A Transformative Plan for Relief and Renewal with a 21st Century New Deal & Marshall Plan
Canada has a society wide crisis in inequality, affordability & productivity, driven by decades of bad central bank monetary policy. Here's how to fix it, with receipts
No one asked for it, but here it is anyway. A plan that would actually make things better for all Canadians, based on the real situation at hand.
I’ve laid out what I see as the real problems facing Canada: a society wide crisis in inequality, affordability and productivity driven by decades of bad central bank monetary policy that has distorted the economy.
This is a plan to reduce volatility and increase certainty by replacing toxic debt with new investment: a 21st Century New Deal & Marshall Plan.
Objective
The Canadian economy, like many others, is mired in a housing and productivity crisis, and political unrest being driven by economic insecurity, especially in the form of private debt - mortgages and credit cards.
The current indicators of our economy are deceptive, and we need to understand what is happening.
Canadian prairie rivers offer a metaphor. Sometimes as winter approaches, the rivers are high and a sudden cold snap freezes the surface, creating a solid layer of ice thick enough that it stays in place, even as the waters drop, snow may fall on it, creating the appearance of a solid surface - when if you break through, there can be a drop of several meters into the icy waters - and sometimes another layer of ice, below.
That is where we are in Canada. The regular indicators are misleading and creating the appearance of safety, when some of the economy has already receded. There have been major shocks to the economy in the last 25 years, which have largely been responded to with central bank stimulus or austerity. This has created an “everything bubble” in overvalued assets that has driven the cost-of-living crisis. Housing, commercial real estate.
As it stands, Canada’s dollar is dropping: the Trump administration’s policies are set to drive up inflation and they are already increasing The major driver is not fiscal, tax or government policy. It has been central bank monetary policy. That was the assessment of Jeremy Grantham, a billionaire investor who has predicted many bubbles, is that the U.S. economy (and Canada’s) in a super-bubble. In 2022, his colleague, Edward Chancellor warned that, because of decades of asset inflation driven by monetary policy raising interest rates would “collapse the economy”.
In July 2022, Edward Chancellor warned
“It will turn out to be largely impossible to normalize interest rates without collapsing the economy…
By aggressively pursuing an inflation target of 2% and constantly living in horror of even the mildest form of deflation, they not only gave us the ultra-low interest rates with their unintended consequences in terms of the Everything Bubble. They also facilitated a misallocation of capital of epic proportions, they created an over-financialization of the economy and a rise in indebtedness. Putting all this together, they created and abetted an environment of low productivity growth.”
William White, a Canadian Economist and advisor to the CD Howe institute, the OECD and the Bank of International Settlements, has called for an overhaul of monetary policy in the developed world.
Goals
The goal of this plan is to defuse and mitigate the damage caused by the current crisis, by providing workable and practical strategies that will also inject equity and investment into the economy.
What is required is an injection of equity back into the system as well as a structured reduction in debt, with a 21st Century Marshall Plan.
This is a period of global crisis and Canada can lead the way, and should work with other developed countries, as well as developing countries.
Project Outline
Background and analysis of the current economic situation
Proposal for deflating the current bubble through injections of equity to cancel debt
Support Documents:
How QE contradicts our current economics
Concrete examples of how federal governments running monetized deficits can “Crowd in” private investment without inflation
Debunking the myth of German Hyperinflation.
The Urgent Need for Action
While the factions blame each other, or government, the real problem is that the private economy is falling apart, after a series of massive shocks over many years, where the repairs to the economy kept setting us up for bigger crises down the road.
In their paper Politics in the Slump: Polarization and Extremism after Financial Crises, 1870-2014, Trebesch, Funke and Schularick studied how politics played out after financial crises. What they found was that politics tended to “take a hard right turn.”
“After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, extreme right-wing parties increase their vote share by 30% after a financial crisis… Both before and after World War II, we observe a significant increase of votes for far-right parties. In contrast, parties on the far left of the political spectrum did not have comparable electoral successes after crises. Second, we also find that political polarization increases substantially after financial crises as measured by weaker government majorities, a stronger opposition and a greater fractionalization of parliaments. These effects are considerably more pronounced after World War II than before”
What’s more, these very divisions paralyze governments and drag out crises.
“Increasing fractionalization and polarization of parliaments makes crisis resolution more difficult, reduces the chances of serious reform and leads to political conflict at a time when decisive political action may be needed most. A number of authors have linked political gridlock to slow recoveries from financial crises.”
This document provides an overview of what can be done, as well as providing evidence and theoretical support for innovative alternatives.
We need action now.
ANOTHER VIEW:
CANADA’S ECONOMY FROM THE PERSPECTIVE OF PRIVATE DEBT BUBBLES
“You cannot see a crisis coming if you have theories and models that assume that the crisis is impossible.”
- Adair Turner
I am going to talk about the private side of the economy as well as public finance, which is where our problems are - and the economists and investors are writing about the problems are overwhelmingly focused on the central bank, and the financial sector - not taxing and spending of governments.
The Canadian economy, like many others, is mired in a housing and productivity crisis, and political unrest being driven by economic insecurity, especially in the form of private debt - mortgages and credit cards.
The assessment of Jeremy Grantham, a billionaire investor who has predicted many bubbles, is that the U.S. economy (and Canada’s) in a super-bubble.
It is self evident that the more you pay for an asset, the harder it is to get your investment back. The fact that asset prices are at record highs means that in order to achieve a profit, record revenues must follow.
Inflation is a problem but inflation is not the core problem. Debt is the problem that is tipping people over the edge, and it is a full-blown crisis. Canada has the third-highest household debt in the world, and household debt causes recessions and financial crises.
All of the toxic politics we are seeing as well as crises, are the result too much private debt that has been used to further drive up the price of already overpriced properties, instead of investing in new value.
We are in a trap, where the money we are putting out is not enough to help people cover their bills, and the bill that is crushing them is their debt. We are already in a crisis, just waiting for the crash.
The Bank of Canada’s efforts at “slowing the economy” and deliberately engineering a recession is choking off the supply of new money into the economy and bankrupting businesses and individuals alike.
Given that we passed through a devastating 2020 pandemic as well as a 2014 oil crash, the Bank of Canada’s policies have been disastrous and are counter-productive, as is any austerity right now.
There are multiple urgent crises we need to deal with: jobs, crime, public infrastructure, investment and productivity. There is global instability, and war, and the same problem is facing multiple countries at once.
It is not due to government overspending: the private economy is crumbling under the weight of overhead costs related to debt, housing, rent, and insurance, which in turn undermines competitiveness and drives up labour costs, because workers cannot afford a roof over their head because of debt-driven property speculation.
Canada has been seeing record commercial bankruptcies as well as growing levels of personal bankruptcies.
While factions blame each other, or government, the real problem is that the private economy is falling apart, after a series of massive shocks over many years, where the repairs to the economy kept setting us up for bigger crises down the road.
Those shocks to the economy could have been measured on the Richter scale over the last 30 years, including the 1987 stock market crash, and a 1989-1990 recession in Canada and the U.S., and Japan, followed by austerity; The Soviet Union collapses and enters the world market; 1990s currency crises in Asia & Russia; NAFTA; the 1999 dot-com crash; the 9/11 attacks; China entering the World Trade Organization; the 2003 Iraq War; the 2008 Global Financial Crisis; the European currency crisis of 2010; the price of oil plummeting in 2014 because Saudi Arabia and OPEC started a price war; the 2020 pandemic.
In 2014 in Canada, the price of oil collapsed, plummeting from a sustained high of over $100 a barrel, to under $50. The impact was devastating and immediate - the cancellation and selloff of billions of dollars in investments (financed by debt) which would no longer be profitable. The entire cause of the crash is known, and public - it was a decision by Saudi Arabia and OPEC to put upstart shale oil producers, especially in North America “in their place”.
Then after 2020, US oil companies worked with OPEC to drive up the price of oil. The impact was incredible, as Matt Stoller writes - it caused 27% of all inflation increases in 2021 in the U.S.. According to Stoller,
“The jump in profits in 2021 was about [US] $730 billion, or $2,100 per person.”
Of course, these high oil prices were felt everywhere across North America and around the world, Canada included.
Scott Sheffield, founder and longtime CEO of a leading American oil producer, attempted to collude with OPEC and its allies to inflate prices, federal regulators alleged on Thursday. The Federal Trade Commission said Sheffield, then CEO of Pioneer Natural Resources, exchanged hundreds of text messages discussing pricing, production and oil market dynamics with officials at the Organization of the Petroleum Exporting Countries, or OPEC, the oil cartel led by Saudi Arabia.
Regulators say Sheffield used WhatsApp conversations, in-person meetings and public statements to try to “align oil production” in the Permian Basin in Texas with that of OPEC and OPEC+, the wider group that includes Russia.
From Statistics Canada:
“In 2021, oil prices reached their highest level since 2015. As a result, the industry looked to recover the losses that were incurred during the COVID-19 pandemic. Total gross revenue in the oil and gas extraction industry increased 85.7% to $174.0 billion in 2021 from $93.7 billion in 2020. According to the Raw materials price index, the price of crude oil and bitumen increased by 70.8% from 2020, while the price of natural gas increased by 15.8%. Total production for crude oil rose by 6.2%, while total natural gas production increased by 3.9%.
In 2022, total revenue for the Canadian oil and gas extraction industry rose 53.6% to $269.9 billion, following an 87.5% increase in 2021. The 2022 increase was attributable to increased economic activity and increased demand for energy products.
