Category Archives: 2020

2020

“WHAT ABOUT THE GRANDCHILDREN?” – DEALING WITH PUBLIC DEBT FROM COVID

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“We’ll be passing the bill to the next generation!”
“We’re indebting the future of Canadians!”

“Higher deficits today mean higher taxes tomorrow!”

“We’re living beyond our means!”

“WHAT ABOUT THE GRANDCHILDREN?!?!”

Oh the ironic baseless cries and fear mongering about federal debt and deficit!  Ironic because federal debt and deficits have actually been the key to our growth and prosperity, baseless and nothing to be feared because we’re a nation that is monetarily sovereign and owns its central bank.  Which means through the Bank of Canada the federal government controls the Canadian dollar and can independently create at will as much of it as we need at any point in time. 

Don’t take it from me, here it is from the feds, “As the nation’s central bank, the Bank [of Canada] is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity [money] in unlimited amounts at any time.”  In unlimited amounts at any time.

I had always planned to eventually write a follow-up to my article “Where did Trudeau get that CoVID cash?”, about what the changes to the BoC balance sheet all mean in the long run, but I am forced to fast track it because there is FAR too much ignorance and fear mongering in the media and government about debt/deficit concerns.  I am hoping to dispel that ignorance and allay those fears, but the neoliberal indoctrination of the public is DEEP.

However, if you’re reading this it means you aren’t satisfied with the official line and have an inkling something deeper is afoot, that we’re not being told the whole truth. You are here to dispel the neoliberal myths, to pull the wool from your eyes, and to get a peek behind the curtain of federal finance and the monetary system. And I applaud you for it, we need a more informed citizenry able to think for themselves, people not satisfied with the ongoing lies and distortions of the political elite in service to the corporate elite (often they are one and the same). I can’t promise all of my explanation will be simple and easy to understand, finance and the monetary system is a convoluted counter-intuitive system, but I’m going to try my damnedest. If you have further questions, please don’t hesitate to comment or contact me.

Without actually reading my article too many people on social media kept commenting as if I was criticizing Trudeau for the COVID funding, when really it was bashing him for NOT funding other needed things and lying about not having the money, like when Trudeau falsely told veterans they’re asking for more than the government can give right now.

The worst part is that people are freaking out over the debt and spending, but you ask them what other choice was there, and they draw a blank.  Were the feds supposed to give NO support and just let people lose their homes and businesses and starve in the streets? 

It’s this strange ideological knee-jerk hyper-partisan reaction of the indoctrinated public to blindly rail against such spending without giving a single thought to what would happen without it.  Many people have been so brainwashed and conditioned by ideological partisan forces to outright reject such policies without giving it a moment’s critical thought, it’s really quite disturbing.  Here are all the reasons why we don’t have to worry about our grandchildren being buried under a mountain of debt:

  1. The media and politicians are hyping up the fear with ignorant and incorrect information
  2. Debt/deficit hysteria has been empirically debunked… many times
  3. We control the Canadian Dollar and can monetize debt
  4. The feds can NEVER go broke and taxes aren’t required to fund spending
  5. Japan
  6. Future inflation, growth, and GDP measures
  7. We don’t ever need to repay it
  8. Conclusions
1.  The media and politicians are hyping up the fear with ignorant and incorrect information

So far no one is hyping up the unfounded fear of debt and deficits more than conservative ideologues, whether the ones elected or those writing for right-wing media like the National Post and the Toronto Sun.  As if we don’t have enough history to prove them unequivocally wrong, but still they have no qualms stirring up as much ignorant hate of the government as they can.  Historically it’s ALWAYS been selfish ignorant conservatives pushing back against progressive spending by the government.

However, it’s not just conservatives catering to the neoliberal system and telling falsehoods, supposedly progressive parties like the NDP have their leader repeating these myths about debt and deficit too.  If politicians and their rhetoric have proven anything over the 85 years of the existence of the BoC it’s how few really understand federal government finance and the monetary system, and how many actively propagate the myths.  Isn’t it strange to live in a system where our public spending decisions are governed by people completely ignorant of how the system of that spending works?

But it’s not all bad, the G&M and CBC have had some more reassuring reporting on the topic, and Modern Monetary Theory (MMT) is coming into the common lexicon, even if the media still misrepresent certain facets by parroting the neoliberal fictions.  Even John Ivison of the National Post got some stuff correct, although he also repeats many neoliberal myths.

I’ve put my critique of a selection of mainstream media articles into a separate post, I will add to it over time as more articles come out that either require debunking for spreading ignorance or lauding for getting it right.

2.  Debt Hysteria and the Deficit Myth empirically debunked… again and again

The other ironic aspect about the public falling for the fear mongering of neoliberal debt/deficit hawks is that their unfounded fears have actually been debunked for decades now by multiple books and groups!  Deficit spending has been incorrectly blamed for Canada’s debt woes at every turn since neoliberalism set in in the 70s.  

As I thoroughly explored in my paper on the BoC and inflation starting in 1974, books like “The Monetarist Counter-Revolution” by Arthur Donner and Douglas Peters and “Money, Inflation, and the Bank of Canada Vol II” by Thomas Courchene, made it obvious uncontrollable exogenous inflation which then turned into an endogenous wage-price spiral was the main culprit of Canada’s increased debt, and NOT out of control government deficit spending.

Yet in the early 80s, as the hangover of the inflation triggered by OPEC oil crisis was still a concern, (primarily conservative) debt and deficit hawks started clamouring about the public debt with the identical false cries we’re hearing now.  By the late 80s, sick of hearing all this bashing of debt and deficits due to supposed government overspending, a couple little known statisticians at Stats Canada, Hideo Mimoto and Murray McIlveen, decided to do their own study about the sources of the growing debt. 

Their conclusion?  Inflation wasn’t even factored in, the deficits leading to increased debt were primarily due to lost revenue from TAX CUTS in the early to mid-70s.  It wasn’t out of control spending causing deficits, it was tax cuts draining revenues, in particular corporate tax cuts, to spur growth that never happened. 

Add in the punishingly high interest rates of the early 80s and the debt was growing faster than revenues or GDP to the point in the mid-80s Canadians had actually paid off the principal of the debt and the remainder was all interest.  It’s important to note that debt was self-inflicted by the interest rates the BoC itself was setting.

Starting in the late 80s, after the inflation obsession of BoC governor John Crow began, the Committee on Monetary and Economic Reform (COMER) made its mission to debunk the neoliberal narrative about using our central bank more fully, and by the early 90s two COMER publications were openly challenging the fiction.  “A Power Unto Itself:  The Bank of Canada, The Threat to Our Nation’s Economy” by William Krehm, and “It’s Your Money” by William Hixson. 

By mid-90s Linda McQuaig was debunking the deficit myths in “Shooting the Hippo”, and by the early 2000s Timothy Lewis wrote “In the Long Run We’re All Dead:  The Canadian Turn to Fiscal Restraint.”  Not to mention research papers on the topic, like Seth Klein’s 1992 paper “Good Sense VS Common Sense: Canada’s Debt Debate and Competing Hegemonic Projects”.  As you can see, there are ample Canadian sources deflating deficit hysteria.

Now we’ve got MMT to help us debunk, starting with Warren Mosler’s seminal work “Seven Deadly Innocent Frauds of Economic Policy” of which Fraud #2 is “With government deficits, we are leaving our debt burden to our children”, and no better than Stephanie Kelton tackling the subject head-on in her new book “The Deficit Myth:  Modern Monetary Theory and the Birth of the People’s Economy”.  Not to mention of course Bill Mitchell’s excellent MMT blog with articles like “Where do we get the funds from to pay our taxes and buy government debt?”

And yet, despite such a thorough debunking by many sources, even the mainstream and well-known Linda McQuaig, decades later we’re still fighting against the misinformation of the neoliberal elite.  The problem seems to be mainly that people simply do not understand the monetary system as it exists, instead clinging to the more traditional notion of physical money under a gold standard.  People truly have trouble wrapping their heads around the fact money is completely virtual and not backed by anything, they have been fooled into thinking there’s some limit on the creation of money, as if it’s a faucet to a finite reserve water supply instead of merely a virtual faucet with virtual water coming out of it.

3.  We control the Canadian Dollar and can monetize debt

It’s really hard getting into explanations of the monetary system without getting technical, because the system was designed as a technocratic vault to dissuade and discourage the average person from attempting to understand it.  It is purposefully convoluted, its inner workings well-guarded and veiled, even from private banks, and it only communicates in dense bankspeak that can take years for the uninitiated to wade through (I know, I’ve been slowly deciphering technical papers on the BoC website for years).  But this explanation wouldn’t be complete without delving a little into the mechanisms that also blow away the debt/deficit myths.  I get a little deeper into the explanation of the basics mechanics of the monetary system in this paper.

Part of the difficulty of the counter-intuitive nature of the system is the notion of federal government “borrowing” when it sells debt like bonds or t-bills.  When people think of borrowing or a loan they think, “You have money to lend, I need to borrow it and will pay you interest.”  Well that’s how it works between two people, but that’s not how it works between banks and the feds.

When a private bank extends a loan to a person they’re not lending their equity money, they’re not lending their depositor’s money, and they’re not giving money based on some quantity of a commodity like gold.  When loaning the banks are creating brand new digital money on the spot.  THAT is the power of banks, to create money/credit, such is the core of our debt-based monetary system.  Debt creates money, repaying debt destroys money, and all that’s left is the interest payment.

However, when banks buy federal bonds they aren’t loaning the money into existence, they are purchasing the bonds with settlement reserves that were created by the BoC and injected into the banks by government deficit spending. It’s important to understand that crucial detail, that the money banks use to buy federal debt is just money the government spent and didn’t tax back. It’s more like a swap of assets than borrowing: the banks don’t like holding low-interest reserves, and so have the option to swap them for bonds, which not only earn more interest, but banks can sell them to investors and they are used as risk-free general collateral for loans in overnight markets.

