A Trillion Dollar Coin for Canada?
Arun here…breaking radio silence to share with you a thought-provoking piece by Larry Kazdan, a graduate of York University in sociology and history, and currently a Council Member with the World Federalist Movement-Canada, an organization that monitors developments at the United Nations and advocates for more effective global governance.
Our friend and fellow blogger Keith Newman recently wrote some words that set up Larry’s piece nicely so rather than trying to reinvent the wheel, I will let Keith introduce Larry’s work and then urge readers to read the piece in full.
The trillion dollar coin solution for the US debt ceiling fiascoÂ was developed by a Modern Monetary Theory (MMT) blogger in 2010 and gained considerable notoriety after a number of prominent economists supported the idea, notably Paul Krugman, who pointed out that “money is a social contrivance and convenience…”.Â A short time later the idea was explicitly rejected by President Obama and the Department of the Treasury.
Larry Kazdan has written the piece that follows on issuing such a coin for Canada. While that solution for our country may seem a little drastic, the continuing issuance of Government of Canada bonds provides conservatives in all parties the ability to use intuitively appealingÂ language regarding the non-existent “debt burden” and the supposed need to “balance the budget”. The unfortunate result is inadequate day care, senior care, coverage for pharmaceuticals, public transportation, environmental protection, etc. Yet, if it chose to do so, our federal government could mobilise our vast natural resources, manufacturing capacity, know-how, and unemployed workers to provide us with these things we so desperately need.
Canada’s Trillion Dollar Coin
High-value coin seigniorage has sparked a public debate in the U.S. because it reveals how the American government can keep spending even if a debt-ceiling is not liftedÂ by the Republican-controlled House of Representatives.
Briefly explained, the U.S. government would use seigniorage, the profit between the cost to produce a coin and its face value, to replenish its bank account. The government would create a high-face-value coin at nominal cost, deposit it in its Federal Reserve bank account, and then have the ability to spend without having toÂ borrow any additional funds that would breach the debt ceiling.
While Canada does not have an official debt limit, and despite claims that job creation is a high priority, the Harper Conservatives are obsessed with balancing the budget, reducing federal debt, terminating government employees and slashing programs important to the health and education of Canadians. So Canadians should understand the coin seigniorage issue carefully in order to critique Conservative conventional wisdom.
Some critics claim that utilizing coin seigniorage is the prelude to hyperinflation, matching Zimbabwe for monetary ignominy.
Other proponents claim this is just an innocuous emergency measure that simply protects the United States taxpayer and the global economy from the catastrophic effects of a debt ceiling breach.
And still other proponents claim this is a revolutionary game-changer because it pulls the veil away from the monetary system and demonstrates that governments with sovereign fiat currencies are not held ransom by bond vigilantes, and do not have to slash public services or welfare to avoid financial meltdown. In fact, sovereign governments have the requisite fiscal capacity to create much larger budget deficits and may need to do so in order to drastically lower unemployment.
This latter analysis comes from a new school of economists espousing Modern Monetary Theory (MMT), who analyze central bank operations in countries that have floating non-convertible currencies. Because no one can demand from these governments a fixed rate of exchange nor any other asset such as gold in return for fiat money, these countries may be considered sovereign currency issuers, and can be contrasted to users of currency (such as households, businesses, cities, U.S. states or Canadian provinces).
According to the MMT model, money is first injected into the economy by federal government spending, which increases the net financial wealth of the non-government sector. On the basis of this money, banks are able to leverage the money supply by concurrently creating loans and deposits (which are really just promises to pay government money). Note that while these bank deposits effectively create new monies in circulation, they do not increase private net financial assets because these new assets are offset by the new loan liabilities. Only the currency issuer creates new private net financial assets at the time it injects them into the non-government sector. Taxes on the other hand will decrease net non-government financial assets, and can be thought of as the destruction of money previously created by government. Note also that in this view, taxes do not fund anything, but simply reduce the purchasing power of the private sector, thereby leaving room for additional government spending without inflation.
