Stock market prices

[Bonam]

Because it makes no sense to.

People like the opportunity to buy "risk free" assets which means it makes sense to have some sovereign long term debt issued.

You can still issue debt even if you're running surpluses.

[Wilber]

Because it makes no sense to.

People like the opportunity to buy "risk free" assets which means it makes sense to have some sovereign long term debt issued.

It also makes sense to issue debt to pay for infrastructure and to "pay off" the debt through a growing economy which makes the debt and interest payments irrelevant over time.

This is not 1986 or 1993 so why people are waging this war on the past is beyond me.

The only opportunity you will have to pay off debt is when interest rates are low, otherwise so much revenue will be sucked up by interest that just balancing a budget will be nearly, if not impossible. That's the rub, the best time to borrow is also the best time to pay debt down and if you choose to borrow, it means you have no intent to ever pay it down.

History has shown us the debt will never be paid off because there will always be another excuse or need to borrow

It is a treadmill you can't get off, you have to keep running faster in order to keep up and if you stop, it all falls apart.

What's the line about those who don't learn from history are doomed to repeat it.

[Wilber]

I carry no debt. I have had in the past, and even in low interest rate conditions, I pay it off and I pay it off quickly. It makes no sense to me to be paying for interest.

Likewise, it took a lot of time and effort to get to this position but now, all my after tax income is mine to spend as I choose, not to support lenders.

[msj]

You can still issue debt even if you're running surpluses.

Yes, true.

But how practical is this with the "surpluses mean we're being overtaxed" crowd?

[msj]

The only opportunity you will have to pay off debt is when interest rates are low, otherwise so much revenue will be sucked up by interest that just balancing a budget will be nearly, if not impossible. That's the rub, the best time to borrow is also the best time to pay debt down and if you choose to borrow, it means you have no intent to ever pay it down.

Nonsense.

The best time to borrow is when the return on your investment is expected to exceed your cost.

I borrowed $300,000 at 7.5% interest rates in order to make enough money to pay that debt off within 5 years and then to hopefully live on for many years to come.

I had my discount cash flow spreadsheet all done up and I jumped at the opportunity.

This does not mean my business does not carry a line of credit nor debt from time to time. It makes sense to borrow at low rates to finance that new compter/software suite that will allow you to crank out more billings with less staff. My interest rates are lower now since I have other assets besides "goodwill" to back up my borrowing.

Government is fortunate in that it can borrow at really low rates and it can invest in projects that will return benefits to citizens for decades to come.

Countries and governments are also fortunate in that, unlike me, they get to live forever so they don't have to worry about retiring with no debt like I do.

[msj]

I carry no debt. I have had in the past, and even in low interest rate conditions, I pay it off and I pay it off quickly. It makes no sense to me to be paying for interest.

Once again, it makes sense to pay the interest if the benefit exceeds the cost.

The benefit does not always have to be a greater investment return either.

Many people buy homes, boats, cars where they could have paid less by seeking alternatives.

But the joys of owning and using the asset exceed such considerations.

Not that governments should be acting this way but lots of people certainly do and not all of them are wrong to do this (as long as they can afford it).

[Wilber]

Nonsense.

The best time to borrow is when the return on your investment is expected to exceed your cost.

I borrowed $300,000 at 7.5% interest rates in order to make enough money to pay that debt off within 5 years and then to hopefully live on for many years to come.

I had my discount cash flow spreadsheet all done up and I jumped at the opportunity.

This does not mean my business does not carry a line of credit nor debt from time to time. It makes sense to borrow at low rates to finance that new compter/software suite that will allow you to crank out more billings with less staff. My interest rates are lower now since I have other assets besides "goodwill" to back up my borrowing.

Government is fortunate in that it can borrow at really low rates and it can invest in projects that will return benefits to citizens for decades to come.

Countries and governments are also fortunate in that, unlike me, they get to live forever so they don't have to worry about retiring with no debt like I do.

This all depends on you paying it off in 5 years, not refinancing if forever.

If you don't pay off any principle, that investment will cost you $112,500 in five years.

In ten years it will cost you double that and so on.

If you don't pay off any principle over 20 years your 300,000 investment in infrastructure will have cost you $562,500 interest on top of your original $300,000. How are you going to pay that interest, borrow it as well?

Edited October 21, 2015 by Wilber

[msj]

Since I will not live forever I must pay it off.

But if I could live forever then things would be different.

If my income grew by 3% per year while my debt charges grew at 2% then I would be fine.

And for those who understand compounding, my income would so exceed my debts after a time that I would be able to borrow more money if I wanted to.