Like any bank the BoC can also create funds out of thin air anytime it needs to, whether lending extra settlement reserves to a bank that came up short at the end of the day, or to fund federal government spending.  Now here’s where I have no choice but to go a little deeper down the rabbit hole to explain why the debt is no constraint on anything.

As I said previously, Canada is “monetarily sovereign”.  What does this mean?  It means we have our own distinct national currency, we control the issuance of our currency, our currency is not tied to the currency of any other nation (our exchange rate is “floating”), and as we own and control our central bank, which provides all the settlement reserves that are the backbone of the financial system, no external force can disrupt the internal workings of our currency.  All of that adds up to the “unlimited” funding aspect of our federal government.  It also means that we control the cost of lending Canadian dollars because the BoC sets the interest rate on settlement reserves (the key policy rate a.k.a. the target for the overnight rate), which then transmits into the interest rates consumers and businesses pay on loans from private banks.

The control of CAD is also essential to defusing fears about foreign-held debt.  It does not matter AT ALL if foreign countries own our bonds as along as those bonds are denominated in CAD because we control CAD.  Different story for our bonds that are denominated in foreign currencies (primarily US dominations) because we do not control those currencies and if a bondholder needs to be paid out we don’t have the ability to create the money at will because it’s not our currency.  But as the vast majority of our federal debt (bonds and t-bills) is in CAD, there is no concern to be had because we can always pay.  A foreign nation buying our bonds more or less amounts to that foreign nation keeping a savings account with us in our dollars, it doesn’t mean they own or control our government.

So, how does the BoC create any funds the government needs?  Through the magic of monetary financing, also known as “monetizing the debt”.  When the government needs funds it releases more bonds to “borrow” from private banks.  But it can also borrow from the BoC when the BoC buys its bonds and credits the government’s account at the BoC (the Receiver General account).  Here’s another federal government page explaining this.

When the central bank buys bonds straight from the government not only does the government have a bunch of new money to spend, it also means that because the central bank is holding the debt, the repayment of the debt and interest goes right back to the central bank, which we own.  At the end of the year all excess profits from the central bank go to the government as revenue.  Such is the magic of monetary financing/monetizing the debt:  when you hold your own debt you pay yourself interest and there is NO debt burden.

What does all this have to do with the extraordinary CoVID funding?  Well, it was entirely done using the ability of the BoC to create money out of thin air.  So if we’ve got all this new debt, but the debt is held by our central bank and pays out right back to us, is the debt really a burden?  Is it even really fair to call it “debt” at that point seeing as no other economic entity has such powers, not even private banks?

Between the fact we are monetarily sovereign and not restricted (like the US or Eurozone) from monetizing our debt, there is no reason to ever see public debt as a burden, because we always have the means to deal with it.

4.  The feds can NEVER go broke and taxes aren’t required to fund spending

Not only is it tough to wrap one’s head around the abstractions of the monetary system, it’s tough to convince people the rules of personal household finance that apply to them DO NOT apply to the federal government.  One might even say the reality of federal finance is completely counter-intuitive to the public’s understanding of finance. 

For example, the federal government can NEVER go broke.  As mentioned at the start of the paper, the BoC can create liquidity (money) in unlimited amounts at any time; the feds can ALWAYS pay their bills.  This also means the feds do not require a dime in taxes to spend, a truth the elite neoliberals do not want us to know and that conservative ideologues refuse to accept.

In our system taxes at the federal level serve only three purposes:

  1. An enforced tax liability creates demand for the domestic currency.  If you’re forced to pay taxes in CAD you will conduct business in CAD.
  2. Taxes send policy signals to the public about the government’s wealth redistribution priorities.  Who gets taxed and by how much?
  3. Taxes are a check on inflation by removing money from the economy.  This is an abandoned use ever since neoliberalism set in in the 70s.

Here’s the part where it gets a little tricky, where an MMT person would add, “Federal taxes don’t fund spending”.  This is perhaps the MOST counter-intuitive and difficult part of explaining the monetary system.  Taxes at the provincial and municipal levels DO fund the government, because those governments are not monetarily sovereign and do not have a central bank.  But at the federal level, because the feds do not spend regular deposit money but rather they spend using central bank settlement reserves in the Receiver General account, it enters the system differently. 

When a provincial or municipal government is paid taxes, those deposits just shift from the bank of the taxpayer to the bank of the provincial or municipal government:

But when the federal government is paid taxes, the deposits DISAPPEAR from the system, and the bank of the taxpayer shifts central bank settlement reserves to the Receiver General account:

When the government spends the opposite happens, it CREATES new deposits with the public, and the Receiver General shifts settlement reserves to the banks to balance the new deposits. 

Another way to phrase this is that taxes don’t fund federal spending, rather they simply remove spendable deposit money from the economy. The settlement reserves the bank of taxpayer holds (before shifting them back to the government with the tax payment) are from some form of previous government spending. Whether spending on the public or paying out bonds to the bank, those reserves originated with government deficit spending, meaning that previous government deficit spending is what funded tax payments, not that tax payments are funding government deficit spending. Confusing as hell, I know, but once you wrap your head around these abstractions as MMTers have you start to see the neoliberal fictions about federal debt and deficit for what they are.

Every time the feds spend more than they taxed, a deficit, they leave more money in the hands of the public but also increase government debt.  The total federal public debt is just the accumulation of deficits and the interest paid on them, all the money the government spent but didn’t tax back.  As we’ll get into later, this puts the burden of the debt on the government, which can roll the debt over forever without consequence, as opposed to putting the debt on the people and requiring strict repayment or face consequences.

You can tell people these facts, that through our central bank the government has unlimited funds and does not require taxes, and people’s faces get all screwed up, the doubts cloud their mind, and they inevitably say something like, “Yeah, but money has to come from SOMEWHERE.”  And you ask them “then where does money come from?’ and they are stumped.  Because MONEY COMES FROM THIN AIR, it is created “ex nihilo”, this is what’s called a “fiat” monetary system.  It’s mostly just numbers in a computer, and a bit of cash and coin.

Yet people have no trouble understanding that the federal government has full control over the printing presses of our notes and the minting of our coins, which while they are physical items, their value is not derived from their physical material but rather whatever number the feds have stamped on the surface.  For whatever reason, creating physical cash and coins based on nothing fits in people’s minds, whereas creating digital money out of nothing in a computer at the central bank somehow doesn’t jive.  This is a great exercise for someone to really make a person think about the nature of money and where it comes from, as it becomes obvious when you really question a person’s assumptions about money that they haven’t really given it any deep thought.

People have truly been deeply indoctrinated, even brainwashed, by the neoliberal system, they simply cannot imagine the myths are fictions; they take them as gospel truths because they do not dare refute the high priests of finance.  The system is too complex, esoteric, and unfamiliar that people simply dismiss any notion of trying to understand it and take the technocratic neoliberal elite at their word, as if these elite working to maintain the status quo of the corporate oligarchy really have the best interests of the public in mind. 

For me that’s the real kicker, when people who rail against the machinations of the elite and the horrible inequality of the corporate oligarchy then turn around and attack MMT or monetary reform by parroting the myths of the very elite they claim to decry.  As I said on one post recently, “if you’ve been jailed without cause, why would you believe the word of your jailer?”

5.  Japan

Ah Japan, MMT poster child and the go-to for any monetary reformer looking to blow away debt and deficit myths.  Japan has had the highest debt-GDP ratio on the planet for a couple decades now, and the sky hasn’t fallen.  At one point the Bank of Japan was also the largest holder of Yen bonds too.  Again, the sky never fell.  And ratings agencies keep putting them up and down, and yet investors still put money there and Japan still lends to developing nations. 

Despite the fact Japan has the highest debt-to-GDP ratio in the world and the Bank of Japan holds about half of all outstanding government bonds, Japanese interest rates and inflation are exceedingly low. Mainstream economic theory cannot account for these real-world results which completely contradict its predictions. Bill Mitchell writes extensively on the subject of Japan defying neoliberal expectations.

The point is, whatever the neoliberal elite claim can’t or shouldn’t be done with debt and deficits here, Japan proves them wrong.  If Japan can do just fine with a 236% debt-GDP ratio then we can too.

6.  Future inflation, growth, and GDP measures

This is the aspect that reveals just how purposefully deceptive media financial commentators are being when they whip up debt/deficit hysteria.  They know full well the amount of debt by itself is meaningless, and that it is measured against other factors to determine if they perceive it as problematic or not, but they cherry pick the information that looks most worrying to the public and then give it no context or comparison that might soothe the public’s mind.  As mentioned earlier, it must be understood, the federal debt is not a burden to the public, the government shoulders that weight, but for those concerned about the debt it can be viewed in more favourable ways and there are factors that will naturally mitigate it over time.

First off, let’s talk inflation.  We can throw misguided concerns about hyperinflation right out the window, in another article I address the neoliberal red herrings of the Weimar Republic, Zimbabwe, and Venezuela, the common tropes indoctrinated people trot out as if they are proof that higher public spending automatically means hyperinflation (as opposed to a confluence of variables and external pressures). 

I get deep into the Canadian experience with inflation in my paper on the BoC and 1974, but it’s really important to understand from the point of view that inflation erodes the real value of debt.  If your debt is accruing interest at 2%, but inflation is at 3%, then in real terms (“real” meaning adjusted for inflation) your debt is actually shrinking by 1%.  And with interest rates as low as possible at the effective lower bound, almost ANY amount of future inflation will be eroding that debt. 

Now, that may seem insignificant in the short term, and it is, but when talking of inflation and federal debt one must think long term.  We sell bonds with as long a maturity as 30 years, inflation at 2% doubles prices in 35 years, or conversely halves the real value of debt.  So, over time the real value of that debt is not the same, and so as long as there is some inflation, debt is slowly becoming less significant.

And of course there’s growth to consider.  We didn’t get out from under the mountain of debt of WWII by paying it off; we grew our way out of it with the unprecedented growth of the post-war period.  If your economy is expanding both in population and consequently GDP, not only is the debt spread between more people, but there is the possibility of running a surplus and paying down some of that debt if we so choose. 

