutual fund is owed the face value of those bonds upon maturity of the debt. That’s why “cancelling all debts and starting over”, which sounds like such an attractive option, is a non-starter. It’s not some anonymous wealthy banker who will be out the money. It’s anyone who plans on collecting a pension, or anyone who has paid for insurance of any kind. Basically all of us would be stiffed.

      • That’s my point. One person’s debt is another person’s asset, literally. The article states the world is in debt to 291 trillion. Who’s coming to collect, Mars?

  6. Almost Everyone’s Guide to Economics
    John Kenneth Galbraith, Nicole Salinger
    Bantam Books 1978 Page 92

    “If there is idle capacity and unemployment, the government must spend more that it receives in taxes………there is no merit at all in a policy that just balances income and outgo, none whatever.”

    • What is that, the science of fiction?

      Economies are just algorithms to organize work and resources for the betterment of society.

      Our “market based” economy is a casino.

      So called experts claim to know how to beat the house without ever considering if gambling makes society better.

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