Falling loonie, rising food prices, selfie-obsessed PM – a look at Canada’s economic collapse

For years, especially since the financial crisis of 2008/2009, Canadians have sneered at their neighbors to the south. Citizens of the Great White North have repeatedly mocked Americans for their economic and fiscal picture in addition to the nation’s foreign policy. And why shouldn’t they? $19 trillion in debt, $120 trillion in unfunded liabilities and expenditures, a part-time/temp/freelance jobs nation and an empire that is unsustainable. The American Dream, to Canadians, is just that: a dream.

But Canadians shouldn’t be so holier than thou and proud of their own economy. In just the last year or two, the Canadian economy has witnessed a horrific amount of destruction, perhaps even worse than the global economic collapse.

This week, a certain Canadian billionaire by the name of Kevin O’Leary made headlines. He remarked that he would invest $1 million in Alberta’s energy sector if New Democratic Party Premier Rachael Notley would step aside – Notley’s NDP has been in power for only a few months and the province has already gone down the tubes. He also hinted at running for leader of the federal Conservative Party, which made plenty of noise across the media landscape.

Essentially, O’Leary thinks “Canada is broken” and “someone needs to fix it.”

O’Leary, who is pretty much a self-made man and has described himself as politically agnostic, has said the country needs a leader who has made payroll at least once in his life. It would be a far better upgrade than the last three prime ministers: Paul Martin, Stephen Harper and Justin Trudeau.

Speaking of Trudeau, a man who said budgets balance themselves and the best way to grow the economy is “from the heart outwards” (apparently taking his economic advice from “Care Bears”), he thinks everything is just rosy. It’s just as bad Ontario Liberals embracing Tim Hortons economics.

In fact, the Liberal Prime Minister believes you can return Canada’s economy to prominence through deficits and selfies. Did anyone expect anything else? Trudeau, a privileged kid born with a silver spoon in his mouth, likely hasn’t read an economics textbook, or anything more serious than a Vogue magazine.

Let’s not get into the Bank of Canada (BOC).

Central bank head Stephen Poloz has slashed interest rates to 0.5 percent, and there’s already talk that he will cut them again next week. At the same time, Poloz has warned about an overheated housing market and skyrocketing household debt. Is it any wonder? This is the unintended consequences of artificially lowering rates to near zero.

A collapsing loonie, soaring price inflation, government ineptness, a mimbo (a male bimbo for all of you non-Seinfeld fans) prime minister and a weak global economy are all ingredients for a recipe of disaster for canuckers from British Columbia to Prince Edward Island (Canadians never think of those in the Territories).

Worried about the Canadian economy? You should be. Here are six signs the country is in store for a financial crisis of its own.

Annual $10 Billion Deficits

During the election campaign, Trudeau vowed to run annual budget deficits of $10 billion. Since then, however, he has hinted that it could be greater than $10 billion. Any multi-billion-dollar deficit won’t bode well for taxpayers as it’ll lead to future taxes, cuts in programs and massive debt payments. Remember, any kind of spending is a tax.

This kind of Keynesian thinking has been tried before without much success.

Here is what Trudeau told reporters just before the Christmas break:

“We put forward $10 billion as the goal that we were looking to keep for modest deficits. But at the same time, we committed, on an ongoing basis, to keep you apprised if the situation worsened. Our entire budgetary framework is focused on growth that benefits Canadians, through investment, and through support for the middle class. And that’s what we’re going to continue to do.”

Trudeau has pledged to balance the budget by 2020, which is very doubtful. And even if he did then that means at least $40 billion more added to the ever growing national debt. Let’s face it: Trudeau has never had to balance a budget in his life. How could he possibly understand how to balance the books at the federal level?

Many supporters have asked the question: what’s the big deal? Why shouldn’t we be running budget deficits? Despite Canadians chastizing Americans for their lack of fiscal discipline, they have embraced the George W. Bush/Dick Cheney viewpoint of “deficits don’t matter.” But they do matter. Just look at the state of Greece today.

Critics of this initiative often argue (rightly so) that budget deficits are irresponsible, ill thought out and even cowardly as it poses a tremendous financial burden on future generations. Let’s not forget how these deficits take money out of the hands of the private sector, who are more likely to do a much better job of their capital than the likes of a Justin Trudeau, a Kathleen Wynne or a Rachael Notley.

