“Catastrophic consequences” for Bank of Canada to continue raising government debt without repayment: Investigation


The idea that the federal government can rely on the Bank of Canada to keep printing money to maintain debt, also known as Modern Monetary Theory (MMT), poses a great risk to the Canadian economy. (Pdf) Published on May 18th..

“Modern Monetary Theory is a dream. If the federal government and the Bank of Canada follow this path, it could have a huge impact on the Canadian economy,” said Fraser Institute’s resident scholar and author of the study. Stephen Gloverman said. An introductory book on modern monetary theory. “

According to the essence of MMT GlovermanThere are no financial constraints on government spending unless the country is the sovereign issuer of a currency and ties its currency value to another currency.

It also defaults to debt issued in sovereign currency, as governments that issue their own currencies, such as Canada and the United States, have the authority to print as much currency as needed to repay public debt. It means you can’t. Studies show that supporters support it.

“Therefore, if increasing government spending to pursue various economic and social goals is a good idea and that is MMTer’s basic belief, then MMT will government by removing the” need “. A policy initiative to drive increased spending. For taxes and governments to compete for private capital by offering competitive interest rates on government debt in the capital markets, “the author wrote.

However, Globerman claims that there are “catastrophic consequences” when the MMT policy model is implemented. Historical records show that the adoption of such a framework can quickly lead to inflation, and sometimes even hyperinflation, which can hurt the domestic economy. The study cites examples from Greece and Latin America, resulting in a runaway inflation and a significant reduction in people’s living standards.

Epoch Times Photo
The Bank of Canada building will be seen in Ottawa, Canada on April 15, 2020. (The Canadian Press / Adrian Wyld)

However, most MMT supporters are governments, given “the current economic situation, including relatively high unemployment and recent relatively low inflation experiences, despite rising government borrowing.” We believe that the risk of inflation associated with increased spending is low. To tell.

Proponents also argue that if inflation becomes a problem, the government can either raise taxes at any time to reduce aggregate demand or reduce spending to slow inflation.

Contrary to what MMTer claims, the survey includes annualized changes in the Canadian and US Consumer Price Index (CPI) from 1962 to 2020. According to statistics, rapid inflation “lasted for 20 years from the 1970s to the 1980s” and “economic stabilization measures can be implemented quickly and easily to effectively mitigate the rise in total prices.” Is issuing a warning to the presumption.

Moreover, inflationary volatility cannot be ignored. According to the survey, Canada’s inflation rate, measured by the CPI, was 2.7% in 1971, reached 7.5% in 1973, and surged to 11% in 1974.

Gloverman said that even if the government could raise the tax rate quickly to combat inflation, it might not happen until it becomes a serious problem.

Whether the central bank requires the federal government to repay debt at maturity, especially in the purchase of historically large amounts of government debt during the COVID-19 pandemic, regardless of whether the Bank of Canada has already approved MMT. Unknown. The study is finished.

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