We crunched the numbers today, and all indicators point to domestic price inflation paired with consumer behavioral deflation. In simpler terms: as consumer prices rise, Canadians are likely to purchase less. This dynamic creates a serious challenge for the Bank of Canada, especially as the foreign exchange (forex) markets react to these pressures.
Many commentators speak about Modern Monetary Theory (MMT) as if it’s still a future concept. We argue it’s already here. People assume that “printing money” should naturally lead to lower interest rates, but that theory presupposes a sound fiscal position—something Canada no longer enjoys.
Canada’s Past Resilience and Today’s Vulnerability
Canada’s housing market famously avoided collapse during the U.S. housing crash. Instead, it continued climbing. On September 20, 2007, the Canadian dollar (loonie) reached parity with the U.S. dollar for the first time since 1976. This was driven in part by how the George W. Bush administration responded to the U.S. housing collapse—a collapse sparked largely by the rise of subprime adjustable‑rate mortgages (ARMs) offered to borrowers with weak credit histories and inexperienced real estate investors.
It’s important to note that subprime ARMs are very different from standard adjustable‑rate mortgages. The subprime versions targeted high‑risk borrowers, creating systemic vulnerabilities that Canada largely avoided. Under Stephen Harper, Canada’s economy was not booming but was better managed. Harper cut the GST and still managed to shrink the deficit—achieving fiscal discipline without imposing deep austerity.
When Justin Trudeau became Prime Minister, the federal government shifted course—running large deficits and imposing heavier regulations across the economy. The result has been a steep decline in Canada’s economic fundamentals.
Mark Carney and the Private Sector Disconnect
We’ve tried to give current Prime Minister Mark Carney the benefit of the doubt, but it’s becoming increasingly clear that he is not a skilled salesman. What we mean is that Carney doesn’t seem consciously aware of how to communicate with niche markets. He comes across like a man trying to sell a brand new Ferrari to someone who can’t even afford a beat-up, 20-year-old Honda Civic.
Carney approaches the private sector like a bureaucrat—assuming that Canadian branding and polished language alone will attract capital. In reality, investors look for returns, and those returns in Canada are deteriorating rapidly.
The ongoing Canada Post strike is a perfect illustration of what’s wrong with Canada’s public sector and its currency. Jim Gallant, representing Canada Post’s union (CUPW), recently stated: “Government can’t be insolvent.” This mindset reveals a pervasive belief in Canada’s public sector: no matter what happens, the money will always keep flowing. We agree with that premise—but the real question is: what will those Canadian dollars buy?
Cuba is a cautionary tale. Cuban pesos flow into the government endlessly, but without U.S. dollars, they buy nothing internationally. Canada is increasingly seen as a hostile trading partner, and the only thing holding our economy together right now is the financial sector.
Austerity or Collapse
Austerity is the obvious fix, but politically it’s a nonstarter. The People’s Party of Canada is the only party polling above 1% that openly talks about austerity. The Conservatives promise a return to the Harper years—yet we argue those years helped set the stage for today’s demand for Trudeau‑style policies. Most of Canada’s price‑control legislation happens at the provincial and municipal levels, which means that even if the Conservatives win federally, provinces and cities may vote for leftist candidates promising to “fight back.”
This creates an environment ripe for currency debasement. To be fair, Justin Trudeau appointed Tiff Macklem, whom we consider one of the better Bank of Canada governors in modern history. His predecessor, Stephen Poloz, cut rates when he should have been raising them—a political rather than economic decision.
Now Pierre Poilievre is signaling he’d hire a Bank of Canada governor who would lower interest rates, which could spark stimulus spending at the provincial and municipal level—money we believe will be used to further enrich the already bloated public sectors.
The Road Ahead
Based on his track record of financial prudence, we assume Tiff Macklem sees the same warning signs we do and will act accordingly. In our view, he will likely raise interest rates aggressively because, frankly, it appears that Mark Carney does not know what he’s doing.
Some argue Carney’s actions are designed to benefit Brookfield. If that’s the case, he’s a poor representative of both Brookfield and Canada. We’re not fans of Justin Trudeau, but we can at least admit he’s a skilled communicator—albeit an incompetent manager. Carney, by contrast, has an impeccable résumé but behaves like an academic who speaks the language of finance without fully understanding it. This disconnect has become shockingly clear as we’ve examined his decision‑making.
In short, Canada faces a choice between austerity or economic collapse. We would go so far as to argue that Canada’s situation is now worse than Argentina’s Peronist era. However, if Tiff Macklem raises interest rates decisively, all segments of government will be forced to change their behavior. If you think this can’t happen, we argue the math shows that it might be inevitable.
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