[SIZE=+2]Our Tottering Fiscal Prudence[/SIZE]
by
William Krehm Pick the most nonsensical of nursery rhymes that starts a youngster chortling, take it as a key for understanding our world and you will still come closer than what passes for economic analysis these days.
Take the columns “Until Debt s Do Us Part” by John Ibbitson, in The Globe and Mail (14/07): “Congratulations to Alberta on retiring its debt. The rest of us should be so lucky. Debt inhibits a government’s ability to stimulate the economy through investments or lower taxes, and siphons dollars that would otherwise be available for capital investment. All provinces suffer from the effects of one province’s debt.
[SIZE=+1]On Opposite Sides of the Debt Teeter-totter[/SIZE]
And the moon is a hunk of green cheese, and we must cut and package it and float an international cheese corporation to replace bankrupt Parmalat. For the only legal tender in the land is federal debt. Hence the only way our governments could meet Mr. Ibbitson’s approval is for the federal government to issue more of its debt which is the only money of the nation. If our federal government repaid a major part of its debt, the provinces would be running up more debt, because there would be less money around, and greater need for provincial and municipal social programs. And the only way Ottawa could pay of a big chunk of debt would be by slashing the tax base of the provinces, the municipalities and its own, As a result there would be an increased need for social programs.
The provinces and the municipalities and the private sector in a sense are seated on opposite sides of the great debt teeter-totter. The more Ottawa cuts its spending, the more the provinces must borrow. The more Ottawa borrows – providing that it uses the Bank of Canada for its borrowing so that the interest paid on those loans will come back to it substantially as dividends of the central bank. For the federal government since 1938 has been the sole shareholder of the Bank of Canada and with a reviving economy, the less the provinces and the municipalities would have to borrow.... There would also have to be enough unemployed, qualified workmen for the projects it finances with such loans, and enough materials within the country so that it does not have to borrow abroad. But unemployed and unsold goods we have in excellent supply. And above all the federal government’s loans would not be wasted on paying interest to private banks, for borrowing that is available to it virtually interest-free from its own central bank.
It is shocking that so elementary a fact about money today has been made inaccessible to the media, parliament, and to our university students.
[SIZE=+1]Paying Off the Debt with Paper of a Different Colour[/SIZE]
You can bring down this house of marked cards by asking your politicians a simple question: “Since gold and silver – even in theory – have been demonetized, i.e., stripped of their role as legal tender, what would you have the federal government pay down its debt with? Federal debt bills of a different colour than those being retired? Or computer entries in a different shade of ink?”
And you could inform them of this suppressed cut of our history:
In 1946, after 10 years of crippling depression and six of war, during which little was built or produced not for destruction, the ratio of federal debt to the GNP was 170%. Over the following 26 years, the country caught up with the neglect of the preceding 16 years, financing the introduction of new technologies, assimilated an unprecedented refugee influx to unheard of standards. Yet despite all this, by 1972 the above debt to GNP ration was reduced from 170% to under 20%. How was this done? By increasing the use of the Bank of Canada for holding federal debt equal to the mid-20 percentages. Today it hovers just over 5%.
In 1991 in the deepest stealth, to bail out our chartered banks from their gambles in the 1980s, they were bailed out, by an amendment of the Bank Act that did away with the statutory reserves of the need to redeposit with the Bank of Canada a portion of the deposits taken in by them from the public in their chequing accounts. These reserves earned them no interest, and thus made it possible for the government to borrow more credit from its own bank within the constraints established. The abolition of these reserves allowed the banks to increase their holdings of government debt by $60 billion without putting up a penny of their own money. (The Bank for International Settlements – a purely technical international agency that allowed no elected official of a government to attend its sessions – to help rescue banks in crisis throughout the world had already declared the debt of developed countries to be “risk-free” requiring no further capital for banks to acquire.) And that is where the nursery-rhyme nonsense comes in. The statutory reserves that were abolished by Ottawa had served as one of two tools for dealing with perceived inflation. In their haste to bail out the banks both Ottawa and the BIS overlooked that the end of the statutory reserves made the debt of any country anything but risk-free. Because whenever the central bank raises interest rates – its self-described “sole blunt tool to fight inflation” – those preexisting bond hoards of the banks would drop in market price. That oversight COMER picked up at once and warned the government about it. Reduplicated by every central bank in the Western world, it was the main cause of the international monetary crisis that began in Mexico and swept east Asia and passed on to Russia. It required Washington, the IMF and Canada to put up a standby fund of over $50 billion to prevent a complete collapse of the world monetary system.
Deregulating Our Bailed-out Banks
But the scandal did not stop there. Having bailed out our banks in 1991, Ottawa proceeded to deregulate them to allow them to acquire stock brokerages, stock market underwriting establishments, and enter the credit card business in a big way. As a result three of our largest six banks featured along with the US biggest in some of the biggest scams connected with Enron corporation. We learned of that involvement from the US government investigations, with settlements paid by our banks of as much as $80 million US.
All this is highly relevant, because the national elections both in the US and Canada were run largely on the basis of which of the major parties promised more loudly to balance the budget. Instead of useful economic theory that might help us understand society’s needs, our government sets policy with nothing but a piggy-bank with a hole in its bottom.
These are details that we should have heard about in the recent election campaign. Hopefully we will in the next one. Without adequate information democracy risks becoming a nonsense rhyme.COMER The Committee on Monetary and Economic Reform
by
William Krehm Pick the most nonsensical of nursery rhymes that starts a youngster chortling, take it as a key for understanding our world and you will still come closer than what passes for economic analysis these days.
