In a circumstance where the whole world economy is based on debt, has the COVID pandemic given us any cause to consider the eventual economic one?
Anybody who has been paying attention should know that from the smallest consumer to the largest sovereign economies (US/China) and every government in between, debt is the common denominator.
The pandemic of personal debt all started with the credit card of course. Prior to that, if we didn’t have it in our pocket, or in the bank, we couldn’t or didn’t buy it. Though American Express preceded it, we can really blame Bank of America and Master Card for the invention and subsequent proliferation of credit card and consumer debt.
And what an invention it was…an instant loan and a payment process in a thin card, accepted universally, that you could carry anywhere. People quickly realized that they didn’t have to apply for a loan, and as long as they could make minimum payments, could have every material thing they ever wanted, right now! And they quickly forgot, or never comprehended, that it wasn’t all free.
Fewer still ever realized it was a permanent barrier to their long-term financial security, and almost none used it to their advantage. So not only did we develop an obsession with material goods, but shopping became a recreation…and debt a way of life. And the fact that economists measure consumer spending as a key indicator of GDP and economic health never meant that you had to accept that as a personal challenge.
As time went on, our own lack of attention to finances and our burgeoning greed started governments on the same path. To secure our votes and stay in power, and because taxpayers apparently no longer cared, they started bribing us with our own money. And when that ran out, in the mid ’70s, they started bribing us with borrowed money, and ever increasing deficits. And do we have anything to show for all this spending? There have been a few positive results, but when a third of your taxes go to pay interest on your government-subsidized lifestyle, definitely not enough.
As both Canada and the US are inexorably linked in their trade, economies and stock markets, for the purpose of this dissertation I will look at them interchangeably — US economic woes will quickly become Canada’s.
After the COVID dust settles, Canada will have a national debt approaching $1 trillion. The US will have one about $27 trillion, though i’m not sure either really knows exactly, yet. And how precarious is all this?
For most of the time since WWII, the US has had the strongest sovereign economy by far, and the US dollar has been the world’s currency. And with the removal of the gold standard they have essentially been able to ‘print’ money as needed on the basis that America will always be able to support it. So far, that has worked, because most international business, and oil in particular, the most important commodity, use the US dollar as their unit of exchange. One of the doomsday financial scenarios has China and others demanding to buy oil in their own currencies. The resulting depreciation of the US dollar would throw the world economy into chaos, which is one of the reasons that it has not happened…so far. (By the way the US in no longer the world’s largest economy.)
Who owns all the debt? One of the popular misconceptions is that the US debt is owed to foreign sovereign states and so, who really cares? That is not the case; nearly 70% of the US debt is internal. And the vast majority of that is defined as ‘public debt’ with the rest being is ‘intergovernmental debt.’ Do we have to guess who is ultimately on the hook for both of those?
The rest of US debt IS owed to other countries, through US Treasury securities, with China and Japan being the largest creditors, though both have been reducing in recent times.
And what has the COVID pandemic taught us? Once again, when the economy is in trouble, Western governments solve the problem by throwing money at it. Of course, it’s all borrowed money…and one of these times, there will surely not be enough money! Because when investors start to rate US (or Canadian) government bonds in the ‘junk’ category, where default is suspected if not inevitable, and thus no one wants them, borrowing starts to become a real challenge.
In recent times, Western countries had to start to solving their regular economic crises through ever more creative means. First there was ‘Quantitative Easing,’ which is essentially the process of having central banks (read the Fed or the Bank of Canada), buy government bonds and other securities that nobody else really wants, and then flooding the market with them to increase available money. And by increasing the money supply through newly created reserves, the Fed provides banks with more liquidity for low cost loans. If it sounds like three-card Monte or a Ponzi scheme, you would not be far wrong.
In funding for COVID relief the US got even more creative and removed the fig leaf that hides the US Federal Reserve Policy from Government Policy. Trump declared that he would add $2.4 trillion of debt to fight COVID (read save the economy) and the Federal Reserve said it would buy it all, but without any paper to support the transaction…therefore creating money out of thin air. And if you think this is financial insanity, many economists would agree with you. Remember that this is a president whose businesses have gone bankrupt six times. What he knows about economics is to borrow more and more money until you can’t, then have someone else bail you out! Again, guess who that is supposed to be? Then go take a look at what happened pensions and bank deposits in Greece or Cyprus.
