Helicopter Drop

Steve Saretsky -

Prime Minister Justin Trudeau delivered his “whatever it takes” moment this past week during the throne speech. Adding, “Now is not the time for austerity.”

Cue the fiscal bazooka. Trudeaus 17 page speech promised a plethora of spending, most notably an extension of Canada’s emergency wage subsidy. The program will be in place until at least Summer 2021 and is expected to cost an additional $40B. Further, the popular CERB program, which has since been rebranded the ‘Canada Recovery Benefit’ will increase back to $500/ week, up from the initially proposed $400/ week. Yes, it’s raining loonies in Canada. Canada’s budget deficit ballooned to $148B from April to July, that’s up from just $1.6B a year ago.

Of course, this begs the question, how will it all be repaid? To no surprise, Governor General Julie Payette is recommending a wealth tax, suggesting the government would “identify additional ways to tax extreme wealth inequality, including by concluding work to limit the stock option deduction for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants.”

You could see this coming from a mile away, it’s an easy sell politically, but in reality, won’t move the needle. No amount of taxation can repay this debt. Instead, let’s turn our attention to the Bank of Canada. The Bank of Canada has bought 80% of Government of Canada bond issuance since March. At the current pace they will own about 60% of all Government of Canada securities by the end of 2021. If you aren’t familiar with Modern Monetary Theory, it’s time to start reading.

This has obvious investment implications, and is a key reason behind the resiliency of the nations housing market. It has also prompted CMHC to temper their forecasts for a steep decline in home prices. “This is very much a path-dependent forecast. That was a ‘the pandemic was going to be horrible, deep,’ and it’s been pretty bad, but government income support, government fiscal support, government monetary policy support have helped alleviate some of those pressures.” Instead, “we think high single-digit [percentage] negative adjustment is what we can expect in most markets.”

Helicopter money has caressed the blow to levered households, who were, and arguably still are, the highest risk of enduring a credit crisis. It’s hard to envision a scenario where Governments suddenly have a change of heart and reverse social spending. The helicopter drop is here to stay.

Three Things I’m Watching:

1. At its current pace, the Bank of Canada is expected to own nearly 60% of the bond market by the end of 2021.

2. No borrower left behind. Housing boom courtesy of the Bank of Canada.

3. Retail sales in Canada have enjoyed a V-shape recovery with the help of helicopter money. (Via Capital Economics Canada)

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