Public Debt and Pandemic
Massive deficit to be revealed today begins new era of debt for Canada, Kait Bolongaro, Jul 08, 2020
The federal government need not agonize over deficits, debt limits or debt ratios. These accounting numbers in themselves have little significance for developed countries like Canada, the United States and Japan who are monopoly issuers of their own sovereign fiat currencies.
The real world evidence is provided by Japan. Japan is the most heavily indebted country in the world by debt-to-GDP ratio, a ratio many times that of Canada. Yet far from experiencing a fiscal crisis, Japan has floated bonds at negative interest rates. Just to hold safe government bonds, investors are willing to pay a premium.
Canada does have real crises - a pandemic cratering the economy, aging infrastructure, growing inequality, and threatening climate change. A fictional fiscal crisis should not be used as an excuse to prevent government from taking robust action on vital issues. Until provinces, businesses and workers can recover their normal incomes, the government must be the spender of last resort to keep people whole and the economy functional.
1. Fiat Money and its Social Significance
"Japan is a case in point. In that country, the government has implemented very large budget deficits year after year since the Asian crisis. The rating agencies downgraded Japan’s credit rating significantly, which many observers initially feared would undermine confidence in the Japanese yen, and cause inflation and high interest rates. But this has not occurred. Demand for government debt has remained strong with interest rates at or near zero, and inflation is not at all in prospect."
"If you’ve got your own sovereign currency, and you do not peg, and you do not issue debt denominated in a foreign currency, then there is no reason to suppose that higher debt ratios cause lower economic growth. Yes, budget deficits can be too high—causing inflation. They can be too low—causing slumps. Debt ratios can be high for “good reasons” and they can be high for “bad reasons”. Focusing on government debt ratios, alone, tells you nothing about the health of the economy in such cases."
3. William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia
"Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be whatever it is – a relatively uninteresting and irrelevant statistical artifact."