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Oh Canada! With the strongest economy in the G 20, we really are the true North strong and free! Our banking system has been used as a model around the world. During the financial crisis, our banks took some losses yet remained relatively stable. And as of late, our income taxes are lower than many US States!

Much of the stability in our financial system is due in part to fairly strict regulation. Granted toward the tail end of the real estate boom, Canadian lenders were becoming more lax in their lending standards. Fortunately for us, we didn’t get sucked in to the liar loans and no obligation, walk away loans that our friends South of the border became famous for.

Our dollar has remained close to par with the US dollar for some time now. Initially, we were thought of as a commodity currency, very much tied to the price of oil. While this still holds true, we’re starting to see a departure from being strictly a commodity based currency to a substitute currency for foreign investors looking to preserve wealth.

We’ve certainly racked up our share of debt as a nation, however not nearly to the extent of many other G8 nations. In fact, our current Federal Debt is lower now than it stood in 1996/97. See the chart below:

Year Gross. Debt in Millions [1]
1961-62. $14,825
1970-71 $20,293
1980-81 $91,948
1990-91 $377,656
1996-97 $562,881
2001-02 $511,946
2007-08 $457,637
2008-09. $463,710
2009-10 (projected) $492,437
2010-11 (projected) $522,337
2011-12 (projected) $535,237
2012-13 (projected) $542,537

Servicing our debt will also be less of a burden moving forward as our resource rich and stable economy, combined with a stable and strong dollar will undoubtedly draw in foreign capital in droves.

I expect a fair amount of volatility over the next several months as it becomes blatantly obvious that there is no sustained recovery taking place. If the United States decide to throw more stimulus into their economy, problems will likely only become worse.

They can’t lower interest rates further, however they can and will increase their purchases of US treasuries. This will keep help keep mortgage rates low, and will likely cause a short term rally in the stock market.

Longer term however, the bond market will begin to force yields higher, causing the Fed to accelerate their buying. A tail leading the dog scenario will begin to unfold until the debt levels become even more staggering and the bond market runs out of control.

Canada is highly dependent on the US economy. I believe however, that China will become an increasingly more active trading partner. I foresee China evolving into more of a consumption based economy as exports to the US and Europe fall.

The Yuan, if allowed to strengthen further, will solve two major issues currently facing China. First, it will tame inflation and stabilize wages for factory workers(major news as of late with all of the strikes over there). Second, it will increase the purchasing power against other currencies. Inputs such as steel, coal and oil will become more affordable to Chinese and allow them to profitably manufacture and sell products into their own economy.

As the Chinese see their purchasing power increase, they’ll likely start to spend more on recreational and entertainment. This will allow a healthy service based economy to emerge, creating many new jobs and increased standards of living.

Canada stands to benefit as we’re a resource rich nation. China will buy more of our products, services, and companies. Asians will also likely continue to purchase real estate in BC as it has a desirable culture and familiarity over many other provinces. All of this will help sustain our real estate market, mining and forestry sectors, agriculture and related industries. It will also serve to keep our dollar stable and reduce our debts as Asians buy up our Treasuries.

Obviously I’ve made some bold statements. As with everything, these are just my opinions based on observations and my train of logic. I could be wrong and events could evolve very differently though!

Thoughts?