The conventional wisdom is that whichever party forms government will not have much financial breathing room, especially with the collapse of world oil prices. In fact, while there are ideological and eventual real resource restraints, there is no financial constraint for a federal government that owns a central bank issuing a floating, non-convertible fiat currency such as the Canadian dollar.
Would anyone dispute that the money supply fluctuates? Two entities provide the monies that Canadians generally use to settle transactions. The federal government creates high-powered money in the form of coins, bank notes and bank reserves (deposits held by commercial banks at the central bank). Commercial banks leverage these reserves in the form of bank deposits (promises to pay government money) when loans are made to businesses and individuals. The coins, bank notes and commercial bank deposits constitute the money in circulation whose everyday volume changes.
The federal government can always make Canadian dollar payments simply by creating more high-powered money without paying any interest to private banks. The only practical limit to new money is the resource capability of the economy, beyond which lies inflation. However, since Canada has 1.3 million unemployed people and a large output gap, inflation risk is currently very low. So nothing should stop the federal government from spending on vital infrastructure renewal and targeted large-scale job creation, no matter the quantum of funds required.
Media and investigative reporters must reveal these facts to the Canadian public because our financial and economic elites definitely will not.
1. Where will the money come from?
“Whatever is technically feasible is financially possible. To the perpetual question ‘Where is the money coming from?’ the answer is now clear. It comes from the only two institutions we permit to create money funds: the treasury of the sovereign government and commercial banks. And the rate at which we permit either to create funds is pretty much a matter of public policy.”
…….. there is no theoretical limit to the ability to create funding, so “the only question is should they be made available.” Finance is not a scarce resource. The state cannot run out of its own money (currency).
2. Alan Greenspan, U.S. Federal Reserve Chairman, 1997
“[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
3. What is Modern Monetary Theory, or “MMT”?
The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.
Larry Kazdan CGA,