Tag Archives: the Bank of Canada

Canada Debt Becoming Unmanageable Economists Warn

With the Canadian government’s high debt-to-GDP ratios, such as a ratio of debt to nominal GDP sitting at 68 percent in March 2023, economists warn that government debt could become unsustainably high if Ottawa fails to reduce spending, increase productivity, and re-establish business confidence.

“We’re not growing our income per capita, which means that we’re not going to get the tax revenues that we need, plus we’re getting a lot of people retiring. So the situation could end up becoming quite unmanageable if we keep our pace that we’re going,” said Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy.

The federal government has run back-to-back budget deficits since the 2008 financial recession, with government spending spiking during the COVID-19 pandemic. As a result, Canada’s debt as a percentage of nominal GDP rose from around 51 percent in 2009 to 74 percent by 2021, for example. Nominal refers to the current value for the particular year without taking inflation into account.

The two previous federal budgets have attempted to lower government spending, but the federal government will still post a $40 billion deficit in 2023–24, which they project will shrink to a $20 billion deficit by 2028–29.

The Liberal government’s response to criticism by the opposition that Canada’s debt could lead the country into a financial crisis has been that Canada has among the best debt-to-GDP ratios in the G7.

According to Mr. Mintz, while Canada’s debt situation is not as bad as it once was, it doesn’t mean that it may not impact Canada’s prosperity prospects.

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Mr. Mintz points out that Canada’s debt situation is not nearly as bad as in 1996. The government’s ratio of debt to nominal GDP ratio reached 83 percent that year.

Mr. Mintz also noted that Canada continues to have a triple-A credit rating according to the world’s leading credit agencies, meaning the country’s debt is not yet seen as problematic.

“We’re still viewed as having a much better credit line compared to a number of other countries. … But at some point, the credit agencies might look at that gross debt number and start asking the question, ‘Is it starting to become unsustainable?’” he said.

Lower Productivity Hampering Debt Payments

The federal government’s ability to pay off its debt could be hampered by low productivity, according to Steve Ambler, professor emeritus of economics at Université du Québec à Montréal.

“The thing that worries me in terms of federal government debt is we are currently in a period of extremely low productivity growth and low overall growth,” he said.

In March, the Bank of Canada’s senior deputy governor Carolyn Rogers warned that Canada’s poor productivity had reached emergency levels.

Although Statistics Canada said the country’s labour productivity showed a small gain at the end of 2023, that came after six consecutive quarters of productivity decline.

The right honourable Jean Chrétien.

Mr. Ambler said an appropriate way to lower the debt-to-GDP ratio is to keep government spending from increasing while also raising productivity to increase tax revenues. He said this was the strategy of Prime Minister Jean Chrétien, whose Liberal government established a budget surplus in three years by growing the economy and keeping government spending stagnant.

To lower Canada’s debt-to-GDP ratio, Mr. Ambler said the government should focus on increasing worker productivity, allowing its resource sector to grow, and easing back on discretionary spending.

He also cited a November 2023 C.D. Howe paper showing that business investment per worker in Canada has shrunk relative to the United States since 2015. Investments such as better tools for workers would increase productivity, while productivity growth would in turn create opportunities and competitive threats that spur businesses to invest, the paper said.

“Re-establishing business confidence would be almost the number one priority, especially in the resource sector,” Mr. Ambler said, adding that a future government might also be wise to lower the feds’ “wildly extravagant subsidy programs” for the electric vehicle (EV) sector.

The Liberal government has given tens of billions of dollars in subsidies for EV manufacturing projects in Canada since 2020, saying the factories will eventually create thousands of new jobs.

‘No Cushion’ to Mitigate Debt Issue

Joseph Barbuto, director of research at the Economic Longwave Research Group, has a more pessimistic view of Canada’s debt. He says that while federal debt is at levels similar to the 1990s, the crisis will be “larger” because the government does not have the “fiscal room to mitigate the downturn.”

Mr. Barbuto said that while the Canadian government was able to help alleviate its debt issues in the 1930s and 1990s by lowering its interest rates, it does not have that same luxury in 2024. The Bank of Canada lowered its key policy rate from 1.25 percent to 0.25 percent in 2020, and was forced to raise it to 5 percent by 2023 in response to rising inflation.

“There’s no interest rate cushion on the other side. Interest rates can only fall back to zero,” Mr. Barbuto said, noting that higher interest rates make it more difficult for governments to service their debt.

“The problem with the monetary system is there’s no fiscal discipline that is pushed on governments, unlike [individuals] or corporations,” he said.