According to the Raw materials price index, the price of crude oil and bitumen in 2022 increased by 49.0% from 2021, while the price of natural gas increased by 25.6%. Total production for crude oil rose by 2.3% in 2022, while total natural gas production increased by 7.3%.”
Just to recap:
Canada’s oil industry revenue was:
$93.7 billion in 2020
$174.0 billion in 2021 (increase of 87.5%)
$269.9 billion in 2022 (increase of 49.0%)
That is an increase of $176.2-billion in profit-taking over two years. "Suncor, CNRL, Cenovus — wow. Big, big windfall," said Rafi Tahmazian, a senior portfolio manager at Canoe Financial in Calgary. "Imagine a bank machine that's broken and it's spitting out $100 bills and there's not enough people to pick them up and there's $100 bills gathering on the ground. This is how profitable these businesses are right now," he said.
This boom and bust cycle has been extraordinarily hard on Canadians where there is a concentration of oil development. This explains the intensity of feeling in the oil patch because the losses people experienced were bad, and it has to be said, they were amplified by austerity in those provinces.
The inflation has been hard on everyone, but it was caused by corporations raising their prices - especially oil companies, not the carbon tax. Jeremy Grantham and the current economic superbubble
In 2022, Grantham wrote “Let the Wild Rumpus Begin” where he argued that we are in the one of the largest bubbles in history, and that it is degrading. And when that happens, it can be extremely economically painful, even as superhigh indicators mask the problems underneath. Even the name “bubble” is a problem, because you have a visual association with it popping and disappearing. Instead, It’s more like the side of a mountain slowly collapsing.
He also explains why we don’t see it: “In a bubble, no one wants to hear the bear case. It is the worst kind of party-pooping. For bubbles, especially superbubbles where we are now, are often the most exhilarating financial experiences of a lifetime.”
He writes, on January 20, 2022:
“This time last year it looked like we might have a standard bubble with resulting standard pain for the economy. But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in U.S. equities, and the potential pain has increased accordingly. Even more dangerously for all of us, the equity bubble, which last year was already accompanied by extreme low interest rates and high bond prices, has now been joined by a bubble in housing and an incipient bubble in commodities.
One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. To allow bubbles, let alone help them along, is simply bad economic policy.”
If you’re wondering why this wasn’t picked up in the news, Canada was in its fourth, and one of the deadliest waves of covid. Putin and Russia were menacing Ukraine, and a trucker Convoy was making its way to Ottawa.
Grantham continues and explains why, paradoxically, superhigh stock prices are not a good economic indicator:
“What nobody seems to discuss is that higher-priced assets are simply worse than lower-priced ones. When farms or commercial forests, for example, double in price so that yields fall from 6% to 3% (as they actually have) you feel richer. But your wealth compounds much more slowly at bubble pricing, and your income also falls behind. Some deal! And if you’re young, waiting to buy your first house or your first portfolio, it is too expensive to get even started. You can only envy your parents and feel badly treated, which you have been.
And then there is the terrible increase in inequality that goes with higher prices of assets, which many simply do not own, and “many” applies these days up to the median family or beyond. They have been let down, know it, and increasingly (and understandably) resent it. And it absolutely hurts our economy. Looking back in a decade or two, if bad things have happened to our democracy, the huge surge in income and wealth inequality of the last 50 years (as CEO income moved from about 25x the average worker’s to about 250x) will have carried the largest share of the blame. So, a pox on asset bubbles!
Today in the U.S. we are in the fourth superbubble of the last hundred years. Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle.
The penultimate feature of these superbubbles was an acceleration in the rate of price advance to two or three times the average speed of the full bull market. In this cycle, the acceleration occurred in 2020 and ended in February 2021, during which time the NASDAQ rose 58% measured from the end of 2019 (and an astonishing 105% from the Covid-19 low!).
The final feature of the great superbubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the blue chip market rises. This occurred in 1929, in 2000, and it is occurring now. A plausible reason for this effect would be that experienced professionals who know that the market is dangerously overpriced yet feel for commercial reasons they must keep dancing prefer at least to dance off the cliff with safer stocks. This is why at the end of the great bubbles it seems as if the confidence termites attack the most speculative and vulnerable first and work their way up, sometimes quite slowly, to the blue chips.
The most important and hardest to define quality of a late-stage bubble is in the touchy-feely characteristic of crazy investor behavior. But in the last two and a half years there can surely be no doubt that we have seen crazy investor behavior in spades – more even than in 2000 – especially in meme stocks and in EV-related stocks, in cryptocurrencies, and in NFTs.
This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.
What is new this time, and only comparable to Japan in the 1980s, is the extraordinary danger of adding several bubbles together, as we see today with three and a half major asset classes bubbling simultaneously for the first time in history.
When pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history.”
In fact, Warren Buffett has largely moved to cash.
“Over the last two years, Warren Buffett has been sending Wall Street a message loud and clear – without saying a word. His approach is more cautious than ever and Berkshire Hathaway's eye-popping $325 billion cash stockpile is the outcome of his latest strategy.”
Who’s to blame for this? Not politicians, or elected government, or their taxes or their spending. When your whole business is just money - finance - what really affects you is regulation and central banking policy.
Grantham writes:
“How Did This Happen: Will the Fed Never Learn?
As of today, the U.S. has seen three great asset bubbles in 25 years, far more than normal. I believe this is far from being a run of bad luck, rather this is a direct outcome of the post-Volcker regime of dovish Fed bosses. It is a good time to ask why on Earth the Fed would not only have allowed these events but should have actually encouraged and facilitated them.
The fact is they did not “get” asset bubbles, nor do they appear to today. This avoidance of the issue seemed to us remarkable as long ago as the late 1990s. Alan Greenspan, who I considered then and now to be dangerously incompetent, famously acted as cheerleader in the formation of the then greatest equity bubble by far in U.S. history in the late 1990s and we all paid the price as it deflated.
Bernanke should have been wiser from the experience of this bubble bursting and the ensuing pain, and he might have moved against the developing housing bubble – potentially more dangerous than an equity bubble as discussed. No such luck! It is pretty clear that Bernanke (and Yellen) were such believers in market efficiency that in their world bubbles could never occur.
This is old territory for me, but I have to admit to enjoying it. Back then, when confronted with a clear 3-sigma event in the U.S. housing market, Bernanke insisted that “the U.S. housing market merely reflects a strong U.S. economy,” and that “the U.S. housing market has never declined.” The information he meant to deliver was unsaid but clear: “and it never will decline because there is no bubble and never can be.” … Whereupon the unprecedented and apparently non-existent housing bubble retreated all the way back to its trend that had existed prior to the bubble, and then quite typically for a bubble, went well below.
Bubbles, Growth, and Inequality
Perhaps the most important longer-term negative of these three bubbles, compressed into 25 years, has been a sustained pressure increasing inequality: to participate in the upside of an asset bubble you need to own some assets and the poorer quarter of the public owns almost nothing. The top 1%, in contrast, own more than one-third of all assets. And we can measure the rapid increase in inequality since 1997, which has left the U.S. as the least equal of all rich countries and, even more shockingly, with the lowest level of economic mobility, even worse than that of the U.K., at whom we used to laugh a few decades back for its social and economic rigidity. This increase in inequality directly subtracts from broad-based consumption because, on the margin, rich people getting richer will spend little to nothing of the increment where the poorest quartile would spend almost all of it.
So, here we are again. This time with world record stimulus from the housing bust days, followed up by ineffably massive stimulus for Covid. (Some of it of course necessary – just how much to be revealed at a later date.) But everything has consequences and the consequences this time may or may not include some intractable inflation. But it has already definitely included the most dangerous breadth of asset overpricing in financial history. At some future date, when pessimism rules again as it does from time to time, asset prices will decline. And if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the U.S. alone. If this negative wealth and income effect is compounded by inflationary pressures from energy, food, and other shortages, we will have serious economic problems.”
This should be recognized by policy-makers as a five-alarm fire.
At this point, we also now have the AI bubble. Companies are running around building massive data centers so they can find more ways to train AI to replace people’s jobs. It will be the proverbial new fish that gobbles up the old fish before going belly up.
Grantham also made another updated prediction here, explaining that the same conditions are still in place.
The euphoria in the markets also drives government revenues, which is why governments generally don’t recognize the problem either, because they’ve got tax revenue coming in as well.
When you get a bubble bursting, a giant domino-chain of private sector bets has gone bad.
People are very judgmental about people in debt, because they think either that they are always living beyond their means, and that they should be punished for their mistake. The one thing that people should consider is that people can sometimes afford to take a risk that they don’t realize they can’t afford to lose. Because nobody sees it coming. Who saw the 2008 financial crisis coming, or the oil crash of 2014? To say nothing of a global pandemic.
There’s also a really important point about money and interest here, for the whole economy. When you buy or sell something, or when government spends or taxes, it’s in fixed amounts of money. There’s no interest running on it. But debt grows and must continually eat into and convert money fixed money into debt, which has inflated asset prices.
The new U.S. Administration’s policies are likely to make things worse not better. In the week of the election, according to news reports.
“Treasury yields surged on Wednesday as market participants strapped in for a Trump presidency that's expected to boost inflation and interest rates.
Experts expect rising yields to lift mortgage rates in the coming weeks, though rates are expected to continue to trend downward over the long term.
Economists say Trump's tax and tariff policies could stoke inflation and deter the Fed from cutting interest rates as much as previously expected.”
The question is how to find a better way to deal with the situation. The answer is not more austerity or cuts, or manipulations of monetary policy. What is required is an injection of equity back into the system as well as a structured reduction in debt, with a 21st Century MarshallPlan.
