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Open letter to Finance Minister Bill Morneau
3-08-2017
Re: http://www.parl.gc.ca/Content/HOC/ePetitions/Responses/421/e-337/421-00858_FIN_E.pdf
In your official response to petition 421-00858, you claim that public financing of infrastructure through Bank of Canada low-cost loans would be inflationary.
But does real-world evidence support your contention when applied to advanced countries with large unused productive capacities and that issue their own currencies, such as Japan or Canada?
According to Australian economist William Mitchell, "...the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with (neo-liberal) economic theories.
It was a mind-boggling failure to explain reality."
The New Economics Foundation recently published "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75". The report concludes "The 1935?70 period saw the Canadian economy recover quickly from the Great Depression, weather the Second World War, make a rapid transition from war to peace, and then enjoy a 25-year period of relatively stable and high growth with rapid industrialization..... The Bank of Canada played a key supporting role by directly and indirectly financing government debt."
Under your proposed Infrastructure Bank, investors are expecting a minimum return of 7 - 9%, and it is clear that low and middle class Canadians will bear the brunt of higher costs through tolls, user fees and increased taxes. That is inflationary.
Canadians deserve a finance minister who will challenge economic myths propagated by financial elites who claim no alternatives exist to their high-cost lending.
Mr. Morneau, whose interests will you serve?
Larry Kazdan CPA, CGA
Footnotes:
1. William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia
http://bilbo.economicoutlook.net/blog/?p=31021
"When QE was first introduced in Japan in the 1990s, mainstream economists rushed to predict that the massive expansion in central bank reserves would be inflationary.
Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.
Nothing like that happened.
Neo-liberal economists wrote off their mistakes by claiming that Japan is ‘so strange’ that it is a ‘special case’ and therefore not generally applicable.
Their ad hoc defense was convenient because the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with their economic theories.
It was a mind-boggling failure to explain reality."
2. Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75
http://www.levyinstitute.org/pubs/wp_848.pdf
As shown in figure 1, between 20–25% of Canadian public debt was financed and held by the central bank and government from the end of World War II up to the early 1980s but inflation was below 5% right up until the early 1970s..............
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....in the period 1945–70....Federal government capital expenditure funded highways, airports, bridges,schools, hospitals, and other physical infrastructure.
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During the period 1960?75, the federal government also introduced virtually all of the major policy innovations that make up Canada’s system of social programs: Canada-wide Medicare, universal pensions, the modern unemployment insurance system, and cost-sharing with the
provinces for higher education and welfare.
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For the majority of the period, the Bank was not independent of the government andits primary objective was full employment and growth rather than price stabilization.
3. Economist John Hotson
http://livingeconomiesforum.org/1996/15hotson
"When the Bank of Canada encourages the Canadian government, provinces, and municipalities to borrow in New York and Tokyo it is a betrayal of Canada. Where should they borrow when new money is needed for government spending? They should borrow at the government owned Bank of Canada, paying near zero interest rates-just sufficient to cover the Bank's running expenses."
Footnotes:
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