As we’ve seen from ratings agencies and the like, debt-GDP is the key measure they use to evaluate debt.  Well none of the various levels of governments of Canada have any intention of stopping the growth economy anytime soon, so it’s safe to say there will be growth in GDP in the future.  As long as that GDP growth outpaces the growth of new debt, our ratio will slowly improve.

However, growth is completely stagnant at the moment, we’re entering another bout of secular stagnation, and they’ve been having trouble keeping inflation to target since the 08/09 financial crisis, so much so the Deputy Governor of the BoC had a speech musing about the possible need to evolve a new monetary policy not solely concerned with inflation.  While these factors are troublesome to the neoliberal system, they also crack wide open how inflexible and insufficient this system is if it cannot be sustained with a natural ebb and flow of economic activity instead of requiring infinite exponential growth.

(as a brief side note, it’s very satisfying for me to see our ultra-neoliberal former Finance Minister Bill Morneau proved completely wrong about inflation and monetary financing.  As I wrote in a letter to the feds, when a federal e-petition for increased use of the BoC to fund federal spending was presented, Morneau’s ignorant lame duck response was to outright lie and dismissively claim “that would be inflationary”.  Now we’re at our highest level of monetary financing EVER, with the BoC holding over 35% of federal debt, all while the government has been spending like mad, and there’s still no inflationary storm on the horizon.  Well there was already enough empirical evidence from Canada proving Morneau wrong then, and now he is living the proof he is wrong, as he watches the government do without inflationary consequence what he claimed they couldn’t)

7.  We don’t ever need to repay it

I saved this for last because it is indeed the most important.  When people cry about future generations paying the debt the question to ask is, “when have we EVER paid back all our debt?”  The answer is NEVER, and we never will. 

As a monetarily sovereign nation we can always pay off maturing debt, that’s the whole point of the BoC, to backstop the entire system so it’s quite impossible for the feds to ever be insolvent or default on debt payments.  With ongoing deficit spending most of the last 40 years the feds just keep rolling over old debt with new debt and adding as much extra needed to cover the deficit spending.  There is absolutely no obligation or need for the feds to pay down their debt, ever. 

Every nation will go into debt into infinity or until their economy collapses and causes a reset, such is the nature of a debt-based monetary system.  The supply of money for federal spending cannot expand without federal debt expanding too, but the beauty of monetary financing means the BoC can hold all the debt if we so chose.  So is it really “debt” when we owe it to ourselves?

There is an important aspect of deficits that the neoliberals do not like to admit to and strive to hide when they foment fear over deficits:  a federal deficit is a private sector surplus.  When I said above that the debt is the cumulative total of all federal deficits and their interest, and all of that is money the government spent and didn’t tax back, what I’m saying is that deficit spending leaves more money in the hands of the public.  This gets back into the counter-intuitive nature of federal spending not being at all comparable to a household.

When you are a business or household, usually a deficit is bad, it means you are spending more than you earn.  But as a business or household you do not have the unlimited funds of a central bank at your disposal, nor the longevity and immortality of a government, so you cannot go into deficit for too long without consequences like having your house repossessed or going bankrupt.  The feds on the other hand can never go bankrupt or be unable to pay a bill.  And the money they spend ends up in the hands of the public, which can be further spent into the economy or saved.

As a business or household a surplus is good, it means you have more money coming in than going out.  A federal government surplus on the other hand means the government is taking back MORE in taxes than it’s paying out in services.  Basically we are getting less from the government than we are giving.  So why the fear of deficits if it means more money in the hands of the public, and government debt can be and is rolled over all the time?

Most people don’t realize the only* way to pay down federal debt is by running surpluses.  It’s just the accounting of the system:  you cannot pay down federal debt except with taxes, you won’t have more taxes than spending unless you run a surplus, and you won’t have a surplus unless you either cut spending or raise taxes.  It’s a zero sum game, and decades of dubious neoliberal tax cuts to spur growth that never emerged has left government debt pretty much unrepayable without massive taxation.  

(*the central bank also has the power to run negative equity to retire bonds, which completely removes any need for government debt to fund spending ever, but the central bank holding negative equity is not acceptable behaviour to neoliberal technocrats and so I don’t include it as an option)

Once you realize that tax cuts created the excess debt, and only running surpluses taking in more taxes than spending can pay down debt, you will see that it’s simply not possible to pay down all the debt without draining the economy of large sums of money.  As mentioned, most of the debt now isn’t even from deficit spending but rather the leftover interest from our ridiculously high rates in the 80s. 

Really though, who ever expected any sovereign nation to pay off all their public debt?  Once you explain that to pay off public debt requires a surplus in which the government taxes more than they spend many people do not like that idea.  Then one can see the choice:  tax more than spend to pay down debt and reduce its perceived burden, or, enjoy the fruits of deficit spending and only pay taxes as determined by the government’s sense of social equity.

Regarding paying interest on the debt, it’s another red herring trotted out by conservative neoliberals.  While massive interest payments on our debt was one of the justifications used for the austerity of the Chrétien cuts in the mid-90s, those payments were never any constraint on government spending.  As I hope I’ve shown, the government is NEVER constrained by a lack of revenues or the need to spend more on interest, the BoC can credit any entity the government needs it to.  Those cuts were a neoliberal choice to appease financial markets and ratings agencies, and they devastated our public service.

It must also be understood, the government doesn’t need revenues to pay that interest on the public debt, when bonds mature the BoC just credits the account of the bondholder by the value of the maturing bonds.  The interest payments show up as a line item on our federal budget, but as with ALL spending the BoC just creates it, we don’t need to wait to collect enough taxes to pay that interest.  Meaning the interest is not a burden either, it can build up as high as it likes, the BoC and government can and will always pay it out.  Banks rarely even take their payout from bonds maturing, rather they simply roll them over into a new issue of bonds from the government, because those bonds will pay more interest and have more uses (like to influence long term interest rates or as collateral for lending in overnight markets) than holding settlement reserves instead.

8.  Conclusions

Well I hope the conclusion is obvious:  we need not fear debt or deficits!  It was silly to fear in the first place when you understand we are monetarily sovereign, and that fear serves the wealthy elite by making people afraid of imaginary invented consequences of government spending on the public.  It arbitrarily circumscribes government support and serves to retrench and create austerity for no other reason than it maintains a desperate work force, suppresses wages, and keeps a stock of unemployed so that corporate profits can be maintained at the highest possible level.

We need to shift our thinking, there is no need in a modern economy for everyone to be reliant on paid employment, but also no need for people to be unemployed if there are jobs needing to be done and people willing to do the work.  A basic income is getting alot of attention now, and the MMT crowd is pushing for a job guarantee.  Whatever the solution we know one thing:  money is NEVER a constraint for our monetarily sovereign federal government.

Adam Smith, 21st Century

BIG thanks to Larry Kazdan of MMT Canada for all his help keeping me on the level.

2020

The proponents and detractors of deficit hysteria

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As a supplement to my article “What About the Grandchildren? Dealing with Debt from COVID” I have made a list of mainstream media articles that either take the neoliberal line and foment unnecessary and ignorant hysteria over the federal debt and/or deficit, or those that state the actual reality of debt and deficits being a necessary investment in the public and no burden to the government or the public. In some cases it’s not the article itself taking a stance, but the politicians being reported on. You will note what type of more neutral balanced publications state the truth (ie Star, G&M, CBC), and the rabidly right-wing articles that propagate fear based on myths (Financial Post).

Those that got it right (mostly):

I have been VERY encouraged by some of the mainstream media coverage of COVID federal deficit spending and the debt it incurred, and even more so that Modern Monetary Theory (MMT) is coming into the public’s lexicon. People are finally waking up the reality of money being simply a symbol of value that is entirely virtual, and that there is no limit to creating a supply of something virtual. Spending money has limits in the amount of labour and real resources available to be bought, but the money itself is never limited. Here’s a bunch of articles that give me hope the public (and the elite) are slowly giving up on the fictions that constrain us from a more equitable society.

Five reasons it’s time to relax about the Trudeau government’s huge deficit

https://www.thestar.com/business/opinion/2020/10/26/five-reasons-its-time-to-relax-about-the-trudeau-governments-huge-deficit.html

This first link is perhaps the most excellent of all the mainstream media in Canada, written by the amazing Jim Stanford. Talk about cutting through the bullshit, he plainly states the 5 perfect reasons why debts and deficits simply don’t matter. These reasons echo many of mine included in the grandchildren article, the most important to note being #5: Government’s debts are Canadians’ assets.

How is Ottawa going to pay off its COVID-19 debt? With any luck, it won’t have to

https://www.theglobeandmail.com/opinion/editorials/article-how-is-ottawa-going-to-pay-off-its-covid-19-debt-with-any-luck-it/

A great and balanced article from top to bottom, allaying fears with relevant history from past instances of large government intervention.

No need to worry about a deficit when the government can print money, say some economists

https://www.cbc.ca/radio/sunday/no-need-to-worry-about-a-deficit-when-the-government-can-print-money-say-some-economists-1.5594636

I must say I’m proud of how our public broadcaster has fairly and evenly represented MMT in this article, even interviewing Kelton and stating the true reality, “This ability to print money means that Canada will always be able to pay its bills, it can never go broke, or default on its debt, no matter how deep into the red it goes.” Excelsior!

Why Canada Won’t Go Broke

https://thewalrus.ca/why-canada-wont-go-broke/

This is one of those articles that kinda gets it right, but is clearly unfamiliar with MMT and so in the subheading makes the mistake of calling it “controversial”. MMT is not controversial, it’s just how it all works, what’s controversial is that MMT lays bare the lies and distortions and obfuscations of those in power that want the public to believe there is some finite limit to the spending of a monetarily sovereign government. The controversy isn’t over the reality of the monetary system, it is over the challenge to power that public knowledge of this reality brings.

