During a trip to New York last week I was able to talk gold and commodities on Bloomberg TV, and also had the pleasure of hearing Canadian Prime Minister Justin Trudeau address Wall Street investors in the Bloomberg studios the same day.
Trudeau discussed his plan for new infrastructure spending of C$60 billion over the next 10 years, as a means to lift the country’s highly oil-dependent economy. Trudeau answered questions on his country’s federal fiscal deficit and I was able to ask him about the amount of Ontario’s debt in particular. Ontario has twice the debt as the state of California and only half of its population.
In the United States, states are held to a strict balanced budget standard when it comes to fiscal taxation and spending, while the federal government can let the budget go into deficit spending. In Canada, however, it’s the opposite, and the provinces seem to have abused their debt levels, but Trudeau is ready to help.
The former Prime Minister of Canada, Stephen Harper, never smiled like Justin Trudeau. But he was a great defensive leader, and his conservative leadership allowed the country to successfully weather the financial crash of 2008. Now the current government can leverage that strong balance sheet to stimulate economic activity.
During the Bloomberg conference, Trudeau sought to reassure his audience that he will remain cautious on spending.
Creeping Taxation and Negative Interest Rates Ignite Global Caution
Compliance and regulation measures have intensified from the financial sector to the food industry, from the U.S. all the way to Brazil. Many CEOs of banks, as well as brokers that I have spoken with recently, have lamented on the financial burden of excessive regulation and the indirect taxation that comes along with this rise in rules on steroids. Regulations are fueled with good intentions; however, the unexpected consequences like slow global growth need to be adjusted.
In Brazil, the government promotes short-term government bonds to fund its bloated government workforce. The anti-capitalist nature of Brazil’s government extends to extreme limitations on public markets, where new companies can only go public by offering shares at $1,000. And I’ve shared with you before how Colombia’s citizens are taxed at every turn.
Meanwhile, central bankers around the world captured headlines last week, and it looks as if easy money is here to stay for the time being, as well as high taxes and regulations. The prevailing message was that global economic conditions have not improved well enough to support any significant changes to monetary policy, which now has interest rates around the globe at near-zero or, in some cases, subzero levels.
The week before last, the European Central Bank (ECB) came out with deeper cuts to already-negative rates and steeper purchases of bonds, from €60 billion to €80 billion. This was followed on Tuesday by the Bank of Japan’s (BoJ) decision to leave negative rates unchanged as it assesses the impact of its controversial policy, which shocked global markets when it was unveiled in January. Likewise, the Bank of England decided on Thursday to keep interest rates at the historic low of 0.5%.
As I (and many others) expected, the Federal Reserve also put rates on hold, even as the U.S. economy is showing signs of improvement in employment, housing and inflation. According to Fed Chair Janet Yellen, a soft global economy made a rate hike too risky.
Be that as it may, our emphasis on central bank actions is way overdone and in many ways a distraction from what’s really important: balanced fiscal policy. Today, many investors expect central banks to jumpstart the global economy, and indeed their decisions can have huge consequences. But they can’t do it alone. What we need is a commitment to streamline regulation and relax taxes, with prudent spending on economy-boosting infrastructure, manufacturing and construction. Until that happens, it doesn’t matter how low policymakers drop rates or how much debt they purchase.