One Canada: A 21st MarshalL Plan to Rebuild the Canadian Economy
Canada can show global leadership with a domestic “Marshall Plan,” comparable to how Europe and North America were rebuilt and recovered after World War II.
The reason this matters, and is so important on so many levels, is twofold.
One, it provides real, genuine and long-lasting financial relief to individuals. The excess debt that people are carrying is not just a matter of personal decisions, it is a direct consequence of economy-wide policy impacts by central banks and banks. Central Banks have made disastrous mistakes, which is why they need to be part of solving and paying for the problem - not taxpayers.
Two, it also works to rebuild the economy by investing in new business and jobs, so that we are working and growing our way out of a crisis.
Two Steps
There are two basic problems that have created a trap for the Canadian economy
Too much personal private debt, which is keeping real-estate prices high, and is strangling the rest of the economy. This “sunk cost” of debt across the entire economy has created a sunk cost dead weight that is preventing us from moving forward.
Not enough investment in productive businesses in the “real economy” or public investments to maintain or improve legacy infrastructure
This economic uncertainty is driving political turmoil, including separatism in Canada (in Quebec and Western Canada), as it has in the past. “Separatist” movements are routinely driven by economic deprivation, especially when people are living with the consequences of a market bubble that has burst, like Alberta’s oil bubble.
At its core, these are financial problems, and they have financial solutions. Austerity is not an option.
The two basic problems have two basic solutions, which are necessary and applicable whether we are trying to deflate the current debt and asset bubble, or whether it is post-crisis.
Solution 1: A Debt-for-equity swap to stabilize the economy, injecting new equity for Debt Relief and Debt Restructuring, especially Personal Debt
Solution 2: Investment in New Jobs and New Business Creation
In practice, what we need to escape the trap is a multi-year, post-pandemic recovery plan, modelled on the same policies that Canada and the U.S. used to rebuild to recover from the Depression and the Second World War. Debt relief and investment is how the MarshallPlan and the reforms that created the conditions for greater shared prosperity and a properly functioning market in the 1940s & 1950s.
For those who are concerned this will cause “crowding out” - to the contrary, public investment can help “crowd in” public investment, because it increases certainty.
In order to minimize disruptions, the debt relief and the new investment go hand in hand. What is required to make it work is a “debt for equity” swap across the economy. This can be achieved in a number of positive ways.
There are positive interventions on a large scale that can and must be made now, and can be done by the Federal Government acting alone. Both the Government of Canada and the Bank of Canada have the capacity and authority to address this crisis in an emergency.
The goal of this program is to find ways to relieve debt and let people keep their property - keeping people in their homes, keeping owners in businesses, keeping farmers on farms.
It is about systematically and carefully relieving people of the excess debt they have taken on that is the result of crises and bad monetary policy. We are in an insolvency crisis.
What is required is progressive, populist policies that provide immediate relief, in addition to a massive stabilizing effort to ensure that people stay in their houses, that farmers stay on the farm, and that we avoid liquidations.
STEP ONE: RELIEF
The first focus of financial relief is for Canadians and their public institutions: governments, so they can provide better services and increase community investments in infrastructure
Once they are stabilized, the market and real economy businesses will benefit, as government investment in infrastructure will create jobs and new value.
Taking these actions pre-emptively will also defuse any potential financial crisis facing Canada’s banks.
Relief for Canadians by Reducing Government Pandemic Debt Burdens:
An immediate payment of “Helicopter money” to all Canadians to cope with the current crisis. $1,000 per person, non taxable would amount to $40-billion, through a monetized deficit. Universal. Everyone gets it, so no one can complain that it’s unfair. Helicopter money can be treated as an experiment. By giving an equal amount to everyone it provides a precise amount going into the economy so you could measure the impact, which would provide data for where the impact was greatest.
The Federal Government and the Bank of Canada should offer to take on or cancel the debt that provincial, municipalities and First Nations accrued during the pandemic as a result of emergency spending.
Yes, this requires the Bank of Canada to act, and politicians cannot compel it. The question for the Bank of Canada and other central banks is what positive steps they can take to address these economic crises.
Winston Churchill said that democracy cannot exist without accountability. That is the whole point of the system. Central banks have extraordinary power but they are still run by human beings as fallible and limited as any of us, which means that their extraordinary power can result in extraordinary mistakes. The real problem with central banks is that someone else always pays the price for those mistakes - taxpayers and citizens - which other constituencies are shielded.
This is a central cause of our current crisis. Central banks do have the capacity to act to provide relief.
Adair Turner Explains Helicopter Money
“It was Milton Friedman who explained most clearly why inadequate nominal demand is one problem to which there is always a possible solution. If an economy was suffering from deficient demand, he suggested, the government should print dollar bills and scatter them from a helicopter. People would pick them up and spend them: nominal GDP would increase; and some mix of higher inflation and higher real output would result.”
Note: there is an assumption here that creating new money is necessarily inflationary and would drive up prices. What this misses is that it such an injection of funds may be replacing money that has disappeared - often only partially. When people have lost income or are paying off debt, adding new money is not inflationary.
Turner continues:
“The precise impact of any given size of helicopter money drop would depend on how much people spent rather than saved their new-found financial wealth. But it would dearly be somewhat proportional to the value of bills printed and dropped. If they were only worth a few percentage points of current nominal GDP, the stimulus to either real growth or inflation would quite small. If they were worth many times nominal GDP, the effect would be large and primarily take the form of increased inflation, since the potential for real output growth is constrained by supply factors.
Thus while Friedman's example is very simple, it illustrates three crucial truths. We can always stimulate nominal demand by printing fiat money: if we print too much, we will generate harmful inflation; but if we print only a small amount, we will produce only small and potentially desirable effects.
The money drop from Friedman's helicopter is fiat money in currency note form-actual dollar bills. And as Chapter 7 [of Between Debt and the Devil] describes, there are historical examples of governments that used printed currency to stimulate nominal demand but without generating dangerously high inflation.
The Pennsylvania colony did so in the 1720s, and the Union government paid its soldiers with printed greenbacks in the American Civil War.
However most money today is held in bank deposit, not paper currency, form.
But the essential principle of the helicopter money drop can be applied in the modern environment. A government could, for instance, pay $1,000 to all citizens by electronic transfer to their commercial bank deposit accounts. (Alternatively, it could cut tax rates or increase public expenditure.) The commercial banks in turn would be credited with additional reserves at the central bank, and the central bank would be credited with a money asset—a perpetual non-interest-bearing bond due from the government. The "drop" is of electronic accounting entries rather than actual dollar bills, but the operation is in essence the same and so too would be the first round impact on nominal demand. Nominal demand would be stimulated, and the extent of that stimulus would be broadly proportional to the value of new money created”
He goes on:
“Three specific uses of overt money finance should be considered: Bernankes helicopter, one-off debt write-off, and radical bank recapitalization.
Printing money in its modern electronic form is thus without doubt a technically possible alternative to either pure fiscal or pure monetary policy. It is indeed essentially a fusion of the two. It entails monetary finance of an increased fiscal deficit, and it would stimulate demand more certainly and with less adverse side effects than either pure fiscal or pure monetary policy. Compared with funded fiscal stimulus, it is bound to be more stimulative, since there is no danger of either crowding out or Ricardian equivalence effects: as Ben Bernanke put it in 2003, if consumers and businesses received a money-financed tax cut, they would certainly spend some of their windfall gain, since "no current or future debt servicing burden has been created to imply future taxes." And compared with a pure monetary stimulus, it works through putting new spending power directly into the hands of a broad swath of households and businesses, rather than working through the indirect transmission mechanism of higher asset prices and induced private credit expansion.
It does not rely on regenerating potentially harmful private credit growth, nor does it commit us to maintaining ultralow interest rates for a sustained period of time. [Emphasis mine].
Our technical ability to stimulate nominal growth with money-financed deficits is not therefore in any doubt. A formal mathematical paper by Willem Buiter confirms the commonsense arguments of Friedman and Bernanke. His paper is titled "The Simple Analytics of Hellcopter Money: Why It Works—Always.”
The more realistic alternative involves negotiated debt write-downs and restructurings to reduce debts to sustainable levels, while avoiding the disruptive effect of bankruptcy and default. It can be applied to either private or public debts. But in neither sector can debt restructuring be sufficient alone to cope with the scale of today's debt overhang.
Atif Mian and Amir Suf argue that the United States should have implemented a large-scale program of coordinated mortgage debt restructuring after 2008. By cutting mortgage debts to affordable levels, this would have reduced the severity of the household consumption cuts that drove the country into recession. Even without such a coordinated program, household debt write-offs have been greater in the United States than elsewhere, helping achieve a more rapid pace of household sector deleveraging. But Mian and Suf are surely right to argue that a more extensive and officially mandated program of debt forgiveness would have spurred economic recovery.”
The Bank of Canada can directly buy provincial government bonds equal to the estimated excess debt that governments took on from March 2020 to March 2024 as a consequence of the pandemic.
This is comparable to the actions of the Federal Government after the Second World War, where the Depression-era debt of multiple provinces was eliminated.
Relief is also needed here - in Canada’s public institutions, instead of supporting the asset prices of private investors.
In 2008-2009, CHMC and the Bank of Canada bought over $100-billion worth of bad bonds and debt from Canadian banks, while the Conservative Government imposed federal and provincial cuts. In March 2020, The Bank of Canada spent over $50-billion in “Quantitative Easing” to support banks, and was supporting the overnight debt market with billions more per month. Around the world, Central Banks have printed about $8-trillion since 2020, all of it going to prop up the price of private assets instead of being invested in public benefits. In other words, the Bank of Canada has been able to create money from scratch, but not for the public benefit.
