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The fall
Winter is coming. It’s a season, particularly in Canada, that can inflict hardship and enduring suffering upon the unprepared. In another era, we knew instinctively to fill our cupboards and root cellars in the fall, to ready our lives for the coming winter. We cut and chopped wood to stay warm. Because winter can be long, bitter and cruel.
We face a different kind of winter with the election of a protectionist, nativist demagogue in Washington. We can’t stop it, no more than we can stop a blizzard blowing off Lake Ontario. We can, however, brace for its impact. It is a mistake, perhaps a deadly one, to do otherwise.
So how do we prepare? How do we brace for the coming storm?
First, we learn to recognize the warning signs. A trillion dollars have been erased in world bond markets since the American election last week. The folks who manage the bulk of the world’s savings—the bedrock that underlies every economy—believe that the U.S. is set to accumulate debt at a far greater pace over the next few years to fund lower taxes which in turn is likely to fuel inflation.
Equity markets are celebrating—at least in the short term. The wealthy are set to become wealthier. Savers, however, will be poorer. It isn’t a disgruntled left-wing pundit making this prediction—it is the markets enunciating this forecast with every trade.
Are we prepared for winter? In Ontario, the prospects are grim. Our cupboards are bare. We have spent more than a decade proactively hobbling our economy with oppressive levels of debt, spiralling electricity rates and a shiny new carbon tax coming in January that is estimated to add $2 billion to the cost of doing business in Canada each year. Manufacturers and processors have fled the province in droves. Others will follow in pursuit of the promises of a deranged president- elect.
We are in a precarious position to weather a prolonged wintry assault.
Ontario’s finance minister, Charles Sousa, announced this week the province wasn’t going to balance its budget after all. He will plug the leak until the next provincial election by dipping into reserve funds. Its like smashing the piggy bank to pay the rent— it won’t solve the problem, it’s only pushing a bigger problem into the future. Things will be better then, we tell ourselves.
But how can we say that, knowing what is coming? There is some slack in the American economy, but not a lot. Much of its overcapacity has been wrung out over the past eight years, an achievement for which the Obama administration will get no credit.
Unemployment is under five per cent. A small boost in that economy—from lower business taxes, fewer regulations and a dose of protectionism—is likely to cause it to overheat quickly, even if temporarily (due to still sluggish worldwide demand). Wage demands will grow, triggering rising inflation. Interest rates will rise to ensure the inflation flame doesn’t become a house-destroying conflagration. Canada will follow. We will say we are defending the dollar. But, in fact, we will be admitting the obvious—that Canada’s economy is tied firmly and inextricably to that of our American neighbours.
In good times we can delude ourselves into believing we operate sovereign economies—that we make the rules and chart our own path. But in a long, cold, brutal winter, basic truths become unavoidable. The veneer of self-determination will fall away when it becomes obvious we haven’t prepared for a change in fortune.
And we haven’t.
The provincial government will spend $11.6 billion in interest payments this year. If interest payments were a provincial ministry, it would rank as the neediest behind only health and education.
Currently, the rate of interest the province pays is low. Finance Minister Sousa says he has locked up much of Ontario’s debt at these historically low rates. Yet, as much as 40 per cent is set to come due in five years. By the time it rolls over, Ontario could be paying hundreds of millions more in interest each and every year.
Municipalities have taken the cue from the province—loading up on low-cost debt across Canada. Residents, too. The ratio of household debt to disposable income is now at a staggering 1.65. This means that for every dollar Canadians have available to spend—we owe $1.65. Some economists and politicians take comfort that the value of our assets—our homes and investments—is growing too. But these can erode in a heartbeat.
We are ill-prepared for the winter ahead.
We have some time—but not much. Whatever measures the new American administration puts in place, they will take the time to ripple through the economy. But we can’t continue to pretend we are immune to the effects of the coming dark, cold winter.
This means cutting costs, becoming more active and shoring up reserves. We must do all we can to restore competitiveness to our economy, as quickly as we are able. We can do this in an orderly way now—or in a panicked, fear-stricken way when the harshness of the coming winter takes its mortal grip.
Winter is approaching—and I fear we don’t even own a sweater.
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