Comparing Canada's finances to a household is misleading
Letter in Vancouver Sun [Vancouver, B.C] 26 Nov 2016 (with footnotes to editor)
Re: Liberals borrowing to keep the lights on, John Ivison | November 16, 2016
Households who borrow to keep the lights on likely do not own a central bank. Owning a central bank makes a big difference, since such banks create money out of thin air. Governments which own one have the capacity to pay for extended wars and to bail out whole financial systems in times of crises, capacities far beyond those of the average household.
Commentators who liken the fiscal powers of monetarily sovereign governments to households demonstrate ignorance of the basics. When economies are in the doldrums, governments must spend sufficiently to support the private sector. Failure to do so leads to a downward spiral of increasing unemployment as Eurozone countries have proven with their on-going policies of austerity.
As long as domestic resources are available, governments that issue sovereign currencies have power and responsibility never to let their citizens sit in the dark.
1. Pavlina R. Tcherneva, Assistant Professor, Franklin and Marshall College
Myth #1: The government should balance its books like a private household.
Reality: Our federal government is the issuer of the currency, which makes its budget fundamentally different than the average citizen's.
A government is the issuer of the currency. The household, on the other hand, is the user.
Government is constrained only by the inflation it can create by over-spending, but its ability to spend is numerically unlimited. Households are constrained by their ability to get dollars from some form income and from borrowing, and both of those have real limits.
2. What is Modern Monetary Theory, or “MMT”?
"The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.
Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual."
Modern Monetary Theory in Canada