Canada’s Finance Minister, Chrystia Freeland wants to stimulate the Canadian economy by encouraging/forcing Canadians with savings to spend some of those savings. Right wing twitter is convinced that she’s prepping us for a “bail-in” where the government just comes in and takes a chunk of the money you have saved. Which may very well be true but that is not actually what she is presently saying.
She asked for ideas so here are a few:
Registered Recreation account. Modelled on the other registered vehicles, the RRA would allow individuals and families to deduct the costs of recreational activities from their taxable income to a certain limit each year. Essentially, keep the receipts from restaurant meals and take out, (when restaurants are open), hotel stays for non-business purposes, whale watching, ski passes, rec center memberships, sporting equipment. End of the year, tote up the receipts and enter it as a non-refundable credit. The RRA would target many of the businesses hardest hit by the lockdowns.
Small Business Bond: At the moment, the savings of Canadians are locked up in accounts which pay, at most, 1.5% interest. We’d all like to do better. Why not create a backed by the Government of Canada “bond scheme” which pays and interest rate of 5% and which lends working capital to small business at, say, 7% on easy terms. Flexible denominations starting at, say, $100 with an individual limit of, say $100,000. This would be the middle class helping out the middle class.
The First Nations Water Bond: Many Canadians are ashamed that the Government of Canada can’t “fix” the crisis of bad water on hundreds of reserves in Canada. Promises are made and broken. OK, let’s try a different approach. Let’s offer 5%, tax-free, bonds to fund a serious private/public/FN approach to real solutions here. Do 20 year bonds but spend the money in the first two years.
A Travel Tax Credit: Go see Canada! Reconnect with Family and Friends. Basically allow individuals and families to take a non-refundable credit for any plane or rail trip to another province where you stay for at least three nights. (And yes, you can “double dip” with the RRA…we’d like you to.)
The Original Art/Performance Credit: Buy a Canadian Painting, go to a Canadian play or musical performance. Keep the receipt and you get a non-refundable tax credit.
Shop Canada! Get a $100 non-refundable tax credit for every $500 spent when you buy from Canadian owned retailers. Must be cash or debit – no credit cards. Cumulative monthly.
Mobilizing Canadian savings is not rocket science: offer a decent rate of return, a tax nudge and the guarantee of the Government that the funds will be returned and money will flow. Give people non-refundable tax credits and they will hit the stores.
None of this needs to cost much. The non-refundable tax credits are tax expenditures but they should have a ripple effect which will offset those expenditures. The Small Business Bonds and the FN Water Bonds would be a charge on the Treasury but the Business bonds would be paid back and the Water Bonds would fund something the Government should be doing in any event.
What Freeland is actually talking about is accelerating the velocity of money in the Canadian economy. You can print as much money as you want but, if no one is spending it or spending it on inert assets like houses, it does very little economic good. There is an old saying that money is like manure, it does the most good when it is spread around. Get spreading Chrystia!
Back in March I wrote a couple of posts about how it made sense for governments to shovel some money into the wallets of people displaced by the COVID pandemic. What I did not anticipate was that the free money train would run into October. Nor did I anticipate that the virus itself would continue along for this long.
Now, the good news is that while case numbers are still high – and getting higher in some locations – the hospitalization, ICU and death rates have dropped significantly. COVID is still a nasty disease that you do not want to catch, but it is not anything like a death sentence for the vast majority of people who catch it.
“Third, did Canadians blow this? Handing over $94 billion in direct deposits made real estate less affordable, goosed motorcycle sales and drove the price of two-by-fours through the roof at the same time 25% of all homeowners with mortgages decided to stop making payments and unknown numbers of tenants welched on rent. There’s a growing sense we might come out of this in way worse shape thanks to the unregulated flow of CERB cash. More spending did not reduce debt. In fact, household borrowing just hit a new high of $2.33 trillion.
Covid really messed things up. The political response was extreme. Maybe that was the right response. Perhaps not. Obviously a lot of people needed income support when their livelihoods were erased. Others found CERB cash replaced the need to look for a job. Others quit work to collect it. Small businesses complained of a lack of willing employees. And the gush of cash, along with crashed interest rates, has inflated prices and increased personal obligation. Now we have an unfathomable shortfall in public finances, and a government unbothered by it.”
