Comment 73613

By A Smith (anonymous) | Posted February 01, 2012 at 14:27:18 in reply to Comment 73601

>> the amount of debt we have is not stable and has been exploding since around 1980

Debt charges in Canada (all levels of government)

1961 - 2.89% of GDP
1971 - 3.81
1981 - 6.25
1991 - 9.41
2001 - 6.61
2008 - 3.89
2009 - 3.82
2010 - 3.71

However, even if these charges were 99.9% of GDP, as long as the debt is issued in Canadian dollars, someone will buy it, at some interest rate.

If you think about a government bond as being Canadian currency + interest, the only way we could ever have a problem selling our debt would be if people decided Canadian currency was 100% worthless.

For example, imagine the Canadian dollar is worth 70 cents U.S. and inflation is 10%. If you are an investor (worldwide), you will likely buy that debt at a 12-13% yield. In other words, it will get sold.

If our dollar moves to $0.000001 U.S. and inflation is 1000%, someone will still buy Canadian bonds, because it will still be worth more than zero.

In contrast, the Euro countries are having problems because they don't issue their own currency, nor do provincial/state level governments.

But for Canada and other currency issuers, default on debt is impossible, as long as there is the political will to issue more debt.

Our leaders are also talking about the dangers of our household debt. The following chart details how it has come about...

This chart tracks the financial balances of the four sectors of Canada's economy.

When these four sectors respective surpluses and deficits are totaled, they sum to zero.

In 1999, they were almost all in balance.

Today, we see that the corporate sector and foreign sector are in surplus (~4% and ~3% = ~7%), while the government sector is at ~5% and households are at ~2%. Added together, they sum to zero.

If the feds want us to save more, and the corporate/foreign sectors keep saving at +7%/GDP, the only way for households to do this is for the feds to save even less.

For example, if household savings are to go from -2% to +2%, that will require the government sector to move from -5% to -9%.

And yet, the feds want to reduce the deficit, not expand it, even though they are the only ones who can take on limitless debt.

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