“There will be a point where because of the accumulated interest with rising interest rates, eventually it’s going to overwhelm the government and then people will not lend the government any kind of capital.”

Mr. Barbuto also expressed concern over Canada’s private debt-to-GDP ratio. Private debt refers to debt owed by private, non-financial entities such as businesses and households, as opposed to public debt owed by governments and banks. Canada’s ratio of private debt to nominal GDP sat at 217 percent in December 2023 compared to 124 percent in 1995.

Mr. Barbuto said Canada’s private debt-to-GDP ratio is higher than that of Japan’s in the 1990s, and pointed out that the Japanese economy had stagnated after the country’s asset price bubble burst in 1992.

The research director believes the Canadian economy will eventually see a debt crisis and collapse in real estate that will result in austerity measures, a shrinkage in the size of government, and the “creative destruction” of the old political and economic system. He said this would be the continuation of an economic cycle that has repeatedly happened throughout history.

“[It’s] inevitable and necessary. A debt detox or deleveraging is the same thing as a drug detox. Nobody likes it, … but it’s a necessary part of the cycle for it then to go back up,” he said.

For the Silo, Matthew Horwood/Epoch Times.

Canadian Money And How Select Banks Create It

Poof!My book, Money: Whence It Came, Where It Went, tells us that “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.

 The process by which banks create money is so simple the mind is repelled.”

Graham Towers, the first Governor of the Bank of Canada, explained the process by which banks create money: “The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money.

John Kenneth Galbraith- mystic or curmudgeon? image: poorwilliam.net
John Kenneth Galbraith- mystic or curmudgeon? image: poorwilliam.net

Broadly speaking, all new money comes out of a bank in the form of loans. As loans are debts, then under the present system all money is debt.”

Money created by banks and other financial institutions is interest-bearing debt. They create the principal and expect their money to be returned with interest. We can’t create interest the way they create the principal, so we must obtain it from some other money that was also created as interest-bearing debt. There is never enough of this money in existence at any time to pay off all of our collective debt. More interest-bearing money must continually be borrowed into existence.

In 2013, not so long ago, the ratio of household debt in Canada, including mortgages and consumer debt, was more than 160% of disposable income after mandatory deductions and income taxes and this statistic will keep growing with each year. The federal debt in Canada then was more than $600 billion, and interest payments on the debt in 2011-2012 cost $31 billion dollars or 11 cents of every tax dollar. Now in 2019, the federal debt has grown to $768 billion.

The five largest banks in Canada reported more than $27 billion in combined net income for the 2012 fiscal year.

Canada’s central bank, the Bank of Canada, claims to “regulate credit and currency in the best interests of the economic life of the nation”, and to mitigate “fluctuations in the general level of production, trade, prices and employment”, yet the purchasing power of the Canadian dollar has dropped steadily since the Bank of Canada was founded in 1934. As a store of value the dollar has not performed very well. It should also be noted that Canadian banknotes ceased to be redeemable for gold in 1929.

Bank of Canada notes are fiat money that the federal government declares to be legal tender, and the Bank has a monopoly on the issuance of bank notes. These notes are supplied to financial institutions to satisfy public demand. Chartered banks in Canada are no longer required to maintain statutory cash reserves for the loans they make. According to some estimates, Bank of Canada notes add up to less than 2% of the total amount of loans made by the banks and other financial institutions.

Once upon a time, Canada used real paper bills for one and two dollars. The move away from paper currency is interesting. Is there a concerted effort to 'do away' with physical money? (The recent withdrawal of the penny being an example.) The penny was costing more to manufacture and distribute than its actual physical value...that's partly because it wasn't made out of pure copper- hence it became "expensive". Will the nickel be the next coin to die? Is it even made out of nickel anymore? Check back in ten years. CP

Money created as interest-bearing debt is scarce from the moment it is created, which curtails its effectiveness as a medium of exchange. Every dollar comes into existence as interest-bearing debt, and the overall cost of interest is reflected in the price of everything we buy. This is not to suggest that interest should be banned or that interest rates need to be controlled by a central bank. Anyone should be free to lend his or her savings at a mutually agreeable rate. Equity financing, with shared risks and rewards, is another option.

What is being suggested here is that we ask some fundamental questions about the monetary system and the function of money.

 Are you able to use your goods, services, labour, knowledge, skills and abilities to obtain enough money to purchase other goods and services?

Are you able to obtain credit when you need it and are also willing and able to pay it back? Are you able to negotiate an agreeable price for credit and loans? Are you on a treadmill of debt, no matter how hard you work, how many expenses you cut, or how hard you try to save?

