Investors are paying bond sellers to take their money in these crazy economic times
Governments running up deficits that taxpayers must repay is an equally bad idea
Economist John Maynard Keynes famously said, "The market can stay irrational longer than you can stay solvent."
And the global bond market today certainly appears to be acting irrationally with 30 per cent of government bonds generating negative yields.
Negative yields are when investors pay bond sellers to take their money, instead of the other way around. It's the same as a pension fund putting millions of dollars in a safety deposit box for a fee — it's safe, but it means there'll be less money at the end of the investment term.
For Canadians used to a system in which borrowers pay interest to lenders, negative yields defy logic. Yet around the world today more than $17 trillion dollars are sitting in government bonds that don't produce a return. Instead, investors are paying to protect their money in uncertain times.
So far this is mostly a European problem. Some European banks even charge depositors while paying people to borrow money.
Large businesses and pension funds, who are handling millions of dollars, use government bonds for the same reason people keep money in the bank, to keep their money safe and easily accessible. They have no choice but to pay premium or negative yields if they want to safeguard their money.
Multinational companies, like Volkswagen, who have offices around the world, will move excess funds away from Europe to North America where yields, while low, are still positive.
This transfer of wealth creates additional demand for North American government bonds and currency, keeping interest rates low, while strengthening our currency — conditions which hurt savers and pension plans but favour borrowers.
The reason central banks around the world lower interest rates is to encourage spending which governments, particularly during an election, have no problem doing. Problems emerge when interest rates normalize and the debt levels and payments become unsustainable.
Greece and Portugal are two recent examples of countries drowning in debt. They had to raise taxes, cut services, lower pension payments and endure many other painful austerity measures. Greece is a cautionary tale that we should learn from.
Luckily Canada is in a much better financial position than most countries, but we are headed in the wrong direction.
Last year the federal government spent $26 billion just to cover the interest on our debt. For the same money we could have built five new bridges, expanded the SkyTrain route to Langley or the University of British Columbia and still had a couple of billion left over.
Politicians need to be cognisant that the greater the amount of debt they put on the books, the less prepared they will be for an economic shock or recession. According to their own economists, our economy has been growing for years so if that's the case, they should be paying down, rather than adding to our debt load.
I'm not against government borrowing and taking advantage of low interest rates as long as there is some cost-benefit analysis.
It was the job of the late Michael Ferguson, our former auditor general, to make the government fiscally efficient and to spot potential problems. Unfortunately, his recommendations were often ignored by government who continued to throw money at wasteful programs. For example, he questioned the viability of the Phoenix pay system years before billions of taxpayers' dollars were wasted.
Be it a typical Canadian family or government, finding savings in your budget, reducing waste and reining in spending should be preferred options over taking on debt. Unfortunately, such advice is often ignored by our political leaders as it is spending promises, not debt management, that wins elections.
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