Inflation beaters - Canada rocks

A reality is that politicians are seldom courageous enough to run on a platform of raising taxes to reduce deficits and pay down debt ─ and almost certainly not now.
Much easier to pay lip service to debt and deficit reduction at a price of inflated money supplies and tolerable inflation; in other words, to monetize the debt. However, the risk in this approach is of inflation getting out of hand, and in the extreme becoming hyper-inflation.
In historical terms the catastrophic collapse of Weimar Germany wasn’t all that long ago. Earlier this year, Zimbabwe, another hyper-inflated country, got to printing bank notes in denominations of up to one hundred trillion dollars, worth about US $30 at the time.

(As a side note, when I left Zimbabwe thirty years ago, I got two US dollars for every Zim dollar - Jacoline Loewen).

Imagine how China would feel if it’s estimated $2 trillion worth of U.S. Treasury bonds (purchased to help the U.S. fund its massive trade deficits) were redeemed in a currency debased anything like this. If there is one thing we should have come to realize it is that the Chinese are no pushovers.
Of course, something this extreme couldn’t conceivably happen. Nor should it, given the U.S. economy’s famed entrepreneurial drive and its enviable record of adjusting to new economic circumstances and growing afresh. Warren Buffett is one who believes America’s best days could yet lie ahead now that it is confronting its challenges “with knowledge”. I especially liked his latter reference, also having long learned never to sell an irrepressible America too short.
A much more palatable, middle-of-the-road option for debt and deficit-strapped governments would be to boost the productive capability of their economies. If inflation is defined as too much money chasing too few goods and services, and economies everywhere are awash with stimulus and deficit money, why not raise the output of goods and services to balance the two better. This way there would also be a cap on prices – and on inflation. The way to achieve this better balance? Encourage cost-saving, productivity-enhancing investment in new plant, equipment, systems, infrastructure – in everything!
In his admirable work, John Aitkens, investment strategist at TD Newcrest, sees a half-speed economic recovery accompanied by a full-speed boost in productivity. He reminds that when this happens the bottom-line impact on corporate profits can be tremendous.
Clearly, the greater the debt and deficit burdens, the greater the inflation threat. The IMF debt-to-GDP danger benchmark is 60%. In Britain and Japan this ratio is already at or close to 100%, in the US approaching 80%. In Canada by comparison it should remain in the low 30% range even allowing for the increased deficit-funding debt issues to come.
Unlike most other G8 and OECD members, Canada did save for a rainy day by using that string of past budget surpluses to pay our national debt a long way down. Not too many years ago we too had exceeded that dangerous 60% high water marker, but no longer.
Thank you, Paul Martin!
Canada’s continuing relative fiscal strength cannot be over-emphasized. Where a U.S. budget deficit of $ 2 trillion would be 13% of GDP, Canada’s at $50 billion will be closer to 3%. The same with the respective national debt burdens - theirs 80%, ours 35%. For this reason alone a resurgent Canadian dollar represents a problem of strength (not of weakness), despite the shorter-term pressures it is putting on our manufacturers and exporters.

1 comment:

toronto insurance broker said...

A very interesting and global analysis, thank you. Now I'm wondering how the strong Canadian dollar will influence the country's economy. Could it possibly slow down the recession recovery? Regards, Lorne.