Add to “free money” significant changes in how people actually live – working from home being the biggest – and the idea that the old normal is coming back is fading.
For lots of people, the old normal was not all that great. Minimum wage is pretty unattractive when you have had six months of no deductions $2000 a month. An hour’s commute each way to a cubicle in the sky is not enticing when your current commute time is 10 seconds. Going back to university classes seems a little pointless when it can be taught remotely – and yes, university is about more than just the classes. Same with high school. It is not obvious who misses shopping in malls or shopping in general. Some of this might return when the virus is finally contained; but it will not return unaltered.
Justin Trudeau is planning on rolling out a comprehensive strategy for the re-opening/re-structuring of Canada in the post COVID world. I expect a hodge-podge of dim green ideas and some sort of Universal Basic Income. Unfortunately, I do not expect any serious proposals as to who is to pay for it and how. Unless I miss my bet completely, Trudeau and his people will take the position that additional spending can simply become part of the Canadian National Debt financed at the current incredibly low interest rates. Which can work for a while provided that the money is cycled into economically productive activity (like building pipelines or very small nuclear reactors). Somehow, I doubt that is what the Liberals have in mind.
Instead, I suspect we will get a bunch of witless green energy schemes along the lines of the green disaster which hollowed out the Ontario economy.
Which will be a missed opportunity as an intelligently designed UBI combined with a serious infrastructure commitment might well serve Canada. By well designed, I mean a program which consolidated all of the payments government – federal and provincial – make to individuals into a single monthly payment. The would include welfare, disability, Child Tax Benefit, GST Credits, EI, CPP, OAP and a raft of other payments. In 2019, on just CPP, OAP, EI and the Child Tax Benefit, the federal government spent 100 billion dollars. In 2017 (the last year I could find numbers for) the provinces and territories spent 69 billion on “social protection” programs which include welfare and disability.
There are roughly 30 million Canadians over the age of 15. A $24,000 a year UBI would cost 720 billion, a little less than twice the federal goverment’s total program spending for 2019. However, a UBI program properly designed would likely make full monthly payments to no more than 10% of the adult population. The rest of the population would have the right to claim the benefit only if their income fell beneath a certain threshold. By basing the UBI on income some of the perverse incentives inherent in the scheme (such as work shyness and the penalization of effort) could be reduced.
The great advantage of a UBI lies in its elimination of the need for everything from EI to OAP to welfare. It is not administratively complex – just like the GST Credit or Child Tax benefit, you file a tax return and receive your payments if eligible.
Now, if you do the math on a 10% eligibility at $24,000 per year, the program would cost 72 billion a year, far less than the $169 billion the federal and provincial governments are now spending. In fact, if 20% of Canadians were eligible, this UBI would still be cheaper.
A critical feature of a well designed UBI is making sure that additional income from employment is encouraged rather than punished. Realistically, $24,000 is not much money (though still better than BC current welfare or disability rates). Being able to earn without forfeiting the UBI is very important. Were it up to me I would set maximum earnings at at least $12,000 a year and, ideally, $24,000 before the UBI was tapered off. And I would treat couples as individuals as is the case under the current tax system.
This sort of well designed UBI with the corresponding elimination of other forms of income support would take a while to implement effectively. Which is where having a bit of “free money” would be a very good thing. But the best part of this sort of UBI is that, net, it would actually reduce income support spending at both the federal and provincial levels. Reductions which will be vital because “free money” is not going to last forever.
My eldest son and I have a lively online conversation which has gone on for years. We disagree about a lot but recently we have agreed that the stock market is heading towards a crash. Not an if, a when. Oddly, we both see the end of September as the likely date. Simon cites market history, I am inclined to go with people understanding “events” and responding to that understanding. Here are a few.
The American Election Whether you are a Trump fan or a Biden supporter does not matter because the Election itself is the market event. Markets could live with either a Trump or a Biden victory; what they cannot live with is the growing possibility that the Election will not be decided on Election Day. In critical states such as Wisconsin, Michigan and Pennsylvania, mail in ballots cannot begin to be counted until the polls are actually closed on Election Day. (You can get all the details in this excellent article, Why We Are Facing The Biggest Election Nightmare In Modern American History No Matter Who Ends Up Winning by Michael Snyder.)
