Financial Literacy

In 2011, for the first time in history, a large country surpassed the U.S. in household wealth. The average Canadian net worth surpassed the average U.S. net worth. The Canadian average in 2011 was $363,000, 16% higher than the U.S. average at $320,000. Since then, the Canadian economy surpassed the U.S. in another milestone, national wealth as a percentage of GDP. In 2013, Canadian wealth is now at 648% of GDP, 18% higher than the U.S. wealth at 550% of GDP.

What is going on?

For decades, the International Monetary Fund has had a 4 point prescription for countries in a fiscal crisis. The simple prescription is time-tested and creates short-term pain but gets the economy back on solid footing quicker than any other method. The four prescriptions are:

1. Raise interest rates.
2. Cut government spending.
3. Deregulate and open the economy to attract investment.
4. Let insolvent banks fail.

Notice that the U.S. response to the 2008 fiscal crisis was the opposite of this prescription:

1. Lowered interest rates to zero.
2. Dramatically increased government spending.
3. Sharply increased regulations that repelled even domestic investment.
4. Bailed out the banks and declared them “too big to fail”.

Meanwhile, Canada, who wasn’t even experiencing a crisis, has been following the IMF prescription in recent years:

1. Government reined in spending and reduced deficits.
2. Reduced the corporate tax rate to 15%.
3. Enacted 11 free-trade deals in the last 10 years.
4. Reduced regulations with labor laws that allowed business to grow.
5. Their banks never had a crisis because, unlike the U.S., the government didn’t mandate that they make loans to people who couldn’t afford them.

The big question for your personal finances:

Have you chosen to put your career and investments in a state or country that is following the successful IMF prescription or do you have them located in a place where the government is doing the dismal opposite?