Don’t Look Nervous at the Banker Anymore: Debt Has New Bling

During my career you have probably read one strategy I always played out with my banker. I’ve always said it’s good to go into the banker and look nervous across the counter once in a while. That stems back to the 1980s when servicing debt was so much harder than it is today. In fact, today, in places like Ontario, you can visit the bank but looking nervous at anybody over the counter probably wouldn’t get you very far. It’s unlikely anybody there would know you. With the advent of the internet and our Canadian bank’s insatiable drive for more profits, bricks and mortar and people aren’t part of the profit centre.

It is no secret that thru the years, I’ve documented my feelings about interest rates, debt and how it all is interchanged. One of my interests within economics has been monetary and fiscal policy and how all of that interacts to foster economic growth. I’ve always felt it was easier to understand when interest rates were substantial, double digit and higher. Over the last ten to 15 years, it’s become a lot more difficult for me as the low interest rate era is one, I never anticipated. Cheap money has made it all so much easier.

Of course, that’s a bit of an exaggeration. The low interest rate era has spawned its own special set of problems. Increasingly debt is seen as an asset, when it’s really a debt. However, it doesn’t quite work the way it used to. Looking nervous at the banker wouldn’t get you anywhere. In fact, the banker would likely be looking nervous at you trying to stuff your pockets with the banks cash.

Stay with me here. I thought a lot about that this week, mainly because of the fiscal update given by Finance minister Bill Morneau. We had all been waiting for an update from the minister after our federal government opened the coffers in response to the Covid19 crisis in Canada. Government spending had increased so much, that the new federal deficit will come in at $342.2 billion with Canada’s total debt coming in over $1 trillion for the first time in our history. It was mind popping stuff, never seen anything like it in my lifetime. The deficit is ten times higher than it was in December 2019.

I’m not going to criticize that move, as Covid19 has been the worst thing ever to happen in Canada during my lifetime. It continues as I write this and all of us are impacted every day. The federal government has attempted to do the right thing at a time when there wasn’t much of a blueprint for knowing what that meant. For instance, it provided $82 billion for the Canada Emergency Wage Subsidy when its initial cost was projected to be $45 billion. That’s huge money discrepancy by anybody’s measure and you would think financing it would be such a challenge.

However, remember, we don’t look nervous at the banker anymore. In this super low interest rate era, the government has a plan. The following is a direct quote from the Globe and Mail, July 8th article “As Debt Soars, Ottawa Banks on Record Low Interest Rates.

First, Ottawa’s debt servicing charges for the current 2020-21 fiscal year will drop $4.3 billion from the level projected in December 2019, despite $469.3 billion of new borrowing, a result of falling interest rates on short- and long-term bonds.
Second, the government is looking to lock in those benefits by nearly doubling the proportion of its borrowing that comes from long-term debt. Longer terms mean Ottawa will continue to enjoy savings even when the economy begins to recover and puts upward pressure on interest rates. (Globe and Mail July 8th)
Is this an alternative reality? Or is it just me? I’m not outraged by this; it was more of a learning experience. I’ve always talked about the never, never plan of farm debt servicing in this modern era. In this case, our government is increasing borrowing tenfold in the current year and borrowing the capital to do it. They then claim savings because the interest rates are so much cheaper than they were in December 2019. It’s like compound interest in reverse.

I fully realize government financing is different than mine. For instance, I built my farm career in an era where interest rates were a lot higher and getting out of debt was a lifelong journey. After the government announcement I even heard from farmers supporting this initiative because they believed farms could do this too. Kick that debt can the road and pass it on to somebody else. It had me scratching my head.

I haven’t even brought up the spectre of negative interest rates yet. That would make all of this debt build up a growth industry. Needless to say, Covid19 continues to shape our world. Now our debt expectations are being forever altered in an attempt to keep the invisible enemy at bay. How this will play out on the farm going forward is very difficult to say. Capital availability seems forever changed. Debt has new bling.