Warning: Canada is Trapped in a New Financial Era

Added: 2026-06-02

[00:00:00]Canada's government has announced a new era, one with some pretty dramatic changes that are set to affect every Canadian. And we're trapped in a tough situation as outlined by the brand new report released by the Bank of Canada, which outlines the biggest risks to the Canadian financial system, the way debt works, and specifically how an emerging problem in Canada's most important financial market has become their top concern. And this is especially important because the tools that are usually used to fix a problem like this have essentially gone offline, leaving us vulnerable to a situation that could make an already challenging financial environment even more challenging for millions of families. So, let's talk about what this new era is, the major risk that the Bank of Canada just outlined, and most importantly, what it means for you, your money, your investments, and what you can do to prepare yourself. Before I explain why all of this is happening, I want to give you a sense of just how important the government bond market is in Canada. It sounds dry, but it impacts your life in more ways than you can imagine. So, let me explain the basics of how this works, and then the rest of the video will make a lot more sense. When the government needs to spend more than it collects in taxes, which has been the case for over a decade now, well, it has to borrow.

[00:01:11]And it does that by issuing government bonds. Now, these government bonds are essentially an IOU. You give the government your money and they say they'll give that money back in the future with interest over time. Now, here's where it gets interesting.

[00:01:25]Somebody has to buy those bonds. Now, for most of history, that's been a mix of pension funds, foreign central banks, insurance companies, these big, stable, long-term holders. Now, with those people, you know what you're going to get. But something has shifted over the last few years. A new and more dangerous buyer has emerged, and that's hedge funds. In fact, that's one of the main risks that the Bank of Canada has outlined in their newest report. In the past, hedge funds didn't buy a lot of Canadian government debt. But now, over the past 10 years, that has changed. In Canada, hedge funds account for over 40% of purchases of government bonds at auction. And some reports are saying that that can go as high as 50% of all government bonds are being purchased by hedge funds. This has been working well for a while now, but it has created one of the biggest problems that we face today, and we'll get to that in just a minute. Right now, the government of Canada is spending and borrowing via bonds a lot of money, a lot more than usual. Now, just a couple days ago, the prime minister of Canada gave a speech at the Economic Club of New York where he outlined how Canada is deliberately entering into a new era, one where the government is focused heavily on building our self-reliance, even if that means dramatically more spending and borrowing. When you think about this new era of strategic autonomy, how you're driving that change for Canada and how many other countries are also beginning to follow your lead, is this a fundamentally higher inflation, higher growth equilibrium, what you called a while ago growth flation?

[00:03:00]>> The short answer is yes. In terms of the overall trends, I I think you you you've described it well. One of the benefits of globalization there are many challenges but one of the benefits was it was structurally disinflationary um and the reverse is also proving to be true. Second point is uh just the scale of the infrastructure buildout that is only just beginning and the scale and the speed of that build uh which on one hand is tremendously exciting and promising on another hand uh just causes big shortages. So that is adding I think to inflationary pressure. Then you have what's coming with that the growth component certainly the growth component which comes from the investment boom.

[00:03:42]>> The government is saying okay we've decided we're in a new era where we need to be independent. So we're also in an era where there's going to be mass amounts of government spending and as a result new debt that's put towards these massive new infrastructure projects which we now see as very necessary in our quest for self-reliance. Now, he also gets into how as we become less reliant on other countries, prices may go up and inflation may be a side effect. Now, keep that in mind because we're going to talk about that more in just a second. And with this grand new vision for Canada, the government's likely thinking, well, thank goodness for all these hedge funds who were buying up vast amounts of government bonds. If it weren't for them, we would have a far harder time borrowing money, and we'd be doing so at a far higher rate. The hedge funds for the government have become a critical dependency. About once a year, the Bank of Canada publishes something called the Financial Stability Report. It doesn't get a lot of mainstream coverage, but it's one of the most honest documents that we get when it comes to risks for the Canadian economy because it's the Bank of Canada essentially telling you what they are worried about. And this year, what they're worried about is exactly what we've been talking about. The issuance of global sovereign debt is also rising and hedge funds are playing a bigger role in that debt, often using borrowed money. In normal times, hedge fund activity helps keep markets running smoothly. But if conditions become strained, this activity could amplify stress and disrupt core funding markets.

