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The Problem with the “Loonies”, Part Two

The Problem with the “Loonies”, Part Two
Profile photo of Caleb McMillan

poloz_wilkins_notesBecause the Loonies are often conspiratorial in their thinking, they’ve mistaken the peculiar case that “money is debt” by jumping to the conclusion that all debt certificates are the same thing as money.

Loonies believe the government can force interest-free loans through the nation’s central bank, the Bank of Canada.

The Loonie idea is that the federal debt can be liquidated by simply printing more money (or adding more digits on a computer screen). The government can essentially buy their own bonds with this new money thereby providing all Canadians a free lunch.

“Inflation, schmaflation,” says the Loonie, “the money supply won’t increase faster than goods and services. Replacing government securities with cash won’t change the size of the money supply.”

But why would I loan money to the Canadian government without the guarantee that the government will repay the principal plus interest? You can’t wish-away time preference.

Instead of accepting more loans, say the Loonies, the government should print money and spend it into circulation. They should do this when the old loans fall due. Instead of asking for new loans, the government pays off the lenders.

The Canadian government rolls over its debt to the general public every five years. The Loonies think having the government print $1.2 trillion which it will then hand over when the debt expires offers no adverse side effects.

Lunacy.

People who own Canadian debt — including insurance companies, trust funds, offshore banks, people with mutual funds that contain government bonds, etc. — will all of a sudden have this new money.

Will they spend it? Invest it? Burn it for warmth? Or ignore it as a superior cryptocurrency replaces the failed 20th-century national-fiat idea?

The lenders to the federal government, who have this new money, will deposit it into their bank accounts. This new money will multiply through fractional reserve banking.

Neither Canadian parliament nor the Bank of Canada have debited their accounts. This new money comes out of nowhere. People will buy assets with this money. The price of those assets will rise. It will cause an economic bubble, most likely, a bond market bubble.

Even with a 100% reserve banking system, people will still go out and buy things with this new money.

And as for foreign investors in Canadian debt — these people will likely look to discard this new money. They will buy investment assets from different countries. They will buy corporate bonds or commodities. They will expect a positive rate of return.

But the Loonies argue that foreign investors would be happy to accept new fiat money. They would spend it on a real goods and services and that won’t cause prices to rise because [insert confirmation bias here]

The banks could be forced to turn the new money over to the Bank of Canada as excess reserves. But the $1.2 trillion held by the general public will still be spent.

When money is created out of nothing, it floods the economy with new purchasing power. The result is price inflation. The value of the existing money falls in value. This is indisputable.

If the Loonies got their way, no one would buy anymore Canadian debt. No investor is going to give up money, which can be invested in corporate bonds, stocks and commodities, if this is how governments act.

But if the new money eliminates the debt, say the Loonies, then the Bank of Canada will never again have to borrow money to fund budgetary deficits.

So where’s the money coming from to cover deficits? The printing press of course!

The Loonies mistake debt certificates as the same thing as money.

Canadian Saving Bonds are IOUs from the government, they are not money. You cannot buy things with them. You cannot run an economy on IOUs.

The same is true for other forms of debt. People who give money to the government are issued IOUs. The IOUs are not money, they are promises to be paid money sometime in the future.

The Loonies say their plan offers no inflation because there is no net change. Newly printed money is supposed to be a substitute of a new form of money for an old form. This argument is dependent on not understanding the difference between money and an IOU.

There ain’t no such thing as a free lunch.

You cannot get something for nothing. Printing pieces of paper with the faces of dead prime ministers and Queen Elizabeth will not create wealth.

The Loonies are lunatics. And in the next part, we will examine their ignorant grasp of history.

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@Caleb983

Caleb McMillan is a writer that lives in Vancouver, British Columbia.

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