The Elephant in the Room: The Debt Crisis
Finance professionals believe that the debt crisis will be solved this decade.
The Government of Canada Debt rose almost 100% (doubled) in 15 years. The Fraser Institute is predicting Canada's combined federal-provincial debt will exceed $2 trillion in 2022/23, or 74.6% of the Canadian economy (see the full report here). The Government of Canada had $1134.5 billion CAD in debt during 2022, largely due to the COVID 19 pandemic. The Government of Canada federal debt amount is projected to trend around $700 billion CAD in 2023, and $600 billion CAD in 2024.
Clearly, this trend would create fiscal challenges for Ottawa and for taxpayers.
In the US, the treasury yield curve is a notorious predictor of recession. On the 2 and 10-year notes, it’s at its deepest inversion in over 40 years. The indicator preceded the downturns of 1990, 2001, and 2008.
Why is debt a problem?
· Inflation is no longer a potential problem. It is a major problem. Debt, rising interest rates, and inflation lead to economic slowdown (i.e. "stagflation"). As such, 2023 will likely remain challenging.
· The last time that the combined Government of Canada debt doubled was the year before the last recession in 2007/08.
· Large combined government debt typically results in higher future taxes.
Looking for something to read?
Ray Dalio, founder of Bridgewater Associates - a very successful hedge fund management firm, is a man who has given great deal of thought to debt and is a bit of a cult hero to finance professional. He has written several good books: (1) Principles, and (2) Principles for navigating Big Debt Crises (free copy here). He believes that almost everything happens again and agin through time (this isn't new to most finance professionals). Where he differs, is that he believes that by studying patterns one can understand the cause-and-effect relationships behind events. He shares his template for developing principles for practical application in the hope of reducing the probability that big debt crises happen and help governments manage debt better in the future.
Scientists may disagree; cause-and-effect relationships cannot be determined based on statistical relationships, correlation is not causation. However, patterns tend to reveal likelihoods which can be used for predictive modelling. Predictive models can be validated and tested using temporal data. As such, Dalio's template may be justified in studying patterns.
Given the current state of government debt, which is far far worse than 2007/08 and growing, it may be beneficial to understand his point of view.
