Phantom Debt | Unpublished

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Unpublished Opinions

Larry Kazdan's picture
Vancouver, British Columbia
About the author

Larry Kazdan has undergraduate degrees in history and sociology, is a retired Chartered Professional Accountant and runs the website
Modern Monetary Theory in Canada.

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Phantom Debt

March 5, 2021

     Re:  What if we just cancelled Canada’s pandemic debt? Konrad Yakabuski, February 11, 2021


    If people transfer $100 from their left pockets to right, they can record that transaction as a right pocket debt, but for most purposes they are neither poorer, richer, nor further indebted.

    The same applies to the federal government which can "borrow" from its wholly-owned Bank of Canada, a creature of federal legislation. The difference between a person and a central bank is that the person must obtain the hundred dollars first before it can be "loaned" to the other pocket whereas the central bank can create money out of thin air for government use. That's what central banks do. 

    Shocking as it may seem to those who believe the government must somehow be indebted to itself, government bonds held by the Bank of Canada can easily be canceled without effect because they are simply an accounting record of a phantom debt.



    1. Fiscal prudes are fretting about the wrong issues

        "The left, the right and people who should know better, like the PBO, are wrong because they cannot escape thinking of the federal government as if it were a household whose credit card was maxed out.


        What they all seem to forget is that the federal government has the power to create new money. In fact, it effectively creates new money every time it spends." 


        "As the nation’s central bank, the Bank is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity in unlimited amounts at any time. "

    3. Alan Greenspan, "We can always print money..."          

        "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."

    4. “Prudential Liquidity Management Plan” (PLMP) 

        "This plan, enacted largely in response to the 2008 financial crisis, called for an emergency fund to the tune of approximately $20 billion to be held at the Bank of Canada on behalf of the Federal Government.


        ....instead of going straight to the debt market or tax base to fund their $20 billion contingency fund, the Federal Government instead turned to the BoC to monetize new bond issuances. The BoC subsequently purchased approximately $20 billion in new government bonds between 2011 and 2013 and credited the Federal Government’s account at the BoC with this newly-created money."

    5. Canada – MMT poster child?

        The Canadian Money Saver magazine (January 2020 edition) article infers that:

            "Canada is effectively the poster child for MMT-like operations in the developed world, with no current barrier preventing the Bank of Canada from effectively funding one hundred percent of government spending if it so chooses." 

           And that these monetary operations have been “taking place in Canada for the better part of a century”.

    6. How We Think About the Deficit Is Mostly Wrong

        "When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.


        Of course, there are real limits to what can be done. No country can commit to large-scale infrastructure investment unless it has the available labor, machinery, concrete and steel. Trying to spend too much will cause an inflation problem. The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have." 

    7. War finance:  William Greider describes the almost circular mechanics of the process

    "To ensure a successful bond sale … the Fed expanded bank reserves by buying up outstanding government securities. The commercial banks lent the expanded money supply to private customers who would in turn lend it to the government by buying the new Treasury issues. The customers then sold their new government securities to the commercial banks—and they eventually sold them back to the Fed when the central bank was again required to expand the money supply. In a roundabout way, the government was borrowing its own money—and paying a fixed fee to middlemen for the privilege."

    8. Banque de France should write off its holdings of State debt 

    "The article proposes that the Banque de France cancels its holding of French government debt (the €370 billion), which could also lead other national central banks in the Eurosystem following suit with respect to their own government debt holdings. He argues that the cancellation (write off) would have no negative social impacts and could help Eurozone governments fund the transition to a low-carbon future. Above all, it reflects an understanding of Modern Monetary Theory (MMT)."




    Modern Monetary Theory in Canada