Take the columns “Until Debt s Do Us Part” by John Ibbitson, in The Globe and Mail (14/07): “Congratulations to Alberta on retiring its debt. The rest of us should be so lucky. Debt inhibits a government’s ability to stimulate the economy through investments or lower taxes, and siphons dollars that would otherwise be available for capital investment. All provinces suffer from the effects of one province’s debt.
“Generally speaking, federal, provincial and municipal governments have been acting responsibly over the past decade to reduce the national debt which has fallen from the equivalent of 100% of the nation’s GDP to about 80%.”
The reference is clearlyto the total of the federal, provincial, and municipal debt.[SIZE=+1]On Opposite Sides of the Debt Teeter-totter[/SIZE]
And the moon is a hunk of green cheese, and we must cut and package it and float an international cheese corporation to replace bankrupt Parmalat. For the only legal tender in the land is federal debt. Hence the only way our governments could meet Mr. Ibbitson’s approval is for the federal government to issue more of its debt which is the only money of the nation. If our federal government repaid a major part of its debt, the provinces would be running up more debt, because there would be less money around, and greater need for provincial and municipal social programs. And the only way Ottawa could pay of a big chunk of debt would be by slashing the tax base of the provinces, the municipalities and its own, As a result there would be an increased need for social programs.
The provinces and the municipalities and the private sector in a sense are seated on opposite sides of the great debt teeter-totter. The more Ottawa cuts its spending, the more the provinces must borrow. The more Ottawa borrows – providing that it uses the Bank of Canada for its borrowing so that the interest paid on those loans will come back to it substantially as dividends of the central bank. For the federal government since 1938 has been the sole shareholder of the Bank of Canada and with a reviving economy, the less the provinces and the municipalities would have to borrow.... There would also have to be enough unemployed, qualified workmen for the projects it finances with such loans, and enough materials within the country so that it does not have to borrow abroad. But unemployed and unsold goods we have in excellent supply. And above all the federal government’s loans would not be wasted on paying interest to private banks, for borrowing that is available to it virtually interest-free from its own central bank.
It is shocking that so elementary a fact about money today has been made inaccessible to the media, parliament, and to our university students.
[SIZE=+1]Paying Off the Debt with Paper of a Different Colour[/SIZE]
You can bring down this house of marked cards by asking your politicians a simple question: “Since gold and silver – even in theory – have been demonetized, i.e., stripped of their role as legal tender, what would you have the federal government pay down its debt with? Federal debt bills of a different colour than those being retired? Or computer entries in a different shade of ink?”
And you could inform them of this suppressed cut of our history:
In 1946, after 10 years of crippling depression and six of war, during which little was built or produced not for destruction, the ratio of federal debt to the GNP was 170%. Over the following 26 years, the country caught up with the neglect of the preceding 16 years, financing the introduction of new technologies, assimilated an unprecedented refugee influx to unheard of standards. Yet despite all this, by 1972 the above debt to GNP ration was reduced from 170% to under 20%. How was this done? By increasing the use of the Bank of Canada for holding federal debt equal to the mid-20 percentages. Today it hovers just over 5%.
In 1991 in the deepest stealth, to bail out our chartered banks from their gambles in the 1980s, they were bailed out, by an amendment of the Bank Act that did away with the statutory reserves of the need to redeposit with the Bank of Canada a portion of the deposits taken in by them from the public in their chequing accounts. These reserves earned them no interest, and thus made it possible for the government to borrow more credit from its own bank within the constraints established. The abolition of these reserves allowed the banks to increase their holdings of government debt by $60 billion without putting up a penny of their own money. (The Bank for International Settlements – a purely technical international agency that allowed no elected official of a government to attend its sessions – to help rescue banks in crisis throughout the world had already declared the debt of developed countries to be “risk-free” requiring no further capital for banks to acquire.) And that is where the nursery-rhyme nonsense comes in. The statutory reserves that were abolished by Ottawa had served as one of two tools for dealing with perceived inflation. In their haste to bail out the banks both Ottawa and the BIS overlooked that the end of the statutory reserves made the debt of any country anything but risk-free. Because whenever the central bank raises interest rates – its self-described “sole blunt tool to fight inflation” – those preexisting bond hoards of the banks would drop in market price. That oversight COMER picked up at once and warned the government about it. Reduplicated by every central bank in the Western world, it was the main cause of the international monetary crisis that began in Mexico and swept east Asia and passed on to Russia. It required Washington, the IMF and Canada to put up a standby fund of over $50 billion to prevent a complete collapse of the world monetary system.
Deregulating Our Bailed-out Banks
But the scandal did not stop there. Having bailed out our banks in 1991, Ottawa proceeded to deregulate them to allow them to acquire stock brokerages, stock market underwriting establishments, and enter the credit card business in a big way. As a result three of our largest six banks featured along with the US biggest in some of the biggest scams connected with Enron corporation. We learned of that involvement from the US government investigations, with settlements paid by our banks of as much as $80 million US.
All this is highly relevant, because the national elections both in the US and Canada were run largely on the basis of which of the major parties promised more loudly to balance the budget. Instead of useful economic theory that might help us understand society’s needs, our government sets policy with nothing but a piggy-bank with a hole in its bottom.
These are details that we should have heard about in the recent election campaign. Hopefully we will in the next one. Without adequate information democracy risks becoming a nonsense rhyme.COMER The Committee on Monetary and Economic Reform