Is Ontario the New Greece?

A warning to Canadians who think it can't happen here.

April 18, 2013

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story_images_Greek-ChorusDo you think Cyprus is a special case? Think again.

Governments are getting desperate as they cannot break this vicious circle of slow growth, high unemployment and towering amounts of public debt.

The advent of globalization over the last 30 years has made the citizens of every nation around the world richer, particularly the richest. For example, there were 29.6 million high net worth individuals in the world in mid-2011 (i.e., those with wealth between USD $1 million and USD $50 million) according to a report by the Credit Suisse Research Institute.

Helped by record low interest rates, consumer borrowing increased to record levels in recent years. Everyone wanted to consume now as opposed to waiting for later. At the same time, governments around the globe, driven by their desire to be elected now as opposed to later, borrowed extensively to pay handsome wages and rich benefits and other support or transfer payments. Over the 2008-09 period, and due to the credit crisis, huge amounts of debt were transferred from overleveraged individuals and businesses to the government. Public debt expanded further through the various stimulus programs.

The result: public debt and public debt per person have skyrocketed around the globe, particularly in advanced economies. And all this is happening while luxury home and car sales are booming. This paradox (wealthy citizens in not so wealthy countries) is unprecedented and unique in the modern history of economic thought, especially post World War II.

But this cannot continue. Debt cannot continue to climb in this fashion. Rich citizens cannot continue to be rich in poor countries. And governments know this. Something has to give.

But what and how? Normally, there have been three options. One option is to raise taxes. Another option is to rein in debt by cutting spending. And finally, another option is to open up the money printing presses and in the process create inflation and reduce public debt in real terms.

We have seen the effect of the first two options. Governments have been trying austerity measures in Greece and elsewhere over the last few years. Austerity has sent those countries’ economies into severe recessions and social unrest. Poor people have suffered the brunt of the austerity programs. Wealthy people, not only in Greece but also in Germany and Britain, continue to hide great sums from tax authorities according to the Boston Consulting Group. This has been confirmed by the release of a report by the International Consortium of Investigative Journalists last week revealing the identities of thousands of people around the world who have stacked their money in offshore tax haven accounts thereby evading taxes. Wealthy citizens want to hold on to what they have and they do not want to share it with others in their societies. But in the battle between governments and citizens, the governments will eventually win.

The third option may be the more politically viable and the solution of least resistance, namely opening up the money printing presses and inflating the debt away. In my opinion, they have to do this otherwise economies will not be able to exit this vicious circle of slow growth and high debt levels.

But a fourth option is now becoming apparent. Rather than austerity measures which hurt both poor and rich people, governments are now contemplating and experimenting (Cyprus is the guinea pig) with ways to hit the rich people directly by imposing haircuts on their deposits above the insured amount of $100,000. The end result of course may be the same. But politically this may be a better solution.

In my opinion, this may become the norm in case of emergencies rather than the exception despite the fact that EU officials have been bending over backwards to assure their constituencies of the opposite.

You say it will never happen in Canada?  Have you read the 2013 Economic Action Plan Mr. Flaherty brought down on March 21? If not, here’s a quote from it “The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.” Translation: after bank bond and deposit note holders, wealthy depositors may be next in line for a haircut in case of an emergency.  But you say Canada will not have an emergency. Has anyone looked at Ontario’s debt recently? Ontario is becoming the new Greece. With a fraction of the size of California’s economy, Ontario is carrying a debt load almost two-thirds higher.

Higher taxes and higher inflation, as well as possible deposit haircuts of uninsured deposits may be unavoidable in the future and will be the result of rich citizens in poor countries.

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