Former BoC head Poloz says investors should consider hedging against global inflation risk

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Canadians should consider inflation-hedging investments such as commodities and real estate as the U.S. and other global governments add to deficits and pile on debt, former Bank of Canada governor Stephen Poloz said Monday at a conference in Toronto.

With the U.S. debt-to-gross-domestic-product (GDP) ratio exceeding 120 per cent, and the size of the U.S. deficit now 7 per cent of GDP, the U.S. fiscal trajectory, in particular, is “clearly unsustainable, it cannot go on this way,” said Mr. Poloz, now a special advisor at law firm Osler, Hoskin & Harcourt LLP. He was speaking about current economic trends at the Society of Trust and Estate Practitioners Canada’s annual conference.

The tax cuts included in the U.S. One Big Beautiful Bill, which is currently being debated in the U.S. Senate, “will make the situation quite a bit worse and for much longer,” should the bill pass into law as currently written, he said. And revenue generated through higher tariffs won’t be enough to make up for the fiscal shortfall.

Mr. Poloz identified global inflation risk as one of several key investment themes advisors should discuss with their clients. Whatever positive disinflationary effects might accrue from technological advances can be wiped out by governments’ irresponsible fiscal policies, he said.

“Everybody needs some inflation hedging in their portfolio,” Mr. Poloz said. “That doesn’t mean you assume it will happen. It means that you buy a slice and say, ‘It’s not going to pay off much except if the bad scenario happens.’”

The drop in value of U.S. Treasuries following U.S. President Donald Trump’s April 2 “Liberation Day” announcement of reciprocal tariffs was a sign of the “growing reluctance” of bondholders to continue to add billions more to U.S. debt holdings.

“The risk is growing that [U.S.] Treasury investors will someday just go on strike, and when these things happen, they’re not gradual,” Mr. Poloz said. “They go on strike, and the Fed will increasingly have to absorb more of each government debt auction.”

Although the U.S. Federal Reserve could just print money to avoid default, it would lead to a kind of “default by stealth,” a vicious cycle of higher interest rates and increasing deficits due to rising rates.

Under such a scenario, it would not be a surprise to see gold increase 10 times in value, as it did in a five-year period in the 1970s, when government debt ran high and inflation soared, he said.

“If you think [gold] can’t go up by a factor of 10 again, if the U.S. has inflation of 5 or 6 or 7 per cent, think again,” he said.

Other investment themes Mr. Poloz identified were a long-term trend in the decline of the U.S. dollar’s dominance and an increase in the Canadian dollar’s value, if the new federal government makes good on promises to remove roadblocks to economic growth.

“Just unleashing the power of conventional energy alone could lead to a much stronger [Canadian dollar],” Mr. Poloz said. “My guess is that it would have been around 80 cents for the past five years if it were not for the constraints that were put on it the past 10 years.”

Mr. Poloz also said investors should identify companies that are set to deploy new technologies, such as artificial intelligence, once the boom-and-bust cycle of early tech development has played itself out.

“That wave has far more benefits than the actual invention of the tech,” he said.

Mr. Poloz also said investors could look to the defence sector, which has always offered good returns, but “the new growth is likely to be much more localized in adjacent industries within other countries, not in the U.S.”