Canadians have backed themselves into a corner, thanks to low interest rates.
The global economy, already fairly anemic, is slowing even more. Government plans depend on growth to lift them up and out of deficit spending, while the rest of us need ever-increasing earnings that keep stock prices moving upward for our mutual funds and pensions.
Japan has showed us what happens in such a scenario. For two decades now it has been treading water. It has had the lowest interest rates in the world for most of that time — and has run horrific deficits, piling up a huge government debt.
Between an aging population — Japan is the first nation to flip from having more old people than young people — and a moribund economy — there’s been no growth in financial assets in Japan. As a result, Japanese investment funds and pensions have been struggling, too.
If Japan had to face Canadian interest rates, it would tip the balance and force the Japanese government to either immediately slash its “stimulus” spending (20 years’ worth has made no difference but has kept things ticking over) to balance its books, or to unleash inflation to depreciate their debts by destroying the value of the yen, or to default on its debt. It can’t afford the interest charges, period.
Yet, without higher interest rates, the Japanese economy can’t restart. Nor can those on fixed incomes have an income that preserves what capital they have.
Canada has similar woes ahead of it.
The federal government, and some of the provinces, could probably manage higher rates. Unlike Japan, which eschews immigration, Canada’s population continues to grow. Immigrants also help with its demographic transition issues.
Some other provinces — notably Québec and Ontario — can’t. Each run massive deficits, have accumulated debts that are way beyond their ability to pay, and depend on interest rates staying low for any chance of survival because paying interest is now the second largest item in their provincial budgets. If interest rates went back to their historic levels of three per cent plus inflation (say five to six per cent today) it would bankrupt them both.
But unlike Japan, which has spent the last two decades building national infrastructure — new rail lines, new roads, new airports, new hospitals and the like (as part of its spending to support the economy there), Canada has done nowhere near enough in this area. Most of Canada’s infrastructure is in need of repair or replacement, after years of government neglect.
Now, the massive infrastructure investment required comes at the same time as the country faces economic pressure to provide needed services, such as welfare, employment insurance, pension top ups and a strained health care system due to an aging population.
Low interest rates are also eating away at our pensions. The wow rates have eaten away at fund managers’ ability to earn enough to outpace the needs of those in the plan. South of the border, the near-zero rates offered by the Fed have moved the U.S. Social Security system 10 years closer to insolvency. Only a handful of the S&P 500 companies with pension plans for their employees actually have all the money they need to meet their obligations, despite years of top up contributions..
The Canada Pension Plan Investment Board, and the Caisse in Québec (which manages the funds in the Québec Pension Plan) have done a little better. Canadian companies have not. Neither have our public sector pensions: the Ontario Teachers’ pension plan, to name just one, has almost a $10 billion deficit relative to needs.
What does this mean? It means we have choices to make as citizens. We can’t just sit back and “wait for growth” to come and rescue us. Neither can we simply demand “stimulus” to try and trigger it.
Thirty per cent of Canada’s output is exported so, when the globe slows, so do we. We’d better plan on solving our problems without growth this time.
There are good reasons out there to argue for both low interest rates — even with what it does to retirees — and for higher ones — even with what it does to government services.
What we have to do is to think through which outcome we want. We have to choose a future — because we can’t have it all.
Troy Media columnist Bruce A. Stewart is a Toronto-based management consultant.