In early December 2015, Mark Carney, former Governor of the Bank of Canada and currently the Governor of the Bank of England spoke at the United Nations Climate Change Conference in Paris. The Carney presentation addressed the international urgency for concrete initiatives to arrest global warming and at the same time emphasized the link of global warming to the economic and financial initiatives of the attendee countries' economies .
In follow up, on December 20, 2015 the CBC program One-on-One aired an excellent interview between Peter Mansbridge, CBC National News anchor and Mark Carney. A key topic was Carney’s recent presentation at the Paris UN Climate Change Conference. In response to questions from Mansbridge, Carney referred back to the Kyoto Protocol and the sporadic ebb and flow of the commitment of attendee countries. Carney again spoke of the interrelationship of those commitments as they related to our Canadian economy as well as global financial stability.
How do these subjects relate to our situation here in Canada? Well as we know, during the 2015 Federal election, the Liberal Platform covered a broad range of subjects. Major items Liberals spoke about were:
- climate change/global warming,
- aboriginal funding,
- the sagging Canadian economy,
- infrastructure investing/spending,
- federal debt/deficit projections.
During the debates, each of these topics were considered in isolation. Predictably then, the solutions that came were silo'd, and a mistake according to Mark Carney. So how do we get find solutions that are wholelistic?
Bank of Canada Printing Money – Economic Theory
When the Bank of Canada prints money to fund any major project (the cost of which is well in excess of the economic value of the project) the impact may create inflation. This is a simplistic theory. However, a common thought is that printing money and increasing the money supply always causes inflation. That however, is a single step economic theory and not necessarily how inflation works today. Along with some international regulatory roadblocks such as the Basel Accord, this creates a false alarm preventing our government from ‘jump starting’ our badly sagging economy. It is the responsibility of the Bank of Canada to maintain a balance between the money supply and the demand for goods and services.
A good case-in-point could have been the 107.3 km 407 ETR. The 407 ETR project could have been a federally funded project operating as a Crown Corporation, or as an adjunct to the Trans Canada Highway. The Bank of Canada could have funded the project by printing money to pay for the construction of a Federal highway. Today the 407ETR would be a revenue generating Crown Corporation providing a huge economic benefit and still be a Canadian asset. That of course didn’t happen. In 1999 the Ontario Conservative Government under Mike Harris leased the 407 ETR for 99 years to a Spanish consortium in order to fund it.
As an observation, it could be argued that Federal governments in the US and Canada, year over year continually run deficit budgets to fund make-work projects. These ultimately result in more Federal debt with very little tangible benefit other than short term job creation and GDP growth. These projects tend to last as long as the current political party’s remaining term in office, and it could be argued that these types of measures create a false economy.
Both the Federal Government and most of our Provincial Governments run deficits and have large debt, with servicing obligations. When governments borrow money without repaying it. It might result in inflation, which is a discussion for another day. Building real infrastructure equates to actual economic value and growth in GDP.
Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.
Printing money under the right set of circumstances and thereby a growth in money supply (M) does not per se cause inflation. (Google: Forbes – Milton Friedman – Printing Money Does Not Cause Inflation and Forbes - Friedman vs Keynes).
There is a major difference between the cost to refurbish infrastructure and infrastructure investment. When the ultimate economic value of the project is well below the dollar cost of the project, it is an expense. Repairing infrastructure roadways, bridges and overpasses is an expense, and are an absolute necessity. The $125 billion in infrastructure spending promised by the current Federal government is far greater than its economic value, and as such is an expense rather than an investment. These promised federal projects should be funded as an expense under the traditional government budget process and not by printing more money.
Stimulating the Canadian Economy
Infrastructure projects are when the economic benefit of the project (measured by GDP and asset value) is well in excess of the dollar cost to create the project. Printing money to fund these projects under an Act of Parliament, is an investment and does not create inflation. The economic impact of major projects of this type can jump-start a sagging economy.
As an aside, continuing to run Federal deficits year over year when combined with the negative impact of compound interest on our existing $600+ billion Federal debt has been at the core of our problems dating back to the mid 70’s. Over 90% of total Federal debt is unpaid interest.
On the subject of infrastructure investment, High Speed Rail (HSR) in both Canada and the United States is decades past due with no tangible HSR plans on the drawing board although the solution is a fairly simple matter. Let’s look at the implementation of a joint venture with the US that includes US destinations of High Speed Rail (HSR) in Canada.
High Speed Rail Canada
High Speed Rail Canada is Federal lobby group. The HSR 2011 Report had a budget cost of $100 Billion together with a simple rule that the vast majority of goods and services must come from a Canadian provider and wherever possible, from the Canadian province through which the HSR track would travel.
The $100 billion is a number for discussion purposes only. The projected cost of the Toronto/Ottawa/Montreal HSR segment was $9.1 Billion to travel mainly on the existing upgraded rail bed which would certainly be a compromise versus a more complete solution. HSR systems in Europe and Asia run on a concrete and concrete additives rail bed. As a country with so much economic promise, a compromise solution should not be an alternative. The population within access to the corridor is 18 million people or one half the population of Canada. The HSR Report contains data on a complete national HSR system that includes the joint-venture portion with the US to service New York, Boston and Chicago etc.
For a complete National solution, the Bank of Canada could fund the HSR project through Transport Canada and print $100 billion. At the outset there would be an increase of $100 billion in the Money Supply. This type of investment could be a far better solution in creating true Canadian Infrastructure.