In its founding charter, The Bank of Canada has the capacity to create money for any and all social purpose. This is about the Bank of Canada functioning as it was intended, as an economic stabilizer, instead of an economic de-stabilizer, which is how it has been functioning for 40+ years.
Setting conditions for relief
In exchange for relief, Provinces and Municipalities should agree to use these funds strictly for the purpose of investment. It should not be used to cut taxes: rather, these investments are being used directly to grow the economy, including for the purpose of increasing prosperity and tax revenues for government.
It is not “excess money” that can be used to reduce taxes or run a surplus: this is money earmarked for investment.
A condition of the swap is that funds “freed up” must be invested in new projects and infrastructure that help make cities, rural and northern areas, including Indigenous communities to make essential investments that will lower costs through environmental efficiency
Transit
Rail relocation and rail rationalization;
Electrification & Energy Retrofits
Essential investments in the public infrastructure that brings people together: community halls, recreation
Upgraded roads and bridges
University education & research
Green restoration initiatives
Housing, especially for veterans and seniors. The Federal Government & CMHC must step in and refinance seniors’ housing complexes so that they stay affordable.
Downtown revitalization programs
Provinces and the federal government must also establish new and better rules for handing bankruptcies.
The federal government should also consider allowing for forgiveness of CERB and CEBA loans, except in cases where funds were fraudulently obtained.
Provinces Must Agree to Mandatory Oversight and Enhanced Compliance
With this increased investment, to ensure integrity and fairness in procurement, and ensuring there is added oversight at every political level, one condition of receiving the funds would be that every province and territory:
Establish strong and uniform conflict of interest laws, with independent ethics commissioners with the power of investigation and sanction.
To combat money laundering and the facilitation of foreign interference through corporate channels, each province must create a free and publicly searchable registry of the beneficial owner of corporations registered at the provincial level. Much of the crime in Canada that is hidden in shell corporations are corporations incorporated only at the provincial level.
Debt relief for individuals living in Canada
The Bank of Canada must work with banks, credit unions and other lenders, along with experts in debt relief and planning to provide relief, through the creation of legal Debt Compromise boards for individuals and farmers.
The goal is to reduce people’s monthly payments and bring them down to a manageable levels. It is essential to stress - this does not cost tax dollars. It is about giving borrowers the power to negotiate with lenders in order to significantly reduce their debt costs.
Debt compromise boards were legislated into existence in the 1930s, 40s and 50s and effectively reduced farmers’ debt by 50%.
A NOTE ON DEBT AS AN INVESTMENT*
It is extremely important to understand that when banks and other major investors are making loans for mortgages, or selling bonds, this is different than money we lend to a friend. When investors are lending they can easily expect to double their money at interest rates of 6%, with a profit of 100% in just seven years due to the power of compound interest.
That is why restructuring debts often does not mean that investors are losing money - they will still be paid back principal with interest, but their expected profit may be lower. They are not “losing” money - their profit has shrunk. Debt does not have to be eliminated, but it can and must be reduced to a manageable level. The goal for individuals must be to reduce monthly payments.
Debt Compromise Boards can provide relief to Canadians who have incurred debt taken on the necessities of life.
The necessities of life include housing, medical debt, food. There would be be strict criteria and it would not qualify for any debt people took on after Nov 1, 2024.
Debt due to medical costs (medication, treatment)
Debt due to buying food
Student debt, including provincial debt
Farm debt for small farmers (to reduce the cost of overhead and food)
Mortgage debt on a principal resident
The most challenging aspect of this is likely to be mortgages. However, the reduction in mortgage debt is critical to our economic recovery and to restabilizing the housing market.
Canadians are approaching $3-trillion in debt, almost all of it for housing. That debt acts like a tent-pole, holding up the price of housing. Reducing the levels of mortgage debt would allow house prices to drop, while preserving and enhancing people’s equity. It means that people can afford to sell at a lower price without a massive loss - which is what the problem is now.
The importance of this action to the housing market, to future generations, to seniors, and to actually returning housing to affordable levels, cannot be understated. Debt levels are a liability, and the trillions in dollars of debt that Canadians have taken on create a floor on housing prices. By making it possible to reduce and restructure debts, it means turning a liability into an asset. As excess debt that is strangling the economy is cleared away, it means that new investments will have a better return.
SOCIAL IMPACTS
There is a direct correlation between having no money, desperation and crime, as well as problem drug use. The threat of a looming default is extraordinarily stressful.
When people have money of their own, it gives them control over their lives. Period. That’s why programs instead of money don’t address poverty. One of the best ways to keep kids away from problem drug use is recreation. For adults, it is a job. It is an investment in social stability.
STEP TWO - Investment & National Industrial Plan
We need a five-year plan of continuous investment in restoring productive industry, and Canadian self-reliance. The focus must be on creating good Canadian jobs with strong Canadian businesses.
Local, Canadian ownership matters. It also means that if jobs are being eliminated or changed by artificial intelligence, as projected, there is a stream of capital to allow Canadians to create new businesses and sustain themselves.
An Industrial Plan
Countries requires a sustained investment and industrial plan in productive industries These do not have to be publicly-owned or run, and in addition to ensuring that provincial and municipal governments are making essential investments in infrastructure, education, and health care, Canadian entrepreneurs and businesses in the productive economy that need access to capital, especially “patient capital.” That is “equity” investment instead of loans. This de-risks investment and increases the chance of success.
Food Security (food production and especially added-value processing for export
Energy Security - Given the massive volatility of oil prices and their effect on every part of the economy, we need to continue to develop bank-up systems that we can count on.
Health & Medical Supply Chain Security
Climate Security - Investing in measures that mitigate climate change, but not just technology: investments in Re-wilding.
Clean Environment and Eradication of Forever Chemicals - We need a concerted and compensated effort to reduce the number of these chemicals in our bodies and our environment.
In addition, the Federal Government should do the following:
Promote Canadian Entrepreneurship and Innovation with Improved Access to Capital:
Overhaul the Business Development Bank of Canada (BDC) to Improve Access to Capital for Entrepreneurs. BDC is like a regular bank and charges 17% interest to entrepreneurs. BDC should focus on providing equity investments (not loans), and ensure that micro-financing is available. There is a large pool of entrepreneurs in Canada who want to start businesses and can’t because they cannot access capital. Commercial banks have overwhelmingly focused on the housing and mortgage sector.
We need to Invest in Canada’s Defense, especially in cybersecurity across Canada’s security and defence, including DND, CSIS and the RCMP. This also requires aiming ensuring that these agencies are operating by the highest professional standards.
For Individuals & Working people - Better jobs with a Federal Job Guarantee
The federal job guarantee is modelled on the successful program run under Franklin Delano Roosevelt.
Direct job creation through a federal job guarantee that provides “a job, at non-poverty wages, for all citizens above the age of 18 that sought one,” which can be administered by provinces, “in conjunction with municipalities, localities, and community groups,” and First Nations. The purpose is to ensure that people can work. It is not a private-sector subsidy, and can be used by “social enterprises”.
This would immediately reduce unemployment and poverty across Canada.
Enforcement of intellectual property rights and modern royalties for Canadian innovators, inventors and creators.
Owners of Canadian copyright and patents are not being well-served by the current regime. Innovators who spend years developing and patenting an invention may have their patent violated or that cannot collect royalties. The same is true of Canadian creators (music, film and TV).
There needs to be robust enforcement and collection of money owed, especially from internet companies (Spotify, Youtube, Google, Facebook) and AI companies.
More competition through breaking up monopolies, and allowing for more domestic competition. Canada needs more and stronger domestically owned, run and operated businesses.
On Basic Income or a federal income guarantee. This should be considered, but it requires that people’s debt be reduced or restructured first.
ADDITIONAL, HIGH-IMPACT POSITIVE MEASURES IN A CRISIS
“Government as customer of last resort”
Government can drive local business activity by buying goods and services from local businesses to be used for local causes.
- For example, restaurants could cook meals for people in need - seniors, people living in distress.
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HOW THE PRACTICE OF Quantitative Easing Invalidates Supply-Side Economics
For many years, central banks would either stimulate the economy with lower interest rates - which means bigger loans and more spending, or raising interest rates to cool the economy with smaller loans, and less spending. That’s the simple way central banks see the economy as working.
However, if interest rates are already low - close to zero, or “at the lower bound” - and the economy is still struggling, if central banks can’t lower interest rates any further, and banks still aren’t able to lend more because they’re running short on cash - are having a “liquidity’ crisis, then the central bank will create new money out of thin air and giving it to banks in exchange for taking some of the banks assets off of them.
From Investopedia:
What Is Quantitative Easing?
Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal Reserve, purchases securities in the open market to reduce interest rates and increase the money supply.
Quantitative easing creates new bank reserves, providing banks with more liquidity and encouraging lending and investment. In the United States, the Federal Reserve implements QE policies.
During the pandemic, Central Banks around the world printed about $8-trillion. After the Global Financial Crisis in 2008 the amount printed was more. Canada’s banks were bailed out by $114-billion and backstopped by the Bank of Canada. In the U.S. there were trillions of dollars printed, as there were trillions of Euros printed the EU. The Bank of England also printed billions and billions of pounds.
This is how Paul Beaudry of the Bank of Canada explained QE as working.
Beaudry’s explanation of the mechanics start involves calling it a “reverse auction” which is characteristic of the needlessly weird language around finance. An auction is selling. The reverse of auction is buying. So, it’s buying assets.