If interest rates were low and I had reasons to borrow, say a $400 billion infrastructure deficit, then it would make sense to borrow at those rates since I could manage the temporary increase in costs that then become relatively small again as income growth once again grows faster than the interest charges.

That's how it works when one lives forever and infrastructure needs to be used by future generations.

[Wilber]

Since I will not live forever I must pay it off.

But if I could live forever then things would be different.

If my income grew by 3% per year while my debt charges grew at 2% then I would be fine.

And for those who understand compounding, my income would so exceed my debts after a time that I would be able to borrow more money if I wanted to.

If interest rates were low and I had reasons to borrow, say a $400 billion infrastructure deficit, then it would make sense to borrow at those rates since I could manage the temporary increase in costs that then become relatively small again as income growth once again grows faster than the interest charges.

That's how it works when one lives forever and infrastructure needs to be used by future generations.

You must, governments do not. The only reason our debt has remained relatively constant is because higher interest debt has been retired and replaced with lower interest debt. We have basically paid off nothing over the past 35 years, all we have done is pay interest on principle at varying rates.

[msj]

You must, governments do not. The only reason our debt has remained relatively constant is because higher interest debt has been retired and replaced with lower interest debt. We have basically paid off nothing over the past 35 years, all we have done is pay interest on principle at varying rates.

We don't have to pay off debt since the government lives forever. Since the economy grows forever the debt does not need to be paid off.

Government revenue can grow forever so as to make debt costs irrelevant over time.

In the mean time, the current generation can enjoy the use of an asset which will then be passed on to future generations to use and benefit from.

At any rate, here is Rosenberg's take on Trudeaumania and he makes some good points: http://www.ritholtz.com/blog/2015/10/the-return-of-trudeau-mania/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

