Mo money, mo problems?
By Jessica Berget, Assistant Editor
To borrow a simplification from the Chronicle Herald, the Canadian government is issuing bonds, then printing money to buy most of them from itself.
With lockdowns still in effect across Canada and many people left unemployed or financially struggling as a result, the Liberal government has made COVID-19 relief benefits available for all Canadians who have been affected by the pandemic. But many are wondering where all this money is coming from, and how Canadians will be paying for it later.
According to Bloomberg, in response to the many Canadians needing financial aid, the Bank of Canada (BOC) has been buying hundreds of billions of federal, provincial, and corporate bonds. These bonds are a contract between two companies or government because they need to borrow money with the intention of paying the money back to the investor; the bonds are much like an IOU. The BOC has been buying these bonds through quantitative easing or in other words “printing more money” to expand economic activity—and this move has been both renowned and criticized by economists. Because of this, it is expected that the Bank of Canada will go from controlling 29 percent of Canada’s total bond market to more than 56 percent by the end of the year according to Ian Pollick, the head of fixed income, currency, and commodity research at the Canadian Imperial Bank of Commerce.
So far this year, Canada’s central bank has expanded its balance sheet (summary of financial balances) at 2.5 times the rate of the Federal Reserve (which is the US banking system responsible for money supply and interest rates). To borrow a simplification from the Chronicle Herald, the Canadian government is issuing bonds, then printing money to buy most of them from itself. Many argue this sounds like Modern Monetary Theory (MMT) which is a controversial framework that says monetarily independent countries (like Japan, Canada, US, and the UK) which spend money they fully control should not be constrained by revenue when it comes to government spending.
Canada’s GDP is less than two percent of the world’s output (compared to America at 24 percent). With the country’s smaller output, many wonder about the impact that printing more money will do to Canada’s economy and currency. One naysayer against this Modern Monetary Theory or the act of a country printing their own money is Greg Tkacz, an economist at St. Francis Xavier University and previous employee of the Bank of Canada. “[The provincial government] doesn’t have the luxury of an unlimited ability to print money,” said Tkacz in the same April 2020 Chronicle Herald article. “Any debt has to be paid back through higher taxes or reduced spending later on. Everything depends on how long the pandemic lasts. If it runs its course in three months, we should be fine. If it takes 12 to 18 months, that would be problematic.”
Many also argue that this act of government spending and printing money can lead to higher taxes and heightened inflation later on, but then again many argue this won’t happen depending on how the economy recovers. Steve Ambler, an economics professor at the university of Quebec in Montreal explains it better: “If inflation doesn’t show up in the next three years or four years then maybe the modern monetary theorists are going to be able to come out and say, ‘Hey! Look we were right,’” he explains in a CBC article. “I’m just extremely doubtful that that’s going to be the case because in the longer run, if we get back towards full employment, these huge money stocks eventually do become inflationary.”
One argument for the modern monetary theory is that any country that controls its own currency (like Canada does) should be able to do whatever they want with it—including printing as much as they want and increasing their debt to create a more balanced economy. In fact, some argue the ability to print their own money means Canada can never go broke or not be able to pay its bill no matter how much debt is acquired.
Many citizens worry about the increasing Canadian debt, but economist at Stony Brook University in New York, Stephanie Kelton says she has a solution in a June 2020 CBC article. “The Canadian government never needs to borrow its own currency, ever,” she explains. “Instead, the Bank of Canada could purchase our debt, interest-free, move it onto their balance sheet, hold it to maturity, stop issuing bonds and you’ll be done with the whole thing.” This may sound outlandish, but Japan has been doing this for awhile and their $11 trillion debt is owned by the Bank of Japan. The country also remains the world’s third largest economy, so many speculate that this would be the correct approach with Canada’s debt. While the two countries are similar in a lot of ways, they are still completely different, so it’s hard to say whether following Japan’s lead is the best approach for Canada.
As of November 2020, Canada’s deficit was on track to exceed $381 billion as a result of the pandemic financial supports. So far, only time will tell if printing more money was right course of action for Canada in dealing with the COVID-19 pandemic and how much Canadians will have to pay for it in the future.