Oh Canada! Imposing Austerity on the World’s Most Resource-rich Country

WEB OF DEBT BLOG

Even the world’s most resource-rich country has now been caught in the debt trap.  Its once-proud government programs are being subjected to radical budget cuts—cuts that could have been avoided if the government had not quit borrowing from its own central bank in the 1970s. 

View original post 1,194 more words

3 thoughts on “Oh Canada! Imposing Austerity on the World’s Most Resource-rich Country

  1. Ellen Brown is wrong. The Bank of Canada has never stopped lending to the government of Canada. Total lending to Canada is shown in the weekly financial statistics (page 3) on the Bank of Canada website and is about $88 billion as of the end of February. (Net of about $66 billion after government deposits of $22 billion.)

    • Agreed, it just dwindled, didn’t stop. Here’s what I wrote in The Public Bank Solution (2013) (with endnotes):

      From 1939 to 1974, Canada financed these projects largely through its government-owned central bank, without sparking price inflation or
      driving up the federal debt. (See Figure 9 below.) From 1935 to 1939, the Bank of Canada issued most of the nation’s credit, and it issued 62 percent of the credit during the last years of World War II. Until the mid-1970s, the Canadian government continued to create enough new state money to monetize 20 percent to 30 percent of the national deficit. It advanced money at low interest, forcing commercial banks to keep interest rates low in order to compete.326
      This four-decade run of prosperity came to an end, however,
      when Canada abandoned its successful experiment in self-funding
      and began borrowing heavily on the private market. This change in
      policies occurred when the Basel Committee was established by the
      central-bank Governors of the Group of Ten countries of the Bank
      for International Settlements in 1974, and Canada joined it.327 A key
      objective of the Committee was and is to maintain “monetary and
      financial stability.” To achieve that goal, the Committee discouraged
      governments from borrowing from their own central banks interest-
      free and encouraged them to borrow instead from private creditors,
      including large international banks.328
      The Canadian Auditor General is the accountant who reviews the government’s books. In his 1993 annual report he acknowledged that most of the government’s debt consisted of interest charges:
      [The] cost of borrowing and its compounding effect have
      a significant impact on Canada’s annual deficits. From
      Confederation up to 1991-92, the federal government
      accumulated a net debt of $423 billion. Of this, $37 billion
      represents the accumulated shortfall in meeting the cost of
      government programs since Confederation. The remainder,
      $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.334
      Thus in 1993, 91 percent of the debt consisted of six interest charges.
      Without those charges, the government would have had a debt of only
      C$37 billion—very low and sustainable, just as it was before 1974.
      By 2012, the government had paid C$1 trillion in interest—twice
      its national debt.335 Interest on the debt is now the government’s
      single largest budget expenditure—larger than health care, senior entitlements or national defense.336
      Today, the Bank of Canada monetizes only 7.5 percent of the state deficit. The Canadian money supply increases by C$22 billion annually, but the Bank of Canada creates less than 2 percent of that increase. If the Canadian government had continued to fund itself as it had before the mid-1970s, estimates are that Canada would now be operating with a surplus of C$13 billion.337

      • I would be interested in seeing the original source for some of these numbers, because they are quite different from what I have seen published by sources including the Bank of Canada, Statistics Canada, and Finance Canada. For example, Statistics Canada series 385-0010 shows federal debt of $3,686 million on March 31, 1939, of which series 176-0010 shows $160 million or 4.34 per cent was owed to the Bank of Canada. This grew to $1,746 million of $14,913 million (11.71%) on March 31 1945 and $1,991 million of $17,893 million on March 31 1946. (11.13%) This is quite a bit less than most of the credit or 62% of the credit.
        This number rose gradually to $8,160 million of $49,057 million in March 1974, before declining slightly to 17,245 million of $110,610 million in March 1980.
        The percentage share fell drastically over the next decade, to 5.74% or $23,319 million of $406,606 million in 1990, That is due to the much higher government deficits and borrowing, not because the Bank of Canada stopped buying government bonds. The Bank of Canada buys government bonds with its available reserves. It has never targeted holding a certain percentage of government debt, instead it creates money with which it buys government debt with other targets in mind, such as money supply and more recently inflation.
        These numbers have grown to $52,765 million of $594,390 in 2008 (8.88%) and $81,286 million of $667,000 in 2013. (12.19%) (Changes in government accounting mean the 2013 number is not directly comparable to numbers from 2008 and previous years.)
        The fact is that the Bank of Canada could not have financed more than the 11-16% of federal debt it has historically, or even the 5-10 percent it has since the eighties, without printing significantly more money. While there may have been benefits to doing this, one cost would have been much higher inflation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.