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It’s a strange new world where we don’t have enough inflation. Governments should not live within their means, balance budgets and reduce debt. While saving was once a virtue, it now seems pointless when returns after inflation are negative. Borrowing to spend becomes a better option.
You know things have changed when former Blue Jays slugger Jose Canseco is paying attention. Canseco tweeted his bewilderment this winter when the Bank of Japan lowered its key lending rate to negative 0.3 per cent. That rate in effect charges bank customers to leave money in their accounts.
The latest example of this topsy-turvy world came as an aside to the U.S. presidential campaign. Hillary Clinton has promised to be prudent if elected and not to spend more than can be raised by taxes. Donald Trump wants tax cuts, which would lead to higher deficits.
Economist Paul Krugman, a Nobel Prize-winner, made the case in a recent article in the New York Times that Clinton is wrong. Under the headline “Debt is Good”, Krugman argued that more government borrowing can pay for useful things, and “we should do more of that when the price is right.” By this he meant upgrading road, rail, airports, water systems and more.
The U.S. is already running a deficit of about $ 500 billion this year and the Congressional Budget Office predicts these deficits will continue to grow each year for the next 30 years. Even bigger deficits would be better?
Here at home, the Trudeau government’s spring budget pledged $ 60 billion in infrastructure spending over 10 years. In a sign of the times, groups who applauded loudest are the traditional go-to business deficit bashers.
Here’s what we’re seeing:
Bring on inflation
So why do we want it back?
One thing it does is give the illusion of growth, which encourages spending. It also erodes the value of debt. Since all of Canada’s governments will owe $ 1.3 trillion this year, according to the Fraser Institute, inflation at the 2-per-cent Bank of Canada target reduces the value by $ 2.6 billion annually.
Why bother saving
That puts the after-inflation value of $ 10,000 in that GIC a year from now at $ 9,910, or $ 90 less.
Nobody can live well with that math. That’s why the stock market is booming and pension funds are moving into new areas in search of returns. Toll roads, student housing and airports are higher risk, but they always spin off cash.
The other side of punishing savers is to reward spenders, whether businesses or consumers. But businesses won’t invest without demand and ever-lower rates provide smaller and smaller incentives for us to buy.
The negative-rate evidence in Europe is that people become afraid and spend less. They think something is wrong, which it is.
Rising trade barriers
The benefits of these deals are now being questioned. Britain is leaving the EU. Hillary Clinton wants to reassess NAFTA and put the TPP on hold. Donald Trump wants to build trade walls around the United States. Canada needs open markets.
More columns by Adam MayersEND
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