“When the Bank buys government bonds of a given maturity, it bids up their price. This, in turn, lowers the rate of interest that the bond pays to its holders. When the interest rate on government bonds is lower, this transmits itself to other interest rates, such as those on mortgages and corporate loans. This stimulates more borrowing and spending, which helps inflation move closer to the 2 percent inflation target. So, as you can see, even when the overnight rate can no longer be reduced, the Bank can still affect longer-term interest rates by using QE.
If we buy $100 million of government bonds from Bank A, we pay for them by issuing what are called settlement balances. These appear as deposits with the Bank of Canada.
Just like commercial banks consider deposits as a liability that they owe to their clients, settlement balances are a liability the Bank of Canada owes to the commercial banks. We pay interest on them at our deposit rate, which moves one-for-one with our policy interest rate.
So to recap, when we perform our QE operations, we buy government bonds from financial institutions and issue liabilities—in the form of settlement balances—to pay for them.
It’s important to note here that settlement balances are a normal part of central banking operations. Being able to issue settlement balances is a privilege that only central banks have. We use this ability carefully to fulfill our mandate of promoting the economic and financial welfare of Canada and Canadians.”
So, the Bank of Canada has an account for a bank and it creates money in it, which only it has the power to do.
What QE is doing for banks is an injection of equity in order to compensate for investments in lending gone wrong.
I know the idea of creating money out of thin air gives people headaches, but it really is the same as creating an IOU, and when an IOU is cashed in, it is ripped up.
Money is much more like files and data in computer memory, which can be created out of nothing and wiped out again. This does not mean it is meaningless, any more than numbers or words are meaningless just because we can erase them after we’ve written them down. That’s why economic models that assume that everything has to be in balance - or are in balance, despite all evidence to the contrary. We are not talking about something physical. It’s information.
This is why the obsession with money within an economy being “backed” by an item of value, like gold, misses the point. The value of a piece of paper or plastic or metal that is turned into money depends on the symbol on it, not the intrinsic value of the material it is printed on. Money is something we use to get other people to do things: it is a way of instructing, organizing and even controlling people and keeping track of social obligations that is legally enforced.
Money is a form of information, and information can be used to control as well as communicate. It’s something you use it to get other people to do stuff - release property to you, provide a service. Because people might do anything, civil and criminal laws regulate how money can be used.
And it is all within a given currency. Having your own currency - monetary sovereignty - means that you need American money to get Americans to do what you want, Canadian money to get Canadians to do what you want.
Yes, this is very different from the way we think about money, and that is the point. It is not a system with piles of cash, coins and gold bullion sitting around. It is a dynamic information system where money is being created and deleted, in highly specific ways. Using terms like “liquidity” and “flows” ignores that what is happening in a money transaction is that when money is transferred from account to account, it is deleted from one account as it is written into another. This specificity matters, and it is not new. This is how money has always worked.
Money creation in the modern economy
Current economic theory is sloppy and imprecise because it groups together completely different types of money flows which originate from different sources and flow to different constituencies.
We should separate out three separate streams of money creation for an economy with its own currency, because they have very different impacts.
Economists, including very prominent ones, will refer to “printing money” in ways that are completely sloppy and inaccurate. It’s common to refer to any kind of deficit spending by government as “printing money” and suggest that it must be causing inflation because they wrongly believe it is increasing the amount of money in the economy, when it is not.
We can talk about three:
Federal Government Fiscal spending, which is spent on services, public investments, transfers to individuals
The special case of Quantitative Easing, which creates new bank reserves so banks can lend more
Private banks expanding the money supply by extending private credit, which varies based on regulation and interest rates set by the central bank.
Empirical studies of the mechanics of money creation flatly contradict the theories and assumptions that are guiding current decision-making.
1. Federal Government Fiscal Spending
Recent empirical studies of finance being allocated by the UK government shows that government’s fiscal spending is not financed up front by taxation or by issuing debt - the spending occurs first, the taxation follows and the debt issuance can also be seen as private investors looking for a safe return. A 2022 working paper from the Institute for Innovation and Public Purpose analyzed the actual processes of how spending occurs in the UK government.
“We find, first, that the UK Government creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector.”
They add that when investors buy government debt, it is because the government is acting as a bank where investors can keep their money safe - because a government that has its own currency and the capacity to create money can always pay its bills. This is a feature, not a bug.
2. The special case of Quantitative Easing, or QE
This is a central bank creating money, and the money is going to financial institutions to create new reserves. This is actual, new money creation, and despite the massive sums, it is actually the kind of policy tool you have behind a glass and that you smash and only take out in an emergency.
So, if you are one of Canada’s banks when you do your online banking with the Bank of Canada, all of a sudden there is $25-billion in there. This is exactly what happened with several banks in Canada in 2008-2009, and is the reason that Canada’s banks did not fail. It was not Canadian caution and prudential regulation. The Bank of Canada, the Federal Reserve and the Canadian government created money in Bank of Canada bank accounts for banks to access, because the assets that made up their reserves were collapsing in value.
To repeat - QE is about shoring up and creating new reserves for financial and other institutions, on the claim that they will stimulate the economy by extending more credit - by overpaying for assets.
That is what Beaudry appears to be saying when he says that when the Bank of Canada buys these government bonds, they “bid up the price.” They’re paying more than the market value.
So, publicly owned central banks, which are a part of government but independent from political influence, are creating new money for private banks to lend more in a crisis, when interest rates are already as low as they will go. This is new money. It is being created by government, and going to private banks, and the banks are getting more for the bonds they are selling than they are worth.
The rationale for this is the ideological belief that the private sector and the market will do a better job of allocating capital, which is beyond ironic, given that the reason for the emergency funding is in response to poorly allocated investments. First, Bank QE happens in response to private sector’s investments collapsing. Second, the new investments made possible by Bank QE are overwhelmingly used to drive up the price of existing assets - not creating new value.
As mentioned above, “Quantitative easing creates new bank reserves.” so they can lend more.
It’s important to note, however that banks don’t lend their reserves. When the central bank creates that money, it’s to purchase assets from the bank: government bonds, or securities made of up mortgages that were part of the bank’s reserves.
What’s happening with QE is that those assets in the private banks’ reserves are being replaced with cash. While this does prevent a so-called “bank run” because the bank’s ability to function is directly related by the ratio of its reserves to its lending, banks don’t lend out those bonds in the form of mortgages. Banks extend credit, and we’ll get to that shortly.
The way that QE works invalidates “supply-side” economics, which says that you have to save to invest. QE creates money in order to invest it, which then flows through the economy and returns to the government in the form of taxes.
This process of money creation is not new, nor is it a change in the way it is being done. This is based on empirical observation of the process of money creation, and on the statements by governments, central banks and financial institutions.
This is a more accurate and evidence-based way of describing how money is created in the economy, which is at odds with our current economic theories, and the entire neoclassical/neoliberal/supply side/fiscally conservative economic theories that have dominated the profession since the 1970s, including fiscal, tax and monetary policy, as well as corporate structures for compensation.
That basic principle is the idea that “you have to build (private) wealth before you can distribute it” and that therefore in order to have more growth and jobs, we must continually push more surplus into the hands of those who already have it, so they will re-invest.
That is the ideological justification for bank QE: investors are seeing a drop in the value of their assets, and the central bank response - is to push newly created money to investors to keep their assets from dropping in value.
Supply-side economics falls at the first hurdle. You do not have to save to invest. Central banks are creating new money so that financial institutions can lend it out.
The fact that newly created money is going to keep up bank reserves is extremely important in multiple ways.
The mechanics of this matter. First, this is considered a “stimulus” for the market - but this is an economic stimulus that is based on people and businesses borrowing more. So, it is not ‘government spending” on programs. The idea is that if people borrow privately and spend, it will be more market-based and efficient than a government program.
However, it is a stimulus with colossal differences in distributional impact on income and wealth for individuals, businesses, and it is all in the form of private debt. Monetary stimulus from manipulating interest rates alone amplifies differences in wealth and income to an incredible degree. People who have less money and property pay higher interest rates and vice versa. That should be self-evident to anyone who has heard of a credit score. Preferential lending will be based on pre-existing concentrations of wealth, with the highest barriers for those with the least resources.
Also - and this is really important: QE is not money that is being spent (or created) by any elected official. It is not money that is being spent on any kind of public investment.
This is dealing with private banks and investors. And really, it’s as if you were a homeowner, and the value of that asset is dropping, so the government steps in and takes the debt off your hands, and gives you newly printed cash-equivalent for it. That is what a “people’s QE” would look like. You keep the house, and the bank doesn’t have to deal with a default.
So, if there is a chicken and the egg argument, “Which came first, government money or taxes?” the answer is “Government money.” That is where money comes from. That is why cash has the face of the head of state on it. That is why we have legal tender.
QE makes it absolutely clear that government is creating money out of thin air so that private investors can invest.
People will sometimes ask whether it is possible to run government without any taxes, the answer is yes, with a giant proviso: while governments do not need taxes to create money to start the economy going again, we do need taxes to keep the economy going in a way that’s stable.
Central banks truly do have the capacity to create money without limit, which is exactly why that capacity is so strictly regulated and controlled.
When you mention this, people who have opinions about such things usually freak out, and they immediately invoke the hyperinflation in Germany in the 1920s, because it was associated with government money printing and the idea that it led to the rise of fascism and extremism in Germany. This is not accurate, as I will detail later.
So, the response to talking about the capacity of central banks to create money, which accurately speaking, is unlimited, is often a kind of panic and horror, because, like true believers who meet an infidel, they imagine that without these particular guidelines - and these alone - there will certainly be a total lack of constraint, and no end to the financial equivalent of sinning.
