By now, you’re likely aware of the many sordid details found in the 2021 federal budget. I’ve been following the discussions closely and I was glued to my TV set as the long-awaited details were finally released on Monday. This is a brave new world. I’m a bit excited and a bit terrified simultaneously. Basically, whenever someone embarks on a foray into unchartered territory, there are too many possible variables that could produce too many possible outcomes to reliably anticipate what might lie ahead. Those potential outcomes range from fantastic to awful. I need to tread lightly in choosing my words here. Simply put, $100 billion in stimulus spending is a lot of money.
To begin, I strongly support the general thrust of the budget. In many ways, we’re finally coming to terms with the existential crisis of our generation (climate) and I suppose I would portray my reaction as belatedly relieved, too (childcare). The problem, even as the government insists this level of debt is sustainable, is that this might be a pig in a poke. Too much of a good thing is not good, either and I fear the allure of increased fiscal largesse might be an alternative for governments of all stripes that is too attractive to resist going forward. Newspapers are quick to parrot the minister, who points out that the situation is not particularly dire – yet. The thinking is that as long as economic growth exceeds inflation, we can grow our way out of this mess, because our debt to GDP ratio will soon be shrinking.
This leads to two obvious concerns:
- The stimulus being provided now might be overkill and, as a result, might cause an unnecessary and otherwise avoidable bout with inflation; and
- Even if the above does not come to pass, there will come a time when the stimulus subsides, causing economic growth to stall
Basically, my general feeling is that we might be going too fast in the present and / or too slow at some point in the not-too-distant future…. Like the end of 2023. To combat this, my preference would be to spend a bit less now to have a few more arrows in our national economic fiscal policy quiver down the road when they might actually be needed. There’s no urgency now. The economy has clearly begun to bounce back.
In keeping with my oft-noted view that stocks, bonds and real estate are all in bubble territory as a direct result of the stimulus that over the past 13 months has caused massive inflation in financial assets, I feel some trepidation. The inflation we have experienced to date is not the traditional kind felt in day to day items, so economists might already be missing the point. There is a consequential reckoning coming. We are all seeing (but not all recognizing) the unintended consequences of public policy actions. This is especially concerning as politicians like the minister herself insist that income inequality is a major issue. I cannot help but think that we are pouring gasoline on the fire. I want the economy to expand and I want it to do so in a way that is sustainable and forward-looking, but my fear is that markets already need a large metaphorical dose of Ritalin to overcome what is quite obviously a case of economic overstimulation. Instead, we are getting the opposite.
The public policy direction is correct and most of the steps taken to date have been necessary. I simply fear that governments (of any stripe) might now be too tempted to throw caution to the wind and stimulate our economy to the point where it gets overheated and everyone gets giddy until the bubbles pop. So far, so good… but just because the government-manufactured asset bubbles haven’t popped yet does not mean we are not dealing with bubbles – or that they won’t pop.