Leaving aside the issues of fraud which arise with mail in ballots, the biggest problem is just how unlikely it is that we will know who has won the Presidency for days, perhaps weeks, after the polls have formally closed. The very definition of uncertainty.
Markets hate uncertainty and as the likelihood of a protracted vote count becomes more obvious the overall market is likely to become, in a word, skittish. Given that the general markets in the US, and to a degree in Canada, are already at all time highs, that will certainly tend towards defensive selling and profit taking. Which, in normal times, would actually be healthy. But these are not normal times.
COVID I think a plausible argument can be made that COVID, the disease, is abating. Case counts may pop here and there but that is almost always an artifact of more testing. Hospitalizations and death counts are low and going lower. The return to school will probably pop case counts in some places, but it is unlikely to have much impact on how many people get really, really sick. As one writer said about Sweden, “All the kindling is gone.” Which is pretty harsh but also, likely, accurate. COVID kills the elderly and the compromised; it is no fun for the rest of us but it is survivable.
However, the economic consequences of COVID, consequences which are entirely political rather than medical, are ripping through Western economies. Lockdowns, business closures, mandatory masking, broad layoffs, work from home, mortgage deferrals, evictions and eviction moratoriums are all in full swing. The idea of flattening the curve has given way to the goal of either avoiding or mitigating “the second wave”. The “vaccine” is variously “a month or two away”, “ready in 2021” or “very unlikely to be effective whenever it’s ready”.
Of course, the entire COVID “crisis” has become politicized with those on the left convinced that without masks and shutdowns we will all die, and those on the right certain that unless the economy restarts we’ll all die poor. Maskers see non-maskers as selfish, non-maskers see masks as a symbol of conformity. Democratic states wear their masks and their crashing economies as proud symbols of anti-Trump resistance. And so on.
From the market’s perspective the main effect of COVID is the creation of fear and uncertainty. While there are plenty of Robinhood traders happy to make good money day trading, there are also plenty of people eyeing the exits and wondering if “the top” has, in fact, arrived. The Robinhooders represent a tiny fraction of the very deep American stock market. If, as will almost certainly happen, they are hit with significant losses on their most recent FANG trades or if Tesla sinks like a stone, the overall markets won’t miss them. However, if the broader market becomes worried, the dash for the exits could be very ugly indeed. A so-called “second wave” of COVID, even if it is largely fictional could trigger a rush to cash out.
Antifa, BLM, protests, riots and arson In themselves, the various demonstrations and riots inspired by BLM and made nasty by Antifa, are largely irrelevant to all but a few hundred square blocks of a few American cities. (Yes, the craven pandering of big business and major league sports is obnoxious, but it is also very much a passing moment.) Applying a bit of crowd control and arresting leaders and organizers can, and has, shut the riots down where it has been allowed by politicians to happen. So far, BLM and Antifa have been denied the martyrs they need to grow.
In terms of economics, Antifa/BLM have caused several billion dollars worth of damage and made retailers more reluctant to locate in certain areas of certain American cities. However, America is a big place with a big economy, so the costs are relatively tiny. (Not so tiny for small businesses which have been torched.)
Psychologically and politically, the idea that there are nightly riots and that downtowns of relatively small cities like Kenosha could be razed is just one more shock to the system. The fact that police forces have been told to stand down in the face of the rioters and that state level prosecutors have declined to charge the rioters, erodes the faith people have in the overall system.
The fact that there are disturbances virtually every night drives home the message that there is no safety in the US. This is not actually true, the bulk of the United States will never see a BLM/Antifa protest much less riot; but that doesn’t actually matter. The riots and the seemingly impossible to appease demonstrators create a mood, a sense of unease.
Markets reflect the confidence of investors. Where that confidence is eroded the conditions are created for a crunch.
March and the Second Wave In late March we had what people called a mini-crash. The Dow, S&P 500, NASDAQ dropped hard as did the markets in other G-20 countries. At one point virtually every market in the world was off 25%. At the time commentators suggested this was a one time reaction to the economic effects of COVID.
