Household debt reduction requires federal deficits

Re: Bank of Canada deputy governor raises red flag on rising household debt, but says system is ‘resilient’, Gordon Isfeld | Feb. 24, 2016

Let us connect the dots for Bank of Canada analysts. Oil has plummeted, and Canada has a trade deficit which means we spend more on imports than foreigners buy here. In addition, the federal Conservatives balanced their last budget by cutting government expenditures and reducing purchases in the economy. Furthermore, the Conservatives had a policy of suppressing wages by attacking unions, privatizing, and bringing in temporary foreign workers. When demand at home drops, domestic businesses are understandingly reluctant to invest in new productive capacity, and will also cut back on their own expenditures.

So how can the remaining household sector keep the economy afloat other than by running down savings and increasing its debt? As the BoC deputy governor admits, rising private sector debt is unsustainable. Since the trade deficit is unlikely to change soon, the federal government must replenish the pockets of Canadians by injecting money into the economy through a massive stimulus program. BoC Governor Stephen Poloz has in fact called for increased government spending, and former Governor David Dodge advised, “The right thing to do is to run cash deficits and perhaps of a considerable magnitude.”

Footnotes:

1. William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia http://bilbo.economicoutlook.net/blog/?p=31908

"If there are external deficits and the government continues to balance its fiscal position (only spends what it raises in taxes) then the private domestic sector will run continuous deficits equal to the external deficit and thus incur ever increasing levels of debt. That is an unsustainable state..... Continuous government deficits are likely to be required if the non-government sector desires to save overall and maintain sustainable levels of private debt."

2. Bank of Canada’s Stephen Poloz tells Trudeau government to spend: Walkom http://www.thestar.com/news/canada/2015/12/10/bank-of-canadas-stephen-po...

"Canada’s central bank chief says that running deficits is the most effective way to restart a stalled economy."

3. Former Bank of Canada Governor David Dodge said provincial and federal governments should run budget deficits http://www.bloomberg.com/news/articles/2015-04-29/dodge-says-canada-need...

-- Larry Kazdan CPA, CGA,

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Modern Monetary Theory in Canada

http://mmtincanada.jimdo.com/