Politicians, pundits need to understand fiscal policy basics

Politicians, pundits need to understand fiscal policy basics
Posted on January 25, 2022 | Larry Kazdan | Written on January 24, 2022
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Hill Times

Re:  Massive federal deficit shows signs of shrinking, but economists urge policy review to avoid austerity measures

https://www.hilltimes.com/2022/01/07/massive-federal-deficit-shows-signs...

A household needs to save today to spend in the future, but this does not apply to the government of Canada which owns the Bank of Canada and issues the Canadian dollar. Central bankers will confirm that a currency-issuing country can never run out of its own money. 

If politician and pundits understood these basics, they would realize that practical spending limits are imposed not by federal debt levels but by the country's available real-world resources that can be mobilized for public benefit.

We need to distinguish the real limits from wrongheaded, self-imposed constraints ("austerity") that lead to sub-optimum results. While too much generalized spending can certainly spike inflation, a monetarily sovereign government can also spend too little and tolerate damaging levels of unemployment and an underfunded health care system, as is the case today.



 

Footnotes:

1. Where will the money come from?

    http://neweconomicperspectives.org/2014/04/reality-present-challenge-fut...

        “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. Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, 1939.

http://www.michaeljournal.org/appenE.htm

        Some of the most frank evidence on banking practices was given by Graham F. Towers, Governor of the Central Bank of Canada (from 1934 to 1955), before the Canadian Government's Committee on Banking and Commerce, in 1939. Its proceedings cover 850 pages. (Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa, J.O. Patenaude, I.S.O., Printer to the King's Most Excellent Majesty, 1939.) Most of the evidence quoted was the result of interrogation by Mr. “Gerry” McGeer, K.C., a former mayor of Vancouver, who clearly understood the essentials of central banking. Here are a few excerpts:

        Q. So far as war is concerned, to defend the integrity of the nation, there will be no difficulty in raising the means of financing, whatever those requirements may be?

        Mr. Towers: The limit of the possibilities depends on men and materials.

        Q. And where you have an abundance of men and materials, you have no difficulty, under our present banking system, in putting forth the medium of exchange that is necessary to put the men and materials to work in defence of the realm?

        Mr. Towers: That is right. (p. 649)

        ***

        Q. Would you admit that anything physically possible and desirable, can be made financially possible?

        Mr. Towers: Certainly. (p. 771)

3. Alan Greenspan, former U.S. Federal Reserve Chairman

  http://www.federalreserve.gov/boarddocs/speeches/1997/19970114.htm

        "...... monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies .......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."

4. Learn To Love Trillion-Dollar Deficits

https://www.nytimes.com/2020/06/09/opinion/us-deficit-coronavirus.html

    "Politics aside, the only economic constraints currency-issuing states face are inflation and the availability of labor and other material resources in the real economy.

    ***

    If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. So there are limits. However, the limits are not in our government’s ability to spend money or to sustain large deficits. What M.M.T. does is distinguish the real limits from wrongheaded, self-imposed constraints." 



5. How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects

Library of Parliament

https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublicatio...

    "..the Bank of Canada ..wholly owned by the federal government..records new and equal amounts on the asset and liability sides of its balance sheet, creating money through digital accounting entries. The federal government can then spend that newly created money in the Canadian economy..

    ***

    ..there is no external limit to the total amount of money the Bank of Canada may create through its asset purchases..

    ***

    ..money creation by the Bank of Canada through purchases of Government of Canada securities is essentially an internal government process; this means that external factors, such as financial market dysfunction, cannot cause the federal government to run out of money."

About The Author

Larry Kazdan's picture

Larry Kazdan has undergraduate degrees in history and sociology, is a retired Chartered Professional Accountant and runs the website
Modern Monetary Theory in Canada.... More