The economic consequences of the Covid-19 pandemic are after 6 months becoming clear. Government’s have run up massive operating deficits. The Government of Canada alone is running a deficit well in excess of $400 billion though we have no official account of how large the Covid pandemic price tag will impose on Canadians.
A key question arises: where did this new $400 billion in emergency funding come from? Who created this emergency money? If this is new debt money issued as government ‘Covid bonds’, then who purchased these bonds and debt? Did the Bank of Canada purchase any of this debt? If so, how much? How much government debt can the central bank purchase?
These are some of the most important strategic fiscal and monetary policy questions that should be part of our national conversation. Yet, the media, including CBC, has seemingly been blind to this existential financial threat Canadians face.
Historically, Canada’s economic growth (like the economic well-being of our own personal and business lives) has been funded by debt. There is a simple truth that few economist and average Canadians understand: all (98%) modern money IS debt, created in the form of bank loans, government bonds, mortgages and other debt instruments.
Between 1973-2019 Canada’s federal debt exploded by 2,488% growing from $28.9 billion in 1973 to $747.4 billion in 2019 (see graph that also shows the explosion of provincial government debts). All of this debt was created in the form of government bonds which were sold to the private financial markets. What most Canadians do not understand is that prior to 1974 (1946-1973) the federal government rarely ran a deficit and if it did it could issue bonds that were then purchased by the Bank of Canada and extinguish federal government debt used to balance annual operating budgets. Since the Bank of Canada is owned by Canadians any interest payments paid on these federal government bonds could be internalized and written off on a regular basis.
Then in 1974, under the leadership of Prime Minister Trudeau, Canada along with several other G7 nations agreed to begin to deficit finance national budgets by issuing bonds and selling this debt to the private financial markets instead of selling this debt to our own sovereign central bank. The following graph shows the explosion of federal debt between 1961 and the end of 2019, just before Covid 19 pandemic hit in March 2020.
The following graph shows what happened after 1974 with a dramatic increase in federal government deficits resulting in the rapid accumulation of national debt that reached $748 billion by the end of 2019 (see graph). The regrettable cost of that 1974 decision to relinquish the power of our debt financing powers through the Bank of Canada can be counted in terms of the wasted tax revenues that have gone to pay the interest costs of this nearly $750 billion in outstanding and accumulating debts. For example, in 2018 the interest payments on this outstanding federal government debt totalled $23.3 billion representing 6.7% of total federal government expenditures. While the interest costs are much lower than their all-time high reached in 1996 when interest charges hit $47.3 billion or 29.8% of total federal government spending.
Covid Debt Time-bomb
With the cost of new federal debt needed to finance the economic cost of the COVID-19 pandemic yet to be tallied, how much additional government debt (bonds) will be sold to the private markets? Will the Government of Canada consider restoring the powers of the Bank of Canada to pre-1973 powers and purchase the “Covid Debt Bonds” and eventually retire or extinguish that debt once the economic pandemic has subsided?
The effect of such a change would remove a powerful economic tool from the hands of democratic governments and give such control to private financial markets and banks.
The evidence of rising levels of federal debt since that formative decision in 1974 is clear.
Covid’s rising debt price tag will only be tallied once the dust of new debt financing settles.
Since March 2020, during the last 6 months of the economic crisis brought on by the Covid-19 pandemic, the federal government has amassed over $400 billion in new debt to help Canadians survive economically.
The latest Bank of Canada accounts show some incredible changes since January 2020. As of August 31, 2020, the Bank of Canada balance sheet shows a massive explosion of debt held by the bank reaching over $542.5 billion from a little over $100 billion at the end of January, 2020.
Source: https://www.bankofcanada.ca/markets/government-securities-auctions/bank-of-canada-holdings/
https://www.bankofcanada.ca/2019/08/bank-canada-balance-sheet/#Detailed-breakdown-of-assets
Of this $542.5 billion total the Bank of Canada held:
- $228.1 billion in Government of Canada bonds
- $185.7 billion sold to Repos markets (A repo is a repurchase agreement; a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price).
- $106.9 billion in Government of Canada treasury bills
- $8.7 billion in Canada Mortgage bonds
- $8.4 billion in provincial bonds (It’s interesting to note that the BoC has NEVER held provincial debt instruments in its entire history until May 2020).
- $4.7 billion in cash and other instruments
How incredible that in a mere 6 months Canada has added $400 billion in debt while it took 45 years to amass $750 billion in federal government debt. The following graph shows the Bank of Canada’s change in total assets (debt instruments purchased and held) on the BoC’s balance sheet between 1960-2020. The spike since January 2020 is staggering.
The strategic questions for Canada are:
- Where did this new $400 billion come from?
- Do we know the % of public debt the Bank of Canada now owns?
- Has the Bank of Canada been buying provincial and municipal debt or only federal?
- So when Government of Canada pays the Bank of Canada interest on the new debt, where does the interest payment go?
- Does the Bank of Canada transfer proceeds to the Government of Canada on an annual basis?
- What are the capital flows between Government of Canada and Bank of Canada?
These are the most critical questions that need an open debate in the media and in our legislatures.
This is unprecedented time in Canada’s economic history. Could the Bank of Canada ultimately write-off and forgive the Covid debt in excess of at least $330 billion? Could it purchase and nationalize the repo market debt? How much additional interest costs from this new $542 billion in debt will be added to the federal budgets and thus our taxes?
Restoring the Role of the Bank of Canada as a Public Bank
Many Canadians do not appreciate the origins of the Bank of Canada and it’s original mandate to create money for the purposes of funding governments (both federal and provincial) should they happen to run an operating deficit due to unusual economic circumstances or crisis, such as Covid-19 presents.
The Bank of Canada was established in 1934 under private ownership but in 1938 the government nationalized the bank so since then it has been publicly owned. It was mandated to lend not only to the federal government but to provinces as well. To help bring Canada out of the Great Depression debt-free money was injected into various infrastructure projects. With the outbreak of World War II, it was the Bank of Canada that financed the enormously costly war effort helping Canada to create the world’s third largest navy and ranked fourth in production of allied war materiel. Afterwards, the Bank financed programs to assist WW2 veterans with vocational and university training and subsidized farmland.
For the next 30 years following World War II, it was the Bank of Canada that helped to transform Canada’s economy and lift the standards of living for Canadians. It was the Bank that financed a wide range of infrastructure projects and other ventures, including the construction of the Trans-Canada highway, the St. Lawrence Seaway, airports, and subway systems. In addition, during this period seniors’ pensions, family allowances, and Medicare were established, as well as nation-wide hospitals, universities, and research facilities.
The critical point is that between 1939 and 1974 the federal government borrowed extensively from its own central bank. That made its debt effectively interest-free, since the government owned the bank and got the benefit of any interest.
As public banking specialist Ellen Brown: “The difference is simply that a publicly-owned bank returns the interest to the government and the community, while a privately-owned bank siphons the interest into its capital account, to be reinvested at further interest, progressively drawing money out of the productive economy.”
What Canada’s leaders in 2020 need to understand and communicate to Canadians is the critical national strategy to restore the powers of the central and public Bank of Canada to create the necessary funds during times of economic/health crisis (akin to a state of war) and ensure we save future generations from the unnecessary interest costs that would diminish our collective well-being and happiness.