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Rescuing the Indebted and ImprudentRescuing the Indebted and Imprudent

Rescuing the Indebted and Imprudent

In Canada, personal debt as a percentage of income has risen from 50% in 1970 to over 165% today. Governments have fared no better. Debt to GDP ratios within the OECD countries has skyrocketed from 40% in 1970 to over 110% in 2012. These levels of debt are unprecedented during times of peace and purported prosperity! When you pile on the unfunded liabilities or promises governments have made (for example, in the United States), the ratio of debt to GDP explodes beyond 300%.

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Topics: Business, Justice, Markets, Economics
Rescuing the Indebted and Imprudent April 2, 2013  |  By Jonathan Wellum
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During the last four decades the developed world has enjoyed the biggest debt binge in history. The "Pepsi" generation that brought us Woodstock, psychedelic drugs, hard rock, and a desire for peace, love, and freedom has in the end shackled itself to the servitude of debt and the empty promises of an expanding and increasingly totalitarian State.

In Canada, personal debt as a percentage of income has risen from 50% in 1970 to over 165% today. Governments have fared no better. Debt to GDP ratios within the OECD countries has skyrocketed from 40% in 1970 to over 110% in 2012. These levels of debt are unprecedented during times of peace and purported prosperity! When you pile on the unfunded liabilities or promises governments have made (for example, in the United States), the ratio of debt to GDP explodes beyond 300%.

Given the foregoing it should come as no surprise to us that country after country is in the grip of an intractable debt crisis. The typical solutions one might offer in order to extricate oneself from such a mess are all fraught with major problems. Given the size of the debts, "austerity"—saving and paying back—is a recipe for depression and social unrest. Higher economic growth is unachievable in most debt-plagued countries because of unfavourable demographics, lack of competitiveness, and dependency on the State. Debt restructuring is out of reach because the banking sector is not strong enough to absorb the crippling losses.

Financial repression (manipulation of interest rates below the inflation rate) is entering its fifth year and has only provided governments and their citizens around the world with the increased capacity to continue gorging on savers and investors.

With few options left it is not a surprise that the authorities in Cyprus have turned their attention to bank depositors and a tax on private wealth. This reinforces for us that when the pressure is intense the State will increasingly escalate oppressive tactics against its own citizens in a bid to maintain the status quo. The tragedy of this is at least twofold. First, they are stealing from depositors and savers who acted responsibly but are now called upon to rescue the indebted and imprudent. (Russian money is reported to have been pulled out of the banks from foreign locations, leaving the locals and middleclass depositors with larger losses.) Second, they are propping up a dying monetary system, namely the Keynesian, debt based fiat currency system we have all been aggressively milking. Problem is: ain't much milk left.

But while Europe discovers that a deposit in a bank is not a riskless form of saving, and the State is coming after private wealth, we should not be complacent in North America. While it appears that our large deposits will not be seized in the near future, central banks have already been butchering private wealth in a far more insidious manner. Jim Rickards states it well: "Nobody is stealing more money from bank depositors than Ben Bernanke." He is doing that, Rickards argues, by maintaining interest rates near zero. Investors so blinded by our existing debt based paradigm do not even bother to question the stealing of their savings, based on "modern economic brilliance." What about the deleterious long-term impact that negative real interest rates are having on our own economy? Few people seem to care about the mispricing of risk through interest rate manipulation, or about the massive bond bubble and lack of personal savings. With net capital investments barely positive throughout the developed economies, including our own, we continue to party on, totally oblivious of the long-term carnage.

Throughout the world the largest "legal" redistribution of wealth is taking place right in front of us. In the U.S. alone, the transfer of wealth from savers to debtors is approximately $500 billion per year, due to the price fixing of interest rates by the Federal Reserve. Chris Turner calculated that the lost interest income to investors in the US since 2001 (post 9/11, when the Federal Reserve began to heavily manipulate rates) is a staggering $9.9 trillion.

In Canada the situation is not different. The Bank of Canada has played the same game. Hedged in by the major central banks around the world it has also manipulated interest rates to levels that have no relation to the free market or market risk. So while we are looking across the pond at the disaster that is Europe, and gaze at the folly of our friends south of the border, we too are having our savings and private wealth looted and transferred to debtors by our own central bank.

The Bank of Canada, and its outgoing governor Mark Carney, will need to answer for this "transfer of wealth" in our own country. Inquiring minds—including those of us who believe in sound money, financial accountability, and market interest rates—would like an explanation.

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