FEDERAL BORROWING RISKS TRUST IN OUR CURRENCY

Canada cannot keep digitally printing more money, says Brian Jean.

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.

This is a real worry for two reasons. First, there is the terrifying danger of a Trudeau government getting addicted to using “digitally printed” money and “borrowing” unlimited amounts of “money” to recraft our society.

Second, even if those excesses are avoided, 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 two 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 two or three percentage points won't be that big a deal. After all, in the '90s everyone got by when interest rates were well over five per cent 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 three per cent on your mortgage — some banks are currently offering closed five-year mortgages at 1.75 per cent. So, if come 2022 or 2023 when that 2.65 per cent mortgage must be renewed, if prime rates are at a 1990s best of five per cent 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 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 realize money doesn't grow on trees. In the '90s we learned that Canada couldn't borrow money forever — people just wouldn't lend it to us. Making up money at the Bank of Canada won't solve the problem either.

COVID policy decisions need to understand that we can only borrow so much. The 2021 deficit needs to be financed conventionally and 2021's spending goals need to be restrained.

We must maintain confidence in our currency and our central Bank. An emergency resulted in a once in a lifetime emergency solution. We now need to get back to fiscal sanity and quickly — otherwise the rest of this decade could be terrifying.

Historically, hyperinflation has always been the inevitable end of abusing the printing of money.