This is the first article in a series discussing the deterioration of Canada’s financial position and the need for monetary reform.
The financial woes Canada currently experiences have roots that reach back four decades. What is most alarming, is that even though Canada is in the best fiscal position out of all the other Western countries, it’s debt is still unsustainable for the future.
And the amount of compound interest that the government has to pay has increased over the years as well, a problem that has been affecting other participants of the economy. This series will provide an in-depth analysis of Canada’s monetary system and discuss how the system is designed to marginalize Canadians and perpetuate an endless cycle of debt.
It will also address contemporary viewpoints by scholars, as well as highlight steps for reforms as well. To begin with, we provide an overview of the current economic situation in Canada.
Canada’s Financial Position
The most significant reason for Canada’s fiscal woes has to do with a structural component, rooted in the private banking system. It is in the way the money is created by the private banks that is increasingly becoming the problem.
The full analysis of how the money is created and its significance is dealt more thoroughly in Part 2. The biggest decision that has propelled the government to its fiscal woes today stems from the actions the federal government undertook back in 1974.
It was in this year, that the Canadian government began borrowing from private banks, and the levels of Canadian debt rose over time, eventually constituting the $1.1 trillion figure that has become the net debt as of October 2011. The net debt figure constitutes the total corporate (private) + public (government) + and consumer (household) debt in Canada.
It is important to note, that the private banking system has not been the primary cause of the net debt, but rather, it facilitated in helping the net debt reach this point. Here is a link to Canada’s debt clock, in real time: Canada Debt Clock.
As of May 21, 2012 at 4:50pm, the net federal (government) debt stands at $584 billion, with each taxpayer having to owe $16,852 in order to eliminate it. And the numbers for both continue to rise, every second.
The private banking system may also be coined (no pun intended) as ‘the monetary system’ as well. The impact of borrowing from private banks has directly contributed to the massive debt, and has led to several detrimental effects on the Canadian people as will be emphasized below.
The private banking system also marginalizes on certain groups and shrouds the true problem in mystery. This is assisted by the different political parties that offer their own party ideologies but they do not tend to address the underlying systemic issue affecting Canada which is the private banking system.
The injustices created through the monetary system has led to government’s having to engage in extreme measures to pay off the debt, the very same debt that has caused the problems in the first place. The injustices of the current banking system have led to the following changes:
- Privatization of Federal Crown Assets
- Fiscal Austerity Cuts to Social Programs
- Borrowing from banks to fund Corporate Tax Cuts in efforts to spur economic growth
- Generous amounts of credit provided by banks for companies to expand through mergers and acquisitions
- Sizeable fluctuations in GDP growth depending on the sector
- Increasing compound interest rates, increasing the payouts governments have to give as part of GDP
- Wage stagnation while increasing Labour productivity
Each of these points is assessed in more detail below.
Privatization of Federal Crown Assets
The privatization of crown assets is a trend that began with the Northern Transportation Company in 1985, and then subsequently led to other privatizations as well. These privatizations have occurred because governments have faced budget deficits and required maintaining a surplus in order to make good on their debts that they issue as bonds in the international markets.
When governments produce surpluses, investors that hold Canadian debt are happy. With the increasing level of financial liberalization that has occurred in Canada over the past few decades as documented in the long running series: Into the Boiler Room: Deregulation of Canada’s Financial Industry, one begins to understand just how much influence the international market can wield on government debt.
Thus it has been in Canada’s best interests to maintain fiscal prudence and establish budget surpluses. And to maintain surpluses, Canadian governments have resorted to extreme measures such as the privatization of the Canadian National Railway in 1995.
The chart below depicts a list of federal crown corporations that have been privatized in the periods between 1986 – 1996, collectively garnering 7.2$ billion in proceeds. The graph is part of the document titled: The Fiscal Impact of Privatizations on Canada.
Ifs one takes a look at the net debt between 1993 and 1996 seen below, they see that the privatization of Federal Crown corporations did not noticeably affect the net debt at all. In fact, the debt is rising despite the 10 privatizations.
As depicted above, the strategy of privatizing federal crown corporations has not produced as much of a benefit for Canada as was originally expected. And usually, crown assets serve to improve revenues for government.
Certain key assets such as Ontario’s LCBO liquor board, or Ontario Hydro often remit a portion of their net earnings to the government. The governments then use these excess funds to balance budgets and redistribute it in the way they see fit.
History has shown that privatizations of these kinds of assets have led to a loss in future revenue streams for governments in order to balance their budgets effectively. In addition, while a state-owned corporation primarily serves the citizens of the state, the primary goal of a privately operated company is to generate profit for itself and private shareholders.
The risk of privatizing crown assets means that it may make these profits at the expense of customers who were served better when the assets were held in public hands. The privatizing of crown assets is usually done to treat the symptom which is the short term government budget deficit, and this has been encouraged and influenced by the private banking system through other forces such as austerity measures on the public which will be addressed below.