Are your savings secure and retaining their value?

Money is basically credit, like an IOU. Our ability to exchange our goods and services should not be hampered by the price of credit or an inadequate supply of money. Anything physically possible is financially possible. We can extend credit to anyone who wants to purchase anything from us and who is willing and able to provide us with a mutually agreeable amount of his or her goods and services. In essence, goods and services pay for other goods and services.

A mutual credit clearing system is an alternative method that can be used to facilitate reciprocal exchange.

Members of a credit clearing association have a trading account where an ongoing record is kept of their sales and purchases, their credits and debits. Every transaction includes a credit entry for one member and a debit entry for another, but interest does not have to be paid when an account temporarily has more debits than credits. Credit is extended to members from the rest of the traders in the group, and the major benefit of this system is that members can obtain interest-free credit. In the long term every member is expected to provide as much as they obtain. It all balances out within the community of traders. It’s all a simple matter of bookkeeping.

Direct credit clearing systems can be operated on a fee-for-service basis to cover expenses and to compensate those who provide this service. Nobody is ever forced to join any trading group and members are also free to leave when their debts are clear. Anyone can start their own credit clearing service, which allows competition between associations based on quality and price of service. Associations can also cooperate with each other to increase the number of potential trading partners and broaden the range of goods and services that are available.

Credit does not have to be scarce or expensive. We can control our own credit and allocate it as we choose. Are your best interests being served by the money you use?   For The Silo, John Kenneth Galbraith.

Regarding Money And Government In Business Positions

LetterstotheSilo Dear Silo, I kept my Silo printed back issues and I just re-read the January-February 2013  issue of The Silo. I noticed that a few of the articles involve the issue of consent (biogas facility, mega-quarry, dads attending births) and choice (media publications, GMO foods, liquor sales). Freedom of choice and voluntary consent are basic human liberties that we often take for granted.

In the old printed article, Peter Dash questions the viability of government institutions to meet general needs, and MPP Toby Barrett says it’s high time the Ontario government takes its nose out of business. As the one image on page 13 puts it: “Government didn’t build my business, I did”. Government does not produce. It is usually an expensive and inefficient provider of services. Liquor sales should definitely be opened up to private competition to enable consumer choice. All government services, including health care, education, infrastructure, pensions, security and defense, should compete in a free market. Why should any group of individuals (including “government”) have an imposed monopoly on the provision of any services?

Goods and services should compete in a free market based on price, quality and consumer demand. Any individual should be free to do anything at their own risk and expense that does not adversely affect anyone else, and to negotiate an agreeable price for the purchase of any goods or services that they actually want and use.

monopolypoortax

Money and power are central to almost every issue. We do not have political freedom or economic freedom because we don’t have – or don’t exercise – monetary freedom. The banks, in collusion with government, essentially control money and credit by controlling the creation, allocation and price of the medium of exchange, which essentially controls the production of goods and provision of services. Money created as interest-bearing debt is always in scarce supply. Inflation is a hidden tax. We are essentially helpless to prevent anything decided for us by the people in government and their friends in big business because we do not control money and credit.

A necessary step, therefore, is to take control of our own credit and allocate it wisely, rather than doing what the controllers of money demand of us. Products and services, including currencies and alternative exchange systems, should compete with each other in a free market. Thomas H. Greco’s recent book, The End of Money and the Future of Civilization, provides an excellent explanation of the nature and function of money and offers a practical alternative to the present system. The Money Fix, a documentary by Alan Rosenblith, also explains the creation of money and its role in the economy. You might find both of these sources informative and interesting.

Sincerely,
K (Name withheld due to request)

“Banks create money. That is what they are there for… The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money. Broadly speaking, all new money comes out of a bank in the form of loans. As loans are debts, then under the present system all money is debt.”
Graham Towers, Governor of the Bank of Canada from 1935-1955

Quotes To Consider- 

“Money is created when banks lend it into existence. When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn’t create the second $100,000 – the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.”
Bernard Lietaer, economist and author

“By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised. … The essential notion of a capitalist society is voluntary cooperation, voluntary exchange. The essential notion of a socialist society is force.”
Milton Friedman

“What is the basic, the essential, the crucial principle that differentiates freedom from slavery? It is the principle of voluntary action versus physical coercion or compulsion.”
Ayn Rand

“For in reason, all government without the consent of the governed is slavery.”
Jonathan Swift

“Give to every other human being every right that you claim for yourself – that is my doctrine.”
Thomas Paine