Gold Standard is Gone
Re: A farewell to gold: Canada winds down its holdings, IAN McGUGAN - MINING REPORTER, Thursday, Mar. 03,
Selling central bank gold is no longer an issue, since the world has been off the gold standard since 1971, and most major currencies float. But the implications of that break have yet to sink in. A fiat currency means our federal government can never run out of its own money - the Canadian dollar. It means that Trudeau can run deficits as high as needed to renew infrastructure, provide vital services, and create jobs for those who want them. There is no limit on what the government can spend; only a limit to real resources available in Canada, and the consequent inflation if we try to reach beyond.
A new fiscal anchor will have to relate to full employment and will require targeted expenditures to prevent inflation from material bottlenecks. But balancing budgets over the business cycle or sticking to arbitrary debt-to-GDP ratios are irrelevant leftovers of a bygone era when the unemployed had to bear the the brunt of fixing international exchange rates.
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. L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College, NYL.
"How can a country’s financial condition remain sound and stable when the state can issue money whenever needed? The danger of spending too much money is inflation; there might also be an impact on exchange rates. The solution to the first problem is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks. The solution to the second is to float the currency."
Larry Kazdan CPA, CGA
Modern Monetary Theory in Canada