Deficit hysteria continues at the Globe and Mail

I don‘t like to dwell on this topic since I would have thought that after the massive deficits. following the last financial crisis, the amount of quantitative easing which is what I called greater monetization of the debt by the central bank and the total absence of inflation as a problem ever since then- which is now twelve years- that the out of date monetarist anti deficit argument could be shelved for the near to medium future so long as we had high unemployment and a trend to falling prices.But there continue to be claims that we are endangering our society by following this prudent policy. Konrad Yakabuski has written another opinion piece asserting this argument.( The Bank of Canada keeps making the rich richer, August 1, opinion . The Globe and Mail) In this piece he claims that ‘‘politicians and academic economists‘‘ insist that the central banks anti deflation pro growth strategy has artificially kept the economy afloat in the short term but in the long term will only boost the stock market and be unsustainable.

The current ratio of debt to GDP is well below what it reached at the end of World War II

Whenever the Federal Government seeks to support the economy it has to use one of the following methods or  set of them to do the job. It can spend money that covers the cost of its programs and have a balanced budget as opposed to a surplus. This is slightly stimulative provided the government does not create a sinking fund to retire the debt in the future. To be more stimulative it needs to run a deficit to counter recessionary forces in the economy. Both by replacing lost incomes in order to stimulate consumption and by changing investor expectations about the future rate of return on investment projects. These projects can be funded by private firms, the government itself from tax revenues or supplemented by the central bank purchasing of government treasury bills and bonds. Since the Federal government issues its debt in Canadian dollars it is a sovereign monetary authority with respect to the Canadian economy so long as the debt is issued in Canadian dollars. If inflation is low as it currently is there is no risk of currency depreciation by the actions of speculators. Furthermore the Bank of Canada has currently lowered interest rates close to zero. This also acts as a stimulant to investment both by the private and public sectors. This is an excellent time for infrastructure investments for example, or investments in our health care or investments in our social policy and education system.

Debt monetization or q.e. is also stimulative to the extent it permits greater investment than what might have occurred in its absence. Some analysts who understand that Keynes originally thought of and entitled his General Theory as a Monetary theory of Production, like Abba Lerner may also argue that the greater monetization will also permit more high powered money to be created and less of the savings done by the private sector and individuals to be depleted by short term debt reduction. More on this later.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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