[Canada] Canadian Politics Redux

[Admiral Yi]

Watched the video.  Didn't see any obvious lies in there.  As a rabid deficit fighter I am pleased.  As a realist I don't think it's a winning political formula.  There is no political constituency for reducing spending and raising taxes.

The rise in personal debt could also explain the rise in housing prices relative to income.

[Sheilbh]

Watched the video.  Didn't see any obvious lies in there.  As a rabid deficit fighter I am pleased.  As a realist I don't think it's a winning political formula.  There is no political constituency for reducing spending and raising taxes.

But surely as you demonstrate there is political constituency in moaning about it - see also, the 1990s.

It was also the basis of the Tories' strategy from 2010-16 and 2022-present. Plus the CDU putting the debt brake into the constituion (which is now causing no end of budgetary carnage) - "yes we stand by our fetish":


The rest of the world doesn't have the US' exorbitant privilege with its political effects.

[Admiral Yi]

But surely as you demonstrate there is political constituency in moaning about it - see also, the 1990s.

It was also the basis of the Tories' strategy from 2010-16 and 2022-present. Plus the CDU putting the debt brake into the constituion (which is now causing no end of budgetary carnage) - "yes we stand by our fetish":


The rest of the world doesn't have the US' exorbitant privilege with its political effects.

In the US there is a huge political constituency for moaning about deficits created by the other side.

Was a campaign run in the UK about deficit reduction?  My recollection is that austerity was a reaction the PIIG crisis, untied to any election.  I could be wrong.

[Sheilbh]

Was a campaign run in the UK about deficit reduction?  My recollection is that austerity was a reaction the PIIG crisis, untied to any election.  I could be wrong.

The election was in 2010 so before the Eurozone crisis had really kicked off. Osborne definitely said we'd be like Greece if Labour won, which wasn't true - but the Eurozone crisis was very much in its early phases and the first Greek crisis happened during the campaign which was already focused on economic plans.

Both parties campaigned on reducing the deficit. The Tories argued for doing it twice as quick as Labour proposed.

But it was pretty front and centre of the campaign:


And following a Labour poster depicting Cameron as Philip Hunt from Life on Mars to take Britain back to the 80s:


The biggest cuts were in the early years - the combination of a double dip recession and the impact of the Eurozone crisis actually caused Osborne to reduce the pace of cuts to something more like what Labour had proposed.

On taxes, by the next election, taxes will be at one of the highest levels they've ever been outside of wartime at around 38% of GDP. Basically all done by Sunak as Johnson's Chancellor and now as PM and largely because of costs from covid but also incurred on cost of living (and - on a very technical level the UK's debt is very exposed to inflation and rate rises so the cost of servicing it has massively increased in the last two years).

Admittedly the current Tory spending plans involve big cuts (and I believe Labour has also signed up to them) but no-one beleives that. All those cuts are scheduled for after the next election and whoever wins those cuts won't happen (certainly not at that level).

Edit: Oh the other thing on austerity was Osborne promised to do it entirely through spending cuts, while Labour said 50/50 spending cuts and tax rises.

[crazy canuck]

BB, what do you think of lumping business debt together with personal and government debt to come up with the  time bomb metaphor?

He's pretty open about that though.  Personal debt is also a concern.

Yes, but I am asking what you think about combining business debt with personal and government debt to arrive at his time bomb debt number.

Do you think that is valid?

[crazy canuck]

Watched the video.  Didn't see any obvious lies in there.  As a rabid deficit fighter I am pleased.  As a realist I don't think it's a winning political formula.  There is no political constituency for reducing spending and raising taxes.

The rise in personal debt could also explain the rise in housing prices relative to income.

Do you think it is the role of government to reduce private business debt?  Or to put it another way is it a valid argument to say that all debt, including debt business take on, should be reduced?

And if so what does that do to research and innovation in the private sector?

[Sheilbh]

Do you think it is the role of government to reduce private business debt?  Or to put it another way is it a valid argument to say that all debt, including debt business take on, should be reduced?

And if so what does that do to research and innovation in the private sector?

Not always, but it can be.

A large part of the global financial crisis which was driven by private sector debt but resulted in huge impacts on the government from having to save the banks (even if that debt wasn't always just directly taken on). To the extent the state acts as the ultimate backstop for the financial sector or guarantees any mortgages it has an interest private sector debt.

Obviously each item of debt on its own could be fully justified but, in the aggregate, a risk for the whole economy. Not sure if it's necessarily the case in Canada that there's a risk - although I believe Canada have some of the highest levels of household and corporate debt in the G20 (seem to remember an Economist piece on it). That seems to me like probably something government should be interested in - it's not necessarily bad but that it is likely a risk.

[Admiral Yi]

Obviously each item of debt on its own could be fully justified but, in the aggregate, a risk for the whole economy. Not sure if it's necessarily the case in Canada that there's a risk - although I believe Canada have some of the highest levels of household and corporate debt in the G20 (seem to remember an Economist piece on it). That seems to me like probably something government should be interested in - it's not necessarily bad but that it is likely a risk.