The article also addresses the spectre of deficits from ignorant alarmist conservatives when it mentions, “Conservative senator Leo Housakos accused the prime minister of leading “the greatest country in the world into bankruptcy.”” Such blatant fear mongering over what is actually 100% impossible should be criminal, or at the minimum, should be grounds to removing a senator’s job for life. Thankfully the article immediately debunks this nonsense.

It continues to explain some of the basics of MMT, mentions Kelton and “The Deficit Myth” and generally does a good job of stating the reality as per MMT, and mentioning that the inflation bogeyman is not rearing its head. It then goes on to speak of the detractors, and then mentions the red herring of Venezuela without getting into why those things do not apply, but still goes on to say none of those issues really apply to Canada, and even drops a line, as I have, about MMT poster child Japan.

COVID-19 has proved the value of big government. Will Justin Trudeau step up and lead the economy?

https://www.thestar.com/politics/political-opinion/2020/04/28/covid-19-has-proved-the-value-of-big-government-will-justin-trudeau-step-up-and-lead-the-economy.html

While this article doesn’t exactly mention debt or deficits, it’s a good example of balanced reporting that questions neoliberal assumptions about Big Government all while avoiding the fear mongering.

The throne speech: Fiscal prudes are fretting about the wrong issues

https://theconversation.com/the-throne-speech-fiscal-prudes-are-fretting-about-the-wrong-issues-146010

Considering I just learned that Marc-Andre Pigeon has been a proponent of MMT for 20 years it’s no surprise he gets it all right in this article. He even stays ideologically neutral by commenting about the calls on the left and right of the political spectrum to be misguided and misinformed, and correctly states we’ve got far bigger concerns, like COVID and climate change. This is yet another case, like the Stanford article, where they pretty much could have written my grandchildren article for me. Or put more aptly, we’re all working to the same equitable ends with a thorough knowledge of the reality of the monetary system.

As Canada’s budget deficit soars, where are the tightwads in Justin Trudeau’s cabinet?

https://www.thestar.com/politics/federal/2020/09/13/as-canadas-budget-deficit-soars-where-are-the-tightwads-in-justin-trudeaus-cabinet.html

While this article engages the anonymous deficit hawks in government, the reporting stays even-handed and amply gives the other side of deficit spending as a good thing its due. It’s kind of debunking the deficit hawks, but in a gentle way, and making the case that in general our government is moving away from the notion that deficits are simply unacceptable.

Bill Morneau can fix Canada’s ‘unholy’ debt mess — if he has the guts

https://nationalpost.com/news/politics/john-ivison-cleaning-up-canadas-unholy-debt-mess-needs-bill-morneau-to-become-paul-martin

This article skirts the edge of getting it wrong, but mostly gets it right, and more importantly, is the only article from the rabidly right-wing Post Media empire that isn’t purely ideological neoliberal fear mongering.

The real problem, which should put this article in the “got it wrong” category, is this: “Realistically, the hard choice remains between raising taxes and reducing spending. McGill’s Ragan said one of his chief concerns is the inter-generational inequity of leaving our children and grandchildren to pay for the current bailout.“

Yes, they brought up the spectre of our grandchildren being oh-so burdened by our debt. Which should put it in the “wrong” category, but the author didn’t say it, and for a Post article to otherwise give a fairly balanced and non-conservative-fear-mongering take, I must give credit where due.

“governments around the world are issuing debt and it’s not clear whether private capital markets will absorb it all, or, if they do, at what rates.” And? Who cares if they do or not, that’s the beauty of being monetarily sovereign and owning the BoC, it can and will absorb whatever markets don’t. This baseless fear is repeated many times in the following articles.

One other small error, but it’s not clear if he just kind of misstated the history: “Canada’s experience in the mid-1990s… Soaring debt levels were compounded by high interest rates, as the Bank of Canada tried to curb inflation.” Actually we had already curbed inflation by the mid-90s, and BoC Governor’s obsession with it already brought on an unnecessary home-grown recession in the early 90s. The high interest rates and inflation were more prevalent in the 80s, not the 90s.

The Bank of Canada: In Crisis and Beyond

https://socialistproject.ca/2020/06/bank-of-canada-in-crisis-and-beyond/

While this article has its heart in the right place, it gets some things right about the BoC and COVID funding, and SO much wrong about the history of the BoC. Much of the mythology I debunk in my article “Much Ado about 1974” is scattered throughout the article, no surprise as the author used as a source the absolute WORST and most mythological article out there: “The Bank of Canada should be reinstated to its original mandated purposes“. So much for Aquanno fact-checking, he ate up the myth from the opinion piece of a non-journalistic source hook, line, and sinker. I’ve been planning an article to specifically debunk all those articles propagating the myth, and it can’t come soon enough when people are STILL parroting the misinformation.

While there is more right than wrong in the article, there’s still some important details that need to be refuted. A common irony I mention in a previous article, when a progressive that rails against neoliberalism still subscribes to neoliberal fictions, “whereas the thrust of the bank’s policies have aimed at supporting credit conditions in the near term, the deficits governments accumulate will have long-term political implications, especially since the additional debt load will not build new productive capacity.“

Whatever the “long term political implications” may become, is Aquanno suggesting we curb this needed funding? Why assume any political implications for such extenuating circumstances when we’re clearly in uncharted territory? And requiring the debt load to build productive capacity is pure neoliberal logic to demonize public spending that does not result in economic growth and corporate profits. Why decry neoliberalism at the start of the article and then use neoliberal fear mongering in the middle?

“Making matters worse, the bank has not committed to any form of yield curve control to ensure that government funding costs remain low in the years following the crisis… for they fail to address the discipline imposed on governments by private debt holders in the form of higher interest rates or investment strikes” I guess Aquanno doesn’t understand that the BoC sets interest rates, not the market? And that the feds can issue whatever interest rate of bonds they please and the BoC will scoop whatever the market doesn’t? Who cares about investment strikes, that’s carte blanche for the government to fill in the gap and cut out private investors altogether so the public will finally realize we don’t need such parasites. Yet again, decrying neoliberalism then ironically propagating its fear mongering.

“Canadian governments will be forced to contend with unprecedented budget shortfalls and the need to use private markets as their main source of financing.” Except will they? The feds sure don’t need private bondholders, and the BoC could buy provincial debt and even municipal debt as it is currently. Not saying that will happen, but why assume one way or the other? Again, uncharted territory, if the feds want the wealth vacuum for the elite we call an economy to survive COVID they will do whatever’s necessary, who knows that that will require in these uncertain times?

“the Bank of Canada has unique institutional capacities that can limit financial discipline and pre-emptively de-rail austerity measures” If he’s talking about private banks, correct, if he’s talking about the feds, incorrect. As the very last critique at the bottom of this web page states, a quote from our BoC governor, the BoC decides NOTHING about fiscal policy, that’s the feds job, and the BoC will accommodate WHATEVER spending the feds desire. The BoC is neutral regarding such things and that’s how it should be, it does not make political decisions, that’s for Parliament.

“A more ambitious strategy involves the development of a new public bank… This would transform debt into a public asset“. Federal debt already IS a public asset when the public holds that debt. When the BoC holds our debt it does nothing for us, but when sold to the private sector it is their asset now. And because we are monetarily sovereign and nothing can cause a default on debt so the feds can carry it forever, a federal deficit is a private sector surplus.

With all its faults that article ALMOST made it into the next category, but the good did outweigh the bad, and there were some great ideas in there about democratized public banking.

Those that got it very wrong:

The real question to ask about those that got it wrong, whether politician or journalist, is if those getting it wrong actually know better and are just supporting an ideological position? It’s baffling to me, through my years of independent layman’s research, that people in positions of power, the people that make the decisions that spend our public dollars, seem to be completely clueless about the monetary system and government finance. In the case of our politicians, especially those tasked with finance, my impression is they willingly and knowingly propagate neoliberal myths in order to facilitate the corporate agenda they are very much on side with. Otherwise, we must admit, we are electing some brainlessly ignorant people into government.

In government spending and deficits, we’re now No. 1 in the world

https://financialpost.com/opinion/jack-m-mintz-in-government-spending-and-deficits-were-now-no-1-in-the-world

Ugh, the subheading of this article primes a person for just how ideologically ignorant the rest of the article will prove “Unproductive public spending outstripping economic growth will be our real albatross threatening prosperity in years ahead“. For those unfamiliar it must be understood, the Financial Post is one of the most unabashedly neoliberal rags ever published, nearly EVERY article they publish is just right-wing neoliberal ideological tripe designed to misinform the public and reassure Big Business.

It goes on to lament about Canada’s deficit-to-GDP as the largest of all nations, but taken without context it’s meaningless. Because we don’t really know what’s happening on either side of that ratio. Is deficit spending much higher because the government is overspending, or is GDP lower because our economy is underperforming? The real question to ask is: does EITHER measure matter?

We are in unprecedented times, COVID has knocked every nation for a loop, and they’re ALL doing unconventional monetary and fiscal policy. So what exactly does that measure tell us other than the government is deficit spending to keep everyone afloat? The fact it’s higher than other nations, especially Europe, can mean either we’re supporting our public with a greater cushion of federal spending, or that we needed more support by comparison because European nations already had a decent cushion built in.

Mintz continues ignorantly throwing out every scary economic number he can think of, every measure that makes Canada look bad, all while completely ignoring the ONLY measure worth looking at: the results of the spending. Are people starving in the streets? Is there an inflationary storm of public spending? No? Then it seems we’re neither doing too little nor too much spending.

He then continues, true to partisan ideologue style, by throwing conservative red herrings about the WE scandal around, as if that pittance of spending is somehow solely responsible for the ballooning deficit. He makes his ideological resistance worse by projecting unfounded speculation that the CRB will deter people from working, because, you know, everyone loves earning the bare minimum and being unable to afford luxuries.