According to MMT, a monetary sovereign such as the U.S., Canada or Japan (but not countries of the Eurozone who do not individually control the Euro) can purchase anything that is available in its own currency, can always pay debts in its own currency, and can never run out of its own money which it issues at will. This does not mean these governments should spend without limit. The limit is the productive capacity of the economy beyond which lies the risk of inflation. The appropriate amount of spending injection will be largely determined by the net savings amount of the non-government sector which reduces aggregate demand, and also the financial drain on the economy by the excess of imports over exports. This is the idea behind functional finance, which posits that government should be guided by the amount of slack in the real economy, never by any arbitrary debt limit or government debt-to-GDP ratio. Cutbacks to food inspection, water quality, marine safety or reductions in old age pensions can never be justified by arguing that the government is running out of funds, which is an operational falsehood, and which does not consider the unused capacity of the real economy.
Consider the Canadian penny.Â It has been discontinued because it costs 1.6 cents to produce.Â But the looney can be made for 12 cents, yielding a profit to the government when the coin is issued of 88 cents. Could the government create a $5 coin and increase the profit to $4.88?Â And what would prevent the Canadian government from stamping $1 trillion on a looney-type slug, depositing it into its account with the Bank of Canada, and deriving a profit of $999,999,999,999.88, which could be spent (but only up to real capacity to prevent inflation) without further resort to borrowing or taxation?
In his excellent book Money Whence it came, Where it went, John Kenneth Galbraith notes that when the origin of money is revealed, “the mind is repelled”, since money is created out of thin air. Galbraith notes that what is often considered sound and proper economics is very often what mirrors the needs of the respectably affluent. The fiscal Mother Hubbards running our country who maintain that government coffers are bare, and that debt is unsustainably high, do not want you to know that if a trillion dollar coin created by the Royal Mint were deposited into the government account, then the majority of Canadians, rather than the favoured financial few in the private sector, could enjoy the immense profits that come from the government’s monetary maneuvering.
When the federal government borrows from the private sector, it exchanges a government liability which pays interest (a bond) for an existing government liability (base money) which the government had previously issued into the economy.Â Except by self-imposed rules, the government’s ability to spend anew does not change.Â Government borrowing was necessary when the country was formerly on a gold standard and could run out of gold. But that era ended in 1971 when U.S. President Nixon terminated gold convertibility, leading to the present era of floating exchange rates. Now governments issue debt to match their deficits largely as a result of pressure placed on them by neoliberals to restrict their spending since rising public debt can be politically manipulated and demonized. But there is no operational necessity to issue debt in a fiat monetary system. High-value coin seigniorage is simply another way to demonstrate that government spending today is not constrained by any need to borrow from bond markets.
In summary, the federal government has the fiscal capacity to spend on infrastructure and services whatever is needed to improve our quality of life and to assure full employment. That we have 1.35 million Canadians still seeking jobs and also more cutbacks of government goods and services is an indication that those in charge either do not understand our monetary system or choose to favour the elites over the needs of the majority. A massive waste of our human capital, and much suffering by those deprived of income and meaningful work, can be attributed to financial illiteracy and/or negligence at the highest levels of political authority.
For those interested in a more detailed understanding of Modern Monetary Theory,Â a website with links to both introductory and advanced on-line material can be found at MMT Canada.
Wonderful piece, which I support entirely. However it made me think, as well, that the Harperites could achieve something similar — with significant political gains — by simply absorbing all provincial and territorial debt. This would have the double effect of entrenching and justifying Harper’s decentralization policies and downloading to the provinces, his reduction of national initiative and of the power of the central government, provide political cover from the charge of the balanced-budget fanatics that he has “run up the debt and deficit” (since he could say that it was good for Canada as the federal government, with its financial resources, is better placed to “relieve our children of this unavoidable debt overhang”), and thereafter justify further belt-tightening in Ottawa. Even another deep round of cuts would likely be more than compensated for by the additional fiscal space opened up for the provinces and territories, many of which would immediately lower taxes (which he could take credit for). So it would be a significant stimulative intervention which would support his ideological agenda while providing savers access to a greater supply of zero risk bonds, which would further stabilize Canada’s financial sector. Not my preferred option, but, maybe, better than a poke in the eye.
