To borrow or not to borrow?

This week's editorial questions borrowing and budget deficits.

If Monday’s question time at the House of Commons is any indication, we are likely to hear the same tune repeatedly over the next few months, maybe expressed with different words or phrases, but the same underlying theme: “Liberals are condemning our future generations to the shackle of debt,” as the position of the Conservatives, and “We promised to invest in infrastructure and job creation, that is what we are doing as we were mandated by the electorate,” as the position of the governing Liberals.

In the meantime, whether it makes any difference is unclear but the smaller opposition NDP seems to have changed its discourse from the election campaign days and now appears to be supporting the government’s public spending policy at the expense of big budget deficits.

The debate will certainly continue at many different levels of the society: from associations and community organizations to think tanks to trade unions and public institutions and the discussions will touch every possible point of contention either for or against borrowing and spending at the cost of huge holes in the national budget.

But in all the fanfare surrounding the size of the budget deficit (the figures had yet to be announced as of the time these lines were written, probably around $30 billion), one point seems to be escaping the attention of many stakeholders, even of some economists.

That point is the fact that borrowing, becoming indebted, is not what it used to be even a decade ago. We seem to be living in a new era and there are signs that debt is going to be an indispensable part of life for a long future to come.

As those interested in economic and financial affairs may be closely following, interest rates are staying put and if they are likely to move, there is only one direction they will go: south.

Very influential central banks like Bank of Japan and European Central Bank in addition to smaller ones like those of Sweden, Switzerland and Denmark and a few others are already applying negative interest rates. US Central Bank has just announced it gave up the idea of raising its basic interest rate for four times this year and now it is even doubtful it could raise them once more after the 25 basis points hike of last December. Some commentators are even talking about that raise to be overturned before the end of the year.

This is the talk in public; in private, many sources close to the Wall Street bankers are seriously contemplating how new software will have to developed to process banking transactions in a negative interest environment.

In this atmosphere, is borrowing a risk or an opportunity?

It has been mentioned here before that in the eight years of Obama administration in the US, the national debt climbed from US $8 trillion to US $19 trillion, according to latest calculations and US economy is said to be growing tepidly but steadily.

This is not, however, to say that becoming more and more indebted is something good in and of itself, because increased indebtedness in the US accompanied increased levels of poverty among the population, which led to the populist campaign of Donald Trump, who now is almost within reach of capturing the nomination of the Republican Party. The Economist Intelligence Unit, part of the globally respected The Economist magazine, lists a Trump presidency as the fifth of the ten most potentially dangerous developments in 2016.

But what the Liberal government says it will do is to use the borrowed resources to restore growth to economy and it might be a policy that could very well work.

Do they deserve a chance in the low risk environment or not?


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