[00:05:12]>> In this section of the report, there are three main takeaways. The first one is that in Canada, hedge funds are buying 40% of all government bonds. The next takeaway is that usually these hedge funds are doing so by taking on huge amounts of debt in order to buy more bonds. That's the leverage they're referring to. And the third point here is that because of this debt-based buying, while these hedge funds could be forced to suddenly sell off their holdings of government bonds, since hedge funds buy so many government bonds by taking out loans, if they're ever forced to sell because of some external economic shock, well, the unwinding and mass selling of these government bonds could happen suddenly and quickly. And external events like these hit the bond market more than you might think. In April 2025, while the US bond market was incredibly volatile in reaction to Trump introducing new tariffs, in January of this year, there were problems in Japan where their bond yields spiked, destroying $41 billion worth of value.

[00:06:10]In 2022, we saw the UK bond market uh with an unprecedented sell-off in the wake of a new government budget. And as of recently, we have today's global financial elite constantly predicting some sort of global bond crisis. All this is to say, the kind of shock that the Bank of Canada is talking about isn't all that unrealistic. And having hedge funds as the primary holder of Canadian government debt, well, that amplifies the risk. But here's the thing. Ultimately, the government and the Bank of Canada, well, they'd be unlikely to let any major unwind like this happen. That would be a bad situation. Instead, it's most likely that they're going to choose a silent way to offload this problem onto the backs of average Canadians in a way that will make your day-to-day life more challenging, but will make the government's economic numbers and the value of the assets of the wealthy look better and better. We'll get into that in a moment, but first, I want to take a second to tell you about something that I've been working on. Most Canadians are holding their money in the wrong accounts and losing hundreds of dollars a year without knowing it. Over the past few months, I've been developing a course with seven hours of in-depth content that fixes that problem. It covers every Canadian investment account, how they're taxed, and the exact order that you should be filling them. It's called the Canadian account stack, and it goes over all the nitty-gritty details and how you could be leaving thousands of dollars on the table. And if you like the way that I explain things in my videos, then you'll already be familiar with my teaching style. So, you can grab it as a one-time purchase or get it, plus access to the next course on Canadian personal finance fundamentals, which is already in production, by subscribing. That also includes a private members chat where you can reach me at any time with any questions that you might have. If you've been a supporter for a while, check your access. You might already have it at the pre-course price. And new subscribers, you can lock in now before pricing changes when the second course drops.

[00:08:00]There's a link in the description if you are interested. Make sure to check that out. Now that you know about the new era of high government spending that we've entered into in an attempt to become more self-reliant and how that's making us increasingly reliant on hedge funds.

[00:08:13]Well, now we need to talk about a new situation that we found ourselves in in Canada and it is directly related.

[00:08:20]>> Breaking news. The Canadian economy has slipped into a technical recession.

[00:08:25]>> A technical recession >> to a technical recession. According to new data from Statistics Canada, >> the definition of a recession is a period of 6 months or two quarters where the economy, as measured by the country's GDP, does not grow. Uh, but if you were to look at the GDP per capita numbers over the past years, you would have seen this happen years ago. And people in Canada, as I'm sure I don't need to tell you, have been feeling the impacts of this recessionary environment on their lives for years now. We've seen stalled wages, a higher cost of living, and a pretty difficult job market. Now, normally when we have a recession, it triggers a pretty predictable response.

[00:09:01]The Bank of Canada cuts interest rates and borrowing gets cheaper, so people spend more. The economy picks back up.

[00:09:08]There's more real estate sales. Uh, that's the playbook, and we've run it before time and time again. But today, we find ourselves in a tricky situation that takes the Bank of Canada's best tool offline. Canada is in a double bind, a two-sided situation that's preventing Canada from being able to respond to this shrinking economy. The first side of the bind is that we already know we're expecting to enter into an era of higher inflation. That's what the prime minister outlined himself.

[00:09:36]>> One of the benefits of globalization, it was structurally disinflationary. The reverse is also proving to be true.

[00:09:42]>> So, we expect higher inflation but are currently experiencing low to no growth in our economy. This is the classic definition of stagflation. A situation where we have a stagnant economy yet at the same time we also have inflation.

[00:09:55]That's stagnation and inflation.

