This has been a crazy year and it has sparked many new things to worry about. But I find myself worrying about an old issue that I never thought would become a Canadian problem: the trust in our currency and the consequences of a loss of that trust.
You see, Canada’s governments have been borrowing more than ever before to cope with COVID. That’s a concern. But what is much more concerning is that most of that borrowing doesn’t have a real-world lender on the other side. Unlike last year, when government borrowing involved going to the global bond markets and having someone else buy our bonds, this year the vast majority of the money our governments are borrowing comes from the Bank of Canada which is inventing this money to lend us. Think of it as the digital version of printing money. ...
The 2020 rise in Bank of Canada financed debt risks global loss of confidence in our currency and our central bank.
If the Bank of Canada loses even a little of the market’s confidence it will have to raise Canadian interest rates to attract investment and prop up the Canadian dollarette.
Historically, hyperinflation has always been the inevitable end of abusing the printing of money. Think of the 1920s Weimar Republic whose workmen got paid in wheelbarrows of banknotes, or Zimbabwe’s money which had a 100 trillion Zimbabwe dollar banknote, or current day Venezuela with its problem of old banknote street litter.
Now, I don’t believe Canada will go Zimbabwe or Venezuela crazy. But even modest 1980s or 1990s level inflation is a huge problem for Canada. The current mandate of the Bank of Canada is to keep inflation to a modest and useful level of 2 per cent. To keep inflation positive and small, the principal lever that the Bank of Canada uses is interest rates. By making money more or less expensive (raising or lowering rates) it can moderate economic activity and keep inflation in the target range.
The debasement of our currency will lead to increases in the price of everything we import, and that means inflation. If the Bank of Canada maintains its current independent mandate and attempts to deal with inflation and the reduction in value of the dollar it will have to raise interest rates.
Now you might think that since we are at historic interest rate lows having them go up 2 or 3 percentage points won’t be that big a deal. Afterall in the ’90s everyone got by when interest rates were well over 5% for almost the entire decade. You would be exactly wrong!
The problem is that so much of our economy and our wealth is mortgaged at extremely low interest rates. You are likely paying less than 3% on your mortgage — some banks are currently offering closed 5-year mortgages at 1.75%. So, if come 2022 or 2023 when that 2.65% mortgage must be renewed, if prime rates are at a 1990s best of 5%
that means the monthly mortgage payment on renewal will almost double.
How many Canadians could handle their mortgage payment doubling? How many businesses could handle the interest payments on their business loans doubling? How about doubling your debt servicing at the same time every imported item you buy has also gone up dramatically in price?
This is where we are headed if Justin Trudeau and Chrystia Freeland don’t figure out that money doesn’t grow on trees. ...
Full article here: The Trudeau government's borrowing risks trust in our currency - The Edmonton Journal