Finance Minister Bill Morneau on the Dangers of Bank of Canada Funding
A guest blog post from Larry Kazdan, publisher of the “Modern Monetary Theory in Canada” blog: https://mmtincanada.jimdo.com/contact/.
Under legislation that came into effect in December 2015, e-petitions that garner at least 500 on-line signatures and that are sponsored by an MP can be tabled in Parliament. The federal government is then required to provide a written response, also posted online, within 45 days.
Below is an e-petition regarding the Bank of Canada and the reply provided by Finance Minister Bill Morneau. Morneau maintains that low-cost financing of public infrastructure through the BoC would be inflationary, but apparently his own plan – an Infrastructure Bank that would reward investors with 7 – 9% returns and whose costs would be passed on to consumers through tolls, fees, or taxes – does not seem to cause him the same concerns.
The contentions of the finance minister on a number of issues should be challenged. Below is my open letter addressed to him and sent to the media. Please add your own thoughts in the comments section below and be sure to forward them directly to Mr. Morneau who can be reached at House of Commons, Ottawa, ON K1A 0A6 (no postage required) and email at Bill.Morneau@parl.gc.ca.
Petition to the Government of Canada
- Since 1974 Canadians have been paying billions in needless interest to international financiers called the Bank of International Settlements;
- Before this, the publicly-owned Bank of Canada had a mandate and practice of lending interest-free money to federal, provincial, and municipal governments for infrastructure and healthcare spending;
- Since this switch Canadian taxpayers have been needlessly paying anywhere from $20 billion to $60 billion a year in compounded interest; and
- This is money that could have been used to better the lives of every single Canadian, and instead we have been needlessly paying large sums of money with no gain and massive losses for Canada.
We, the undersigned, citizens of Canada, call upon the Government of Canada to restore the use of the Bank of Canada to its original purpose, by exercising its public statutory duty and responsibility. That purpose includes making interest free loans to the municipal, provincial, and federal governments for ‘human capital’ expenditures (education, health, other social services) and/or infrastructure expenditures.
DATE: NOVEMBER 2, 2016
PRINT NAME OF SIGNATORY: THE HONOURABLE BILL MORNEAU
SUBJECT: BANK OF CANADA
Government of Canada marketable debt, which includes treasury bills and marketable bonds, is distributed through competitive auctions to Government Securities Distributors, a group of banks and investment dealers in the Canadian market. These Government Securities Distributors then resell securities bought at auctions to their wholesale and retail clients in private sector markets. Ultimately, Government of Canada marketable securities are mostly held by Canadians, and can be found in retail and institutional investment portfolios, insurance and pension funds, as well as a variety of other investment vehicles. For more information, you may review the Debt Management Report 2014-2015 on the Department of Finance Canada website at http: www.fin.gc.ca/dtman/2014-2015/dmr-rgd15-eng.asp
It is sometimes suggested that the Government of Canada should fund part or all of its debt by borrowing from the Bank of Canada at a low or zero interest rate, rather than by borrowing in private sector markets.
This approach would require the Bank of Canada to either borrow the funds that it loaned to the Government, or create new Canadian currency.
If the Bank of Canada borrowed the funds for the loan, it would have to pay whatever interest rates that prevailed in private sector markets to obtain the funds. Accordingly, it could not afford to re-lend the funds to the Government at lower or zero interest rate.
Alternatively, the Bank of Canada would have to create new Canadian currency, which could lead to adverse economic conditions and costs. The experience of many nations has demonstrated that relying on domestic currency creation to finance government expenditures results in excessive inflation, erodes the value of a country’s currency and often leads to a misallocation of scarce resources.
Since 1991, the Government and the Bank of Canada have jointly agreed that the central objective of monetary policy should be for the Bank of Canada to target an inflation rate of 2 percent. This is the best contribution monetary policy can make to solid economic performance.
Canada’s policy of low, stable and predictable inflation has served Canadians extremely well. This policy has contributed to creating a more stable economic environment relative to that of previous decades and has allowed households and businesses to make better long-term financial plans.
Open letter to Finance Minister Bill Morneau
In your official response to petition 421-00858, you claim that public financing of infrastructure through Bank of Canada low-cost loans would be inflationary.
But does real-world evidence support your contention when applied to advanced countries with large unused productive capacities and that issue their own currencies, such as Japan or Canada?
According to Australian economist William Mitchell, “…the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with (neo-liberal) economic theories. It was a mind-boggling failure to explain reality.”
The New Economics Foundation recently published “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75”. The report concludes “The 1935?70 period saw the Canadian economy recover quickly from the Great Depression, weather the Second World War, make a rapid transition from war to peace, and then enjoy a 25-year period of relatively stable and high growth with rapid industrialization….. The Bank of Canada played a key supporting role by directly and indirectly financing government debt.”
Under your proposed Infrastructure Bank, investors are expecting a minimum return of 7 – 9%, and it is clear that low and middle class Canadians will bear the brunt of higher costs through tolls, user fees and increased taxes. That is inflationary.
Canadians deserve a finance minister who will challenge economic myths propagated by financial elites who claim no alternatives exist to their high-cost lending.
Mr. Morneau, whose interests will you serve?
1. William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia
“When QE was first introduced in Japan in the 1990s, mainstream economists rushed to predict that the massive expansion in central bank reserves would be inflationary.
Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.
Nothing like that happened.
Neo-liberal economists wrote off their mistakes by claiming that Japan is ‘so strange’ that it is a ‘special case’ and therefore not generally applicable.
Their ad hoc defense was convenient because the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with their economic theories.
It was a mind-boggling failure to explain reality.”
2. Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75
As shown in figure 1, between 20–25% of Canadian public debt was financed and held by the central bank and government from the end of World War II up to the early 1980s but inflation was below 5% right up until the early 1970s…………..
….in the period 1945–70….Federal government capital expenditure funded highways, airports, bridges,schools, hospitals, and other physical infrastructure.
During the period 1960?75, the federal government also introduced virtually all of the major policy innovations that make up Canada’s system of social programs: Canada-wide Medicare, universal pensions, the modern unemployment insurance system, and cost-sharing with the
provinces for higher education and welfare.
For the majority of the period, the Bank was not independent of the government andits primary objective was full employment and growth rather than price stabilization.
3. Economist John Hotson
“When the Bank of Canada encourages the Canadian government, provinces, and municipalities to borrow in New York and Tokyo it is a betrayal of Canada. Where should they borrow when new money is needed for government spending? They should borrow at the government owned Bank of Canada, paying near zero interest rates-just sufficient to cover the Bank’s running expenses.”