I agree entirely, but the trillion dollar question is… How far are we operating below capacity? The Bank of Canada estimate of capacity is undoubtedly far too limited, but what is a more credible estimate of the potential for expansionary policy via monetization of deficits before we do run into an inflation problem?
I would argue with Summers and Stiglitz that near zero interest rates mean we can now finance major public investments that would provide a significant boost to both short and long term GDP and would reduce long term public debt to GDP. That would generate a lot of additional tax revenue to finance programs and services.
In short, why should we not put the emphasis on fiscal policy?
Andrew, I agree that the emphasis should be on fiscal policy. Note that under the “trillion dollar coin” scenario, the new money created gets into the economy via federal spending i.e. fiscal operations.
As for your second paragraph, I also agree with your call for major public investments. The MMT view is that determining factor should be need and slack in the economy, rather than the current interest rate, since the government is not required to pay bond interest, as demonstrated under the coin scenario.
As for the public debt to GDP ratio, according to functional finance:
“Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, â€œprinting money,â€ etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability â€¦”
Also note the MMT view that taxes at the federal level do not fund anything (http://bilbo.economicoutlook.net/blog/?p=9281), but rather serve to reduce aggregate demand.
As for inflation, increased government spending could lead to this (as could increased private spending). MMT theorists deal with this by recommending a job guarantee program (JG) which hires off the bottom:
“The JG program is quite explicitly a â€œrightly distributedâ€ spending program in which government spending is directed precisely to those who want to work but cannot find a job. This places no direct pressure on wages and prices because the workers in the program were part of the â€œsurplusâ€ or â€œredundantâ€ labor force and are still available for private employers (at a small mark-up over the JG program wageâ€”the minimum wage).
For more detail on JG, see:
I think it’s a mistake to use the word “injected” to describe monetary creation. MMT has convincingly shown that all money in a fiat system (and I think all money) is created in the act of spending it. Total private (financial) savings in the economy equals total government (financial) debt–by definition. Paul Martin’s reduction of federal debt required an increase in private debt (or a massive trade surplus), for example, so here we are today. Etc.
So I get all the mechanics of the monetary system, but this trillion dollar coin is hypothetical in a way that doesn’t seem to work, because the government does not use notes or coins for fiscal spending. I understand how the coin can create that value out of thin air, but then how does the government spend it?
On the BoC balance sheet, notes and coins only have value in the hands of the private sector (they must be “in circulation”), they do not count towards the money supply when held by the BoC. So unless the government is actually physically spending this coin into the economy, and the spending is the precise value of the coin not requiring any change back, this hypothetical is not really a workable solution. More confusing is the fact the government NEVER spends in notes, banks trade reserves for notes to meet consumer demand for notes, the government does not and has never spent physical money into the economy. But let’s just say it did, so they spend the coin, one private sector entity’s bank account deposit goes up by a trillion, and now that bank is holding a trillion dollar coin reserve asset that earns no interest, while that new trillion dollar deposit does earn interest. I’m no fan of the banks, but even I’ll agree that’s not a burden they should bear.
Lastly, in terms of perception in the minds of the public, to enter circulation this trillion dollar coin would have to be “invested” in federal bonds so the BoC balance sheet balances, which would mean our federal debt would have to go up by a trillion dollars too. Not a big deal when you understand MMT, but a very big deal for anyone who doesn’t understand the nature of federal debt not needing repayment.
Switch “trillion dollar coin” with “trillion dollar bond” and then the government will be flush with the reserves needed to spend into the economy. But in coin form, the government is stuck with a coin it can’t really spend, or if it did, it would not be received well. Perhaps this hypothetical is to convince those unfamiliar with MMT of how simply the government can create needed money, but for anyone who understands the mechanics and accounting, this is simply muddying the waters and creating confusion.
This is not necessary and belies the whole point of MMT. Money is a measure of value and a measure of the storage of value. A trillion dollar coin would attract the thieves who would attempt to steal it. It is feeding into the thinking of the gold bugs that money is a commodity rather than a measuring tool.
awesome article, enjoyed it immensely…