Debt nation: Canada borrowed itself into a tough spot, now it must borrow its way out of coronavirus crisis

Undoubtedly, a speech of almost 86 years may seem a strange thing to mention, but there are not many precedents to which the world can draw when it comes to the economic effects of the coronavirus pandemic. The recent Great Recession could be a logical benchmark for the current crisis, but the Great Depression could be more relevant when it comes to understanding what we are about to face, especially when it comes to accumulating debt.

During the Depression, drought and low commodity prices crushed farm incomes and left people struggling to pay off loans. The federal government of the time was finally shaken enough to put aside its laissez-faire ideology and take action.

The pandemic that has paralyzed the economy

It has been expressed that Justin Trudeau also plans to spend a lot to avoid an economic disaster if only to eradicate a different existential threat. Canada, once again, will ask for reasonableness and equity when it comes to debt. And like the Depression, the coronavirus pandemic has paralyzed everyday life, only it has happened in weeks, not years.

The virus has sent the economy off a cliff. Canadians filed approximately 929,000 new job insurance claims in just one week in March, more than 20 times the usual weekly total and equal to nearly five percent of the country’s workforce, according to DBRS Morningstar.

Economic production has also been affected. In fact, a recent note from Capital Economics predicted that Canada’s gross domestic product would contract by 35 percent annualized in the second quarter. The recession has left many people and businesses suddenly facing the possibility that their income and cash flows, used to pay bills and pay debts, will quickly run out.

If consumers and businesses don’t have cash, it appears to be up to the government to get them something before they default on their loans. And the way that governments will have to get that money during the current crisis is to borrow.

In other words, Canada’s problem and solution are one and the same: debt puts us in a difficult situation, a debt must now get us out.

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Source: Geoff Zochodne | Financial Post