Keynesians, liberals and socialists often pontificate that budget deficits don’t matter when you have zero interest rates because it stimulates the economy. However, this argument only looks at economic factors through the lens of aggregate demand. But the financial resources need to be allocated in various combinations throughout an array of economic sectors. For instance, if the government buys $100 more than it receives in tax revenues then it takes away genuine resources out of an area of entrepreneurs and into the hands of the bureaucrats. Whether it’s deficits or government spending, it hurts the economy, hurts the private sector and hurts the people.

But if government is stimulating the economy and I see people filling in ditches – an economic policy made famous by Napoleon himself – then isn’t it working? This is another common statement defenders of big government make. With this, let’s take a look at Fredric Bastiat’s famous essay “That Which is Seen“:

“As a temporary measure, on any emergency, during a hard winter, this interference with the tax-payers may have its use. It acts in the same way as securities. It adds nothing either to labour or to wages, but it takes labour and wages from ordinary times to give them, at a loss it is true, to times of difficulty.

“As a permanent, general, systematic measure, it is nothing else than a ruinous mystification, an impossibility, which shows a little excited labour which is seen, and bides a great deal of prevented labour which is not seen.”

In other words, public officials celebrate because the average person can see someone dig a ditch, and is thus earning a living, which can then be put into the economy. At the same time, however, citizens can’t see what could’ve been if the private sector still had its money to do something useful with it, like to satisfy the consumer or meet an actual demand.

Therefore, politicians can’t pat themselves on the back, cut ribbons and take selfies if they took a lesson from the renowned French economist.

Budget deficits are ineffective, and only pad the pockets of cronyists, bureaucrats and politicians.

Rampant Price Inflation

Cauliflower is $7? Cucumber is $3? A bag of peanuts is $5? What in the blue hell…?

If you take a look around social media you will see the plethora of images of soaring food prices. It was warned late last year that food price inflation would go up about four percent (SEE: Canada’s 2016 food price inflation highest in West), but that number will likely increase even further.

Is this a solution to the high food prices in #Sudbury @MorningNorth @CBCSudbury? #Canada #CanadianDollar pic.twitter.com/KLXLjnQIQr

— Michelle Murray (@MisherMash) January 14, 2016

Canadians should be concerned because the cost of everything is going up. Because we import foods like avocados and oranges, and we have such a low loonie right now, the price tag will be much larger than what you anticipated before you headed to a Loblaw’s, Metro or No Frills.

Senior economist Sal Guatieri of BMO Nesbitt Burns tells the Globe and Mail: “Although pump prices are falling faster than food costs are rising, Canadians are worse off because they spend about four times more on food than on gasoline.”

Guatieri adds: “Food prices have likely accelerated since November (given the loonie’s further 7-per-cent slide), while the decline in gasoline prices has slowed (pump prices are now actually up from a year ago).”

With the financial crisis deepening, it’s likely that consumers will continue to see regular hikes in grocery prices. Of course, affluent statists will still contend there is zero inflation.

A Pending Housing Collapse

For years, financial institutions, the Canadian Mortgage Housing Corporation (CMHC) and even the central bank have warned that the housing market is overheated, in a bubble and will likely significantly cool off at anytime. Some have pegged that “cooling off” number as high as 40 percent.

Although many are still in denial mode much like their southern brothers prior to the subprime mortgage meltdown, a price crash is indeed headed towards the nearest igloo. There are many signs of a housing bubble in Canada, you just have to walk out the door to see it:

• Last year, The Economist listed Canada has having “the most overvalued housing market among some of the most advanced economies.” They said Canada’s market was overvalued by 39 percent, just behind Belgium with 50 percent.
• Global investors are shorting Canada’s housing market, which means they’re betting against companies involved in mortgage lending, such as banks and insurers.
• Foreign nationals are buying up Canada’s housing market. In Vancouver’s west side, for instance, 70 percent of homes were acquired by Mainland Chinese nationals. But officials are just calling these facts racist. Oy vey.
• A new CMHC report found overvaluation in 11 of 15 markets in Canada, and warned of possible condo overbuilding in the major cities of Toronto, Montreal and Ottawa.
• TD Bank thinks the greatest threat to Canada’s economy is the housing market, which could see a correction in some cities as high as 15 percent (even more).