The March crash very quickly reversed itself. The Fed turned on the money pipe and markets all over the world staged V shaped recoveries to the point where, last week the DOW, S&P 500 and NASDAQ were all at or near their all time highs.
But is it real? The March mini-crash suggested that the markets could be spooked easily. That they could recognize the immense economic implications of COVID. However, the speed of the recovery to new highs, suggests that the mini-crash did nothing to re-align the market’s value with the underlying realities of a collapsed GDP, very high unemployment and an accelerating “real” inflation rate.
Market crashes are sometimes triggered by a single event, the collapse of a bank, a commodity crash, or even a small war; but, more often, they happen when investors “lose confidence”. The end of the dot com bubble was not about the internet suddenly being useless, it was about millions of people saying, at more or less the same time, none of these dot com companies make any sense at these prices. It also happened when the overall economy was strong, American politics were in balance and there was no political pandemic battering the real economy.
The V shaped recovery from the March mini-crash suggests strongly that the real “correction” has not occurred yet. Remember, that in the dot com bubble and crash the NASDAQ went from a high of 4798 in March 2000 to a low of just of 1000 in two years.
I have not been writing much about COVID and its consequences simply because, day to day, very little changes.
I am very lucky. I live in British Columbia which has had among the lowest per capita case rate and death rate in the developed world. There are a variety of reasons for this first among them the provincial government’s decision to treat its citizens like grown ups. The government has shared its statistics, its models and its recommendations. It has issued very few “orders” nor has it locked down the economy. Social distancing, the ubiquitous plexi glass barriers at the cash tills, maximum occupancy to prevent over crowding are pretty much it in terms of required measures. No sit down dining in restaurants and bars closed. We are encouraged, but not required, to “stay at home”.
Yesterday there were only 15 new cases in the province. The curve has been decisively flattened. On Vancouver Island, where I actually live, there have been only 126 cases overall. There were no new cases yesterday.
The rest of Canada ranges from New York City levels of illness in Montreal to very little illness on the prairies and in most of the Maritimes. Ontario, particularly Toronto, has been hit pretty hard and has reacted with broad lock downs and fines for illicit dog walking or hoops shooting.
Right now, BC is coming back online in a phased way and I suspect most businesses will be operating with capacity restrictions by mid June.
Now the question is how much economic damage has the virus done.
While it is convenient for politicians and economists to think of the economy at the macro level with unemployment rates and money supply and such like, the actual economy is a vast set of tiny transactions and the habits which power those transactions. Before we can really talk about the effect of the virus on such lofty things as aggregate demand, we have to think about the very small scale exchanges of daily life.
To give one example: if a person who, before the virus, went to an office everyday is now working from home their web of tiny transactions will have changed shape – gas bought once a month rather than once a week, no dry cleaning, no Starbucks, no lunch in the food court. The question is whether, even if they keep their job, they will be going back to the office. Increasingly, the answer seems to be no as everyone from the Bank of Montreal to Facebook have announced that they are looking at leaving their workforce at home.
These sorts of choices – whether made by the individual, companies or governments radically and unpredictably change the economic balance in ways we will not fully understand for years. There is no way to model this sort of change because there is no way to predict what a shift to working at home will actually mean economically. Nor do we really have much ability to work through the ramifications of extremely limited air travel or fanless sporting events.
Now, add to these and countless other shifts in behaviour, there is also the uncertainty as to the rate of change in that behaviour. Air travel is, at the moment, very, very limited. Flights are cancelled, air crew furloughed, smaller planes deployed where possible. That happened at the beginning of April and is ongoing. It is not, directly, the result of government saying “reduce air travel” but rather a consequence of lockdowns and “stay at home” edicts. It is also a very rational response to the virus itself – who wants to sit in close quarters with someone who is asymptomatically infected? Will that change and if so how fast?
A lot of the day to day transactions of life require a background of general trust, a sense of confidence. You can flatten the curve, lift the lock downs and generally stimulate the economy with helicopter money but until trust and confidence are restored you are essentially pushing on a rope.
