Comment 74707

By A Smith (anonymous) | Posted February 23, 2012 at 12:21:02 in reply to Comment 74690

Government debt, specifically, federal debt, is not actually debt at all, regardless of what our leaders tell us.

Here is a quote from a paper put out by the Parliament of Canada...

"It should be noted that the absence of sales of government bonds or treasury bills in the context of a prolonged fiscal deficit would cause the Receiver General account cash balance to go into overdraft. The central bank may object to this approach, however, because it might give the public the perception that the federal government is financing its spending using a “line of credit.” Nonetheless, the approach is sensible from an operations standpoint.

Did you catch that?

From an actual operations standpoint, the federal government COULD keep spending, even WITHOUT bond sales. That would occur because the Bank of Canada could just keep crediting money to their account.

Here is how the paper describes the role of federal debt...

"2.2 The “Traditional” Tool: The Bank of Canada’s Open Market Operations

Open market operations consist of withdrawing cash from the economy by selling government securities to financial institutions, or injecting cash into the economy by buying government securities from financial institutions.

The target for the overnight rate dictates the interest rate at which the Bank buys or sells these securities. If the overnight rate is trading above the target – a sign that there is not enough cash available to lend in the interbank market – the Bank will intervene by adding liquidity to the private economy through the purchase of government securities.

Conversely, if the overnight rate is trading below the target rate – a sign that there is too much cash available to lend in the interbank market – the Bank will intervene by withdrawing liquidity from the private economy through the sale of government securities."

Federal debt is just a tool to control interest rates. It is not something our children EVER have to pay back, it is not a moral issue, it is just a reserve drain AND is actually a prime source of savings for Canadians.

The ONLY reason why Canadians think public debt is bad, is because it is called PUBLIC DEBT. It just sounds bad.

In reality, the federal debt is just the amount of money the feds have put into the private sector and not taxed back out of circulation.

Bigger federal deficit = Higher private savings

Larger federal surplus = Higher household debt

That's why as the federal debt has been reduced the past decade, household debt has soared. The feds, in paying down their debt, have simply drained private savings from the banking system, forcing people to borrow from the banks.

With unemployment at 7.6%, the feds should cut taxes, run a larger deficit, which would allow Canadians to spend more and also pay down bank debt. The fact that this is not happening is because people still believe that the feds are spending constrained. However, according to the Parliament of Canada, this just isn't true.

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