It’s worth pointing out that central banks have been doing this, and we need to put it (and other government spending) in perspective.
When we are talking about QE, we are talking about only one source of money being newly created in the economy. While these numbers are absolutely colossal - hundreds of billions or trillions of dollars, pounds, Euros, they may still sometimes be small in comparison to the total economy, as well as total private lending.
People will say, “well, this new money that’s going in is what is causing inflation” may seem like it makes sense, except that money itself is not one big pool. That’s a mathematical convenience for economists.
All that money is in millions of separate bank accounts - personal, corporate government, charities, and so on. It’s not a pool that sloshes around. Just because money’s going into someone’s bank account doesn’t mean you’ll see a penny of it, and the disparities in ownership in any economy where there is a billionaire on one hand and a homeless person on the other is colossal. Money does not flow.
It is important to understand that fiat money can be and is created out of thin air, right now, and while various cranks will complain about it, if you want a functioning modern economy, you need to have an entity - one entity - that has the capacity to do this.
And if you think it’s weird that money can be created out of thin air consider that we can all write IOU’s. There are cheques, money orders and we now transfer money electronically all the time. A store can “extend credit” to a customer and run a tab.
It’s vitally important to understand that not only can that money be created out of thin air, it can go back to thin air again. It can be created and deleted, and so can real value. Paper money can be printed and burned. A house can be destroyed in a flood.
People might well ask why if we can print money, why would we pay taxes? We pay taxes because the economy can’t run on newly created money on an ongoing basis. And to be frank, it keeps people honest. It’s part of being part of the same community. We are all chipping in together to build something that none of us could do on our own.
2. Private banks create “credit-money” by extending credit, based on interest rates set by central banks
In 2014, analysts at the Bank of England wrote a paper called “Modern Creation in the Modern Economy” that explained that that commercial banks expand the money supply as well - in a way that is similar, though not exactly, to Central Banks. Commercial banks create new money, within a specific framework, by extending credit. “the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.”
… “Broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”
As the Bank of England explains:
“Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”
This is not fiat-money like the kind that is created by government. Banks are “extending credit” and this credit-money is 97% of the money in circulation.
If you want to understand how this can possibly work, it is for a couple of reasons.
One, which is relatively easy to wrap your head around, is because the credit money being created is going to purchase an asset - a home, so if the borrower defaults, the bank gets a valuable asset they can then sell to recoup, and they are being charged interest.
Banks calculate how much credit they can afford to extend, and that amount and who is eligible changes when interest rates change.
This description of money creation contrasts with the notion that banks can only lend out pre-existing money... Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves.
Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.
What a bank is saying is “this person is good for this amount of money”, which requires a promissory note from the borrower - a mortgage, which is paid back with interest.
As that money is paid back, the interest on top of the principal is what the bank actually earns, but the credit money that has been extended is gradually “deleted” or destroyed.
This is a significant challenge in the way we think about money, but again, it is because money is not a series of fixed material objects. Just as it can be created out of nothing at the stroke of a pen, it can be erased again at the stroke of a pen.
So, the repayment of these bank loans gradually deletes the credit money that was extended.
This may sound weird, but credit money is not a yardstick. It’s a measuring tape.
Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card. Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If the consumer were then to pay their credit card bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.
Banks are therefore in a balancing act of continually extending and deleting (or destroying) credit money - and the Bank of England makes it clear, there are limits.
Although commercial banks create money through their lending behaviour, they cannot in practice do so without limit. In particular, the price of loans — that is, the interest rate (plus any fees) charged by banks — determines the amount that households and companies will want to borrow. A number of factors influence the price of new lending, not least the monetary policy of the Bank of England, which affects the level of various interest rates in the economy.
When central banks drop interest rates to “stimulate” the economy, it alters the lending landscape: more people qualify for loans, and they can be larger - so banks create more credit-money. When they drop interest rates to “cool off” the economy, fewer people qualify and loans shrink.
PRIVATE DEBT IS WHAT IS DISTORTING THE ECONOMY, NOT DEFICITS
A point here, because none of this is “government money”. So when you compare the impact of a government deficit of $20-billion (which in Canada is about $500 per person) compare the financial and debt impact on individuals of a single point in interest rates: It can increase or lower the size of a mid-range North American mortgage for a single household by nearly $50,000.
This practice - of altering interest rates so that banks increase lending - is called “money printing” by economists, but it is not government printing the money. It is banks extending credit.
That means the impacts per person will vary wildly, and the impacts across the entire economy are many multiples whatever the impact of a deficit will usually be. In this instance, the increased personal debt load through “monetary stimulus” is 100 times higher than the government fiscal stimulus, and a federal government with its own currency has a printing press which means that it can always, in an emergency, pay its bills.
It should be clear that this “monetary stimulus” creates massive distortions, because it means that millions of people go tens of thousands or hundreds of thousands of dollars deeper into personal debt.
While economists call this “money printing” it is not government spending, and the“benefit” here is that you’re borrowing money. So if you don’t want to go deeper into debt, or can’t afford to, you won’t get the benefit that “government stimulus”.
While it is supposed to stimulate the economy as a whole and encourage people to take out loans to start new businesses the credit is being created as mortgages, which drive up the price of new and old housing alike. Instead of creating new assets and new value in productive industries- which need not be inflationary at all - individual households are taking on hundreds of billions of dollars in new debt to drive up the price of existing assets - especially housing.
The result in a number of countries - Canada, the UK, the US, New Zealand - is a massively inflated housing market underpinned by personal debt that is so high that it slows the economy, because so much income is being directed to debt servicing. This causes tremendous stress and real economic hardship, because people are facing losing their only major asset.
In Canada, household debt, held by families in the form of mortgages, is much higher than the public debt held by government.
In December 2023, the federal government’s debt was CAN $1.173-trillion.
This month, October 2024, Canadians’ household debt was CAN $2.98 trillion.
This household debt is mostly mortgages, and has mostly been used to drive up the housing market since 2009. It is a direct consequence of the Bank of Canada (and other central banks around the world) using “monetary stimulus” and QE to pump up one sector of the economy - the FIRE sector, of finance, insurance and real estate.
This boost fuels the FIRE sector - as well as tax revenues. Instead of fiscal investments in infrastructure, innovation, R & D and investments in productive industry and industrial capitalism, it has driven up the price of existing assets - stocks and property - around which there is already concentrated ownership. It directly makes the rich richer and the poor poorer.
In 2019, the Globe and Mail ran an important article “How Canada’s suburban dream became a debt-filled nightmare” It was published in the first days of the General Election, and didn’t get the attention it deserved.
It showed maps of Canadian cities, showing how much take-home income people were spending on mortgage interest. In many suburbs - especially around Vancouver and Toronto, but in other cities as well, people are paying up to 20% of their income on mortgage debt.
"Fifteen are on the fringes of Vancouver - places like Langley, Surrey, Coquitlam and Richmond. Two are in Calgary's northern outskirts, and four are in Edmonton, clustered south of the highway that rings the city. Just two are in a city's downtown core: one in Montreal and one in Vancouver.”
That was in 2019.
That fall, in September 2019, there were also signs of financial instability - because debt levels around the world were so high. There had been a spike in overnight interest rates and the US federal reserve stepped in to stabilize the very overnight lending market where the 2008 crash began.
The 2020 crash was prevented by the emergency pandemic response. During the pandemic, central banks created billions of dollars in QE - to create new reserves for banks - and lowered interest rates, to encourage more lending. While there were also important fiscal measures, they were dwarfed by the tsunami of easy money this unleashed, which went into driving up the price of housing, which was aided and abetted by provincial governments who lifted evictions and allowed for rampant above-guideline rent increases.
The higher the price of an asset, the harder it is to get a return. This also applies for real estate. There was a speculative frenzy driven by access to low cost debt which drove up the price of housing, while adding to people’s individual debt burdens for education and for housing, which is a necessity of life.
The problem we are facing is not an inflation crisis caused by government spending. The inflation of 2022-23 was largely due to profit-taking.
These levels of private debt are a threat to the stability of the entire financial system, and that is why the decision to hike rates, as central banks around the world have, is driving the crisis and making it worse, not better.
So trickle-down economics isn’t right. So what? The fundamental reality is that the economy and money function in a way this is different than what we have been told.
There will always things that are impossible to do. However, we are having artificial constraints and limits placed on us by adherence to an economic model that is failing, in part because it not even close to being an accurate model of the economy. It is a model based on ideas about the economy - many of them political assumptions of risks and danger that either do not exist, or that can be avoided with planning.
These other accounts are a modern form of Keynesian economics. And it’s important to emphasize, this is not proposing a new system of policies for governments to start doing. It is proposing new and better explanations for what they are doing right now.
These ideas of money creation are not new. Keynes, Schumpeter and Milton Friedman all recognized that commercial banks extended credit and created money, long before today’s heterodox economists did.
In 2016, eight years after the Global Financial Crisis, a new crisis is sweeping the globe: Global Trumpism. As Political Scientist Mark Blyth put it, “The era of neoliberalism is dead, the era of neonationalism has just begun.”
The History of Hyperinflation in Germany after WWI is Dangerously Wrong
Many economists, historians and news articles will immediately condemn creating new money as inflationary, citing the hyperinflation crisis in Germany in the 1920s. This history is almost entirely wrong.