[00:09:58]Stagflation. Now the Bank of Canada, they feel like they can't cut rates to boost the economy because of this looming prediction of inflation in the future. If they were to cut rates, that could make any potential inflation even worse. They're between a rock and a hard place. Now, that's the first half of this double bind. The second part of the problem is the bond market. If the Bank of Canada cuts rates to try to help the economy grow, well, then bond yields would fall. When bond yields fall, well, that means that the return on holding those government bonds becomes lower. It becomes less attractive. So, bond investors, including those highly leveraged hedge funds, well, they start questioning whether or not this smaller reward is with the worth the risk. If they pull back from buying Canadian government debt, well, yields could actually rise, exactly the opposite of what the Bank of Canada would be trying to do in stirring up the economy by lowering rates. And in the Bank of Canada's financial stability report, they show that term premiums, the extra return that investors demand for holding long-term government debt, well, those premiums have been rising for years across Canada, the US, Japan, and the UK. All of these investors are already demanding more compensation in order to hold this government debt. So, the Bank of Canada is caught in a double bind, disabling one of their most powerful economic tools, the ability to change interest rates. They can't cut rates because of this inflation risk. And they also can't cut rates because of the risk of spooking the bond market and its hedge fund holders. And of course, they don't want to raise rates because the economy, it's already contracting. So we find ourselves in a situation where the government is going down a path where they view increased spending as crucial to the increasing and development of our national self-reliance. That makes sense to a certain extent. But at the same time, they're recognizing, as we saw in that Carne clip, that this risks driving up prices, otherwise described as being inflationary. Meanwhile, the Canadian economy has slowed significantly, but the Bank of Canada can't cut rates without amplifying that inflation. as well as being worried about creating a situation where hedge funds that support the government spending, that aspirational spending to create sovereignty, well, that changes to the interest rates could unwind the positions of these hedge funds in a dramatic fashion. Now, obviously, I'm concerned about this, but let's think about what if everything went well. What if everything went smoothly and the government's plans, well, they worked.

[00:12:33]What would that look like? Well, if we were going down that road, the only way out is dramatic economic growth. The infrastructure gets built, energy exports ramp up, the economy grows faster than debt, the wages keep up with inflation in Canada, and we earn our way out of this sticky situation. Canada does have real assets, assets that the world wants, energy, land, resources.

[00:12:58]Uh, and that's pretty important in an era where a lot of countries are trying to become self-reliant just like we are.

[00:13:04]It's a pretty big opportunity and I really do hope that we make the most of it. Fingers are crossed. But for that to happen, everything would have to go right. And just as we evaluate this best case scenario, we need to also be aware of the risks so that we can prepare ourselves. What happens if things don't go well? What if they go wrong? Well, the Bank of Canada's financial stability report outlines a potential bad situation in their stress test section.

[00:13:29]a situation where oil prices remain over $100 a barrel for three years. Cost pressures are passed through to goods and services leading to higher prices i.e. inflation. There's financial market stress across asset classes both in Canada and the United States and that remains elevated for several months. And as well because inflation is high and persistent, monetary policy remains tight. In other words, uh you have to keep interest rates higher. Based on the Bank of Canada's research, if this were to happen, there would be some pretty rough outcomes. First of all, there would be a decline in investment prices that could lead to an inverse wealth effect where we end up hitting multi-deade record mortgage default rates as seen here in this chart. Um, they go on to say that this could also increase the amount of business loans that are defaulted upon, reaching levels not seen since the 2008 and9 global financial crisis. But what has me most concerned is how these situations don't even take into consideration the risks that they outlined earlier. Primarily the deterioration of the bond market.

[00:14:34]They say that the stress test situation we just talked about does not explicitly model the effects of liquidity spirals.

[00:14:41]investors could sell their assets in order to raise cash and this could lead to market dysfunction and make the actual impacts more severe for Canada's banks and the broader financial system than the stress test scenario suggests.

[00:14:58]This describes a situation where the hedge funds massively sell off government debt, leaving governments with no realistic way to raise funds in order to operate. That's called a sovereign debt crisis, something that nobody wants to happen. And ultimately, I don't think that they let it happen.

