Our National Debt

[The Terrible Sweal]

Thanks for the recommendation.

[Hugo]

The Bank of Canada can arguably set the nominal interest rate but certainly not the real interest rate. It no longer sets reserve requirements.

How is the BOC setting interest rates if it no longer has a reserve requirement? Furthermore, what is the use of a nominal interest rate if it has no effect on real interest rate? My point was true for the US or UK rather than Canada. The abolition of reserve banking is undoubtedly a good thing.

I think it's impossible to outlaw budget deficits and I'm not certain anyone would want to. In any case, deficits are not the problem. Government spending is the problem.

There was a movement under Reagan, narrowly defeated, to set a Constitutional amendment that would limit government spending to a percentage of GDP. This would be a far better curb on government spending than either. It would never pass in this political climate, but setting a cap at 10% of GDP for government spending at all levels would do wonders for Canada. Link that to a flat income tax and a return to the gold standard and we'd be an economic powerhouse in no time. You could watch unemployment dwindle away and real incomes skyrocket.

[August1991]

How is the BOC setting interest rates if it no longer has a reserve requirement?

Changing reserve requirements is only one way to influence interest rates.

The abolition of reserve banking is undoubtedly a good thing.

Canada and I believe Australia, NZ and Switzerland no longer have regulated reserve requirements. The UK too, maybe.

There was a movement under Reagan, narrowly defeated, to set a Constitutional amendment that would limit government spending to a percentage of GDP.

That's what I was thinking of.

It would never work in part because no one really knows what the deficit is. It would be difficult to define and it would be easy to circumvent the definition. I think in Ontario, there was a provincial law about not raising taxes. IMV, such laws are meaningless.

[Hugo]

Changing reserve requirements is only one way to influence interest rates.

That's true. It is, however, quite a good way to conceal inflatory measures. It may be that the Canadian government has happened upon a better way.

Canada and I believe Australia, NZ and Switzerland no longer have regulated reserve requirements. The UK too, maybe.

Switzerland and Sweden have abandoned the reserve method. However, the Board of Governors of the Federal Reserve System finds in a paper (PDF required) that this is because those countries have found that they can manipulate inflation/interest rates sufficiently without a reserve, instead using a tunnel system.

The Bank of England maintains a reserve, but this is to fund themselves rather than to manipulate monetary policy.

The only sure way to abolish governmental manipulation of inflation and interest rates is to return to commodity-based money. There seems to be no indication that this will happen any time soon.

It would never work in part because no one really knows what the deficit is. It would be difficult to define and it would be easy to circumvent the definition. I think in Ontario, there was a provincial law about not raising taxes. IMV, such laws are meaningless.

The problem is that Dalton McGuinty evidently agrees with you. The law in Ontario stipulates that new taxes must be approved by referendum and McGuinty has flouted it. The Canadian Taxpayers Federation filed a lawsuit against McGuinty and Sorbara for violation of this law.

I do agree that such laws would be meaningless. An Act can be flouted, evidently, and it is unlikely that an amendment to the Constitution either in Canada or the US would be passed without some sort of clause stating that it can be overridden in the case of national emergency (such as war or recession), in which case, such an amendment would be similarly useless. The political climate has changed since Reagan's time, and if such a measure couldn't pass then, it definitely won't now. I can't see any major political party in the US or Canada supporting it.

[takeanumber]

Just keep on trying to revive the reputation of Mulroney.

Nobody with a brain buys it.

I'm not going to take economics lessons from a seperatist (still enjoying the EI transfers?) and a social con (how's the welfare?).

[Argus]

The government under Mulron$#@&*#$ paid high interest on the debt because it devised high interest rate policies.

<{POST_SNAPBACK}>

There really wasn't a hell of a lot of choice. Our economy is tied too closely with the Americans. There's no way the Bank of Canada could have left interest rates low while the US central bank was jacking theirs up to the roof. It would have drained all the investment out of Canada and sent the dollar into the toilet (thus jacking up inflation, which would have then required higher interest rates anyway).

[Argus]

Just keep on trying to revive the reputation of Mulroney.

Nobody with a brain buys it.

I'm not going to take economics lessons from a seperatist (still enjoying the EI transfers?) and a social con (how's the welfare?).

<{POST_SNAPBACK}>

That is the sulky answer of an overmatched child. I doubt August is a separatist. As for me, I probably pay more in taxes than you earn, boy.

[August1991]

Just keep on trying to revive the reputation of Mulroney.

Nobody with a brain buys it.

I'm not going to take economics lessons from a seperatist (still enjoying the EI transfers?) and a social con (how's the welfare?).

<{POST_SNAPBACK}>

Fuhgedabboutit

Switzerland and Sweden have abandoned the reserve method. However, the Board of Governors of the Federal Reserve System finds in a paper (PDF required) that this is because those countries have found that they can manipulate inflation/interest rates sufficiently without a reserve, instead using a tunnel system.

Commercial banks in those countries still have reserves, but the size of the reserves is not dictated by the central bank. The commercial banks decide themselves what reserves to keep. In Canada, those reserves would be base money issued by the Bank of Canada.

Canada (Mulroney in fact) deregulated this primarily to make the commercial banks more competitive.