The Return of Trudeau-mania

by David Rosenberg - October 20th, 2015, 2:00pm

The following electoral analysis is from David Rosenberg, lifelong resident of Toronto, former Chief Economist for Merrill Lynch North America, now Chief Strategist at Gluskin Sheff. You can reach Dave at Drosennberg-at-gluskinsheff.com

~~~

[...]

The Liberals were able to offer change when it unveiled its official economic plank, with deficit-financed infrastructure spending the lynchpin and the only party to abandon the thought that we need to run balanced budgets across the continuum of the business cycle irrespective of the economic conditions of the day.

[...]

Canada, after all, according to many estimates, has a national infrastructure deficiency exceeding $700 billion closing that gap and thereby bolstering potential GDP growth is a worthy goal.

[...]

And the outlook for the currency has actually turned more positive. Why?

Because of all three parties, weighing in all the tax effects and spending initiatives, and accounting for all the fiscal multipliers, the Liberal plan looks to add the most to real GDP growth for the next four years by our analysis (mostly via the proposed infrastructure package).

The Conservative stimulus provided a comparably smaller boost (income splitting, expanded child care benefits, payroll and business tax relief), while the NDPs proposals were dead last in our analysis, only adding marginally to growth on an average annual basis.

If Canadians voted with the economy in mind, you can see why the results were what they were.

So this pro-growth Liberal spending plan, and Robin Hood-style tax policy (actually a net add to growth since the recipients have higher spending propensities than the well-heeled among us), will take pressure off the Bank of Canada from having to pursue any further policy accommodation.

This as a stand-alone development fiscal policy joining in on the stimulus front to a significant degree is Canadian dollar bullish, once the early uncertainty effects subside.

We also are going to see incremental net new Government of Canada bond issuance of roughly $30 billion from the Liberal plan versus the Conservatives Budget projections over the next four years, which is a far cry from the balanced budgets that the Tories and NDP were planning.

This was the critical plank for the Grits deficit-financed infrastructure outlays. The fiscal gridlock stateside will ensure that Uncle Sams debt financing needs will remain on a downward path at a time when Canadian requirements will be moving in the opposite direction.

For the markets, the front-end of the Canadian yield curve has already been repriced as the two-year Government of Canada note yields 0.53%, and it is fast approaching 0.6% south of the border.

But the anomaly that has yet to be resolved is at the longer-end of the curve where Canada-U.S. yield spreads are still deeply negative (-57 basis points for 10-year notes and -60 basis points for 30-year bonds).

So the trade here is a move towards less negative Canada-U.S. bond differentials and a steeper domestic yield curve.

And it goes without saying that better growth prospects and rising long-dated yields is bullish for spread product, including the Provincials.

As for equities, well, insofar as growth matters, and insofar as the Liberal plan, even with rising deficits over the intermediate term, has a more pro-cyclical bend, it is tough to draw a negative conclusion from the election results.

Yes, change could cause a near-term assessment of the fair-value price-to-earnings multiple, but keep in mind that in the past, stock market performance during Liberal regimes were decent.

[...]

So to put things into perspective:

The Liberal economic plan offers up the greatest growth prospects.

o This is actually keeping with the historical record of the past 50 years, as real GDP growth has averaged 3.3% under Liberal governments and 2.1% when the Tories have run the show.

Majority governments serve up stability and the Liberals will not have to get into bed with the NDP.

This is not the 1988 anti-free trade Turner-led Liberal Party the rhetoric has been supportive of the Trans-Pacific Partnership.

In the post-WWII era, the Liberals have been in power 64% of the time for anyone 30 or older, this is old hat.

Change is tough, but necessary; imagine life without it.

Scott Brison, a likely choice for Finance Minister, has a Bachelors of Commerce degree from Dalhousie (nice to have in a finance role), has Bay Street experience (formerly Yorkton Securities); was a Conservative Member of Parliament from 1997 to 2003 (pro-business bent); was Parliamentary Secretary in charge of Canada-U.S. affairs.

Edited October 21, 2015 by msj

[ReeferMadness]

Why hasn't any party talked about paying off our debt. Even the CPC didn't say they would.

Color me cynical but I think that was a deliberate Harper strategy. The one thing he believed in above all was that government should get smaller. If the debt was paid off (or paid down substantially), it would free up money for some future government to start spending on programs again. I think paying down debt would be his last priority.

[Bonam]

In the mean time, the current generation can enjoy the use of an asset which will then be passed on to future generations to use and benefit from.

See, the problem in your argument is that you assume that the money that the government borrows will be spent wisely, in investments that generate returns and in enduring assets that have value for future generations. But how true is this assumption? What portion of government spending truly meets these lofty criteria?

[blueblood]

As to all the high fiving of excessive deficit spending, one must remember the bond vultures who had to deal with trudeau sr's first spending spree... Interest rates can and do rise and if economic conditions warrant, they will rise again. If too much is borrowed out, it still has to get paid back.

As for living forever, how much of our decendants economy should be taxed to pay for more borrowing. The more we can hack off the principal, thats lower interest payments yet still enjoying the same services.

[Wilber]

Well then, people were getting sweaty about knowing the total cost of the F-35 program over its 40 year life span. Shouldn't I know the total cost of that bridge you want to build, including servicing the debt it took to build it. Not the 17.5 billion quoted for infrastructure but the total cost over the life of that infrastructure and beyond if that debt isn't repaid before that infrastructure was replaced? Or do we apply different standards depending on who's project it is?

Do you not factor in interest on any loan you take out when you calculate what something will actually cost you?

[msj]

See, the problem in your argument is that you assume that the money that the government borrows will be spent wisely, in investments that generate returns and in enduring assets that have value for future generations. But how true is this assumption? What portion of government spending truly meets these lofty criteria?

I agree and this is a fair point.

I also agree that perfection is the enemy of the good. If we (well, really you conservatives) are all going to worry that something isn't going to be absolutely the right decision then nothing is ever going to get done.

But someone needs to fix up our wasteland dumpy infrastructure and I can only hope that most of the decisions will be wisely made.