I suspect we are coming to the end of the first wave of the virus. A good, hot summer, may see the end of it. However, the possibility of a second wave, potentially worse than the first, cannot be dismissed. Which is just one more worry to pile on top of the profoundly out of kilter economy.
In many ways the biggest obstacle to economic progress is the very idea that we will somehow “get back to normal”. The fact is that there is no longer a “normal” to return to which means we will be going forward into a economy which we will be inventing as we go. Which might sound scary but, realistically, market economies have always invented their own futures.
I have, and I checked, $85.00 in my pocket. I have had that for several days. We also have a few hundred dollars in the proverbial cookie jar.
We, like virtually everyone else, use our debit cards and online banking to do 95% of our transactions. I know how much money I have by checking into my bank account online. If I get a cheque I take a picture of it and it is cashed.
Money is now, effectively, digital. So is credit but that is another story. I receive a small pension and my wife gets the Child Tax Benefit. Digitally.
We are in the middle of a health crisis but also an economic meltdown. Hundreds of thousands of Canadians will be laid off. Businesses will close, the markets are in turmoil. We are at the middle of the month but, in 14 days, rents and mortgages will have to be paid. Day to day bills have to be met and, in a couple of weeks, a lot of people will have literally no money because COVID-19 will have destroyed their income.
Assuming that there are 23 million adults in Canada, it would cost 23 billion dollars to give everyone of them $1000. Which is a lot of money. Even for a Liberal government. (Of course the net cost could be reduced a lot by a) making it taxable, b) restricting it to people receiving the GST credit.)
An injection of $1000 per adult would goose the economy and make getting through the next month a heck of a lot easier for Canadian families. But is it prudent or even possible economically?
Right this instant, world wide interest rates are at all time lows. Sovereign debt can be had at less than 1% and even if the entire payment was borrowed it would be a blip on Canada’s overall deficit and interest payments. Essentially, the Government of Canada would be giving its citizens a long term loan using our excellent credit rating to raise the funds. Of course, those citizens would be paying that loan back over time through their taxes; but acting quickly could reduce real economic harm to a manageable economic problem.
We may have to do this for a few months. Which is ugly for the balance sheet but probably good for the nation.
There is the obvious risk of inflation and an equally obvious risk for the Canadian dollar. But, against that, we have to recognize that the enemy here is deflation as the economy contracts due to “lockdown” and despair as individuals and families hit the economic wall.
Yes, this would be Ben Bernanke’s “Helicopter Money” . It was not actually Bernanke’s idea, it was Milton Friedman’s. Read the article at the link. The original idea of “Helicopter Money” was that it was a tool of last resort when monetary policy has run out of bullets. (And when the prime interest rate is at .25%, that is an empty gun.)
Friedman and Bernanke saw this in strictly financial terms; they did not see the possibility of a non-financial crisis. COVID-19 is just that. A health crisis with a nasty financial side effect.
I am a hard money guy. I despise the lazy pseudo-Keynesians happy to spend in the bad times and just as happy to spend in the good times. I hate deficits. But, right now, I am hoping some adult in Ottawa – there has to be at least one – is getting ready to push billions of digital dollars into the hands of a bewildered Canadian public.
Now, to be fair, they will probably spend it on “beer and popcorn” (as the lame Liberal strategist said back in 2005 blowing Paul Martin’s election chances.) But for many Canadians it would be a lifeline through layoffs, cut hours, business slowdown and having to stay home.
It can be done in an hour. 92.5% of Canadians filed their taxes online in 2019. Most will have a bank account registered with the CRA. So will a lot of us who have a pension or a GST rebate or a Child Tax Benefit entitlement.
Pushing the button and sending a chunk of money to Canadians who are reeling from lock-down, social distance and losing their jobs makes a lot of sense.
We’ll deal with the fiscal consequences when COVID-19 is done.
The Yellow Vests are, ostensibly, protesting Macron’s imposition of higher fuel taxes in the name of CO2 reductions and the Paris Accord. However, while there is a strand of the protest which is really just people who like throwing rocks and lighting fires – apparently from both sides of the political aisle with more than a few of France’s increasing immigrant population taking advantage of the chaos – the bulk of the protestors seem to be the French version of deplorables. Working and lower middle class people from the provinces and the outer suburbs who have been steadily falling behind economically.
