In Part One we presented a way the Canadian Government could create sustainable funding for important programs. We started by suggesting that $1 Trillion be borrowed and invested.
Part Two , here, addresses feasibility of this borrowing to invest, and what are the risks?
Starting with feasibility, consider a couple of issues: could the government borrow this much, and could such a fund invest this much?
First, yes, the government could borrow $1 trillion.
For one thing, the $1 trillion is invested, not spent. The difference is that investment grows in monetary value, whereas spent money does not yield future monetary value. You invest in Berkshire Hathaway shares, and one day you can sell the same shares for much more than you paid. You spend on clothes that you wear, and then one day you give away or sell at a garage sale for ten cents on the dollar.
Today our Canadian Federal Government debt is projected to reach $757 billion in 2023. The government spent this money that is now the debt. The debt is not an asset earning income. If Canada can borrow that much as debt, without any collateral beyond our good name, borrowing a trillion for an asset portfolio to generate revenue should be possible.
Furthermore, businesses with a ratio of Debt payments ($22 billion) To Income ($295 billion) (DTI) less than 10% are operating at a safe or even conservative level, well below typical 36% upper limits.
Second, yes, the government could invest $1 trillion.
The world’s stock markets – just equity – are valued at $70 trillion ($US). Total global debt instruments like bonds, for example, are valued at $199 trillion ($US). Debt can be a good investment. Taken together, the investable market in stocks and debt is 270 times the size of Canada’s $1 trillion initial investment. As Canada’s portfolio grows in value, the total market value increases along with it.
The Canada Pension Plan management team today successfully manages about $300 billion. That team would be an excellent starting place to seek talent and expertise in handling this sizeable new portfolio.
What about risks?
Several risks do exist, such as the risk that 1) the market crashes, 2) interest rates rise, or 3) the government of the day decides to spend all the funds available.
First, the risk the market crashes could severely devalue the investments.
In the worst crash of the 1930s depression era, the Dow Jones index of stocks lost 90% in value. The shares did rebound eventually. Doubling in such a case would be delayed from a typical 15 years to possibly as long as 26 years, which occurred in the period from Sep 1929 to Dec 1955. The longest time is twenty-six years to double the investment includes covering 2.2% interest and inflation.
During very severe downturns like the Great Depression, some interest payments from taxes would be likely. Eventually, the fund would pay back any taxes used. Moreover, this is an extreme example as it picks the worst possible peak times to buy investments. In contrast, investments of this size are bought and sold over an extended period reducing the impacts of significant downturns.
Second, the risk that interest rates may rise.
The risks associated with higher interest is that some taxes may be needed to pay for the added costs. Some will remember mortgage rates over 18% in the 1980s. While debtors hurt, lenders made significant profits of the order of 15%.
In a high-interest scenario, many options exist, such as lowering interest payments by selling off some portion of the portfolio. Professionals can manage through this, and the result is a delay in doubling the investment, not bankruptcy.
Third, the risk of collapsing the fund to spend prematurely.
Politicians love to offer solutions that work right now. Money sitting at their disposal would be extremely tempting. This temptation may be the highest risk such a fund faces, one that requires a level of vigilance and persistence. Maximum safeguards using all the tools at our disposal are necessary. We could enact laws to protect the fund. Use new business models and technology to prevent tampering. Educate the public to underscore the value of this saving, stamping out temptations of pilfering. Mitigating this third risk relies on all of us.
Norway has one of the most significant heritage funds in the world, valued at over $1 trillion. Per person, this would be as if Canada had a fund of over $10 trillion. Norwegians consider this fund a source of national pride and have strict rules limiting withdrawals to a maximum of 4% per year. Norway prevents political conflicts of interest by requiring all investments to be outside the country. Tampering with this fund evokes reactions similar to tampering with universal health care in Canada – their citizens won’t allow it.
Humanity has struggled with the issues of lack of funds and concentration of wealth for centuries. Saving before spending by governments and individuals could turn the corner to ensure we fund our solutions adequately. Those who need assistance can benefit from the wealth generated, without increased taxation and without begging or turning to crime. Those who create wealth are supported by avoided or reduced tax.
Canada should give this idea serious consideration. Whether we try the particulars of this example or some modified version, the potential benefits are enormous.
Photo by Casey Horner on Unsplash