In the mid-1920s, there was a period of hyperinflation in Germany when the value of money dropped so badly that people were wheeling money around in wheelbarrows or used it as wallpaper. It’s also known that Hitler and the Nazis came to power sometime after this - and people make the mistaken conclusion that hyperinflation led to the rise of fascism and the Second World War. This is totally inaccurate history and is sometimes used as a reason to warn of the dangers of inflation (Keynes also warned of the dangers of inflation in his “Economic Consequences of the Peace”).
This matters for many reasons, and the real story is worth repeating, to get the order of events straight.
In the 1920s, Germany was faced with massive debts to France and Belgium, to pay war reparations.
“According to French and British wishes, Germany was subjected to strict punitive measures under the terms of the Treaty of Versailles. The new German government was required to surrender approximately 10 percent of its prewar territory in Europe and all of its overseas possessions. The harbor city of Danzig (now Gdansk) and the coal-rich Saarland were placed under the administration of the League of Nations, and France was allowed to exploit the economic resources of the Saarland until 1935. The German Army and Navy were limited in size. Kaiser Wilhelm II and a number of other high-ranking German officials were to be tried as war criminals.
Under the terms of Article 231 of the treaty, the Germans accepted responsibility for the war and, as such, were liable to pay financial reparations to the Allies, though the actual amount would be determined by an Inter-Allied Commission that would present its findings in 1921 (the amount they determined was 132 billion gold Reichsmarks, or $32 billion, which came on top of an initial $5 billion payment demanded by the treaty).”
The hyperinflation in Germany is one of the best known such episodes in history. To give an indication of the level of inflation, a loaf of bread that cost 160 marks at the end of 1922 cost 200,000,000,000 (200 billion) marks a year later.
Many economists, historians and news articles will seek to explain the dangers of hyperinflation by citing the German government, but the history is almost entirely wrong.
The Nazis did not come to power until more than half a decade after the hyperinflation had come to an end. The explosion in money-printing in Germany in 1922 and 1923 was not by the government at all.
A clearer story had been produced in a working paper of the International Monetary Fund (IMF). It was, in fact, a consequence of a policy blunder by the Allies, who insisted that the government be stripped of its role in supervising or running the central bank:
“The Reichsbank president at the time, Hjalmar Schacht, put the record straight on the real causes of that episode in Schacht (1967).
Specifically, in May 1922 the Allies insisted on granting total private control over the Reichsbank. This private institution then allowed private banks to issue massive amounts of currency, until half the money in circulation was private bank money that the Reichsbank readily exchanged for Reichsmarks on demand. The private Reichsbank also enabled speculators to short-sell the currency, which was already under severe pressure due to the transfer problem of the reparations payments pointed out by Keynes (1929). It did so by granting lavish Reichsmark loans to speculators on demand, which they could exchange for foreign currency when forward sales of Reichsmarks matured. When Schacht was appointed, in late 1923, he stopped converting private monies to Reichsmark on demand, he stopped granting Reichsmark loans on demand, and furthermore he made the new Rentenmark non-convertible against foreign currencies. The result was that speculators were crushed and the hyperinflation was stopped. Further support for the currency came from the Dawes plan that significantly reduced unrealistically high reparations payments…. this episode can therefore clearly not be blamed on excessive money printing by a government-run central bank, but rather on a combination of excessive reparations claims and of massive money creation by private speculators, aided and abetted by a private central bank.” [emphasis mine]
So, it was not the German government that was responsible for hyperinflation at all. It was the private central bank, which allowed private banks to print their own currency – to offer credit that was convertible into government marks on demand. Effectively, it gave private banks a license to print money, and they did.
What’s more, the crisis was relieved in part by restructuring debt payments to a more affordable level.
Hyperinflation is caused by a country having to pay off debts in another country’s currency. This is the reason for every instance of hyperinflation, except one - Zimbabwe, which also had special circumstances.
Usually it happens after a sudden collapse in the price of a export commodity - oil, grain, potash. When the price is high, foreign investment flows into a country and its exchange rate is high. If the price of the dominant commodity collapses, there is an economic downturn, and the distortion in debt and currency is amplified by a change in the exchange rate. This triggers a downward spiral. Imports become many times more expensive, exports don’t bring in the revenue they used to, and the absolute amount of domestic money required to pay off a foreign debt explodes.
There is no evidence that printing money for domestic use causes uncontrolled inflation - it is always printing money associated with paying off foreign debts after a collapse in commodity prices. This is what happened to Venezuela and this is part of the reason for the so-called “resource curse” of oil-producing countries.
The hyperinflation in Germany stopped when they introduced a new currency, in November 1923. It was a period of serious economic disruption - but it is not what led to the rise of fascism. Hitler did not come to power in 1923. In the German elections of 1924, the Nazi party only received 3% of the vote.
After the hyperinflation, until 1929, Germany had the fastest-growing economy in the world. That growth ended in 1929, with the Wall Street Crash and financial crisis that started the Depression. The top five economies around the world were all shrinking, and for the first years, they all pursued cuts and austerity.
As Mark Blyth has argued at length in his outstanding book, “Austerity: History of a Dangerous Idea” - is that it doesn’t work, and results in very nasty politics.
After 1929, in Germany, conservatives and social democrats alike pursued austerity. The Nazis stayed a fringe party over several elections, with their vote growing as economy sputtered and suffering got worse, until they were elected in 1933 on a promise of jobs. Hitler and the Nazis did get the economy running again, mostly by building up the military.
In the 1930s, France might have been able to put a check on Germany’s expansion by also investing in a military build up. They opted for cuts and austerity instead, and were in no position to offer any meaningful resistance to a German invasion.
In Japan, the major target for budget cuts was the military. Over the 1920s, the military’s share of the government budget was cut in half. After a number of years, and continued cuts, the response from the military was increased radicalization and outright assassinations. A number of senior officials were assassinated by the military, including two Prime Ministers.
In late 1931, an army plot to overthrow the government was uncovered - which was related to the years of cuts. “A decade of austerity had convinced the Japanese military that they were ‘at war with the entire civilian political elite.’” A number of other officials were murdered in a failed coup in 1936, but the die was cast, and spending opened up for the Japanese military and war on China in 1937.
Austerity means stripping people of money - and stripping them of control and leaving them powerless. The assumption is that the economy will just recover its balance - and come back to equilibrium on its own. It won’t, because it was never in balance in the first place. As people fight over scarce resources, it leads to conflict and the splintering of societies, along any number of tribal and tribal nationalist lines.
It wasn’t hyperinflation that led to the Nazis. It was austerity. It was austerity that led to the extreme nationalism and militarism of Japan. These were the two major axis powers in the Second World War, who pursued empires through invasion and conquest as a means to build wealth.
However, there is always trouble before the crash where the mad speculation in stocks conceals an economy that’s eroding for many people.
As FDR put it, “People who are hungry and out of a job are the stuff of which dictatorships are made.”
Keynes quit the Versailles Peace talks of 1919 warning that the consequences of the peace - the reparations demanded of Germany - would result in a war in 20 years. He was right, right down to the year.
That is why, after the Second World War, the solution was to do the opposite, and launch a Marshall Plan that would rebuild Europe, including a plan that in 1948 that introduced the Deutschmark reset the entire German economy.
“The Deutsche Mark replaces the Reichsmark in the three western zones. The Deutsche Mark banknotes had already been printed in the United States at the end of 1947 and then brought to Frankfurt as part of the secret “Operation Bird Dog”.
The banknotes are distributed as of Sunday, 20 June. In exchange for 60 Reichsmark, every citizen of the western zones receives 40 Deutsche Mark directly from the ration offices, followed by a further 20 Deutsche Mark in a second tranche shortly thereafter. As of 21 June, the Deutsche Mark is the sole legal tender. Everyday payments such as wages, salaries, insurance and rents are converted at a rate of 1:1. However, those with savings are hit hard: Reichsmark balances are gradually converted to Deutsche Mark at a rate of less than 1:10.”
This was one of the major driving factors for Germany’s post war boom. In North America, the high-pressure economy of the War Effort had also reduced personal debt so that in 1945, the average American worker was saving 20% of their income.
How a Monetized Deficit Could Work to Provide Tax Relief
In the U.S. total household debt was $17.7- trillion. In Canada, it was close to $3-trillion. Both are reflections of the massive housing and asset bubbles in these countries. The thing is, every borrower requires a lender - and there are a lot more borrowers than lenders.
So, all that household debt is actually the assets of a small percentage of the population.
It’s not complicated: The more you go into debt, the richer your lender gets, and the poorer you get. And every time there’s a crisis, the solution has been to make it easier for you to go deeper into debt. Lower interest rates for bigger mortgages, and credit cards instead of a raise.
On November 4 2024, it was reported that: “New insights from Bank of America show that people across income brackets, whether earning less than $50,000 or over $150,000, continue to report living pay-check to pay-check. Nearly half of those surveyed agree with the sentiment of tight budgets, as daily essentials like gas, food and health care "swallow up" their earnings.… With interest rates high, financing costs for essentials like car loans or home improvements are pushing monthly budgets to the brink.”
This is not a “hot” economy. This economy showing all the signs of “Pre-crash mania” which we is manifesting it a stock market that is soaring, along with all sorts of other desperation, panic, and get-rich quick schemes.
Here’s the simplest way to explain how a central bank could act in an emergency to provide economic relief, right now.
Let’s say you have the complete Canadian federal budget ready to go. You know how much revenue from income tax. It’s been $175- billion in recent years.
Due to an economic emergency, you want to help citizens, you could say “this year, and this year only, we will cut personal income taxes by 25%.” Everyone still files their taxes - but at the end of what you’ve calculated, you’ll pay 25% less (or you’ll get a 25% rebate).
For the government, that means $43.75-billion less in revenue. To keep the budget in balance, normally what you would to would be to sell bonds and go to private investors, or cut back and fire people or reduce government payments.
However, if you do this, it undermines the benefit of the tax cut. If you are running a deficit and borrowing, you will have to pay back the benefit of the tax cut with interest. If you are going to cut $43.75-billion from government spending, you’re just robbing from Peter to pay Paul. You’re making one group better off at the expense of another.
Instead, you create an agreement that this year the central bank will create that exact sum in new money - $43.75-billion - and give it to government to replace the otherwise lost revenue.
This is what is known as a “monetized deficit”, although it could also be considered “helicopter money.” It is effectively an injection of cash into the economy, and it is a very specific amount, for a very specific purpose. Every Canadian knows exactly where the money is being used. Every taxpayer gets relief. And government can also continue to make needed investment without taking on more debt.
As Biagio Bossone explains:
“The monetization of fiscal deficits – that is, budget expenses in excess of revenues – involves the financing of such extra expenses with money, instead of debt to be repaid at some future dates. It is a form of "non-debt financing". Thus, monetization of fiscal deficits can occur only through one of two modalities:
First, the sovereign (government) prints its own money and finances its expenses. In practice, the same happens as the fiscal deficit is financed with newly created money issued by the central bank and transferred to the state treasury without future repayment obligations: the money issued by the central bank is either credited to the account of treasury or treasury is allowed an overdraft facility. Debt would obviously originate if treasury were to borrow the money from the central bank; yet, this would not constitute true monetization of the deficits, but simply a temporary support to treasury cash needs.
According to an alternative (and more convoluted) modality, fiscal deficits are monetized as the government issues bonds in the primary market and the central bank purchases an equivalent amount of government bonds from the secondary market. Importantly, however, and this is commonly the forgotten part, for this modality to replicate the same effects of the first, the central bank must commit to the following actions: i) hold the purchased bonds in perpetuity, ii) roll over all the purchased bonds that reach maturity, and iii) return to government the interests earned on the purchased bonds (Turner, 2013).”
This kind of financing is actually one of the ultimate ways that a democratic government can do to assert and maintain its sovereignty - that it’s possible, in emergencies, to fund the government this way without taxes. In fact, it is the exclusive right of government and public institutions, not private ones. It’s how the U.S. paid for 15% of the Second World War effort.
If anyone is concerned with the idea that this sum of money will be incredibly economically disruptive or inflationary ask yourself this - if you got back 25% of your taxes back, would you use it to drive up prices? Of course not. We need to reject the bizarro-world explanation of the economy that citizens and customers spending a few thousand dollars each is what drive prices up.
If you got 25% of your income taxes back, you know that you could use it, but there’s no way you’re going to be driving up any prices with it.
To be fair, there are people who pay no taxes who could also benefit - seniors, people with disabilities, veterans. So you could commit to reducing everyone’s personal income taxes by 25% (or another amount) and also commit to a minimum benefit.
The good news
The fact that our governments are incapable of dealing with crises is not just political, it is ideological. Right now in the UK, Labour is making terrible cuts that are simply unnecessary. Canada and the U.S. and many other countries are facing far-right conservative parties because policymakers and central banks keep tightening the thumbscrews, in defiance of evidence and reality.
The inequality generated around the world by globalization has generated anger not just at elites in specific countries, but at the countries that lead the global elite. The system is broken because the ideas that drive neoliberalism have failed. Joseph Stiglitz has said so, Paul Romer has said so. Angus Deaton has said so. William White has said so. There are also plenty of other economists who have been saying so for a long time, like Marianna Mazzucatto, Stephanie Kelton, Dr. Steve Keen and others.
It is all driving unrest, with citizens across the world are turning on each other and their elites.
Extraordinary crises require an extraordinary response, yet all we have is the same two “left-right” options: more public debt and higher taxes on the one hand, or austerity and more private debt on the other.
There is a sensible, peaceful, sane path of economic reform and relief that can stabilizes the economy and put the private sector back on its feet. The crisis we are facing is due to the result of the creation of too much private debt.
Unlike fiat money created by government or central bank QE for bank reserves or government taxing and spending, the demand that credit-money places on the borrower grows based on an algorithm of compound interest that continually doubles.
We have replaced stable equity with unstable debt, in people’s personal lives as well as in corporations. There’s a saying that “Debts that can’t be paid, won’t be.” The question for policymakers is to come up with a plan to make sure that if defaults are inevitable, that steps are taken to mitigate the harm, and keep risks from spreading. Orderly, structured defaults and debt renegotiation is preferable to chaotic defaults.
What is required is to reverse this process, and replace debt with equity by restructuring and reducing debts. William White has argued that is essential, here:
“These shortcomings point to the need for explicit debt restructuring or even outright forgiveness. However, the administrative and judicial mechanisms needed to do this effectively are lacking and need to be put in place. In recent years, the Working Party on Macro-Economic and Structural Policy Analysis at the OECD and the Group of Thirty have published extensive documentation of current shortcomings and suggestions for improvements. Procedures for resolving debt problems in the corporate and household sectors need improvement. Not least, “zombie” companies must be restructured rather than be given “evergreen loans” as is currently the case. Indeed, measures taken to reduce the economic costs of the pandemic have sharply worsened this problem. Procedures for resolving financial sector insolvencies are even more inadequate. The problem of banks that are “too big to fail” must be dealt with definitively. We also need an accepted set of principles for the restructuring of sovereign debt.”
Ari Androcopoulos has written a paper, “The Relationship Between High Debt Levels and Economic Stagnation, Explained by a Simple Cash Flow Model of the Economy” which not only recommends helicopter drops, but explains how Central Banks’ policies of increasing debt and raising asset prices has contributed to our current crisis. One important consequence is that private, not public debt is contributes far more to economic stagnation than believed.
Economist Steve Keen has argued for a “people’s QE” helicopter money as a solution out of the crisis, before another debt crisis engulfs us.
He suggested direct depositing money straight into bank accounts, with individual households in the economy getting a share to avoid moral hazard. Keen’s idea is that those who have debts can pay them down, relieving creditors as well. Those without debt can spend, save or invest. As spending drives growth, taxes help restore government balance sheets.
Again, there is a sensible, peaceful, sane path of economic reform and relief that can stabilizes the economy and puts the private sector back on its feet.
The crisis we are facing is due to the result of the creation of too much private debt. Unlike fiat money created by government or central bank QE for bank reserves or government taxing and spending, the demand that credit-money places on the borrower grows based on an algorithm of compound interest.
What is required is to reverse this process, and replace debt with equity.
Another paper by Josh Ryan Collins, “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75” showed that the Bank of Canada played a major role not just in helping Canada escape from the Depression, working with the government to provide “significant direct or indirect monetary financing to support fiscal expansion, economic growth, and industrialization.” Inflation, the great fear of money creation, was not found to be a serious concern in peacetime: it was more strongly correlated with wartime inflation.
Buiter writes:
“there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.” (Emphasis mine.)
Add to this new research questioning the definition of supply and demand, which imply that “measures to raise demand in a recession – fiscal stimulus, perhaps, or monetary easing – could make productivity growth faster too, giving the economy a boost not just in the short term, but for many years.”
The objections to such a program is based on the very economic theories that have created and extended the current crisis, and make it impossible to resolve. Neoclassical / neoliberal economics are based in what are superstitious taboos, not evidence.
The point of this is not that money can be created for follies. The point is that if we can actually do something - we have the people, know-how and resources - the capacity to do it without driving up inflation is the limitation, not money.
In 1942, Keynes delivered this radio address:
Anything We Can Actually Do, We Can Afford
“Let us not submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds, shillings and pence of cash income … Why should we not add in every substantial city the dignity of an ancient university or a European capital … an ample theater, a concert hall, a dance hall, a gallery, cafes, and so forth. Assuredly we can afford this and so much more. Anything we can actually do, we can afford. … We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life? …
Yet these must be only the trimmings on the more solid, urgent and necessary outgoings on housing the people, on reconstructing industry and transport and on replanning the environment of our daily life. Not only shall we come to possess these excellent things. With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.”
This is not just about government. It is about economic renewal that combines relief and investment that is essential to move forward, because we are being held captive by an economic ideology that takes evidence and logic less seriously than a medieval theologian. The biggest challenge is overcoming these medieval beliefs - which are returning up to a medieval economy and a medieval political system, and medieval treatment of one another.
The bubble we are in is due to excess private debt destabilizing the economy. By reducing that debt we can stabilize the economy.
The rules of the world are being re-written.
We have an opportunity and an obligation to do what we can and what we must to protect Canadians and their livelihoods, and the rule of law. This plan to spend five years reducing debt and investing intensely in jobs, new businesses, and cleaning up the environment will make the difference in mitigating the current crisis and moving us to a more prosperous future together.
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DFL
We don't even need a private bank as a middle man taking profit from borrowing from the fed and lending it to people.
That's a bullshit job as Graeber coined the term.
The crash of 2008 was totally expected. How could housing climb 3-5x more than wages and keep going?
I found most people to be so brainwashed by capitalism that they thought rising house prices were a good thing... Especially if they owned a house 😂
But let's say you bought low, before 2000s and now want to sell. Sure, big jump in price means you made out well. But to buy another home, you still have to pay the high costs.
This housing bubble only really benefited the banks, gambling investors, and real estate companies.
Some parts of this are so good that they should be separate posts. For example this issue (one of your headings) is often a critique of those who support your policies
The History of Hyperinflation in Germany after WWI is Dangerously Wrong
You need a separate post for the topic, which you handle brilliantly!!