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It is actually credit, and not money, that makes the world go around. That is why the upset in credit markets, provoked by the issue and sale of poor quality “sub-prime” mortgage debt by U.S. financial institutions, has captured world attention.

When borrowers cannot borrow, because lenders will not lend, you have a credit crunch. Without credit—the willingness to lend money today in the expectation it will be repaid later—those affected cease their activity, and the economy slows, causing job losses, personal bankruptcies, and cessation of business by many firms.

It was to ensure healthy credit conditions that the Bank of Canada was created. With the great depression as a backdrop, the need for government action to restore lending was obvious, so Canada created a central bank, and gave it a legislative mandate to act as a lender of last resort to financial institutions, to be the government's banker, and manage government debt, “regulating credit and currency in the best interests of economic life of the nation.”

For decades, finance ministers and central bank heads from the leading industrial nations (G10) have met to set the agenda for monetary policy. In recent years, a monomaniacal concern with controlling consumer inflation has dominated other legitimate concerns, such as runaway asset prices, where the value of stocks, companies, old masters and real property including houses has skyrocketed.

More importantly, the G10 have concluded, quietly and in secret with virtually no public debate, that central banks lending to governments was what provoked consumer inflation and that such lending should be kept to a minimum. ...

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Government-guaranteed Canada Infrastructure Bonds, to be purchased by the Bank of Canada, would serve to cover our most urgent needs, such as:

• hospitals
• schools
• roads
• waterworks
• other essential services

The repayment term of the bonds would match the estimated life span of the asset being considered, and in return for abiding by federal standards, part of the interest savings due to dividends could be passed on to the provinces or municipalities (leaving a net cost to the federal government of say 1% - 2%).

Rebuilding Canada's Infrastructure would create desireable new jobs for Canadians of all ages, ideally reducing today's unconsionable 7.5%(6 point something today) unemployment rate to a more modest 5% or less.

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"It is actually credit, and not money, that makes the world go around"

He's talking about investments in government and private sector debt as well as credit in home equity. The U.S housing bubble is all over the news and how the Federal Reserve has nothing but interest rate targeting to deal with the fallout. Our BoC has agreed to forgo an interest rate hike here.

Being somewhat familiar with Duncan's previous articles, he's likely referring to the fact that 95 percent of Canada's money creation is supplied by private banks to governments, businesses and people as interest-owing debt.

[ 22 August 2007: Message edited by: Fidel ]

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Originally posted by Doug:
I suppose the problem in government lending from the central bank is that it becomes easier to go to the bank to create money than to go to citizens and corporations to collect it in taxes and if repeated too often, yes, this will cause inflation.

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2.Canada's debt as a share of GDP went down significantly from 1945-1974. I haven't looked at the numbers for each year, but my guess is the government probably ran a surplus for many of those years. The Bank of Canada probably could have financed a small amount of debt when needed.

3.I finally figured out how the Bank of Canada could finance the debt. If the government raised reserve requirements to a very high level (say 50%), the money expansion multiplier would be very small and the Bank of Canada would be able to print more currency and supply some of it to the government of Canada.

There are obviously problems with such a system with the government crowding out private sector borrowing. The obvious consequence would be that private sector borrowers would pay higher interest.

The more practical problem would be the transition of raising the reserve requirement ratios. The only way this could be done would be for banks to call in many of the loans they now have in order to meet the higher reserve requirements. This would obviously result in economic devistation. I suppose a transition could be done over a long enough period of time, say 50 years or so.

The great thing though, is that this is entirely academic. Canada has been running a surplus for the past eight or nine years and has paid down over $70 billion in debt. This is good news.

As I've said before, there are times where I can see federal governments needing to go into deficit, but by and large, there is no reason why governments should not be able to finance all their operations through present taxes. If the government wants more money, it should raise taxes and not look for ways to get 'free money'.

There are people using Weimar Germany and "John Law bubble" as examples of the situation that's building now but on a global scale. Apparently the debts in those examples grew larger and faster than the amount of money they were able to print to service or roll over total debt without causing inflation. I get the feeling there has been a financial highwire act taking place for many years now, and something like this credit crunch has the potential for snowball effect. I think it doesn't sound good for the "new economy" that never was and is now disappearing anyway.

In general,I agree with Mr.Cameron. The reason for today's derivative meltdown is greed and big bank chicanery. No-one understands derivatives,not even the banks who create them.

A bank takes a group of specialist employees and consultants who each vett a small detail of aderivative agreement but have no inkling of the many other details. The result is a document that in its many parts may meet legal obligations but as a whole takes on a life of its own.

The Bretton Woods agreement started a trend of trust in the US dollar that enabled the financial industry to trade on that trust until they could literally sell any sort of worthless crap to an ever more liquid market greedy for ever higher returns.

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China and India have the attention of the world for their massive economic advances in acquiring Western technology. They are even taking over Western firms, and keeping their interest rates relatively low, while the central banks of Europe, the US, and Canada are relying on higher interest rates, to keep prices down and "cool" the economy. Instead of licking inflation, using interest rates as the only means of controlling their economies, prosperity has rewarded us with the subprime mortgages that threaten to cut the legs of our banks off at the knees.

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