This next line gets to the very heart of why I wrote “What About the Grandchildren” because he trots that red herring out without any shame: “Doling out money may be a politician’s dream, but it will be a nightmare for our children and grandchildren when the bill comes due.” Such ignorant fear mongering ought to be illegal, but apparently putting “FP Comment” before the article is license to throw out any wildly unfounded ideological conjecture the author wishes with impunity.

His comments about the US are laughable in the face of their COVID response and difficulty dealing with the virus. I honestly cannot understand why he holds any of the lame US response as something to be admired, it only reveals just what a blind ideologue he is. Only someone from the elite could make such comments and look themselves in the mirror.

It gets worse, he can’t help but end the article with yet another neoliberal conservative myth, “But the public’s belief that government spending comes from a magical money pot will eventually have to be revised.” Except it DOES come from a magical money pot, it’s called the Bank of Canada. Does Mintz still believe we need to mine gold to create money? That begs the question: is he that supremely ignorant, or is he just another conservative ideologue trying to pull the wool over our eyes?

Justin Trudeau’s credibility as a fiscal manager is shot; he’ll have to curb spending to get it back

https://financialpost.com/news/economy/justin-trudeaus-credibility-as-a-fiscal-manager-is-shot-hell-have-to-restrain-spending-to-get-it-back/wcm/34fc8c33-4610-4132-89d6-039df1571722/

It’s probably a pointless exercise in futility (or at least needlessly redundant) to debunk yet another article by the pro-corporate neoliberal rag known as the Financial Post, but the myths within this article do vary from the last. Of course, it all begins with wildly fantastical fear mongering in the subheading: “Calls grow for a ‘fiscal anchor’ to prevent a return of the ‘northern peso’“

The northern peso, really? The author goes on to parrot the neoliberal fear mongering that convinced Chrétien to make his devastating cuts in the 90s, despite the fact (yes, I’m going to mention it again) that Japan was already WAY higher debt-GDP ratio than Canada and they weren’t exploding with hyperinflation or watching their economy fully collapse. Well, I say “convinced” but I do not believe Chrétien or Finance Minister Martin needed any convincing. Does the quarterback need to convince the wide receiver to catch his throw? No, because they’re on the same team working towards the same goals. The team is called “neoliberalism” and the goal is corporate hegemony.

It’s actually kind of enraging to debunk this article, because it’s even more rife with falsehoods and distortions of the truth. For example, “In early 1995, creditors demanded yields of around nine per cent to lend the federal government money for 10 years, pushing interest payments to more than 30 per cent of revenue.”

That’s pretty much an out and out lie. Firstly, investors cannot compel the government to set interest rates on bonds, and being monetarily sovereign, and with the BoC by convention scooping up any bonds not sold at auction, there is never a possibility the government will fail to sell bonds. The second falsehood (two in one sentence!) is that interest payments were ALREADY that percentage because of the high rates of the early 80s, not because of new bond issues. But the author pushes the double fiction that all of that is because of Canada’s debt levels causing external powers to force their hand. What a load of tripe!

It gets worse “With a debt approaching 70 per cent of gross domestic product, Canada looked like a risky bet and investors demanded extra compensation for the possibility that the federal government would default.” This is one of those cases where it’s not clear if the author is just that incredibly ignorant of the reality of a monetarily sovereign government or if they are intentionally lying to the public? We are MONETARILY SOVEREIGN, we own our central bank and control our currency, it is literally IMPOSSIBLE for us to default. The whole point of having a central bank as “lender of last resort” is so that we can ALWAYS pay our bills! What a lying shill!

Ugh, it’s so much easier writing about the good articles, in this case I have to stop every paragraph because there’e another falsehood, “Don Drummond, an associate deputy minister at Finance when Jean Chrétien’s government finally reversed a couple of decades of overspending“. As the Mimoto study has proven, there was NO overspending, our debt and deficits troubles started with tax cuts at the same time as the collapse of Bretton Woods, leading into the inflationary storm of the OPEC oil crisis, worsened by a homegrown wage-price spiral, and then we floundered around with monetarism for a while without improving anything.

The greatest irony is when former BoC Governor David Dodge chimes in about debt service costs and the impact of taxes on the middle class, as if he doesn’t know the reality of federal finance. But if there’s anything that makes neoliberalism an impenetrable fortress for reformers it’s the fact its proponents are all united in its tenets and ideology. There is only ONE fiscal anchor: did the spending produce equitable results without inflation or other negative effects?

He then goes on to mention a ratings downgrade, as if those agencies have ANY credibility after the 08/09 financial crisis where those same corrupt agencies rated toxic MBS as AAA and directly contributed to the economic disaster. Why does anyone listen to those corporate shills anymore?

In a bizarre twist, no lack of irony in this article, the author then goes on to talk about how we’ve learned central banks can create vast amounts of money without inflationary consequence, and that has “run the bond vigilantes that Dodge and others worried about in the 1980s and 1990s out of town“. So which is it? Do we have to worry about pressure to sell our bonds at a certain price, or not? The rest becomes some weird downplaying of all the fear mongering the author built up over the article, stating correctly many of the realities he railed against earlier. By the end I really have to wonder if he wrote what he believes, or what the FP wanted him to write for their corporate masters?

Top bankers warn Ottawa about Canada’s spiralling debt

https://financialpost.com/news/economy/bank-chiefs-said-to-warn-trudeau-against-spiraling-canada-debt/wcm/24dd090c-5ead-4c91-b018-d12a738a42fc/

Alright, I know it’s getting repetitive, but one more article from the FP in need of debunking. Right off the bat the falsehoods and fear mongering starts, “Canada’s largest lenders are warning Prime Minister Justin Trudeau’s government it doesn’t have carte blanche to run massive budget deficits“. Um, yes, they do have carte blanche, because the BoC can fund whatever the government pleases, without or without the banks.

This notion of “lending” by banks gets back to part of my explanation in the grandchildren article. When “lending” to the feds the banks aren’t creating new money through a loan like when they give a person a mortgage, they are swapping existing settlement reserves the government spent into the economy for bonds. That’s all, it’s just a trade, their reserves for the government’s bonds. And if the government so chooses it can, through the BoC, fund everything without a single bond sold to the private sector.

The next quote kinda repeats the same neoliberal nonsense, as if the banks have any control over the feds finances, “while low interest rates provide some scope to borrow more in coming years to support the recovery, it’s imperative the government recommit to specific new debt targets to impose discipline on the budgeting process.” Or else… what?

Who is going to impose this discipline if the government won’t? Will banks simply stop accepting government cheques? This crazy notion that banks control our government is just the worst neoliberal fiction, they have absolutely NO POWER over our government, they can easily be cut right out of the loop and they know it. So their neoliberal sycophants and lackeys create this illusion that somehow the banks can impose their will on the government. Newsflash: THEY CAN’T!

So… hard… to… keep… reading… this… BULLSHIT! “But that would need to come with a hard commitment to bring the debt burden down gradually in order to ease concern about the nation’s fiscal path, they said, possibly by introducing legislation to force the government to lower its debt ratio.” So, who’s going to introduce and pass this legislation? The banks? Investment houses? Foreign powers? This would be self-imposed by government itself, and would be the stupidest thing to do. Talk about an inflexible and brainless policy, no different from the limitations of the Maastricht Treaty preventing European central banks from buying their government’s bonds, or the self-imposed US debt ceiling. The OUTCOME is what’s important, not the numbers that got us there.

In the 90s under Governor Crow they once talked of enshrining inflation as the primary concern of the Bank of Canada into law, thankfully cooler heads prevailed and they didn’t. We need policy FLEXIBILITY, not to rigidly think the evolving needs of the public are going to conform to the formulas of left-brained technocrats.

Of course the article just blathers on with more inconsequential nonsense and fear mongering. Someone once told me no credible financial or business person actually reads the Financial Post, which considering the dry subject matter, makes me wonder who does read this unmitigated complete and utter neoliberal conservative bullshit?

Freeland Grilled By Tory Finance Critic On Ballooning Government Debt

https://www.huffingtonpost.ca/entry/freeland-covid19-pandemic-relief_ca_5fa56330c5b623bfac4ebe97

Pierre Poilievre is one of those rabidly ideological CONservatives that would oppose the government saving his grandmother if it meant deficit spending. As finance critic it’s not clear if he’s just that ignorant of the system he is supposed to be critiquing, or if this is all just part of the show Cons put on for their equally ideological followers.

Poilievre spouts a bunch of nonsensical hysteria, but most telling is this “she won’t tell us whether the debt will be paid back before interest rates rise“. First of all, under the circumstances of extraordinary COVID funding, how could ANYONE predict that? The crisis is ongoing, we’re not remotely back to normal, so what’s his hurry?

More importantly, what difference does it make if interest rates rise when you are a monetarily sovereign nation (see the grandchildren article for an explanation of that term)? Interest rates have ZERO bearing on the government’s ability to fund its deficit spending. And if they do rise, it’s because the economy is getting back on track. The truly silly part though is that with how low interest rates are, our bonds are locked in to that interest rate until they mature. The BoC could raise rates to 10% tomorrow and it would not affect the cost of our existing debt one iota. Either this guy’s an ideological conservative rube ignorant of reality, or he’s just another political psychopath riling people up with falsehoods and rhetoric for his party’s gain.

An interesting if not insidious piece of info in this article: the parties all dipped into the wage subsidy to fund their party offices, a bit of a dubious use, but I guess it’s still a legitimate job.

NDP Steps Up Push For New Tax On Wealthy, Companies ‘Profiteering’ From Pandemic

https://www.huffingtonpost.ca/entry/jagmeet-singh-super-wealth-tax_ca_5fa31df5c5b6f1e97fe675a6

This is one of those sad examples where the leader of a supposedly progressive party, the NDP, none the less panders to neoliberal thinking and advocates for taxes based on conservative logic.

