On August 10, 2015, the Library of the Canadian Parliament released one of their In Brief research publications – How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects – which described the operational interactions between the Bank and the Canadian Treasury that facilitate government spending in some detail. It allows ordinary citizens to come to terms with some of the essential capacities of the currency-issuing Canadian government, which Modern Monetary Theory (MMT) highlights as a starting point towards achieving an understanding of how the monetary system operates. The description is in contradistinction to the way the mainstream macroeconomics text discuss this part of the economy. It leads to an analysis where we learn that the Bank of Canada holds a significant stock of government debt which it is allocated at auction time on an non-competitive basis. And that this capacity is unlimited and entirely within historical practice. In other words, we learn the operational way in which the government is free of financial constraints.
The Centre for European Reform, which must have little to do given the snail pace of so-called ‘reform’ that goes on in Europe, released a report over the weekend (June 23, 2018) – What’s the cost of Brexit so far? – which all the Europhile Remainers found filled their Tweet and other social media void for the day. I would have thought that they should have been happy, given England’s demolition of Panama in the soccer and 5-zip thrashing of Australia in the ODI cricket tournament. But no, they wanted to amplify the CER propaganda and makes themselves feel sad. Britain’s economy, apparently, is already 2.1 per cent smaller than it would have been had the vote to exit in June 2016 not won. And apparently, this has been a “hit to the public finances is now £23 billion per annum – or £440 million a week”. If you delve into the way the CER came up with these results you will quickly move on with a ho-hum and get back to the World Cup, which is infinitely more interesting (and that is saying something! read: I don’t enjoy soccer). The saying – Apples and Oranges – is relevant.
There was an article a few weeks ago purporting to show that public deficit expansion (increased net public spending) has never worked. I won’t link to the article because I would not want the Magazine to get any advertising revenue via my blog and also because, frankly, the article is one of those reinvent history efforts – along the lines of when the facts do not align with theory the way forward is to just make up some new facts and deny what actually happened. But one of the examples use to justify the claim “Keynesian deficit spending … over and over again … has not worked” is the Ireland and Denmark experience in the 1980s when these nations “reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well”. This example is often used these days to justify the claim that deficit spending does not promote growth and fiscal austerity does not damage growth. However, no ‘Keynesian’ theory I know suggests that cutting the fiscal deficit will ‘depress’ the economy. It all depends … and that is what this article (like all the others that use this example) fails to recognise or admit. It bears also on current events in Canada and Argentina, which are demonstrating some other interesting facets of macroeconomics.
It’s Friday again, my blog Lay Day, which means I fast track the blog entry in favour of other writing tasks. But one thing that is worth noting today (and I’m sort of catching up on recent events in my reading of them), is a speech that the Governor of the bank of Canada (its central bank) gave to the Empire Club of Canada in Toronto on December 8, 2015. The speech – Prudent Preparation: The Evolution of Unconventional Monetary Policies – was somewhat of a revelation given that it was coming from a central banker. Essentially, he admitted that monetary policy in the current situation was relatively ineffective and that expanding fiscal policy was the appropriate government strategy to address the cyclical downturn in non-government spending. He also disabused his audience of the notion that the current low growth environment was of a ‘structural’ nature. He said that the slow non-government spending growth was cyclical and reflected the reality of precarious private balance sheets and low confidence in the future. He channelled the writing of John Maynard Keynes, explicitly, which in itself, was a significant public recognition, especially by a central bank governor. So Canada has now elected a new government that is promised to increase the fiscal deficit to stimulate job creation and economic growth. It also has a central bank governor that implicitly is urging the government to use its fiscal policy capacities in that way. What a refreshing change!
The tale of two nations – two monetary systems – two continents – Canada and Portugal. It is reasonable to assume that when voters in so-called free democracies elect members to their parliaments who then freely coalesce across ‘party’ lines to form an absolute majority that they will be given the right to govern irrespective of the ideology they represent and the policies that they have put forward to the voters to win their approval. That seems to happen in Canada. It definitely doesn’t happen in Portugal. The Portuguese President dropped his so-called “bomba atómica” last week when he refused to endorse the coalition of parties that held the absolute majority of seats in the Assembly as a result of the recent national election. He indicated that he would not allow a government that would relax the fiscal austerity and consider exiting the Eurozone. His motivation was that financial markets had to remain appeased. It was an extraordinary intervention and will come back to haunt the nation given that the conservative austerity government will lose its authority as soon as it puts its platform to the new Parliament for endorsement (within the next 10 or so days). Then the nation is in chaos and the President will be compelled to accept the anti-austerity left coalition or something worse will happen. But, happily, in Canada, the election of the Liberal Party is a rejection of the obsession with fiscal surpluses – at least for now.
The December 2014 – Financial System Review – published by the Bank of Canada presents some chilling data, which tells me that the Canadian government’s embrace of neo-liberal orthodoxy is taking the nation down a dangerous path. The Review was obviously written before the latest global growth trends became apparent to the likes of the IMF who have now finally worked out that the policy structures in place which emphasise internal devaluation and fiscal austerity in most places are killing off growth. Canada is now very exposed because of its policy failures. The problem is that the political class in Canada is obsessed with recording fiscal surpluses and seem unable to understand that the only reason it has been able to reduce the fiscal deficit in the post-GFC period is because the economy has experienced a resources boom which is now over and the household sector incurred unsustainable levels of debt. Both sources of spending growth are now unlikely to continue and business investment is now contracting as the opportunities in the resources sector diminish. The Government and the main opposition party are heading into the national election boasting that each will achieve a fiscal surplus in the coming year. That is now unlikely because the downturn in the economic cycle (Canada is now in recession) will work against the aspirations of the politicians. They will end up with a fiscal deficit whether they like it or not. If they take the (stupid) neo-liberal path and fight against the private spending cycle, Canada will end up with what I call a ‘bad’ deficit driven by the automatic stabilisers – a rising deficit with rising unemployment and declining growth. Alternatively, it can take the sensible path and introduce new discretionary spending programs to allow a ‘good’ deficit to emerge where the public spending supports the moderation in private spending and unemployment does not rise. That is the preferred path but I doubt that either major party in Canada is mature enough and educated enough to take that action.