[00:15:14]The takeaway is that if this worst case scenario comes to pass, there's really no other way to bail the financial system out than to print money, just like we did during the pandemic. The Bank of Canada always emphasizes the importance of the bond market, especially in this financial stability report. If there was this level of turmoil, to me, it seems obvious that they would step in and for a time replace the hedge funds as the primary buyer of government debt, creating new money in order to do so. This would be successful in preventing a major collapse of the financial system and in preventing the long-term harm that would come along with it. But at the same time, it would create a different kind of long-term harm, the kind that we're already quietly living with. Mass money creation would further accelerate inflation, driving up the cost of living in an era that the prime minister believes will already be inherently inflationary. This wouldn't just be consumer price inflation, but also asset price inflation, where assets go up in the amount of dollars that they're worth as a result of those dollars individually becoming less valuable. Uh people who are in the fortunate position to be holding assets, well, they'd see their net worth increase. While those who don't own assets and may already be living paycheck to paycheck, they'd be stretched even more thin as prices increase. This, in my eyes, is the biggest problem of our time. There's a dramatically expanding wealth gap between those who own things and those who don't. It's almost like the structure of this existing financial system is splitting the population into two classes. the ownership class who derive much of their wealth from the growth in the value of their assets and the working class those who rely on their wages and the ever shrinking purchasing power of those wages. It creates all kinds of problems in society all centered around this higher cost of living. One of which is our dramatically declining birth rates in Canada and that gives rise to other downstream impacts like the uncertainty in certain social and retirement services, our ability to fund them and the stop gap sort of band-aid solutions to those problems like exploiting other count's populations via mass foreign worker programs. This is a big problem. Now, of course, all of that is incredibly concerning to me, but I want to share with you something that may be a non-traditional perspective. You know, I'm not a politician. I don't have mass influence over the direction of the country. Hey, nor do I want it. That's for sure. I can vote, but ultimately, I just want a simple life and want to be able to provide for and enjoy time with my friends and my family. I think it's important to understand what's going on and what it can mean for you. That's why I make these videos. But once you understand it, I don't think it's all that productive to spend time being mad about it. I think you need to see it for what it is, take that information in, and use it in a way that improves your life individually rather than being angry at the system or any given government of the day. Would I like to see some changes made? Of course, I would. But that doesn't mean I'm going to ignore and opt out of the system as it is today out of protest. I'm not going to be some martyr. I'm going to take my learnings and make the most out of the situation in an effort to set myself and my family up for the future.

[00:18:36]Now, some people might say that that's a defeist or like a black pill perspective, and that might be true. It might be an accurate assessment of what I'm saying, but ultimately, I think I need to be realistic and focus on the things that I can control uh to try to create as positive a life for myself and my family as I can. And with that said, though I may sound like a broken record for longtime viewers, I'll share with you the way that I'm currently thinking about things and what I'm prioritizing.

[00:19:02]And I'll re-emphasize that this isn't specific financial advice for you, just things to think about. We already talked about how the end state of most of these challenging financial situations is that the central bank steps in to fund the government by being the buyer of government bonds and that they create new money in order to do so. As a result, we could see further cost of living inflation and asset price inflation. Now, in order to protect yourself, you need to hold some of the things that tend to maintain their value in that situation. You need to increase your income as much as possible and decrease your spending as much as possible to have money left over in order to invest. And you need to do so inside of a tax advantaged account. If you're in Canada, that's a TFSA. And as a brief plug, if you feel like you're unfamiliar with the benefits of tax advantaged accounts like TFSAs, RRSPs, RESPs, and how you can save thousands of dollars inside of them, well, I've just finished putting together a deep dive called the Canadian account stack that goes over everything I know about them in my direct teaching style, and you can probably find all the information elsewhere, but I've done my best to compile it all into one convenient place. So, check out the link in the description if you're interested in that. But I digress. As I was saying, if you're not already doing so, you need to start investing inside of a tax advantaged account like a TFSA. Usually, it's best to have most of your portfolio in low fee index ETFs, giving you exposure not to individual stocks, which can fluctuate dramatically, but to a diversified set of multinational investments across a range of different sectors. The core principle is to try to keep up with the pace of inflation by storing wealth in assets, not putting all your purchasing power in things that central banks can debase like cash. Now, to that extent, I also think it's prudent to have some money, a small portion of your portfolio in alternative asset classes that may maintain their value in the case that there is some sort of major structural change to the way our entire financial system works.

[00:20:58]Um, to that extent, I'd say look into things like precious metals, gold and silver, and maybe even high market cap crypto like Bitcoin and Ethereum.

[00:21:06]Obviously, take it all with a grain of salt, but at the very least, that's what I'm doing. And I definitely don't agree with all of the aspects of the Canadian financial system, but I think you have to play the game with the rules as they exist. It's going to be interesting to see how all of this plays out, though.

[00:21:20]Will we be able to grow our way out of our problems via these massive infrastructure projects like the Canadian government thinks we'll be able to do? Or do you think that this spending just increases the risk of our wealth disparity problems getting worse and worse? I'm really curious to know what you have to think about all that.

[00:21:37]Let me know what you think I got right, what you think I got wrong. Subscribe to the channel if you haven't already done so. But with all that said, thanks so much for watching everybody. I really hope this video helped you out at least a little bit and I'll see you next