Investing : The real story about Canada's debt vs. U.S.

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  • Jun 29th, 2020 8:36 pm
Jun 28, 2020
2 posts
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Investing : The real story about Canada's debt vs. U.S.


For purposes of my own investment research, I've been reading and watching quite a few articles lately with different opinions about the true state of Canada's national debt vs. the U.S., in terms of percentages: "Debt to GDP" seems to be a popular measure but there's not.

Interested to hear your thoughts about the true state of Canada's national debt situation. What do you think is the best way to compare and contrast Canada's national debt vs. the U.S.?
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May 11, 2014
4081 posts
Iqaluit, NU
Honest truth? Not a great measure whatsoever. Unfortunately the exact amount of debt and percentage of GDP it constitutes is unfortunately unreliable to derive any meaningful information from it from an investing perspective.

The biggest lesson that an investor can take from any information or data is to not use it as a focal point of an investment. The biggest example I can use to reiterate this fact is Japan vs Greece. Japan and Greece both had over 200% debt to GDP, the highest government debt levels in the world. So why does one collapse while the other is doing alright, and in some measures thriving?
Some investors were so convinced Japan would collapse that Yen carry trades were very popular. The idea of borrowing Yen at extreme low interest rates, investing in higher yield countries and pay back these loans. In some circles, some were betting on Japan to collapse and the yen to plummet, meaning these loans would be cheap to pay back. This became the "widow-maker" trade as the yen in fact strengthened and some people lost on currency exchange and even homes where Yen mortgages were available.

The difference between Greece and Japan are quite large. Japan has substantial current account and (for the most part) trade surpluses. High assets per capita and large cash amounts held by companies mean Japan stands as one of the largest creditor nations with high income to service this debt. Greece suffered from weak markets, was a net importer and companies suffered in productivity and debt. Consumers were also indebted.

We can even see large differences between Canada and the US yet conflicting investment outcomes. While Canada has alot of government debt, it doesn't suffer from as much future liabilities such as pension etc. whereas the US on medicare, medicaid, and social security obligations are extremely high, not to mention poor municipal fiscal health. Canadian consumers are more indebted, yet Americans have high personal cost obligations such as health insurance requiring to set aside large amounts of cash in health savings accounts, tying consumers. Yet the US has better investment outcomes for the most part and a higher credit rating than Canada. This is because economically the US has better income, productivity and population to support obligations. Not saying here both countries are fiscally healthy, but again we can't use debt as a good measure for investments.

One thing I would advise. Macroeconomics can affect companies and investment outcome, but this should never be your focus as an investor. Good companies can go through economic downturns, survive and still bring about returns.,Bad companies can still go bankrupt during economic booms. Similarly investing shouldn't be based on economics, let alone one economic measure.
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