Fiscal Austerity through Program Cuts
As the net debt continues to increase, not only have governments resorted to privatizing their crown assets, governments also take measures towards fiscal austerity in order to reduce their expenditures and maintain budget surpluses. In fact, the Canadian government has just recently brought in austerity measures in order to address the budget deficit that has been growing since 2000.
The government instituted a plan to balance their budget for the year ending 2016 as indicated in their latest budget report released in March titled: Economic Action Plan 2012. A look into the budget document, demonstrates the amount of cuts that have been placed on each of the major governmental departments and the cuts that have affected funding for social programs.
As of 2012, the government announced the following changes:
- A gradually increase in the age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement benefits from 65 to 67. This change will start in April 2023, with full implementation by January 2029
- Changes to admissibility on employment insurance as well as 5% limits to EI rate increases
- $8 billion dollars in public sector spending cuts resulting in the layoffs of 19,000+ public sector workers, and more layoffs to come in the coming years
These are just a few of the tough decisions the government has had to make as a result of allowing the private banking sector to operate in the manner that it currently does without much in the way of reforms.
Another such major problem with the private banking sector is the compound interest rates that the private banks charge upon the government and the growing number of debt payments that have been issued out as a result of the monetary system.
Compound interest rates as part of GDP
In the fiscal year of 2010-2011, the Canadian public debt charges amounted to $30.9 billion. This figure is represented below and it represents the interest on the net debt.
Unfortunately, the latest budget is a perfect example of governments neglecting to address the root problem of the monetary system. Rather, the current government’s focus is limited in scope as it does not address reducing the $30.9 billion in interest payments that are taking a toll on the government’s ability to spend.
This problem spills over into other areas such as resulting in cuts to social programs, as well as the layoffs that have reduced over 19,000 public sector jobs as of late. The effects of fiscal austerity are clearly being seen in Europe today, and its effects have been devastating.
The austerity measures have not produced any meaningful growth for the countries that have had to undergo it. The increasing reality is that one cannot cut their way to prosperity. Some individuals have advocated for implementing as much austerity and privatization as is necessary, in order to begin a plan in reducing the net debt.
The issue goes beyond simply reducing the net debt, as the complete elimination of the debt that the monetary system creates, is all but impossible to accomplish. The intricacies of the monetary system and reasons for the problem mentioned above are described in part 2 of this series.
In 2000, the Chrétien Liberals, and later Paul Martin, began to decrease corporate tax rates in an effort to spur economic growth through corporate tax savings. Initially the tax rate was 28% up until 2000, but this was later reduced incrementally, down to 21% in 2006.
After the Progressive Conservatives took power in 2006, the tax rate was further reduced in the hopes that corporations would reinvest the tax breaks and create more jobs. Nothing could be further from the truth as the benefits of the tax cuts on job creation have not materialized.
And there are two problems with the current method of tax cuts. The first problem is that the tax cuts provided by the government have not been reinvested to create more jobs. This problem has been noted in a report titled: What Did Corporate Tax Cuts Deliver by the Canadian Labour Congress (CLC): The report stated that the tax cuts provided by the government were not being reinvested to create more jobs.
Rather, it reduced the revenue. As the CLC report pointed out; each one percentage point cut to the corporate income tax rate has ended up costing (and continues to cost) the federal government about $2 billion in annual revenues.
In addition to the loss in annual revenue, the federal government has had to borrow money from the private banks in order to fund these tax cuts.
This has created a domino effect whereby governments have had to borrow money, thereby increasing the debt, in order to fund corporate tax cuts, which has decreased the annual revenue of the government further, and has undermined the government’s ability in paying down its net debt.
With a reduction in government revenues, the only tools the government have at their disposal, have been to raise taxes, implement austerity measures, privatize crown assets, and others. All of these options have had a detrimental effect on the Canadian public and do not address the underlying problem inherent in the private banking system.
An analysis into several key sectors of the economy presents some very interesting trends. These are described below.
The net debt has created large pressures in the economy, and the financial crisis of 2008 has exacerbated the conditions of economic growth in Canada. The chart below looks at the unemployment figures between the 1970s up until 2011.
Bear in mind, that this chart is missing certain categories that have not been included in the calculation of the official unemployment rate. The official Canadian unemployment rate fails to include:
- People who work part-time but want full-time positions (not classified as under-employed)
- Discouraged Workers who have stopped looking for employment in the past 4 weeks
- Military Personnel and Armed Forces Members
An alternative measurement of the unemployment is also conducted by Statistics Canada located here: Alternative measures of unemployment.
And below we also present an analysis of the GDP by sector.
Allocating GDP by sector allows an analysis of each sector’s share in overall aggregate production and how it evolves over time. Data obtained in this manner reveals interesting trends that may develop within the economy.
GDP 2001 – 2010 Mining, Quarrying, and Oil
GDP in the Mining, Quarrying, and Oil and Gas Extraction sector increased from $51.2 billion in 2001 to $53.9 billion in 2010. The increase in GDP reported between 2001 and 2010 represented a compound annual rate of 0.6%.