After a while you have to wonder whether the folks creating these economic devices actually know what they are doing, or is playing with OPM (Other People’s Money) just an experiment for their next macroeconomics thesis or theory?
During the past three months, I’ve also heard people suggest that we are just getting our our tax dollars back through CERB [Canadian Emergency Response Benefit] and other programs. Not really; in Canada our taxes run $20-25 billion short in a good year, and the $250(?) billion of pandemic spending will be on top of that. This year’s deficit will be 10 times the usual!
And was all that spending done with genuine compassion for the aggrieved and needy public? Maybe in Canada to some extent, though political survival and re-election opportunities are never to be ignored. But in the States…not a dime went to compassion. It was obvious from the start that DJT was more focused on restoring the economy, his only ‘semi-legitimate’ achievement, than preserving lives, which is why so many will die.
And how much of the spending was fear? Not fear of the health impact, but of the financial one? Has the health pandemic given us a glimpse of the eventual financial one? Has COVID shown us the tip of the iceberg?
I doubt many politicians are smart enough to understand the financial consequences empirically, though they might intuitively. Because, if we all continue to borrow and spend gratuitously, how does it all end? Maybe like the ‘cooking frog’ analogy, slowly and without suspecting…until the water starts to boil!
First, more people won’t be able to pay their bills. (Canadian personal debt is already at an all-time high, and a source of repeated concern to the Bank of Canada.) After a while merchants, utilities and other owners of that personal debt, start to run short of cash to run their businesses or pay their suppliers. Eventually both start to default on their taxes. (Has anybody looked at the CBRM Tax Receivables lately?) Now it really starts to hurt…the formerly bottomless pit of of tax dollars begins to look awfully shallow. And when government can’t print or borrow more money and their sources of revenue dry up, and they default on their own payments, what happens? You don’t have to be a Harvard economist to see the ultimate chaos and resulting collapse.
And when? Well, I’m not a Harvard economist either, but I can see the road, where debt has removed the guard rails, and the US is breaking the speed limit, so there will surely be a crash eventually, if we stay on this road!
Luckily the solution is simple strategically, but extremely challenging in process and psychology. The answer for one and all is to stop spending and borrowing money we don’t need, or can’t afford. The first personal guideline and the most important would be:
“Never borrow money to buy anything that Depreciates,” — MJ
The worst offender to that rule of course would be cars, but it would also eliminate just about everything else except a mortgage or a student loan; both of which almost always appreciate.
And maybe learn the difference between price and value. Price is what you pay and value is what you get — or don’t get. And added value is more often than not a local purchase from a local supplier. For instance, though my regular hardware store might have slightly higher prices, their knowledgeable staff save me money on DIY projects and make up the difference on a regular basis. Plus, like most local businesses, they support the community and the people in it; added value and an excellent return on investment.
Maybe, once we learn to practice the basics of good personal finance, with fewer car, TV, furniture, credit card and loan payments, we can start to hold others, like our governments, to the same standard. If we actually have the will and the stamina to manage ourselves, we can demand that those managing our tax dollars do the same. Governments need to be rewarded for being good custodians of the overall public purse, not for putting the most dollars in your own. They should still have a social conscience, but balanced and ‘tough love’ debt reduction should be the priority. One thing on which all economists agree is that persistent deficits propel public debt to levels that impede economic and personal income growth. As per the maxim that “there is no such thing as a free lunch,” government largess and spending may look good in the short term, in the end it’s coming from our pockets.
If any good can come from the COVID economic downturn it is that people are forced to think more seriously about their own financial strategies. That many people affected by the economic damage wrought by the recent COVID pandemic will change their habits by cutting back on spending, reducing debt and increasing their savings. Reducing spending and debt and increasing savings are not bad things; they are the way to personal financial security and a successful retirement. Unfortunately for most other Canadians, it is more likely that life will continue as usual where the pursuit of an optimal lifestyle overshadow concerns about future financial security, and that of their country.
Mike Johnson
North Sydney
The Editor responds:
My views on this subject are about as incoherent as they are strong, so I would direct readers to someone much better able to articulate what I would like to say than I am — namely, to the author of The Deficit Myth, economist Stephanie Kelton.