Sure, tax the wealthy for all kinds of equitable reasons, but not for the falsehood that our federal debt is somehow a burden. This line sums up the falsehood well:

“Singh said ordinary Canadians are becoming “more and more worried” about shouldering the burden of slaying the deficit, warning it could mean eventual government cuts to health care and social programs.“

“To pay for the programs, the help that people need, it should not be you that has to pay for it,” Singh said. “It should not be families and people and workers and small businesses who have struggled. It should be those who have profited off the pandemic, it should be the ultra-wealthy that contribute their fair share.”

I hope readers have been paying attention and know what nonsense talk that is, that we do not require ANYONE to pay taxes for the feds to fund the needs of the public. The article goes on and on about what we can “afford” if we implement such a tax, even though we can already afford whatever we please without any tax. Putting it in this frame only propagates the neoliberal fiction and plays into conservative-minded sympathies. Yes, tax the ultra wealthy and supranational corporations to level the playing field, but not because if we don’t do so we can’t afford to fund the needs of the public.

Deficits Matter And Federal Aid Programs Won’t Last Forever: Freeland

https://www.huffingtonpost.ca/entry/freeland-covid-aid-programs-deficit_ca_5f99c518c5b6aab57a0ee4c7

Then of course our Liberal finance minister Freeland goes partly progressive by not shying away from more deficit spending, but then ensures the neoliberals she is still very much on their side when she states, “Whether on Bay Street or Main Street, there are no blank cheques, and there are no free lunches. Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite.”

No free lunch? Do tell, other than the salary of the person typing the numbers into a computer, what’s the cost to creating more supply of a virtual currency? The only costs are people and resources, the money is not a cost because it does not exist in the real world, and people starving in the streets is a much greater cost.

The approach should be whatever is necessary, and yes, that debt might just exist into infinity unless she expects a looming currency reset or debt jubilee, or sees some end to the nation of Canada some time soon. This is the kind of neoliberal posturing we’ve come to expect from our elite politicians, they say progressive things to soothe the public, but then follow it up with reassurances to Big Business and conservative ideologues.

The neoliberal bent is even more pronounced when she said, “the federal government will impose spending limits upon itself, rather than waiting for “more brutal external restraints” from international market forces.” What, pray tell, are these “more brutal external restraints” and how can they be imposed on a monetarily sovereign nation? This is pure neoliberal scare tactics to impose farcical discipline on federal spending as if that discipline could ever be imposed from the outside.

This smacks of the same neoliberal thinking that led Chretien to make his devastating cuts in the 90s, merely because ratings agencies and the financial world had some beef with our deficit (ignoring of course the example of Japan). Bill Mitchell addresses this incredibly well in his article “Overt Monetary Financing – Again” when he writes:

“The sense of fright is driven by a lack of education that leaves people unable to comprehend how the economy actually operates.

“Neo-liberals magnify that sense of fright, by demonising what are otherwise sensible and viable explanations of economic matters.

“They know that by elevating these ideas into the domain of fear and taboo, they increase the probability that political acceptance of the ideas will not be forthcoming.

“That strategy advances their ideological agenda. The basic rules that should guide government fiscal policy are, as Lerner noted, “extremely simple” and “it is this simplicity which makes the public suspect it as too slick”.

“Neo-liberals who have vested interests in ensuring that the public does not understand the true options available to a government that issues its own currency manipulate that suspicion.

“In the place of these simple truths, neo-liberals advance a sequence of myths and metaphors that they know will resonate with the public and become the ‘reality’… I’m often confronted with arguments by sceptics who say ‘the markets’ will be unhappy, or retaliate, but when I asked them, specifically, to articulate exactly what they think the markets (whoever they are) will or can do, I am met with a sort of jumbled set of propositions or more typically, silence.“

So I ask the same of Freeland, what are the “more brutal external restraints”? One might be a depreciation in our exchange rate, but again, considering due to COVID most nations are in the middle of such extraordinary measures, why would Canada be singled out? Especially when those measures aren’t funding government works like infrastructure, but rather are just supporting the minimum of demand to keep profits flowing to our supranational corporations. I think Walmart would be pretty upset if we stopped COVID funding and their customers could no longer afford even their cheap wage slave prices.

What other “brutality” might happen? Corrupt ratings agencies lower our credit rating? And what then? They can do that all they like, it still doesn’t obligate us to raise our interest rates. If banks and investors still feel Canadian bonds are as risk-free and reliable as always, they will invest accordingly. The real joke there is when you realize we don’t actually need to sell our bonds to anyone, domestic or foreign, to fund government spending, so what is the fear?

The only other possibility that might happen, a la Venezuela, is sanctions. Again, is the world going to single Canada out as deserving sanctions, especially considering how incredibly corporate-friendly a nation we are? What then are these supposed “more brutal external restraints”?

I just have to throw in a great example of alchenomics: “Officials estimate the economy will still shrink by 5.7 per cent this year, but grow by 4.2 per cent next year, and 3.7 per cent in 2022, meaning gross domestic product won’t rebound to pre-pandemic levels for another two years.” They have absolutely NO WAY of knowing any of that, and I would bet all my savings they will be proven wrong. We never truly bounced back from the 08/09 crisis, now with COVID we’re even deeper in uncharted territory and the old rules apply less than ever. Economic forecasting is worse than weather forecasting. The longer the horizon the more incorrect it will be, and with the increasing volatility in the climate being a pathetic fallacy for the increasing volatility in stock markets, add in COVID, who can predict ANYTHING for sure anymore?

There is one EXCELLENT tidbit in this article however, that lays bare the farce of central bank independence, when the Governor of the BoC says, “As for how long the aid should last, Macklem said it was up to the government.” UP TO THE GOVERNMENT, meaning the central bank will accommodate WHATEVER spending the elected government has decided on. Meaning, yet again, we have another admission from the powers that be that there actually is nothing in the way of them funding a more equitable society for all other than their own lack of action.

Adam Smith, 21st Century

2020

Where did Trudeau get that COVID cash?

14 Comments

pdf version:  BoC balance sheet COVID

Introduction:

It seems fitting that in the anniversary of its 85th year the Bank of Canada has come full circle and is back to its roots using the same kind of monetary tricks it employed in 1935 to start pulling Canada out of the Great Depression (plus a few new tricks).  Neoliberal governments the last 40 years have hoped Canadians forget the progressive past of our publicly-owned central bank aiding the people, but it’s come back to the forefront in a way now that will be hard to ignore.

The $361 billion (and counting) question?  WHERE DID THE FEDS GET THE MONEY FOR COVID SUPPORT?!?  Well, the answer is as simple as it always has been: where does all money come from?  OUT OF THIN AIR!!!

Yes, for those of you reading this information for the first time, it’s true, we live in a debt-based fiat monetary system, pretty much all money is created as debt, and there is nothing backing our money (like gold or silver) other than confidence in our economy.  Here is a federal government page admitting to that fact: “Both private commercial banks and the Bank of Canada create money by extending loans to the Government of Canada and, in the case of private commercial banks, lending to the general public.”

When your bank gives you a loan, or line of credit, or mortgage, they don’t lend you their own money, they don’t lend you their depositors’ money, they type numbers in a computer and POOF!  New deposit money you can spend, matched by the new debt you rack up, it’s all just numbers on a digital ledger.  The flip side is that repaying a loan destroys that new money, and all that is leftover is the interest you pay to the bank.  If we paid off the principal on ALL the debt there would be no money left, only the unpaid interest.  And so new debts pay off old debts in a never ending spiral of growing debt that grows the almighty GDP.

Well it’s that simple for the government too, our public central bank has the ability to create ANY money the government should require to finance the solution to any problem.  Here’s another great quote from the feds themselves about how the federal government can never go broke and will never have difficulty finding funding:  “As the nation’s central bank, the Bank [of Canada] is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity [money] in unlimited amounts at any time.”  In unlimited amounts at any time.

So, why don’t they create more to solve Canadians’ problems?  Well, neoliberal governments serve the profit needs of the private sector first, they don’t actually want to solve society’s problems, they merely want to create the illusion they are helping, just enough to get re-elected. Which is why they never give quite enough money to actually solve anything unless it’s to bailout a favoured supranational corporation.

But in a crisis with such macroeconomic ripples as this, to give the economy the support it needs the government and central bank have no choice but to tip their hand and reveal just how easy it is to turn on the money taps when the wealth vacuum for the elite we call an economy stops functioning.  Not only is COVID a threat to the economy, it’s a literal threat to the elite in power, because a virus does not discriminate by socioeconomic status.  The elite are immune from poverty, homelessness, hunger, inadequate healthcare, and unclean water, so those life-threatening conditions do not get the funds necessary to solve those problems. 

As it turns out, maintaining those problems serves to strengthen the neoliberal system by creating conditions of stress, scarcity, and desperation that suppresses wages and keeps people seeing each other as the competition instead of cooperating.  If people are too busy struggling to make ends meet they don’t have time to think about what their politicians are doing, never mind taking action. It’s one of the primary ways elite neoliberals keep as many people as politically disengaged as possible to ensure there is no “excess of democracy“.

The long and the short of it is this:  our federal government does not have to “find the money”, it has ALWAYS had the power to create whatever it needs if it so chooses.  The only reason they don’t is purely ideological and caters to the needs of the wealthy, our largest corporations, and the financial sector.  While there are real world constraints to increasing government spending on the public, we’ve never truly seen what they are because our governments serve the profit needs of the private sector first, and everything else second.  We’ve never known how many more problems we could solve if our products, services, and resources were dedicated to improving the public good first (like ensuring ALL Canadians have reliable access to clean water and healthcare or a roof over their heads), instead of being monopolized to ensure corporate profits and being squandered on things like luxury cruise liners and military equipment.

It’s simply the nature of a capitalist economy in a debt-based monetary system:  if most of the economy is privately-owned and all money is debt, then if the government doesn’t maintain those private profits the debts can’t be repaid and the whole house of cards comes crashing down.  Under this inequitable unsustainable system politicians really have little choice but to support the prioritization of the profits of our largest corporations because if there’s a corporate profitability crisis and companies start defaulting on their debt the economy will collapse.  Either that or our “leaders” could, you know, advocate for a system NOT based on making a tiny minority of people exceedingly wealthy thereby empowering those ultra-wealthy to monopolize our resources and direct public policy to their own greedy ends?

