Borrow, spend, print and pray
What happens if interest rates go up? It’s not unthinkable, or even unlikely. They are at historically low levels, thanks in part to emergency government policies that have been in place for seven years now. And now central banks from Washington to London are warning that they will rise.
If so, what becomes of our governments’ budgets? Ottawa paid over $28 billion in interest in 201314, more than 10 per cent of its $271.7 billion in revenue, and has been struggling mightily to escape the deficits it eagerly embraced in 2008.
If its effective interest rate rose even a modest 1/3, the additional $9 billion in “public debt charges” would mean that there would be no end in sight to deficits that, as we learned in the 1970s and ‘80s, add to the debt and thus interest payments, eventually driving up borrowing costs in a vicious spiral. Re- member that as recently as 1988-89, Ottawa paid $35 billion in interest on a national debt that was half of what it is today.
Ontario is even more exposed, currently paying $12 billion a year in interest, or 10 per cent of its revenue, and still deep in deficit. And while Queen’s Park carries the largest provincial debt, Quebec’s is far bigger as a share of its economy, while Nova Scotia, New Brunswick and P.E.I. are all comparable to Ontario.
A rise in interest rates back to normal levels would also be menacing for citizens, quite apart from the prospect of panicky tax increases. Canadians were keen savers until fairly recently. But as of late, they have become as profligate as politicians, partly as a result of deliberate government policy. The point of “quantitative easing,” the deep-sounding modern name for throwing the printing presses into overdrive, has been to “stimulate” the economy by encouraging us to borrow and spend. And we have.
It’s weird to see governments, after spending decades claiming consumption taxes are better than income taxes because they reward the saving that powers investment and growth, deliberately trying to create a world where savers are chumps. It’s even weirder when they harangue us for the borrowing they deliberately encouraged and frantically try to “cool down” the same housing markets they’ve been overheating with their interest rate policy, despite what you’d think would be the stimulus effect of spin-off activity in construction, financial services, transportation, furniture making, etc.
Part of it is governments’ own desperate need for cheap money. But part is a weird conviction among people who are ostensibly fiscally conservative, that Keynesian stimulus should work and, if not, printing money will. Neither worked 40 years ago and neither can today.
What determines borrowing and lending over time is real interest rates not nominal ones. And governments cannot change real interest rates by monetary jiggery-pokery. They are a market-clearing price driven by countless individuals’ estimation of economic conditions. In the short run, governments may manage to create a gap between what some people want to save and lend, and what others want to borrow and spend (including on productive assets) by pushing down real interest rates. But they cannot then fill that gap with paper money instead of real wealth, and if they persist in trying, stagflation will return.
So what is the public- or privatesector plan to deal with, say, four per cent real interest rates in a few years? If you haven’t got one a lot better than today’s “borrow, spend, print and pray,” we humbly suggest paying down debt. And engraving above your portal Adam Smith’s wise words respecting trade: “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” The reverse is also true.
Government interest rate policies have created a mess that will only get worse when they start to rise again