The worst part of this story is that so many homeowners from coast to coast are taking out lines of credit against their homes, which could place them in far greater danger once the bubble bursts. One-third of Canadians have a home equity line of credit (HELOC), but these numbers were gathered in 2011 so that number is likely much, much higher today.

More Focus on the Bank of Canada

For whatever reason, the Bank of Canada is gaining a lot more media attention than ever before. There have been more news articles, radio reports and television coverage of Poloz than any predecessor in recent memory.

Now, this isn’t a good thing because then that means the economy and the stock market focus too much on the BOC than anything else.

Look at the Federal Reserve in the U.S. The stock market listens to every word uttered by Fed Chair Janet Yellen and the Federal Open Market Committee (FOMC). A stock can move up or down depending on what Yellen and Co. say.

The nation is Fed-obsessed, and this is one of the pitfalls of having a powerful central bank, or having a central bank at all.

The Downfall of the Loonie

The loonie continues to make and break records. And not of the good kind either.

The loonie not only reached 2003 levels, but it’s also on the longest losing streak since the 1970s, when Pierre Trudeau – the incumbent prime minister’s father – was leading the country. The loonie traded at 68.74 cents prior to the opening of the Toronto Stock Exchange (TSE).

It also traded lower against the euro, British pound and Japanese yen.

Of course, a lower loonie makes importing pretty much anything that much more expensive.

Most financial experts expect the loonie to fall further to as low as 59 cents before making the rebound. But that rebound could be a long time waiting since oil still has yet to bottom out. With still an immense supply of oil in the market and a paucity of demand to meet that supply, the Canadian economy could still be in quite the roller coaster.

See, this is the problem when a country relies too much on its comparative advantage. Former Prime Minister Stephen Harper hedged all of his bets on Alberta’s oil. Russia, Saudi Arabia, Venezuela and others believed they could sustain massive government spending on oil.

Will this serve as a lesson for countries? Probably not.

Soaring Provincial Debt Levels

Earlier this month, the Fraser Institute released a report entitled “The Cost of Government Debt in Canada.” Study authors found that Canada’s collective government debt is $1.3 trillion. The three governments the greatest in the red are the feds ($698 billion), Ontario ($298 billion) and Quebec ($188 billion).

The provinces are deep in the hole, particularly the province of Ontario, which is used to be a “have” province. Thanks to corruption, scandals, unions and a questionable voting population, Premiers Dalton McGuinty and Kathleen Wynne have sent the province into the toilet with more debt, more public servants and soaring costs in every imaginable sector, especially in energy.

Ontario has a scandal problem, and these scandals aren’t trivial since they’re in the billions of dollars. Whether it’s gas plants, e-health, ORNGE, the Pan Am Games or the standard nature of corruption, taxpayers are always on the hook for the billion-dollar tabs. It’s unlikely to end as Wynne will probably be given another majority government come election time.

We can’t forget that high debt levels lead to enormous interest payments (SEE: Canada’s government debt to exceed $1.3 trillion in 2016: report). In Ontario alone, debt servicing payments account for the third-highest budgetary item, behind healthcare and education. The once economic powerhouse is now spending more than $11 billion a year to cover the debt.

And the province actually has the temerity to ask citizens to help pay it off by donating their tax refunds to the treasury (SEE: LOL: Ontario government urges taxpayers to help pay off $300 billion debt). Well, perhaps the ones who voted the grits into office should cover that balance.

Here is what the conservative think-tank opines:

“There are also immediate consequences from government debt in the form of interest payments, or what are called debt servicing costs. Governments must make interest payments on their debt similar to households that must pay interest on borrowing related to mortgages, vehicles, or credit card spending. Government spending on debt servicing costs results in less revenue available for important priorities such as tax relief and spending on public programs like health care, education, and social services.”

Final Thoughts

Canadians shouldn’t snicker at their American brothers. Canadians are in a very bad situation, and there is no hope in the near future, especially when you have a bloated government and a leader that spends more time on the cover of Vogue magazine than working.

But then again with Trudeau’s lack of expertise in anything besides skiing, that could be a good thing. Keep Trudeau away from anything that may destroy our lives even more.

–AM

Photo by Ell Christman via Flickr.