Historically, the French have been very good at organizing strikes and protests and the French police have become very good at breaking up such demonstrations.
But what this video shows is the French police “standing down”. Taking off their helmets. The crowd applauds and breaks into La Marseillaise.
Will the Yellow Vests bring down Macron? While I devoutly hope they do they will not do it on their own. However, if the police down tools that would be a different situation altogether. Of course, there would still be the Army; but how reliable the Army would be is an open question.
The one thing which the Yellow Vests need to keep their effort going is continued large numbers of non-violent protestors. This weekend there were fewer than last weekend. Christmas is coming. The point about street protests is they succeed when they are massive, they fail when people stay at home.
Holy Cow!!! It is now strongly getting said that Canada is going to take the knee and give up protectionist tariffs on their dairy, telecom, aeronautics, and banking industries in order to save their auto-industry. Total and complete acquiescence to U.S./Mexico Demands. pic.twitter.com/xoegWXIB2H
Sundance is a remarkably well informed American commentator who pays attention to trade. The above is not confirmed but if that turns out to be the Canadian position the politics will be fascinating.
A complete capitulation to Trump would make Trudeau look like the wimp most of us already think he is. It would also give us a chance to catch the tailwind of the current American economic boom.
It would, I suspect, cause the left in Canada to implode simply because it would suggest that their hero Justin takes business more seriously than posturing. And when you give up posturing what does the left have left?
As Trump would say, “We’ll see what happens,” but real Canadian patriots have to hope that common sense prevailed and that we are on the road to genuine free trade with our friends to the south.
[Note seeing much action on the CDN/USD front. If the above is true I would expect a fairly sharp rise in the value of the Canadian dollar.]
Only in Canada would the rudeness of our Prime Minister to a departing guest be raised – admittedly by Warren “Lying Jackal” Kinsella – to a question of Canadian patriotism. Our Minister of External Affairs has wagged her stubby little finger at the Donald and called his response to Trudeau’s rudeness “inappropriate”.
In so far as there is any thinking at all in Ottawa I suspect some bright light in the PMO, in the wake of Ford’s victory in Ontario, has had the idea that the way for Trudeau to win the next election is to try and cast that election as an opportunity for good Canadians to vote against the monster Trump. It is just the sort of idea which will emerge from a gender-balanced brain trust a bit high on soy. Because decent, good Canadians hate Trump and if Trudeau is seen to stand up to the orange ogre we will all troop to the ballot box in Trudeau’s support. While I think that is unlikely, it is really all these clowns have left.
Which is very bad news for Canada. Because Trump is not kidding on tariffs and could care less if all the Canadas rise as one in support of the Little Potato. As I pointed out below, at virtually no cost to the American economy, Trump can pretty much wipe out the one bit of manufacturing which exists in the so-called “Golden Triangle”. And if Ms. Freeland thinks he is inappropriate now, imagine how fast her finger will have to wag if he hits oil and lumber with the same sort of across the board tariff.
A lot of diplomacy and trade strategy can be learned in a school yard. Six grade one students are unwise trying to take on the kid in grade seven. While they might be able to slow him down they can’t actually hurt him, but one solid punch from the big kid and a little kid is laid out flat. Is that fair? Of course not. But it is how the world works.
Here’s a counter suggestion: total, real, free trade. No tarriffs either way on Canadian or US made and manufactured goods. An open border for evrything from steel to cheese. (And yes, the dairy farmers will scream…let’em.)
Canada is not going to win a trade war with its biggest trading partner. It is a silly idea and one which only the Liberals could come up with. But we could be creative and say, unilaterally, that we are eliminating all tarrifs and other barriers to US made goods. That would swat the ball back into Trump’s court.
So far as can be seen, the biggest US gripe about Canada is transhipment of Chinese goods. We can deal with that with a value add requirement.
Trump is never going to give an inch to retaliation. He’d rather die. But a better deal for Canada and the US, now we are talking.
And, best of all, cheap cheese and wine and all manner of good things.
Jay Currie 