Canada needs lower interest rates

If you look around you can always find someone worse off, and by comparison, you’ll feel better about your own situation. The New York Times recently borrowed $250 million dollars from the Mexican billionaire Carlos Slim. The interest rate: a whopping 14 per cent. Times are tough for the newspaper business, with ad revenue down considerably in the recession and challenges from the Internet. Carlos Slim is betting that the better brands will survive.

Fortunately, the average cost of borrowing for the province of New Brunswick is lower than that, presently 8.3 per cent, down about half a per cent from several years ago, due to the trend of lower interest rates and the rise of the Canadian dollar. Former Premier Bernard Lord isn’t happy with the rising provincial debt strategy taken by Premier Shawn Graham’s government, according to a recent news report. A combination of higher capital spending and lower personal taxes will be financed by debt. The auditor-general indicated in March that the province’s debt could surpass $10 billion by the end of 2013. That’s approximately 52 per cent higher than the legacy of the previous administration.

If the interest rate on the provincial debt remains the same, the annual payment for that $10 billion debt could be $830 million annually, or $253 million more than 2008. To be fair, a higher debt is not necessarily a bad thing, if the money borrowed results in future increased revenue to pay the higher debt interest. For example, if the spending increased economic prosperity, or if our population would increase to provide higher tax revenues – not likely based on our recent history.

There is an historical precedent for this strategy that comes to mind. What country consistently deficit-financed budgets, lowered taxes over the past 30 years and now finds itself in a financial minefield? While Zimbabwe may have a terrible debt to GDP ratio at 240 per cent, the country I was talking about is the United States. It’s at 85 per cent and will hit 97 per cent in 2010.

Canada’s ratio is slightly less than 30 per cent but will rise in the next few years as we follow the Keynesian expenditure bandwagon suggested by the Obama administration.

So where is these story going? Well, the U.S. makes a link between oil prices and the economy. “Another spike in oil would have consequences in terms of world recovery…” explained Steven Chu, the U.S. energy secretary in Rome at a meeting of energy ministers.

Italian Economic Development Minister Claudio Scajola called for an alliance between the private sector and governments to spur investment. “When the crisis is over, the risk of insufficient energy supply exists, and as a result high and unstable prices.”

From these statements, it appears that some governments finally recognize a precarious situation in oil pricing and supply when they see one. There’s a book that just went on my must read list, “Why your world is about to become a lot smaller – Oil and the end of globalization.” Jeff Rubin, formerly CIBC’s chief economist, foresees future recessions caused by oil price spikes in triple digits.

We’ve seen that recessions lead to reduced government revenues. A logical thought progression would suggest that provincial governments could benefit from lower borrowing rates to help adjust to difficult times in coming years. How could this be done?

The mandate of the Bank of Canada could be enlarged to include purchase of provincial bonds as deemed advisable. Perhaps these funds could encourage an off-oil agenda by conservation and green power construction. At the moment our central bank provides assistance to chartered banks and administers national monetary policy. The short term funding to chartered banks can be as low as the bank rate, presently .25 per cent.

One intent of monetary policy is to limit inflation to around 2 per cent and definitely avoid deflation. Over the past few years, the growth in the money supply has varied between 7 per cent and 12 per cent and depending on which money supply indicator you use, it increases by a double digit and sometimes triple digit billions each year. A portion of this money could be used. The key question is, how the chartered banks would view this type of change?

Simply reflecting on a statement from Senator Dick Durbin of Illinois brings doubt: “we’re facing a banking crisis that many of the banks created..  are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

In Canada, Finance Minister Jim Flaherty’s proposed revision of credit card law doesn’t lay a glove on the chartered banks. There’s no cap on maximum interest rates.

Let’s see if I’ve got this right. The banks have access to billions of government capital at .25 per cent, your deposits for virtually nothing, and they loan it out to us at 19 per cent interest? That’s quite a spread to work with, Jim.

The banks may not own Jim Flaherty or Stephen Harper, but they certainly have a good hammerlock going and didn’t someone just cry uncle.