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Canadian Emergency Wage Subsidy indefinitely extended; Canada's national debt to triple or quadruple to $1.5-2 trillion by year-end 2021
May 8, 2020
9:10 am
Doug
British Columbia, Canada
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Today, at his usual Rideau Cottage morning press conference, Prime Minister Justin Trudeau announced that the Canadian Emergency Wage Subsidy, which provides for 75% of private sector payrolls to be funded by the federal government, has been indefinitely extended. This is a good and necessary move, with which I generally support; however, it will come at a huge monetary cost. When pressed on whether the CERB maximum eligible weeks would be extended from the current 16 weeks (4 months), Trudeau simply deferred, stating only that an announcement would be coming in the "coming days" (i.e., next week). Since the legislation allows for cabinet to extend the CERB, this can be done without further parliamentary approval. It's also possible the CESB could be extended as well, and there's likely further measures coming for low-income seniors (I suspect a GIS enhancement, possibly a doubling of GIS, would be my bet) and international students. Trudeau also, rightly, noted these measures are not yet "stimulus" measures during the recovery phase; these are just emergency measures to sustain Canadians economically.

In his most recent report, the Parliamentary Budget Officer forecasted Canada's budgetary deficit to top $300 billion. With these measures, it will likely be $500 billion or more, not including any monetary expansion measures by the Bank of Canada. Canada's national debt was something like $700 billion for the preceding fiscal year, so we know, at minimum, it will grow to $1.2 trillion by year end 2020. Factoring in further stimulus spending needed in the fall and into next year, and it's, very conservatively, I think, easy to see our national debt exceeding $2 trillion at or before year end 2021.

We were already on the precipice of being downgraded from AAA, so it is quite certainly certain that with a $2 trillion federal debt, we will be downgraded to at least AA/AA-, if not further...

...Unless the Bank of Canada monetizes the national debt by buying the majority of it up for cancellation (i.e., by expanding the money supply), then we wouldn't be downgraded.

Cheers,
Doug

May 8, 2020
10:30 am
Bill
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Norman1, I'd be interested to hear your take on this as previously you've indicated Canada's federal debt levels aren't a big concern, just wondering if this impacts your assessment.

May 8, 2020
11:25 am
SaverJunior
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Government borrowing is as addictive as fentanyl I reckoned. Because this government would just borrow any amount of money needed to solve the problems at hand. But it would be the next or next next government to deal with the paying back part.

As you can see below, once the borrowing habit started during the World War II, it never stopped rising until Jean Chretien and Steven Harper's government. They really made a mark in history. It is not about the political party. It is always about the leader and his/her leadership. The debt uptrend resumes with J Trudeau. Per Doug's 1.5-2 trillion forecast, try plotting this number onto the graph confirms what "skyrocketing" and "going through the roof" means.

fedebt1.png

According to debtclock as of today, growth of the national debt is about $609 millions per day. I suppose, just like credit card, there got to be a minimum payment that Canada must pay back every month in order to keep the borrowing account in good standing. What if someday Canada can't even afford to pay its minimum payment as it grows to an unaffordable level? What can the debtors do to Canada? Let them claim whatever piece(s) of land desired?

Anyone knows who are the major debtors?

May 8, 2020
12:09 pm
Kidd
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Canada needs a "MATURE" fiscally responsible leader, something we currently lack and unfortunately there's no one in the pike with those qualifications. This country has too many on the wagon and far too few pulling it.

May 8, 2020
2:09 pm
chamnic
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We also need a population that would vote for such a leader.

There is a reason why no such leaders show themselves for elections as they probably won't be elected, simply because people don't want fiscal restraints, increased taxes and so on as people prefer to vote for ludicrous and unreasonable promises (yeah no tax on Netflix !!!).

Just look what happened in Quebec with their fiscal restraints, it did some good to their finances (and was needed) but people complained left and right and eventually people quickly voted the liberals out.

May 8, 2020
4:05 pm
Norman1
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Bill said
Norman1, I'd be interested to hear your take on this as previously you've indicated Canada's federal debt levels aren't a big concern, just wondering if this impacts your assessment.

We should wait for more details next week.

Prime Minister said today that the wage subsidy program will be extended beyond its original June ending date. More details next week. Not sure how anyone could put a price tag on that right now.

Nothing yet about the program being extended indefinitely. Nothing yet about the program continuing to be a subsidy of 75%.

For context, the total federal revenue is around $300 billion a year. $2 trillion of debt is about 7 years of income.

How precarious would it be for someone earning $50,000 a year to have 7 x $50,000 = $350,000 of debt?

May 8, 2020
4:59 pm
Kidd
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Norman1 said

For context, the total federal revenue is around $300 billion a year. $2 trillion of debt is about 7 years of income.

How precarious would it be for someone earning $50,000 a year to have 7 x $50,000 = $350,000 of debt?  

That's not what i would call "context". Every penny of income, would have to go to debt. No services, no wages, no bribe payments.

AND by the time all the debt has been passed down to us we have... fed debt, prov debt, municipal debt and personal debt.

Canada on a good year, might bring in 300 billion but they have a long history of spending more than they bring in and will there ever be another good year?

May 8, 2020
5:03 pm
Bill
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Thanks, Norman1. I guess the answer to your last question would depend on things like what's the interest rate you're paying on your debt, how secure is your income, how much do you need for daily expenses, what prospects do you have for your income going up, or for going down, and so on.

chamnic, perfectly said. Despite our virtue-signalling, in truth we vote for whoever pads our pockets - and successful politicians happily exploit that fact.

May 8, 2020
7:19 pm
Norman1
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Government of Canada 30-year bonds yield around 1.2% per annum at the moment.

For the Government of Canada, $350,000 could be paid off in 30 years for about $14,000 a year or about $14,000 ÷ $50,000 = 28% of earnings.

There's always the interest-only option of paying just the $4,200 of interest (8.4% of earnings) each year and let the politicians in power in 30 years deal with the $350,000.

May 8, 2020
7:37 pm
Loonie
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Norman1 said

There's always the interest-only option of paying just the $4,200 of interest (8.4% of earnings) each year and let the politicians in power in 30 years deal with the $350,000.  

In this case, there is never any real need to pay off the principal, so the real cost is simply the interest.

But I've always been under the impression that it mattered who holds the debt because they could call it or use it to influence national policies. Who does hold the debt we are currently incurring as a nation? All I hear is that they are essentially printing money, not borrowing it. No doubt I'm confused. Would appreciate clarification.

May 8, 2020
8:55 pm
Norman1
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Loonie said

But I've always been under the impression that it mattered who holds the debt because they could call it or use it to influence national policies. …

Not sure how that would be possible. Government of Canada bonds are transferable but not retractable by the holder. Never heard of any covenants on the bonds.

If someone buys a 30-year Government of Canada bond, one is stuck with it unless one finds an interested buyer for it.

My understanding is the federal government will borrow the money. Bank of Canada may print some money to temporarily buy any bonds left over until other buyers show up.

May 8, 2020
10:12 pm
Loonie
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I don't follow these things closely, but from time to time one hears comments to the effect, for example, that China "owns" a lot of US's debt and that this makes the US politically vulnerable. How does this fit in? Does it mean the Chinese (govt or people?) have bought up the bonds that were issued to finance the debt, then? And, if so, would that not make them politically vulnerable somehow?

It seems that what you are saying is that the money currently being "printed" (more likely just entered into virtual ledgers) must in due course be somehow turned into bonds, but also that the debt can become less burdensome by paying only the interest. Presumably, when the bond comes due, the government just re-issues it?
It then seems like the biggest risk to stability is not debt per se but inflation.

May 9, 2020
6:45 am
Bill
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It very much matters who holds your debt because if you are reliant on them re-upping at maturity you are subject to their influence if not control. And every day governments need buyers to pay for their maturing plus newly-issued (e.g. like for CERB, etc) debt, if the buyers turn their backs then what do you do that day? You can issue debt all you want, does you no good if nobody's buying.

China has traditionally been happy to buy USA debt to keep USA prosperous, the USA consumer economy has fuelled the rise of the Chinese manufacturing economy. In recent years, I believe, China has moved more to using their money to buy up assets worldwide, to encourage markets elsewhere in the world for their goods, and to inject it into their own economy to further more of domestic consumer economy over time, in lieu of automatically buying ever-increasing amounts of USA debt. It's true that in any debt arrangement both parties are reliant on each other, but at the end of the day a creditor with other options can more easily gradually extricate from the situation.

May 9, 2020
8:34 am
Norman1
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It just ends up that the Chinese own lots of US government bonds. They are paid in US$ when they sell things to the US. They also pay in US$ for some of their raw materials.

Just like some people here, they know they can avoid currency exchange fees by keeping their US$ in US$ bank accounts and US$ bonds. One of the safest and largest supply of US$ bonds in the world is the US government.

The US government bonds that the Chinese hold are not special. They are the same marketable bonds that one sees in things like pension funds and ETF's.

