March 31, 2016
Canada goes full Krugman. Finance minister jacks borrowing and spending. Confirms gold sale.
Bill Morneau’s first budget has handouts for everyone and deficits as far as the eye can see. The sheer scale of the borrowing required, means the Canadian government will be forced to print much of the cash. That could put upwards pressure on gold prices.
Bill Morneau took center stage last week in the Canadian Parliament and didn’t disappoint. The new Liberal finance minister’s first budget jacked up program spending across the board, to be paid for by borrowing and, eventually, presumably, money printing. His rhetoric was coated with suggestions that “economic growth” would solve the country’s problems. The only folk left out, were taxpayers and savers.
On the face of it, Morneau’s logic makes sense. With interest rates near zero, and the Canadian government’s debts among the lowest in the G-7, why not borrow a bit and invest in infrastructure? Well, there are several reasons – and all of them augur well for the future of gold.
Canadian government debt at record levels
Morneau is technically right. The Canadian government’s debt is low levels, compared to that of other advanced economies. However those numbers are shaky. For one, they include only federal debts, not provincial debts. If you include all Canadian government debts including the provinces (US states are not allowed to run deficits) things look far worse.
Furthermore Morneau’s numbers don’t include huge debts which the former Conservative Harper Government never bothered to record as liabilities, such as deferred pension and healthcare costs, a policy Prime Minster Trudeau’s Liberal government is continuing. Canada’s Fraser Institute estimates that such unfunded liabilities totaled nearly $4.1 trillion in 2014. Those unrecorded debts alone are equal to more than 200% of Canada’s GDP. Worse, Canadians, whose household debt-to-disposable income ratios are at record levels, are in no position finance those additional government obligations.
Sell off gold, spend the cash
During the hours before Mr. Morneau tabled the budget, he wandered into the lock-up room, where reporters were poring over advanced copies of the document. There I had a chance to ask him about reports that Canada has sold of its last gold reserves, and whether that was prudent, given uncertainties in the world economy and the Bank of International Settlement’s recent warning that global NIRP/ZIRP/QE monetary policies weren’t working as expected.
Morneau didn’t bat an eyelash. Canada’s reserves were at an appropriate level he responded. An hour or so later he walked over to Parliament Hill, and announced that the new government’s total spending would explode by 6.9% to $317.1 billion during the 2016-2017 fiscal year. The increases would be partly funded by the cash from the gold sales and by $30 billion in deficits.
In his youth Morneau, completed graduate studies at the London School of Economics and INSEAD in France, where, as Talleyrand would have said: “He learned nothing and forgot nothing.” The result, as might expected, was a Canadian budget that was pure Keynes/ Krugman, with a bit of Larry Summers thrown in.
The hard money community of course, won’t believe a word of it. But Canadians will be praying that Morneau is right.
Photo: please use 2 pictures of Bill Morneau, the first, on the splash page use one of him speaking in Parliament, the second, inside, a face shot.
Peter (at) peterdiekmeyer.com
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