But you’re not here to listen to a diatribe about the neoliberal inequality engine we use as the system to run our lives (or maybe you are?), you’re here to learn how the government can create all the money it needs for social good through our central bank.  It’s really quite simple….

How it all works:

The Bank of Canada creates money primarily two ways:  it can create it to loan to a bank or government (an “advance”), or it can create it to buy financial assets like bonds, treasury bills, and many other kinds of securities.  Advances rarely happen, especially advances to governments (here’s a short list), but the latter method happens all the time, if not daily.

I won’t go too deeply into details about the mechanics of all this, because in the aggregate the daily moves of the BoC are quite an intricate dance ensuring stable predictable flows in the financial system.  Just look at how even the balance sheet numbers were before the crisis, the BoC works very hard to keep those numbers steady, shuffling assets and liabilities around multiple times a day to get its balance sheet, and consequently interest rates, right where it wants them.

While the government has many different accounts for itself and its various Crown corporations, all the funds for COVID are coming out of the Consolidated Revenue Fund, aka the Receiver General account, at the Bank of Canada. This is where pretty much all discretionary spending by the federal government originates. BILL C-13: An Act respecting certain measures in response to COVID-19 states “there may be paid out of the Consolidated Revenue Fund, on the requisition of a federal minister and with the concurrence of the Minister of Finance and the Minister of Health, all money required to do anything in relation to that public health event of national concern.”

There is one huge caveat to my analysis of the BoC’s balance sheet:  one cannot say for sure precisely what is going on because the BoC is incredibly tight-lipped about all of its inner workings, the motivation for the moves it’s making must be deduced from understanding what each of the items on the balance sheet are and why they would change.  Central banks are pretty much a black box, one can track the changes on their balance sheet but they’ll never explain precisely why they took a particular course of action each day.  Most of the reason is it makes it impossible to criticize them from the outside, whether you are a sitting politician or a business analyst, but it’s also to maintain the mystery of it all and ensure the public have little chance of ever understanding it.  Well this is another of my attempts to pull the wool off our eyes and reveal to the public, as plainly as I can, the reality of banking and the monetary system.  Welcome to the rabbit hole…

The Balance Sheet:

The opening diagram is of the weekly averages of the balance sheet of the BoC.  Every economic entity, including people, are each their own balance sheet of assets and liabilities.  Assets are what you own, liabilities are what you owe.  Your house is an asset, your mortgage is a liability.  To a bank, your deposits are their liability (they owe it to you), but your debt is the bank’s asset (because you owe it to them).

So what you are looking at on the opening diagram is the total of all BoC assets on the top, and the total of all BoC liabilities on the bottom, both measured in millions of dollars.   By accounting convention total assets and total liabilities will always balance, which is why they are a mirror image of each other.  As you will note, they both soar after COVID lockdown begins, indicating the hundreds of billions of new dollars the BoC created for the crisis.

But don’t expect the BoC to outright admit that’s what it’s doing; they use bankspeak to obscure the reality.  Instead of stating clearly they created hundreds of billions of dollars out of thin air, the BoC states “These interventions, which involve acquiring financial assets and lending to financial institutions, increase the size of the Bank’s balance sheet.”  A “balance sheet expansion” is simply money creation, they just refuse to call a spade a spade because that would alert the public to the subterfuge.  Fortunately I have been studying the BoC long enough to cut through their Orwellian bankspeak so rest assured I will explain everything as best I can.

I’m learning over time how incredibly hard this topic is to convey to regular folk unfamiliar with even the basics.  Many an ignorant person will claim, “if you can’t explain it simply it means you don’t understand it”, but that’s truly not the case, not for particle physics, not for the monetary system.  The topic is simply too esoteric, requires knowledge of far too much unusual and slippery terminology, and explaining the accounting does not translate well into words or even pictures (it requires an animated explanation, one day, one day).  I will go through each category one by one so everyone can hopefully understand what it means.  If you’d like you can also refer to the Bank’s description of the balance sheet.  Or just trust my conclusions and skip to the bottom.  Here we go…

Advances:

As previously mentioned, advances are loans to banks or the government, in this case specifically the banks that have accounts at the BoC.  But before you get your hackles up about our banks needing loans, these are not bailout loans to prop up an insolvent institution, these are temporary bridge loans to cover unexpected shortfalls in the large-value transfer system (the LVTS, which is where banks and the government settle up all their transactions at the end of the day).  As you can see, those loans are already being wound down, they will likely be the first item to disappear from the post-COVID balance sheet.

The reason these loans were necessary was likely due to unexpected friction between banks settling with each other in the LVTS; one or more institutions fell a little short and the BoC, as lender of last resort, covered them.  The BoC charges them the Bank Rate, and we make a little money off the deal.  More on the operating band of interest rates later.

The BoC states clearly it will not disclose the names of the banks, and this is for good reason.  The average person simply does not understand how central banking works, and if they saw their bank’s name as receiving a loan it would likely undermine public confidence in that bank and possibly cause a run on the bank.  So the books clearly show the loan, we’ll just never know to whom it was made unless we dissected the balance sheets of all the banks in the LVTS and pieced together who had loans from the BoC at that time.

Securities Purchased Under Resale:

Securities purchased under resale agreements is when the central bank buys assets from the private banks, usually government bonds, with an agreement to sell them back at a later date, anywhere from one day to three months.  This is normally done in order to influence interest rates and/or neutralize government flows.

This is by far the largest change on the asset side of the BoC balance sheet, and it’s the easiest to spot example of quantitative easing (QE), which the BoC is doing for the first time.  In a nutshell, QE is when the central bank injects liquidity (new money) into the system by buying existing financial assets from the banks and other entities.  The reason for this is because those assets become less desirable for banks and companies to hold, partly because those assets lose value in the wake of the crisis, but also because those assets are not as “liquid” as money, they can’t be spent like money and must be sold first.  By making these purchases the central bank is encouraging an easy flow of credit from the banks because they will be less reluctant to lend if they are flush with billions in liquid cash.

(for the wonks only:  one can quibble about the semantics of labeling resale agreements as QE as Governor Poloz has, but in Canada’s case it fits, firstly because we actually rarely use resale agreements for monetary policy, opting for transfers of government deposits instead, and when the activity is so unusually large and intended to be ongoing for the crisis, it is no longer a typical resale)

Canada Mortgage Bonds:

Anyone who’s seen the movie “The Big Short” or delved a little into the cause of the 08/09 Great Financial Crisis (GFC) will be familiar with mortgage-backed securities (MBS).  These are when a bank bundles a bunch of mortgages into one big security, and then sells that security to investors, and the investors reap the interest payments of the mortgages.  Well there’s a reason Canada did not suffer as badly as other nations during the GFC, and it’s mainly because of how we handle MBS.

First off, our banks are not allowed to invest in any MBS other than Canada Mortgage Bonds, which is why they were not exposed to that market when it crashed in the US.  Secondly, our MBS can only be made out of Canada Mortgage and Housing Corporation (CMHC)-insured mortgages, so these mortgages are already safely insured and guaranteed by the government.  Lastly, our banks only bundle the mortgages, then the CMHC buys them up, then the CMHC itself sells them to investors.  So we have structured this market much more securely and with a lot more oversight and accountability than the free-for-all frenzy that happened in the US.

HOWEVER, the government, BoC, and CMHC seem to be making an exception now, and will “allow lenders to add previously uninsured mortgages into the pool of securities eligible to be bought by the government.”  So they are opening the door to precisely the kind of dynamic that toppled the US, let’s hope those uninsured mortgages are from solid borrowers, not simply wealthy foreign investors willing to dump their real estate if the market sours.

In this case, the BoC is not purchasing direct from the CMHC as it does for balance sheet purposes, but rather on the secondary market to support financial market functions, another form of QE as direct support for the banks.  Prior to the crisis the BoC always held a few of these, now they’ve ramped it up over 1100%.

Banker’s Acceptances:

A banker’s acceptance (BA) is kinda like a post-dated cheque but guaranteed by the bank, not the company writing the cheque, and is used by small and medium-sized corporate borrowers.  This is another form of QE by the BoC, as they don’t normally hold BAs, and the BoC is not buying them direct from the companies, but rather from the banks that guaranteed the BA.  Once again, it’s not clear which banks the BoC is buying these securities from, nor which companies they are from.

Commercial Paper:

Here’s where things get interesting.  Commercial paper is debt issued by companies but also public entities, like provinces and municipalities.  But this is not direct support for public entities, at least not on the surface, because the BoC is buying this debt from banks, not from the public entities themselves, and so it is more QE.  But the BoC can buy municipal debt if it so chooses, and was able to do so before COVID, they just won’t lift a finger to fund cities unless doing so supports monetary policy (which I would argue in cities like Toronto it does, because the cost of living, and hence inflation, is higher there and would be even higher if we raised taxes to fund our flagging infrastructure).

Government of Canada Bonds:

Finally we have come to the heart of the matter:  direct support for the feds by the BoC.  But, of course, it’s never quite as clear as one would hope.

Government of Canada bonds are the main way in which the government issues debt.  Private banks acquire bonds either by swapping their excess reserves for bonds in the primary market or by crediting government deposits at the banks with the purchase, and then sell some of the bonds to the public in the secondary market.  The tricky part however is how much the BoC bought direct from the government in the primary market and how much it bought on the secondary market to support the financial system.  When the BoC buys newly-issued federal bonds direct from the government it is called “monetary financing”.  This is sort of the other side of the coin of QE, except instead of creating money to buy existing assets, it creates money to buy new assets, injecting the government with new money.

This mechanism of monetary financing is the subject of much debate in Canada (I’ve written a VERY in-depth paper on the subject), as it is proof of how our government can easily use our central bank to create whatever funds it needs without ever paying a dime of interest to the banks.  It is monetary financing that kick-started the BoC in 1935 to begin ending the Great Depression, made possible our funding of WWII, and aided the government throughout the post-war economic expansion. 