May 9, 2020
8:41 am
Yatti420
Canada
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If Trudeau could have a bunch more drug induced voters believe me he will... China owns the USA very true.. They never have to fire a shot.. Just beat us to digital currency domination first.. This is another reason why having the BRICs etc as their own world bank was a very bad thing imho lol..

May 9, 2020
8:44 am
Bruford
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The real question here is how they will pay for it. Increased taxes are most certainly coming in one form or another. Tax rates will definitely rise. Confiscatory wealth taxes will be another obvious source for spendthrift Liberals.

May 9, 2020
8:49 am
Norman1
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Loonie said

It seems that what you are saying is that the money currently being "printed" (more likely just entered into virtual ledgers) must in due course be somehow turned into bonds, but also that the debt can become less burdensome by paying only the interest. Presumably, when the bond comes due, the government just re-issues it?

Other way around. sf-smile

Government of Canada will sell bonds to raise needed funds. At the moment, from those announced programs, if there aren't enough other buyers for the bonds, Bank of Canada will buy what's remaining. If it doesn't have all the Canadian dollars already at hand to pay for the bonds, Bank of Canada will print some.

There's no automatic renewal with Government of Canada bonds. So, the holder will receive the final interest payment and principal at maturity. Holder can put in an order buy Government of Canada bonds with those funds at maturity.

As Bill mentioned, Government of Canada issues bonds regularly. As well, dealers carry an inventory. So does the Bank of Canada.

Scotia iTRADE is one dealer that offers the bonds. I don't buy them because the yields are quite low.

For example, Government of Canada 0.75%, maturing March 1, 2021, was offered at 100.42% of face value, for a yield to maturity of only 0.22% per annum. iTRADE charges a $1 per $1,000 bond commission ($24.99 minimum per order) that increases the cost to 100.52% of face value. The yield to maturity becomes just 0.10% per annum.

May 20, 2020
4:55 am
cruzinalong
Ontario
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There is NOTHING wrong with paying just interest. When you work you can get a personal line of credit from your FI. The only requirement is to pay the interest. You can do this for years. When you have saved enough you pay off the POC. Retire. At one time you paid prime. I had a mortgage that the rate was 1/4% below prime for a 4 year term. Products change over the years so I am not up to date on current options. As long as your borrowing cost is less than the investment return you will do fine. Governments do it as well. They sell bonds that somebody purchases with ridiculous yields.

May 20, 2020
5:33 am
cruzinalong
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Norman1 said

Loonie said

It seems that what you are saying is that the money currently being "printed" (more likely just entered into virtual ledgers) must in due course be somehow turned into bonds, but also that the debt can become less burdensome by paying only the interest. Presumably, when the bond comes due, the government just re-issues it?

Other way around. sf-smile

Government of Canada will sell bonds to raise needed funds. At the moment, from those announced programs, if there aren't enough other buyers for the bonds, Bank of Canada will buy what's remaining. If it doesn't have all the Canadian dollars already at hand to pay for the bonds, Bank of Canada will print some.

There's no automatic renewal with Government of Canada bonds. So, the holder will receive the final interest payment and principal at maturity. Holder can put in an order buy Government of Canada bonds with those funds at maturity.

As Bill mentioned, Government of Canada issues bonds regularly. As well, dealers carry an inventory. So does the Bank of Canada.

Scotia iTRADE is one dealer that offers the bonds. I don't buy them because the yields are quite low.

For example, Government of Canada 0.75%, maturing March 1, 2021, was offered at 100.42% of face value, for a yield to maturity of only 0.22% per annum. iTRADE charges a $1 per $1,000 bond commission ($24.99 minimum per order) that increases the cost to 100.52% of face value. The yield to maturity becomes just 0.10% per annum.  

Scotia iTRADE sells third party GICS with terms 2-5 years. I bought a few a couple years ago. The yields were competitive/equal to the third party. On my annual fee and performance statement it showed Payments Received from Third Parties. Issuer commission .9% of GIC value. I have one maturing in October. It will be interesting to see what I receive at maturity.

May 20, 2020
11:08 am
Vatox
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cruzinalong said
There is NOTHING wrong with paying just interest. When you work you can get a personal line of credit from your FI. The only requirement is to pay the interest. You can do this for years. When you have saved enough you pay off the POC. Retire. At one time you paid prime. I had a mortgage that the rate was 1/4% below prime for a 4 year term. Products change over the years so I am not up to date on current options. As long as your borrowing cost is less than the investment return you will do fine. Governments do it as well. They sell bonds that somebody purchases with ridiculous yields.  

There is something wrong! The government doesn’t work and produce, so where is the savings mound that will be used to pay that principal? Sure, if we had every single year as surpluses and never bungled spending projects or have cancelled contract penalties.

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