Two weeks ago I wrote a letter to the Editor at The Globe and Mail critiquing Konrad Yakabuski for the deficit hysteria he was presenting in an opinion piece on the Bank of Canada and the pandemic . The paper didn’t publish the letter. I reproduce it below .
Konrad Yakabuski (June 13, Our long economic nightmare is just beginning) is correct that we face a major economic challenge because of the covid-19 crisis. But he is mistakenly convinced that the policy of the central bank monetizing more Canadian government debt than it does normally will worsen our situation.
He claims only the U.S. Federal Reserve and the Congress have nearly unlimited monetary and fiscal firepower‘ to keep interest rates low and support deficit finance until a recovery takes place. He claims that the financial markets will respond by turning on other governments like our own over the high deficits and debt monetization.
But this ignores the historic fact that in 2008-09 in the face of the then financial crisis it was the government and the central banks including the Bank of Canada which bailed out the financial markets and the banks from the morass they had created by excessively risky speculation in the derivatives market. In the period that followed the bank purchased massive amounts of private corporate and public sector debt .There was no inflation and the panic was resolved. The markets subsequently boomed as the debt to gdp ratio improved.
Covid- 19 will be no different. The Bank of Canada and the government have the power, the means and the responsibility to prevent a depression. Interest rates are low because that is the correct policy combined with fiscal stimulus and income replacement to prevent deflation. Raising interest rates at this time would only deepen the downturn.
Professor of political economy
Concordia University, Montreal
This is not the first time the Globe has refused to publish a letter from me which tried to explain that the the fears about deficit investment spending were misguided and that monetizing more of the debt by having the central bank buy some of the bonds and bills used to finance the debt was good policy. I have been making this argument for the past 40 years in various academic journal articles, in my monograph The Deficit:hysteria and the Current Crisis 1984 , published by the CCPA and in my monograph The Deficit and Debt Management:An Alternative to Monetarism published by the Canadian Centre for Policy alternatives in 1989. A new book published in the U.K. by Stephanie Kelton, The Deficit Myth apparently raises similar arguments of which Yakabuski and the Globe not surprisingly given their fiscal conservative orientation are skeptical. I have not read more than an excerpt from Kelton‘s work ( I have ordered it today but it won’t likely arrive for several weeks.) When I receive and read it I will comment in more detail on the work. As far as Yakabuski is concerned, he is correct to argue that the bond raters may well have reacted negatively about QE during low unemployment times , although there is some hypocrisy in that seeing that the central bank saved their skins during the financial crisis by buying debt from them. Context is important but all of it is relevant not just a favourable selection.