The Darwinian Flush

60% of Canadians are debt free.  Presumably they worked hard, saved money (cash) and prudently paid off their debts or never incurred them.  Somehow, someway they learned to save money for a rainy day, like a job loss, illness, recession or pandemic.  It does rain.

The other 43% of Canadians have some form of debt (Ask Ipsos why it doesn’t add up to 100%).  Many of them have huge amounts making Canadians the most indebted in the world.  The indebted have mortgages, home equity lines of credit, open lines of credit, installment loans, student loans, car loans, credit card debt, etc.  They don’t save like the prudent.  Amidst a borrow, borrow, borrow environment somehow, someway they are unprepared for a rainy day.  It does rain.

It just rained, in fact it poured.  The country was already falling into recession and a pandemic hit.  In a free market, many of the leveraged are eliminated for reckless borrowing and the prudent rewarded with their cash on hand.  It’s not exactly a free market.

Enter the Government, democratically elected.  Reward the reckless with CERB, CESG, give away hundreds of billions of dollars that you don’t have (simply print IOUs and have your central bank buy them – because no one else will).  Then tell the reckless, you don’t have to pay rent or your mortgage.  Then introduce in the last year, and a bunch of other giveaways.  What was the alternative?  The free market, savers win, borrowers lose (the Darwinian flush) and asset prices return to equilibrium.  Now this isn’t universal healthcare or universal education, this is big.  It took Canada 150 years to run up a $600 billion dollar debt, and in just six months add $400 billion to it.  Care to bet on the debt one year from now?  The government is more reckless than the reckless 43%.  I’m guessing our leaders may be personally part of the 43%. 

Few governments have spent their way out of a disaster like the current one (WWII took decades of productivity gains and inflation to overcome).  Here’s the scary thing, we’re not going to inflate our way out of this due to globalization and technology.  Inflation was low the last generation due to outsourcing of manufacturing to low wage countries, the next wave is outsourcing of services (education, finance, professional services).  Canada’s productivity is one of the worst in the OECD.  Of course, doing nothing was not an option for elected officials (or they join the unemployed).  The price will be high for giving away massive free money to consumers.  It could have been conditional: an interest free loan, or required work claims like the great depression’s projects. Instead it doubled the country’s debt and kicked the disaster down the road a few quarters, leaving little or no ammunition to fight the next downturn.

What’s the lesson here?  In the 1930’s the great depression decimated the reckless, leveraged borrowers of the roaring 1920s.  In the roaring 2020’s reckless, leveraged borrowers are being bailed out, temporarily.  Will the 2030’s be a repeat of the 1930’s?  No one knows the future exactly, and history doesn’t repeat itself exactly (too many unique variables), but human behavior does. 

One thing is clear, savers have money and borrowers owe it.  Going forward, common sense tells us savers will win and borrowers will lose, 60/43 odds?  Or maybe wealth without work, something for nothing and free lunches will be the new world order.  It will not.  The borrowers have had a great run, their time is up.