Canada’s economic success in 2021 will depend heavily on the U.S economy, Canadian economists have no clue what’s going on – December 5, 2020,
So in the minds of many economists who base their beliefs on theories derived from academic textbooks, many of them are having a hard time interpreting deflation combined with liquidity. What’s happening in the Canadian economy right now is quite simple actually, the Mainstreet economy is deflating and the central bankers are providing liquidity attempting to get more people, companies, and government into more debt.
The problem with debt revolves around debt servicing if let’s say I need $1000 Canadian dollars per month to service my debts, I will need to make at least $1000 every month. In the private sector, private banks and private institutions are willing to finance or give loans to the people, the private financial institution believes has the ability to pay them back.
In the government, things don’t operate that way, The Bank of Canada is a Crown Corporation, and the only relationship it doesn’t have much control over is the forex markets. The Canadian dollar could rise and could fall based on perception and if the Bank of Canada can’t control this rampant inflation becomes problematic.
In the modern era, we’ve been taught to think of inflation as a good thing, but the reason behind this backward thinking has to do with what’s really happening to the economy which is deflation. Technology has actually been the great deflation, what’s kept inflation has been government and central bank intervention.
Instead of bad ideas or bad businesses going bankrupt, governments all or the world have been playing the role of Jesus attempting to save and provide welfare to every failing big business that asks the government for a handout. Making matters worse are the failing individuals who vote for more government welfare.
The entire Canadian economy revolves around government welfare and our system works for a reason and those reasons only, our ability to manipulate our currency and geographic location. We border with the United States. Our economy benefits greatly from bordering with the United States, however, because of this, any of our politicians confuse this with a free lunch.
Justin Trudeau has benefited greatly from Donald Trump’s regulatory cuts, which has created a sort of stimulus for the U.S economy. Unfortunately, it appears that Joe Biden will be the new president of the United States in 2021 and so far the markets have signaled that as a negative for the U.S economy. U.S Stocks are up, by the U.S dollar is down, typically this means people are in some way shape, or form dumping their U.S dollars.
People who can do so are also getting out of debt and savings rates in America are going up, the markets know some challenging times are ahead, but I personally believe it will take Canadian economists to figure out why the Canadian dollar is rising and might continue to rise which is a bad thing for Eastern Canada.
Now, as was the case when Stephen Poloz was the Bank of Canada governor, the BoC will have to cut rates if the Canadian dollar as an example reaches parity with the Greenback. America is Canada’s largest trading partner and there still are U.S states which ‘right to work’ States that become very competitive with Eastern Canada if the Canadian dollar is near parity with the U.S greenback.
The Canadian government is very big and it’s not like we’re the United States whereby we have military bases all over the world, so at the very least there’s a demand for a public sector. In Canada, our public sector for the most part benefits public sector workers and Canadians dependent on Welfare and this is very challenging to pay for if Canada’s private sector continues to shrink or runs into solvency problems.
So, currently, debt servicing in Canada is being paid not by Tax collection but instead by printing money. Usually, this equates to inflation, but this hasn’t happened yet, why? It’s because of confidence, the markets still believe there’s a way out of this, the markets are gambling on it.
The problem is that under Obama, everyone knew this debt was unsustainable, but Donald Trump made people believe that the debt was manageable, Joe Biden on paper has worse economic policies than Barack Obama and it will be challenging for the markets to interpret what Joe Biden is going to do, which usually means stagnation and debt repayment for those who can repay debt.
In short, the Canadian economy is deflating, but the Canadian government can’t go bankrupt before the people do. In Argentina, people love their big government, things get progressively worse, but for people on the Left, anything is better than capitalism, so that’s how this works, and you will have to navigate your way through it, as the dollar rises next to the U.S dollar, don’t think pres will go down for consumers, expect the opposite to happen, expect prices to go up, all fiat currencies are going down, what will be happening is that some will be going down faster than others.
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Interesting times ahead!