Debt-to-GDP ratio is irrelevant

Debt-to-GDP ratio is irrelevant
Posted on March 3, 2016 | Larry Kazdan | Written on March 2, 2016
Letter type:


Troy Media

Re: The federal government's short-lived fiscal anchor, Feb. 26

Unlike households, businesses or provinces, the federal government is a currency issuer, owns a central bank, and can spend without first having to get funds from elsewhere. Consequently if there are real resources unused by the private sector, the federal government always has the fiscal capacity to employ them for public purposes such as the provision of services, infrastructure renewal, and achieving full employment.

The belief that government must restrict its spending to some arbitrary number or ratio is a holdover from the gold standard era when governments could run out of bullion and fail to pay their debts. Today the myth lingers on, fomented by those ideologically inclined to restrict government activity.

Trudeau's real failure was promising to balance his fourth year budget and to decrease the debt-to-GDP ratio. These are conventional measures which have no justification other than outdated dogma, and which will compromise his ambitious agenda to deliver social justice within a productive economy.


1. Our Sovereign Fiat Currency System and Our Inability to Involuntarily Run out of Money

"In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt."

2. Crikey, why is it is honourable to deliberately increase unemployment? Australian economist William Mitchell

> > "The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency. > > Under those circumstances the government can always service its nominal liabilities and the public debt ratio is an irrelevant focus of attention. > > At any time of its choosing, the government could cease to issue public debt and continue deficit spending at will. It might have to change some regulations and statutes which have been put in place to give the impression that the debt issuance is funding its net spending, but that would be merely legislative activity. > > Remember the government just borrows back what it spent in deficit in a previous period. Bond sales draw on private saving which is just a reflection of past deficits."

> Larry Kazdan CPA, CGA


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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