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Canada compared to Japan…
Why a high debt-to-GDP ratio does not condemn Canada to high interest & inflation

Article featured in the Winter 2020-21 print edition, Vol. 34, No. 2 (without footnotes, which are included below)

Larry Kazdan, Vancouver BC
[This article is Larry's response to an Oct. 20th National Post article by John Ivison, titled:  Canada is heading into a 'foggy' fiscal future, new C.D. Howe report warns]

Even though Japan has the highest debt-to-GDP ratio in the world and the Bank of Japan holds about half of all outstanding government bonds, Japanese interest rates and inflation are exceedingly low. Mainstream economic theory cannot account for these real-world results which completely contradict its predictions.

For those agonizing over potentially higher interest rates on pandemic-induced Canadian federal debt, please note that the Bank of Canada can keep buying more Canada bonds (as it is now doing), the interest expense returns to the government as shareholder profits, and while private-sector bond coupon-clippers will no doubt scream about the loss of their no-risk income, the Canadian sky will continue to shine as brightly as it does in the Land of the Rising Sun.

Footnotes (Not included in the print edition of Vol.34-2):

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."

2. New IMF Paper Shows Yet Again that Reinhart and Rogoff Results Are Erroneous


"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."

4. Let’s not get serious, Paul Krugman


"..it somehow became conventional wisdom that debt and deficits were a huge threat, far more important than mass unemployment.

Where did this conventional wisdom come from? Not from the markets, which showed no concern whatsoever about U.S. solvency. Not from the math, which didn’t suggest any problem with running large deficits for multiple years. Not from history: advanced countries like Britain for much of the 20th century and Japan for much of the 21st so far saw debt exceed 150 percent of GDP without experiencing any kind of crisis.

But going on about debt, talking about the need to make tough choices, sounded serious and hardheaded. It sounded even more serious because all the other serious-sounding people were saying the same thing."

5. Alan Greenspan, former U.S. Federal Reserve Chairman, 1997

"[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."

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Email: lkazdan@gmail.com (604) 874-9982

Larry Kazdan has undergraduate degrees in history and sociology and is a retired Chartered Professional Accountant; Larry runs the website:
Modern Monetary Theory in Canada

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