What about the debt?

Hello everyone, 

We have received a lot of inquiries from clients wondering about the long term implications of all the debt that governments around the world are taking on to provide stimulus measures during the Covid-19 pandemic. The media, and especially the internet, is full of dire predictions about the collapse of paper currency due to the high levels of government debt being taken on during these times.

Without a doubt there is an upper limit on how much debt that the markets will allow a country to assume before they will stop having confidence in the currency or the financial markets.

Because it has never happened we cannot say for certain what level of debt will cause this lack of confidence.  But based on history as well as evidence in our current markets I think there is plenty of reason to believe that we are nowhere close to “hitting the wall” in the foreseeable future.

We measure levels of debt by comparing it to the size of the economy, similar to a bank granting a mortgage based on the value of the house.  This is referred to as the debt to GDP ratio.

Currently our federal debt is projected to amount to about 53.3% of GDP by the end of this year.  A very large number for sure, but much smaller than what it has been in the past. Immediately after World War II. Our debt topped out at 109% of GDP.  As late as the mid 1990’s we hit the 60% level.  These previous levels were also reached in an era when interest rates on that debt were much higher than today. With current levels of interest rates the cost to service the debt is much lower. Although high, the Canadian figures are much better than many other areas.  In the United States the ratio recently exceeded 100% and in Japan it is much higher than that.  None of these countries are experiencing any financial stress from the issue. (Department of Finance, n.d.)

If problems are to emerge in the future the first sign of trouble will show up in the bond market. If investors are worried about a collapse of our currency they will be reluctant to purchase our bonds which will cause the interest rate to spike higher.  We saw this a few years ago when several European countries, such as Greece, saw their bond interest rates spike higher as confidence in their ability to remain solvent dissolved.  Currently in Canada our 10-year bond is yielding less than 1%.  This is the bond market in essence saying that they do not see any issues for the next decade.

After the pandemic subsides and the economy has had time to recover we will need to take steps to reduce the debt back to prepandemic levels.  It remains to be seen what those measures will be but as we go through this process a collapse of our financial system is not the issue that should be keeping us awake at night. 

We have heard from many of our clients expressing support for Alan in the Waterloo Record’s Readers’ Choice Awards and we cannot be more grateful for the support. If anyone feels inclined to vote the deadline is September 27th. 

https://www.therecord.com/readerschoice/  

All the best, 

Tchabushnig Wealth Group  

Source for Economic Figures:

(n.d.). Retrieved from Department of Finance: https://www.canada.ca/en/department-finance/services/publications/economic-fiscal-snapshot/debt-management-strategy-2020-21.html  

This communication has been prepared by Alan Tchabushnig and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. It is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member - Canadian Investor Protection Fund.  This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to.