The U.S. should follow Canada’s example in its quest for fiscal responsibility, but will have to accept a period of deflation as part of the deal, according to Gluskin Sheff’s David Rosenberg.
Rosenberg explains that it took several downgrades for Canada to take its debt problem seriously, but when it did, it chose to attack the problem through both higher taxes and budget cuts.
From David Rosenberg:
Canada’s fiscal progress didn’t happen because of the economy—that much is certain. It took years of painful retrenchment and tax increases, and it took public acquiescence to make it stick. For America, it will end up playing out much the same way. And the process will be contractionary, deflationary, and very bullish for the bond market as supply recedes, and ultimately pave the way for more sustainable economic growth, including the return of capitalism.
Such an approach faces some different obstacles in the U.S., which include more powerful special interests, according to Rosenberg. He cites the mortgage interest tax deduction as an example of one such discount that will need to be ditched.
However, the interesting thing here is that government budget cuts and tax increases will lead to lower inflation. Dramatically lower inflation, from the looks of this chart. The question is whether that sticks, or government and the Fed go back to their monetary expansion ways.
Photo: David Rosenberg
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