Canadian Diversified Investor: The pot calls the kettle black

Debt is something us mere mortal souls are supposed to repay, if not…. But did you know that governments never repay their debts? Instead they inflate it away. I am not just blaming the Europeans, nor the U.S.A., although if you hear Americans talk about Europe you would never guess that they are deeper in hog than Europe (in terms of Debt/GDP U.S. is 103% while Europe is 87%).

You may hear Canada’s federal government bragging that their debt to DGP is only around 35%. That is not bad, but when you realize that a lot of this debt is shoved on to the provinces, you may think differently. The ones that really should be peed off are Albertans because their provincial debt is virtual nil. So who are the big provincial debtors? You got it: Ontario and Quebec and to a lesser extend BC. The latter with close to 47 Billion loonies in debt. No wonder BCers love nature so much! That is a lot prettier than their wallets!

We are also talking so much about China’s growth and the end of the U.S. and Europe as economic super powers. The Euro area plus the United Kingdom has a GDP of over 15 trillion in U.S. dollars. This, in spite of the large drop in exchange rate between the EURO and U.S. dollar recently, otherwise the European economy would have been closer to 19 trillion! The U.S. economy is somewhat smaller; it is barely touching 15 trillion. China? It has now exceeded the size of Japan’s economy and counts just over 7 trillion. With Europe and the U.S. economies counting close to $32 billion is China with a GDP of $7billion really that influential?

While the Euro-area combined with the United Kingdom is close to 400 million people and the U.S. counts just over 300 million, China counts 1.3 billion or 1,300 million people. Thus who is more productive a Chinese, a European or an American? It is the Canadian and Australian! They produce $50,000 and $60,000 per capita compared to $48,000 and $39,000 for Americans and Europeans while the Chinese barely earn a paltry $5,430 per capita.

So let’s go back to government debt: in the 1990s, Canada was deep in ‘doodoo’. In 1997, the Federal debt reached 92% of GDP not counting municipal and provincial debt. No wonder we feared that under Mulroney we might become a third world country! We fought the national deficits under leadership of politicians such as Ralph Klein and Paul Martin. But they did have some help from falling interest rates and rising commodity prices. In 1997, debt of the Federal Government peaked at $563 Billion. Now, being the world’s wunderkind of financial prudence would you care to estimate our federal debt?

Oops it is $599 billion! We really didn’t repay a lot and then with the financial crisis we required stimulus. Remember how hard the Liberals and NDP were shouting at Stephen Harper’s minority government to do something? Well Stephen did ‘reluctantly’ spend. In the U.S. debt nearly doubled to $14 trillion over those years. So how does a government pay off its debt? It doesn’t! Just like on your Line-of-credit, governments pay only interest on the moneys borrowed and then hope that the country’s economy grows so much through inflation and real productivity that the debt kind of ‘goes-away’. The graph below tells it all:

Canada's Debt Statistics

Really, we just print money and earn more by building an ever more efficient, i.e. more productive, economy. As long as our economy grows so will our GDP and so will our debt ‘disappear’.

What is the real solution for Europe and the U.S.? It is not repaying debt as many Gurus would like make you believe. Much of the U.S. debt came from the Iraqi and Afghanistan wars; also the bailouts of the financial and automobile industry resulted in a lot of debt. But now both are recovering and car makers and bankers start to repay some of the bail-out money and no additional expenditures are required. Government spending is likely to decline or at least stabilize. Some austerity may be required and many U.S. government levels have reduced staff. There are probably excesses in the system such as grossly overpaid firemen in forever-bankrupt California but overall we don’t want to overdo austerity.

It may be politically popular in Germany and the Netherlands to demand severe austerity in Greece and Spain but that only reduces growth further. What really is required is lower interest rates and renewed growth. The same in the U.S.; it’s economy is now gradually picking up and will likely grow at an even faster pace in the coming years. This, plus a generous supply of affordable energy and a recovering housing market will probably carry the day. In a few years, you’re likely to see politicians claiming how they saved the nation’s economy rather than its hardworking citizens. Of course, if those same politician’s don’t resolve their ‘fiscal cliff’, which is nothing more than political chicanery, then they could delay the U.S.’s recovery significantly and add to that country’s already high debt load.

None of us are angels – even the gurus and talking heads who have their personal agendas. A lot of government number comparisons between countries are like comparing apples and oranges. For example here is a comparison between Canada’s government debt and that of the U.S. From my estimate, Canada’s graph includes provincial debt while that of the U.S. appears only to include federal debt. I have no clue as what is included in the European chart. But with data like this, who needs an enemy! Also, included is a table from Statistic’s Canada that may shed some light on the Canada's real situation. Talking about pots calling kettles black.