Wednesday, February 4, 2009

Debt Financing

For some reason, short-term Treasuries have had their yields bid up a fair bit (relative to the last couple of months) in recent days.

Canada had to painfully grapple with a debt problem twenty years ago. I don't think we've ever fully acknowledged the possibility that without the low interest rates of the '90 recession and the bravery of the Liberal government in balancing the budget following that episode, Canada could well have gone banana republic, Argentina-style.

I'm not claiming that the US today is anywhere near the levels of debt that will cause that system to break - if it ever did, this current mess would certainly look like peanuts, though. Japan currently carries a much bigger public debt and yet the yen has probably been the strongest currency in the world over the past four-six months and has nowhere near the reserve status the dollar enjoys, i.e. there are no countries out there making trillion-dollar bets on the continued strength of the yen, while China has been doing just that for the dollar.

Still, with stimulus factored in, the US is looking at running a deficit of $2 trillion this year. For purposes of comparison, the Canadian GDP is about 1.3 trillion. The entire US defence budget is 1 trillion and a little change. Even absent stimulus, there's still a chronic structural deficit problem here.

However, I don't know if their politics are equipped to deal with it. I get a lot more exposure to American political machinations these days, and there's certainly a lot to be said for having strong leaders in the House, like we do. Don't laugh, I'm being serious. Imagine if every time a new law was proposed, the sponsoring member had to go around to each member individually and earn their vote through some addition to the bill. From what I gather, that's basically what happens. Conversely, in Canada, there remains some party unity, which is apparently a great thing in passing reasonable legislation.

Anyway, the public-debt-to-GDP ratio is still only kicking around the low 40%'s down here, but it will probably hit 50% this year. Eventually, something will give, and we'll probably be all around to see it. Frankly, I'd bet on devaluation over the strict fiscal measures we went for.

No comments: