Under Justin Trudeau, the Liberal Party government has caused Canada’s debt to swell to unimaginable proportions in just a few years. Economists keep saying the debt is manageable but common sense suggests otherwise.
It took Canada 150 years from Confederation to accumulate $650 billion of national debt. It took the Trudeau Liberals only 6 years from coming into power in 2015 to double that amount.
One big change in Canada’s economic outlook is the result of the Trudeau government’s attack on Canada’s energy industry on the pretense that CO2 is harmful and that Canada could make a material difference to global emissions even if it were. The energy industry is a major contributor to Canada’s economy, often overlooked.
The Canadian Energy Centre publishes some striking data on the economic importance of the oil & gas sector which in 2016 had a direct impact on the economic of $102 billion with another $210 billion impact through its purchases of goods and services.
Most Canadians are numbed by the deluge of statistical data thrown at them and have some trouble deciding what is important and what is trivial. Looking at the total goods producing sector of the Canadian economy may help. In 2017 total good producing industries made up 30% of Canada’s economy and oil & gas 30% of that or 9% of the total.
Those numbers don’t seem alarming until you consider the contribution oil & gas makes to government revenues. Then the data come to life. In the 18 years from 2000 to 2018 the energy industry contributed $672 billion to Canadian government revenues.
In 2018, Canadian government debt totaled $672 billion. Without the contribution from the energy industry, it would have been double that even without the profligate spending of the Trudeau Liberals. As Trudeau continues his assault on the oil & gas industry, the contribution from this vital source will shrink while the national debt continues to balloon ever higher.
On top of government debt, household debt in Canada is enormous today, totaling some $2.5 trillion. Add that to government debt of $1.5 trillion and you are talking serous money. The entire GDP of Canada is about $2.0 trillion.
The Bank of Canada, like many central banks, has had its thumb on the scale of interest rates for the past decade or so and Canada’s debt has been manageable given government bonds could be sold with interest rates as low as 1%. But there is a limit to how long this Ponzi scheme can go on, and eventually Canada will need to stop “printing money” with the bulk of new issues of government bonds being purchased by the Bank of Canada, which is like the government buying its own bonds. Bernie Madoff would be proud.
Financial experts have long recognized that the implicit risk free interest rate must equal real growth plus inflation. If not, it cannot be “risk free” since effective interest rates become negative, a situation that cannot persist indefinitely. When there is a “buyers strike” and a bond issue fails, rates will adjust quite quickly with catastrophic consequences. The history of Mexico, Argentina, Turkey, Venezuela and the Weimar Republic in Germany are lessons in the risks of sustained expansions of sovereign debt unsupported by any economic strength or ability to repay.
The debt alone will not cause stagflation but it certainly sets the stage. The other phenomenon facing Canada is the effect of Western democracies, persuaded without evidence that CO2 causes climate change, driving a shift into more costly forms of energy like solar and wind, and limiting the growth of cheap and reliable fossil fuels. The effect not only drives up the cost of fossil fuels as less money is invested in supply while demand remains high, but also drives up the cost of base metals - particularly copper, nickel, iron ore, and cobalt which are essential to battery technology as governments force feed electric vehicles on the population in a vain attempt to alter nature.
Many economists would agree that metals are a foundation of the world economy. Virtually all consumer hard goods are either made metals or plastics. Plastics are of course derivatives of oil & gas; base metals are non-ferrous metals like copper, nickel, lead, aluminum and zinc; iron ore is the primary ferrous metal; and, precious metals like gold and silver are important parts not only of jewelry but also of electronic components. Copper, nickel and cobalt are key components of batteries and motors for electric vehicles (EV’s).
Many governments, including Canada’s, have policies to shift away from internal combustion engine (ICE) vehicles to EV’s within the next decade so so. That creates enormous demand for copper, nickel and cobalt to name three, and existing mine capacity is incapable of meeting that demand. New mines are subject to considerable lead times to meet stiff environmental rules under the Impact Assessment Act in Canada and similar legislation abroad. It take about 10 to 15 years from the time a deposit is discovered to obtain permits to put it into production and another two to three years to build the mine and supporting infrastructure.
It is clear that the dreams of a “green” future with “renewables” power EV’s and supplying the bulk of the world’s energy are a pipe dream - or more correctly, an anti-pipe dream since the “green” activists oppose the pipelines that are necessary to provide the fossil fuels needed to meet energy needs. The result of governments trying to force a square peg into a round hole will be higher prices for metals and a much longer runway to every realize any material uptick in the use of “renewables” or the adoption of very large numbers of EV’s. Those higher prices will find their way into all aspects of the economy and push inflation ever higher.
Higher inflation will start the cycle of demands for higher wages but physical constraints on resources industries will bridle growth. At the same time, senseless policies will continue to drive up housing costs as demand outstrips supply and increased immigration fuels more demand. In an earlier article I reported on the underlying causes of high housing prices. They vicious cycle of low growth and higher inflation met by wage demands will lead to stagflation if Canada is lucky and an economic collapse if it is not.
It is great for Justin Trudeau to claim budgets will balance themselves or for Tiff Macklem to claim higher inflation is “transitory” but the transition may turn out to be decades rather than months and it will be a rough ride for our children. Canada can avoid drastic outcomes if it votes Trudeau out of office and installs a government imbued with common sense instead of left wing ideology and fiscal prudence instead of wasteful spending, but Canadian voters have drunk the Trudeau Kool Aid and our future under Liberal governments will be a self-inflicted wound.