Private vs Public Debt

Private vs Public Debt
Posted on March 5, 2016 | Larry Kazdan | Written on March 4, 2016
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Publisher

Publisher:
Financial Post

Re: How profligate borrowing became Canada’s national pastime, Philip Cross, March 1, 2016

Ever increasing private debt is unsustainable as was demonstrated during the 2008 financial crisis when financial institutions had to be bailed out by central banks. But national debts are different. Great Britain has had public debts for over 300 years, the U.S. for over 180 years, and total debt issued by governments typically increases with growth in their economies.

Nor can monetarily sovereign countries (unlike Greece in the Eurozone) be forced to default. According to former U.S. Federal Reserve Chairman, Alan Greenspan, "[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." Whether national bonds are owned domestically or by foreigners is irrelevant, since interest and principal in the national denomination can always be paid.

So while Philip Cross is correct to worry about increased household debt, his anxiety about the federal government is misguided. A household does not own a central bank whereas the Canadian government does. The Bank of Canada can always fund any federal deficits needed to build infrastructure, provide services, and put 1.3 million Canadians back to work.

Footnotes:

1 Alan Greenspan, former U.S. Federal Reserve Chairman, 1997

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

"[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."

2. William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE),
University of Newcastle, NSW, Australia
http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory/

You’ll hear many politicians speak of “paying down the national debt.” What do you make of this refrain?

"The historical reality is that national governments very rarely run down their overall stock of debt. A debt instrument is a commitment by the national government to pay a certain principal at a specified time, and in the meantime pay some yield or interest on that debt. So governments pay back debt in that individualized context, but overall, in a macroeconomic sense, governments generally don’t run down their overall stock of debt.

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The outstanding public debt is really just an expression of the accumulated budget deficits that have been run in the past. These budget deficits have added financial assets to the private sector, providing the demand for goods and services that have allowed us to maintain income growth. And that income growth has allowed us to save and accumulate financial assets at a far greater rate than we would have been able to without the deficits.

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.....there is no reason to obsess over the level of outstanding public debt. The government can always honor its debt; it can never go bankrupt. There’s no question that the debt obligations will be met. There’s no risk."

Larry Kazdan CPA, CGA,

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Modern Monetary Theory in Canada
http://mmtincanada.jimdo.com/

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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