Justified is not quite right.  The subprime crisis was not about justification (what does that mean anyway?) but about repayability.  That's what causes debt crises: failure to repay, not on whether the money was borrowed to buy nice things.

[Sheilbh]

Justified is not quite right.  The subprime crisis was not about justification (what does that mean anyway?) but about repayability.  That's what causes debt crises: failure to repay, not on whether the money was borrowed to buy nice things.

My point was more on CC's R&D point - each individual loan taken purely on its own terms may be fully justified (and prudent) from the lender and borrower's perspectives. In the aggregate it may be creating risks, vulnerabilities and instability. That's where government - and central banks - are required.

[Admiral Yi]

My point was more on CC's R&D point - each individual loan taken purely on its own terms may be fully justified (and prudent) from the lender and borrower's perspectives. In the aggregate it may be creating risks, vulnerabilities and instability. That's where government - and central banks - are required.

I think there are logical leaps in there.  If a given loan is prudent, then kinda by definition it will be repaid (with some default rate accounted for the risk classification and interest premium).

How can a loan that is prudent not be repaid?

[Jacob]

I accept the premise that the scale and nature of a nation's private debt burden could be such that prudent management of a nation's financial system requires some sort of intervention. I think the argument for it would be fairly technical in nature, and have yet to be persuaded that it's a major problem in Canada.

I think adding consumer debt + corporate debt + public debt to arrive at some total scary number (which is apparently what Poilievre is doing?) is disingenuous, runs the risk of derailing the substance of the debate, and creates a real risk of generating misapplied policy to generate headlines to address a chimerical problem. The nature, associated risk, and possible remedies for each of those debt numbers are very different and require separate policy IMO.

Certainly, "debt bad" doesn't inspire confidence in the Conservatives fiscal acumen or responsibility. It comes across as a rationalization for cutting spending on ideological grounds.

[Jacob]

May I remind you I voted NDP in the last Alberta election.

To your credit

[Admiral Yi]

I think adding consumer debt + corporate debt + public debt to arrive at some total scary number (which is apparently what Poilievre is doing?) is disingenuous, runs the risk of derailing the substance of the debate, and creates a real risk of generating misapplied policy to generate headlines to address a chimerical problem. The nature, associated risk, and possible remedies for each of those debt numbers are very different and require separate policy IMO.

I disagree.  The logic of aggregating the numbers is that they are all repaid out of the same pool of individual income.  In the case of household debt the relationship is direct.  In the case of government debt the relationship is at one remove, since government debt is financed by taxes, which are paid by households out of individual income.  In the case business debt there is another remove because that debt is financed out of revenue, which is derived from household consumption.

[Sheilbh]

I think there are logical leaps in there.  If a given loan is prudent, then kinda by definition it will be repaid (with some default rate accounted for the risk classification and interest premium).

How can a loan that is prudent not be repaid?

Time.

Overexposure to one area or sector, changes to the wider economy like, say, a set of supply shocks causing a rapid rise in interest rates and the cost of money to a bank which it isn't able to pass on (depending on the nature of the loans etc), the bank buys another bank with far more risky assets and suddenly its sensible book looks a bit different, sovereign risk meaning your capital is reduced. On an individual level circumstances changing.

Basically neither individuals or banks know what's going to happen for the entire duration of the loan. By definition they always contain risk, even if at the point of issuing/taking a loan it is prudent. Charging a risk premium is an estimate on repayability, but it is also an estimate based in a specific moment in time - what is sensible and appropriate in one context can look very different in just a few months. For example, I don't know that anyone can really say that we know what prudent lending or financial markets look like in an age of climate change both in terms of things like risks of stranded assets or the actual physical impact of climate change.

It's the same with hedging products - you can very sensibly hedge for the risk that you know at this point in time but it's also a bet that the same risk will present in 5-10 years time and it might not. Prudence isn't constant. So you can imagine a situation where your loans suddenly are no longer prudent and your hedging isn't suitable.

I accept the premise that the scale and nature of a nation's private debt burden could be such that prudent management of a nation's financial system requires some sort of intervention. I think the argument for it would be fairly technical in nature, and have yet to be persuaded that it's a major problem in Canada.

I think the argument ultimately would just be whether or not there's a bubble forming which is technical in some ways, but we all know the impact can be really broad.

I don't know the details to be persuaded either But as I say Canada has some of the highest levels of private sector debt in the developed world (interesting with Australia, another big exporter of fossil fuels and raw materials). The Economist did a bit on it a while ago particularly around the risk of a housing bubble forming.

[Admiral Yi]

Time.

Sure.  But again I don't think your assumption that risk assessment does not account for the possiblity of changes in the macro environment is warranted.  To me it's self evident in the bond market; longer duration bonds carry a higher yield because there is more uncertainty.