U.S. Stats Canadians Should Know About

I was talking to an old neighbour about finances and stuff the other day.

The discussion turned towards how it takes more and more money to maintain a middle-class standard of living.

He's a doctor.

When I mentioned that inflation is the silent little thief that is responsible for making it harder to pay the bills he stated, "Yeah, but when the costs of food and gas go up my income will go up too ... so it's no big deal."

I used to think like that.

But it's a very dangerous conclusion.

Let us explain why, but first some data...

It shouldn't be any big surprise any longer that the U.S. spends a lot more money than it earns in taxes.

The U.S. government currently takes in approximately $2.3 Trillion in tax revenues every year.

It spends approximately $3.6 Trillion.

That a pretty big difference ... they're short approximately $1.3 Trillion dollars a year right now.

That's a big fat shortfall (aka ... a big fat deficit).

You can track this for yourself on this site, click here.

But you may dismiss this as no big whoop ... I mean who cares right?  We've all got our own daily problems.  No need to care about this stuff.

Governments having been running deficits and carrying debt forever right?

Uh, yeah ... but have you seen the actual data?

Take a peak at this historical chart of U.S. deficits going back over a hundred years:


Notice anything strange over the last few years?

The amount of money the U.S. government is short for it's own spending is HUGE.

Absolutely INSANE.

As you can clearly see they're short quite a lot of money over the last few years.

All in the name of "stimulus" spending, or perhaps more accurately, in the name of "bank bailouts".

And how do they go about making up for this shortfall in cash?

Well, no big surprise here we think ... they simply create more money.

Check it out for yourself:


That's a lot of money printing since 2007, a whole lot.

Basic common sense would tell you that by just printing money you can't solve economic problems.

But there are Nobel Peace Prize winning economists who write editorials for the NY Times and argue otherwise, here's one of them.

These guys are held up as heroes in many parts of the economic universe.

Which is always amusing to us because there are 3 minute YouTube videos that clearly show their theories are flawed, here's just one of many.

The problem with "money printing" as a way to solve debt and deficit problems is that they simply don't work.

Just examine what's happening...

All this money printing is done in hopes that people start spending money and grow the economy.

But U.S. banks aren't lending as much as the government would like and U.S. citizens aren't spending as much as the government would like.

Economists will often measure how much money is being moved and spent with something called the "velocity of money".

And as you can see below, money movement is decreasing, not increasing.


So back to the discussion with my old neighbour about all of this...

The problem with all of these U.S. government activities is that it makes our money worth less.

When the government attempts to inflate their way out of a debt problem, as they are trying to do, it steals from our savings.

Inflation at only 4% per year will cut the value of any savings you have in half in under twenty years.

(Aside: Does you ever wonder why the banks have a "Savings" account and a "Chequing" Account any more?  Is there any difference really?  These days it seems a savings account is an online trading/investment account.  More on that in a second.)

So what sounds like a little inflation is exactly a huge big deal.

It's why you can't save money in traditional savings accounts any more.

You're losing money if you do.

It promotes an environment where you must make risky investments to just try and stay ahead of the inflation curve.

And the problem with this is that the average middle-class Canadian doesn't understand what's going on so they save their money as their used to saving it.

Often in cash, confused with what to do with it.

Not realizing that their falling behind every year.

Savvy investors, however, aren't holding cash.

They're actively putting their money in things that they believe will earn real returns.

The financial literate win.

The middle-class loses.

As proud Canadians we want the middle-class to win.  We're one of the few places in the world that still has a middle-class but we're losing it quickly we think.

The next problem with these strategies is that they create asset bubbles elsewhere in the world.

Case in point...


Does any believe that mortgage rates of 2.99% or 3.29% are normal?


Do we have to share with anyone what that's doing to the price of property in Canada?

When you hear Canadian economists talk about the state of the Canadian housing market they're often missing the point.

They talk about properties in Vancouver being "overvalued" and condos in Toronto selling like "hotcakes".

But they're missing the point.

Prices in Canada are only a symptom of current economic policies.

Don't freak out on the British Columbian's paying a million dollars for 3 bedroom bungalows.

This is simply a symptom of U.S. economic policy rearing its ugly head here in Canada.

Canada is a tiny economy relative to the U.S.

When they take drastic actions we feel drastic pain.

Low interest rates = higher property prices.

High interest rates = lower property prices.

Have you ever wondered why Canada hasn't raised interest rates?

Because as long as we're going along with U.S. monetary policy decisions ... we can't.

So although my doctor friend's income may continue to rise his saving's are at risk of being demolished.

If he's putting money away in an RESP for his children's University education he would do well to recognize that the value of what he's saving will likely by half as much education as he thinks it will.

Start planning for that.

Until Canada acts on its own and rejects following the U.S. lead we'll continue to head down this crazy enconomic path.

(We're not suggesting that changing course is easy - far from it.)

And we're no saints when it comes to spending ourselves.

Just look at Ontario.

So what can we do in these types of environments?

We don't claim to have all the answers but we have our own thoughts:

1. You need savings.  But not in cash.  Perhaps in things that do well in inflationary environments:  commodities, fine art, land.

2. You need cash flow / income.  We like cash flowing real estate.  It still exists you just need to be smart about where you look.  Perhaps starting your own business - another good option.

3. You need good credit.  Your good credit is very useful, watch after it.

These are fun times if you know what to watch out for.

Spread the word about financial awareness, education and of course, do your own research and share it!

We'll all benefit!

Until next time...

Your Life! Your Terms!


Related Articles

0 comments on “U.S. Stats Canadians Should Know About”

  1. Nice article and great seminar last night, Tom. We are just starting our investing career, but have vicariously felt the chastening of stock market investors we know. Like you, we feel optimistic about real estate and are looking forward to working with you, Nick and your team this year.

  2. What you said about savings is very true. Although I have not yet gotten into the rent-to-own endevour as yet,I have started with my own property,by putting in a basement apt. in my home. Cost? $18,000. Return? $815/month.
    My next "home income generation", project will be solar panels on my roof, to take advantage of Ontario Gov't's 20 year guaranteed power buy-back purchase. ( Everyone should be doing this, for every property they own)

    What have these 2 projects got to do with inflation? I've taken the money out of my savings account to finance them. So instead of collecting 2-3% in the bank, I'm collecting 54% annually.

    The beauty is ,I don't have to pay myself back, because my home has increased in value by at least 100K with the apt, and will increase about another 50K if I do the solar panels. I'll pay myself back if I decide to sell. In the meantime, thanks to inflation, my 18K spent on the apt. continues to drop in value, while the rent will continue to increase.


    P.S. If I decide to sell, the new owners will have a home that will pay for at least half of their mortgage by itself.

crossmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram