Federal fiscal firepower

Federal fiscal firepower
Posted on January 5, 2023 | Larry Kazdan | Written on December 12, 2022
Letter type:


The Province

Re:  Liberals did not show fiscal restraint in fall update: parliamentary budget officer

The Canadian Press, Nov 28, 2022

Our federal government owns a central bank, issues the Canadian dollar, and has been able to sustain the economy during times of world war, financial crisis, and pandemic disruption. The government's fiscal firepower derives from ownership of the Bank of Canada which "has the power and operational ability to create Canadian-dollar liquidity in unlimited amounts at any time."


Today, Canada needs to renew its health and educational infrastructure, transition to new energies, and provide the next generation with jobs and training. None of these goals will be achieved if government practices unwarranted financial restraint based on a faulty metaphor.

"Keeping one's powder dry" may be applicable to a seventeenth century musketeer, but is inapplicable to a modern monetarily sovereign government that can never run out of electronic dollars.  


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


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..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


"..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. Fiscal prudes are fretting about the wrong issues


"The left, the right and people who should know better, like the PBO, are wrong because they cannot escape thinking of the federal government as if it were a household whose credit card was maxed out.


What they all seem to forget is that the federal government has the power to create new money. In fact, it effectively creates new money every time it spends."

5. William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia


"Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be whatever it is – a relatively uninteresting and irrelevant statistical artifact."

6.  Pavlina R. Tcherneva, Assistant Professor, Franklin and Marshall College


Myth #1: The government should balance its books like a private household.


A government is the issuer of the currency. The household, on the other hand, is the user.


Government is constrained only by the inflation it can create by over-spending, but its ability to spend is numerically unlimited. Households are constrained by their ability to get dollars from some form income and from borrowing, and both of those have real limits.


7. 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. 

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual."

8. John Maynard Keynes,  (1883-1946) British economist


"I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself."




"As the nation’s central bank, the Bank is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity in unlimited amounts at any time. "

10. Learn To Love Trillion-Dollar Deficits


"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." 


11. Abba Lerner:  Functional Finance


"The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call 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, “printing money,” 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.."


12. Krugman and Galbraith on Deficits


"MMT suggests that the appropriate level of deficit expenditure is that level just sufficient to sustain full-employment output given private-sector net saving intentions.

Loosely speaking, MMT says that if deficit expenditure falls short of this level, there will be a demand gap and unemployment, whereas if it exceeds this level, there will be demand-pull inflation. More accurately, the theory also recognizes that there can be inflation before this point due to bottlenecks or supply-side factors, which in large part is why Modern Monetary Theorists call for a job guarantee as a means of achieving full employment alongside price stability. The theory suggests that a buffer stock of jobs (provided through a job-guarantee program) will be more effective than the buffer stock of unemployed workers that is maintained under the current NAIRU approach to inflation control. The job guarantee would function as an automatic stabilizer, with employment in the program varying countercyclically."




Modern Monetary Theory in Canada



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Larry Kazdan has undergraduate degrees in history and sociology, is a retired Chartered Professional Accountant and runs the website
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