News from the “debt front”

Posted: August 30, 2013 in Community, Family Businesses
Tags: ,

Federal Reserve Chairman Ben Bernanke announced recently that the printing of money will start to decline. The Federal Reserve has been buying up to $90B per month of Treasury Notes. This has been the policy of monetizing massive US deficits. Interest rates in OECD countries are at legislated rock bottom rates. Inflation is about 2% per year and, by some accounts, the US economy is growing.

Don Drummond, a respected economist, told everyone that economic growth in the developed countries would be between 2-3% for the foreseeable future. So it will be difficult for Canada to grow into its debt.  Our Minister of Finance likes to point out that our federal debt to GDP is the lowest in the developed world.  Maybe, but he conveniently forgets to mention the provincial debt burden. The world’s largest debt rating agencies haven’t overlooked this. Canada’s GDP is $1.5 trillion. Our combined federal and provincial debt is about $1.1 trillion. This makes our total debt to GDP about 73%. We aren’t as good as we boast.

Ironically, large publicly traded companies have clean balance sheets. They used to consider OPM (other people’s money) as leverage. At the end of the day, it is debt. It has to be repaid and the debt service costs are subject to “prime plus ?” interest rate swings.

There was a study published by a economic think tank that an inflation rate of 4-6% would not be unwelcome. It would encourage governments to be more responsible. Yeah right!  Look at the possible impact on the consumer in general. Mortgage rate increases would make servicing of existing mortgages ($350,000+) unsupportable, not to mention the servicing of other personal loans.

Small business is always in a precarious position when it comes to the availability of bank credit. Banks would tighten up their credit policies and new loan growth in the small business sector would be very specious.

 

 

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