Between 2009 and 2010, the total value-added of the Mining, Quarrying, and Oil and Gas Extraction sector increased by 4.8%. As oil prices increase, this sector will continue to see improved growth, and Western Canada will enjoy revenue’s from the sale of its oil and natural gas.
GDP 2001-2010 Manufacturing
GDP in the Manufacturing sector decreased from $181.1 billion in 2001 to $159.7 billion in 2010. The decrease in GDP reported between 2001 and 2010 represents a compound annual rate of 1.4%.
Between 2009 and 2010, the total value-added of the Manufacturing sector increased by 5.7%. Since the implementation of NAFTA and the Free trade Agreement, manufacturing has been on a slow decline since 1987.
Not surprisingly, the services sector including Finance, Insurance, and Real Estate has shown remarkable gains over the past decade
GDP 2001 – 2010 Finance and Insurance, Real Estate and Lending
GDP in the Finance and Insurance sector has increased from $62.8 billion in 2001 to $83.5 billion in 2010. The increase in the GDP reported between 2001 and 2010 represented a compound annual rate of 3.2%.
Between 2009 and 2010, the total value-added of the Finance and Insurance sector increased by 2.3%.
An interesting thing to note is that the total value added to the economy in the financial and insurance sector had been 2.4% less than the manufacturing sector. The significance of this point is that the growth has come at the expense of the manufacturing sector, and much of this “growth” tends to represent above market values on the assets of the bank’s balance sheets.
Thus from the points presented above, one can easily determine which sectors have been most favored and which have been neglected the most as a result of the private banking system.
The FIRE (financial, insurance, and real estate) sector has grown due in part due to excess bank credit that has fueled the rising levels of debt, and has created inflationary pressures that have negatively affected the wages of laborers.
A report by the Centre for the Study of Living Standards (CSLS) in a report titled: The Relationship Between labour Productivity And Real Wage Growth In Canada and OECD Countries. The report found that back in 2010, the median real earnings of Canadians barely increased between 1980 and 2005; however, over the same period however, labour productivity rose by 37.4%.
Labour productivity refers to the output generated per hour of work. The significance of this is that, while worker productivity increased by 37.4%, workers were still being paid their normal rate, their wages did not increase despite the fact that they were producing more.
The report calculates the median earnings rather than the mean earnings due to the mean’s susceptibility to extreme variables.
Mean earnings are not used since the high wages of those such as doctors and the relative low wages of other jobs interfere with the accuracy of mean earnings.
A table below shows the gap between labor productivity and the earnings of full time workers.
The graph indicates that workers have been working harder while wages have been stagnating. The stagnation has been due in part to inflation which has reduced the purchasing power of people’s wages.
Not only that, but monetary policies enacted by the Bank of Canada through setting low interest rates, has also adversely affected the prosperity of workers. This is because savers do not receive much return on their savings (held as deposits in the banks) in order to combat inflationary pressures.
The excess inflation has been caused by the private banking system where the banks have granted excessive loans at low interest rates. This has inflated the money supply. Another important thing to note, is key change brought in 1992, that granted banks more opportunities through the phasing out of reserve ratios which had historically been parked in the Bank of Canada.
This change, as well as the recent low interest rates, has incentivized banks to offer copious amount of loans. The excess loans that banks have given out have also been used by corporations in order to facilitate management strategies, a prime one being mergers and acquisitions.
Mergers and Acquisitions
The excess capital that corporations have been given has allowed them to enter into leveraged buy-outs of their competitors and other private companies. A leveraged buy-out is a strategic acquisition of one corporation to another, by using a significant amount of borrowed money (i.e. from a bank).
A significant amounts of mergers and acquisitions has a dual effect, both on centralizing corporate power, and in creating monopolies in the private sector as well.
These mergers have also reduced certain kinds of revenue streams for the government. With these mergers, companies have increased their “efficiency” and economies of scale by combining their operations.From a corporate stand point, increasing ‘efficiencies’ usually means reducing costs by cutting jobs.
Mergers tend to increase unemployment, and when people do not have money to spend as a result of job cuts, the government reverts back to ineffective corporate tax cuts which the executives use to facilitate bigger bonuses.
Mergers also benefit private banks in another way – since banks have also been granted privileges due to deregulation, to act as brokers between merger dealings. This helps bring in millions of dollars for Bay St. brokerage firms
Thus far, the arguments presented above demonstrate that the private banking system is in desperate need of reform. The private banking system has influenced, and affected the following forces:
- Privatization of crown assets
- Fiscal austerity measures and cuts to social programs
- Corporate tax cuts
- Selective GDP growth depending on the sector
- Increasing amount of tax dollar to pay compound interest rates
- Wage stagnation while increasing Labour productivity
- Mergers and acquisitions of corporations
Canada has been very fortunate thus far, to have a lower debt-to-GDP ratio compared to other western nations, and is in the best position to reverse course.
The private banking system operates in a very convoluted manner, and it is because of its complexity, that it has been allowed to exist in the manner that it is in currently.
In fact, it was John Kenneth Galbraith that once said,
The study of money, above all other fields is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple that the mind is repelled.
The next article examines the monetary system in greater detail.