After neoliberalism set in starting in the 70s we curtailed this power more and more, but unlike most central banks that are forbidden from the practice, we actually use monetary financing EVERY time the feds issue new bonds and the BoC snaps up a percentage at auction.  Without painstakingly disaggregating the data by poring over the various purchase results we cannot tell precisely how much monetary financing we increased since COVID hit, but it’s somewhere in the $50 billion range.

Provincial Money Market:

This is perhaps the MOST intriguing and encouraging change in the BoC balance sheet.  The provincial money market is where provinces issue bonds, it’s their primary market.  What makes this so intriguing is that seemingly for the first time ever the BoC is doing monetary financing for provinces.  Yes, you heard that right, the BoC is creating new money to buy debt directly from the provinces AND it’s possible the BoC has created new deposit accounts for them too (more on this later).

Alot of the debate about the BoC and Canada’s past funding of public works centered on the notion of the BoC making loans to the feds, provinces, and cities.  Unfortunately I’ve had to dispel a lot of myths about this, as it is a misinterpretation of the function of a central bank and the loans the BoC has in fact made.  As per the loan provisions of the BoC Act, they are NOT meant as loans to fund projects; just like advances they are temporary bridge financing to cover a shortfall in expected revenues, which is why the loan provision terms are so limited in amount and time frame.  But monetary financing is a horse of a different colour, it’s like a back door “loan”, a way to provide funding that uses newly created money and does not require paying interest to the private sector.  Another phrase for it is “public money creation”: money created by a public institution for public use.

This is one change the BoC should consider keeping, especially as it can help ease the debt burden some of our provinces suffer under.  But federal and provincial jurisdictions are closely guarded, we’ve seen how provinces become the fiefdoms of ideological demagogues (especially Conservative ones) and how the feds will or won’t cooperate with various Premiers (and vice versa).  Supporting the provinces in this way would likely be seen as letting them off their fiscal responsibility hook, and so the feds would be loathe to do it for the same reasons they don’t really do it themselves:  they cannot appear to favour the public sector and must remain fiscally neutral in the eyes of the neoliberal financial world.  This means you do not run deficits without matching the deficit spending with bond issues to the banks, else the neoliberal world will punish you with divestment, lowered credit ratings, lowered exchange rate, and worse comes to worse if you really push the envelope, crippling sanctions.

Treasury Bills:

Treasury bills (T-bills) are simply another form of federal debt like bonds; they just pay out interest differently.  The changes in this category are pretty much the same analysis as government bonds: some were likely bought direct from the government (monetary financing), some were likely bought on the secondary market to support the financial system (QE).

All Other Assets:

This category is insignificant, it includes property and equipment, intangible assets and other non-investment items, and did not change in any meaningful way.

On to the liabilities…

Notes in Circulation:

This is cold hard physical cash (notes).  As a brief aside, the word “cash” is a prime example of the intentional ambiguity of bankspeak.  In central bank terms, “cash” can mean the same thing as “reserves” or “settlement money” or “high-powered money”, it’s basically referring to fully liquid deposits, and usually does not refer to physical notes.  Another way to put it is “cash” is any deposit easily converted into actual physical cash. Not knowing this can make reading about central bank actions very confusing.

Normally this is the largest liability on the BoC’s balance sheet and requires the most acquiring of assets to match it.  It is demand-driven by the public, meaning the BoC only provides as many notes as the banks are asking for according to the needs of the public.  It says “circulation” because the notes are just paper until the BoC officially circulates it by swapping it for reserves with the banks.  The government can have billions of notes printed waiting in a warehouse, it does not count as “money” until the BoC circulates it.

The good part is that the demand for notes has barely changed, meaning there are no bank runs or people withdrawing large amounts of notes.  Another interesting thing to note about notes (pun intended) is that they are the ONLY access to central bank money the public has.  Despite the fact deposit money in a private bank is our primary medium of exchange, it’s not actually legal money like notes, it’s just the PROMISE to pay legal money on demand.  Deposit money in private banks is not defined in the Currency Act, it is de facto money, and we have allowed private banks the power to create it at will.

All Other Liabilities and Capital:

Just like “All Other Assets” this is not a significant item on the balance sheet.  The “capital” part is likely just the leftover equity after all else has been accounted for.  However I would like to know what exactly changed that it decreased in amount.

Government of Canada Deposits:

As yet another example of confusing bankspeak, Government of Canada deposits are also known as the Consolidated Revenue Fund aka the Receiver General Account (RG account).  This is where all spending comes from and all taxes go into.  That’s why you make your tax payment to the Receiver General, and why all government cheques come from the Receiver General.  It’s the government’s account at our central bank.

The change in this account is more or less (in the aggregate) the result of new monetary financing, the BoC bought debt direct from the government and credited this account with newly-created money.  And the BoC does this on a regular basis, it just used to do it more (the main subject of my previously mentioned paper).

One might be confused considering the government’s various announcements about financial support of the economy not really jiving with this increased amount.  Well, that’s because the government NEVER has on hand all the cash they need for their spending in a year, it’s a daily simultaneous flow of spending going out and taxation going in.  The BoC anticipates these government flows and will take pre-emptive action to ensure the RG account has what’s needed for any particular day of government spending, either building up reserves for a big spend, or auctioning them off when they’re not needed.

This also means the federal government does NOT depend on your tax dollars in order to spend on public services (whereas without a central bank provinces and municipalities do depend on tax dollars to fund themselves).  The federal government does not need to save up tax dollars first before it can spend on the public, it spends first and taxes later, or more accurately, spending and taxation both occur at the same time every day in varying amounts relative to each other.  Point being though, federal government spending is NEVER constrained by tax dollars, if it were very little would happen until after tax time rolled in and the government saw how much they had to spend.

Other Deposits:

Remember when explaining provincial money markets I said I’d get back to new deposit accounts?  This is another case where because of the BoC’s stated policy of “confidentiality considerations” we may never know who exactly owns these deposits, but it seems very possible a large chunk of them is whichever provinces the BoC bought bonds directly from.

“Other deposits” is a newer entry on the BoC balance sheet, I can’t say for sure without really digging deep, but it’s entirely possible this is the first time the BoC has ever granted deposits to entities other than the federal government and banks.  According to the BoC website “These include foreign central banks and international financial institutions, designated clearing and settlement systems, and other domestic federal government agencies.”  As this COVID intervention is likely for domestic entities, the BoC likely gave new deposit accounts to smaller banks not part of the LVTS, or possibly even to some of the larger corporations it’s supporting with QE, and lastly, maybe even some of the provinces or larger cities.  We may never know.

Members of Payments Canada:

And finally we come to the aggregate result of QE, the increase of deposits of the private banks that are members of Payments Canada.  The members are the largest banks/financial institutions in the country, they all participate in the LVTS, and they are for whom most of this hubbub is about.  Increasing these deposits (aka “injecting liquidity”) by buying up financial assets from these banks is what is meant to grease the wheels of money markets and bank lending, to ensure continued easy access to credit.

You will note the amount of these deposits is barely visible before COVID.  That’s because the BoC has a 0% reserve requirement, since 1994 our banks have not been required to hold any reserve money as a percentage of their deposits, they can lend or spend their excess reserves as they see fit.  But keeping reserves at the BoC earns the bare minimum in interest (the Deposit Rate), they’d rather swap them for a variety of government bonds earning various rates of interest for various time periods which they can then sell to investors.  So they keep a very specific minimum at the BoC, which did not fluctuate week after week before the crisis.

(wonks only:  in a bizarre twist, the BoC is violating its own interest rate operating band.  The target for the overnight rate aka the policy interest rate aka the key interest rate (more confusing bankspeak giving everything multiple names!) is a 0.5% band, the policy rate is at the center, the Bank Rate (the rate banks pay on advances from the BoC) is 0.25% higher and the Deposit Rate (the rate the BoC pays on deposits) is 0.25% lower. 

source: https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201024E

So when the policy rate is 0.25% as it currently is, the Deposit Rate should be 0%, we should not be paying banks interest on their deposits.  But for whatever reason the BoC is not going to the actual effective lower bound, it’s staying just above it, so all the new deposits we created for the banks are still earning 0.25% when they should be earning squat.  Even with all that extraordinary support we’re still ensuring the banks get their pound of flesh).

If you think all this cajoling and bending over backwards to ensure the banks do their job and fulfill their function as providers of credit is a bit of a farce, you’re not alone.  The entire monetary system is set up not to control banks and their de facto money creation, but rather to gently influence them, leaving as much to the “free” market as possible.

The BoC does not control the supply of money, at all, it attempts to influence the cost of credit, primarily through its actions in markets to support its intended interest rate.  It’s yet another monetary dance, part of the illusion of finance, and it’s the reason I advocate for nationalizing the banking system.  Having a fully public banking system would eliminate the necessity and expense of overnight money markets, neutralizing government flows, selling bonds, and doing the specious dance of leveling the central bank’s balance sheet.  Money creation should be a public utility, not one of the most profitable private businesses vacuuming billions of dollars from the public every quarter.

WHAT DOES IT ALL MEAN?

Those COVID “funds” are nothing more than numbers in a computer conjured out of thin air, the feds have the power to create as much as they want at any time. Yes, money is imaginary, to say we don’t have enough is to admit we don’t have enough imagination.

It all boils down to this:  when Justin Trudeau tells a disabled veteran “They are asking for more than we are able to give right now” he is either telling a bald-faced neoliberal lie to deny funding the needs of Canadians, or he is supremely ignorant of how our monetary system works and is completely oblivious to the fact he’s telling a neoliberal falsehood.  That also goes for every politician claiming we need to “find the money” or who foments hysteria around debt or deficits.  These are the falsehoods standing in the way of truly improving life for ALL Canadians.  Whether lying or ignorant, can such people really be trusted with our collective future?

Adam Smith, 21st Century