Or we can turn to the private sector, let them build these assets and maintain them at interest rates that will be higher than government rates, not to mention built in profit margins which may or may not be cost prohibitive, and hope such decisions will be wise and subject to less corruption.

Either way, infrastructures gotta be built and gotta be maintained to certain levels so why not take a serious look at it now while our debt ratios are healthy and interest rates are low?

Now's just about as close to a perfect time to be doing this as any.

[msj]

Do you not factor in interest on any loan you take out when you calculate what something will actually cost you?

Of course the full cost needs to be considered.

And that's what I expect when decisions are being made - a comparison of the full benefits versus the full costs over the life of the asset/ debt.

But as I say, with growth in the revenue line the cost of the debt can become increasingly irrelevant over long periods of time.

This is also why infrastructure should be financed with debt whereas operating deficits should be avoided as much as possible.

That is, don't run a deficit by spending money on transfers to individuals and other levels of government.

Big difference.

[blueblood]

I agree and this is a fair point.

---SNIP---

Thats all fine and good, however ontario has been playing this game for some time and has got its credit rating chopped. They had their books cleaned up with harris and at first it was a small deficit.

Its the slippery slope that "us conservatives" are worried about and we have seen and or lived through the dangers of a govt that deficit spends too much. A lot of infrastructure got build and the national debt was a lot smaller, so what gives?

Edited October 21, 2015 by Charles Anthony
[---SNIP---]

[msj]

As to all the high fiving of excessive deficit spending, one must remember the bond vultures who had to deal with trudeau sr's first spending spree... Interest rates can and do rise and if economic conditions warrant, they will rise again. If too much is borrowed out, it still has to get paid back.

As for living forever, how much of our decendants economy should be taxed to pay for more borrowing. The more we can hack off the principal, thats lower interest payments yet still enjoying the same services.

Once again, historically interest rates are low so it makes sense to take advantage of the low rates.

Take a look at historical interest rates going back 100+ years and you will find that the '70's and '80's rates are the aberration.

It is like this worry over inflation: yes, one day it will be a problem again but in the meantime smart people have missed out opportunities because of their 70's/80's mentality and have missed the run up in certain investments as they hold their precious gold and silver.

Opportunities are all over the place but we must cower in fear because, the 80's, is not exactly the kind of planning bias I want my government to have.

Yes, they must be cognizant of higher interest rates, but not to the point of letting our infrastructure defict grow out of hand.

[Bonam]

I agree and this is a fair point.

I also agree that perfection is the enemy of the good. If we (well, really you conservatives) are all going to worry that something isn't going to be absolutely the right decision then nothing is ever going to get done.

But someone needs to fix up our wasteland dumpy infrastructure and I can only hope that most of the decisions will be wisely made.

...

...

This is also why infrastructure should be financed with debt whereas operating deficits should be avoided as much as possible.

That is, don't run a deficit by spending money on transfers to individuals and other levels of government

I agree with spending money on infrastructure. But the vast majority of government spending is transfers. You can't just say, we'll borrow a bit more and spend that on infrastructure, therefore it was a good idea to borrow, because you have to consider the budget as a whole. If 90% of spending is transfers, then 90% of spending is transfers, whether that money came from taxes or borrowing.

My argument is not about wanting government to be perfect and opposing good enough solutions. In fact, as an engineer and a scientist, I'm well aware of the reality that the perfect is the enemy of the good. But you seem to ignore that most government spending does not in fact generate returns or create lasting assets.

[msj]

Thats all fine and good, however ontario has been playing this game for some time and has got its credit rating chopped. ... so what gives?

Taxpayers must be cognizant of poor management and should have replaced the government with better leadership.

Yes, this is a risk, especially when better governing options do not come along.

Perhaps Ontario lacks talent when it comes to governing?

Maybe people there decide to go to Ottawa or Toronto (in the private sector) whereas here in BC we are lucky that the talented go to the BC Liberals while the untalented go to the NDP.

[dre]

But you seem to ignore that most government spending does not in fact generate returns or create lasting assets.

You would need a whole pile of data at your disposal to make that claim with any certainty, and you would need case studies where money is NOT spent on things like healthcare, social services, defense, infrastructure, justice, etc etc.

Its not necessarily true that those things dont generate returns.

[Bonam]

You would need a whole pile of data at your disposal to make that claim with any certainty, and you would need case studies where money is NOT spent on things like healthcare, social services, defense, infrastructure, justice, etc etc.

Its not necessarily true that those things dont generate returns.

I do not disagree that those things have value, and that money needs to be spent by government on them. But msj argues that "operating expenses" should not be paid for through deficit spending, while infrastructure should be. I don't see the distinction since it all comes out of general revenue.

[TimG]

I do not disagree that those things have value, and that money needs to be spent by government on them. But msj argues that "operating expenses" should not be paid for through deficit spending, while infrastructure should be. I don't see the distinction since it all comes out of general revenue.

What you could do is set up a crown corporation to segregate money borrowed for infrastructure. This would allow governments to balance budgets when it comes to transfers but use debt financing for projects when it makes sense.

[Bonam]

What you could do is set up a crown corporation to segregate money borrowed for infrastructure. This would allow governments to balance budgets when it comes to transfers but use debt financing for projects when it makes sense.

I would not be opposed to something like that.

[blueblood]

Taxpayers must be cognizant of poor management and should have replaced the government with better leadership.

Yes, this is a risk, especially when better governing options do not come along.

Perhaps Ontario lacks talent when it comes to governing?

Maybe people there decide to go to Ottawa or Toronto (in the private sector) whereas here in BC we are lucky that the talented go to the BC Liberals while the untalented go to the NDP.

A question that arises is what kind of infrastructure. Apparently the red book has "social" infrastructure and buzzwords like that. The bc liberals are pretty much the same as the sask party fiscally.

Its too bad, in 08 when people were asking for deficit spending and the spigot was opened, that would have been an opportunity to throw down an energy east pipeline or look into upgrading the trans canada highway in ontario to name a few.