Madam Speaker, today is an occasion for us to pay a visit to the newly renewed popular idea called “modern” monetary theory. We put “modern” in quotation marks because it is a very old idea. It is thousands of years old, if the truth be told, but once again it is being presented as new.
Modern monetary theory is the idea that governments can spend as much as they want, and to pay for it they simply print the cash. They create the money because, of course, the bank, which it owns, in our case the Bank of Canada, has a monopoly on the creation of that currency. Why not just create more money in order to spend it?
The only limit on the amount that can be spent is when said money creation leads to inflation, at which point modern monetary theorists say the solution is to simply raise taxes to reduce the demand that was driving up the inflation in the first place. Once too much of that printed money starts chasing too few goods, the government taxes the money back and slows down the inflation. Effectively, it is a roundabout way to massively expand government up front while claiming there is no cost, and then, when prices spiral out of control, to try to tax them back into submission.
The government and the finance minister claim they do not believe in modern monetary theory, but we have to suspect that the minister believes in some version of it because she has imposed literally no limit whatsoever on her spending in the form of a fiscal anchor. There is only one difference between her version of modern monetary theory and its original theorists. The original proponents said that banks should simply give the money to the government to spend, whereas under the current model the government has set up, the bank sells the debt to the marketplace and then buys it right back at a higher price only weeks later, to the great profit of the investors with whom it carried out that transaction.
All of this sounds magical, as we are creating something from nothing, but as it has been said, there is nothing new except what is forgotten. To quote Reinhart and Rogoff, two Harvard professors who have studied 800 years of debt crises, “Early on across the world, as already noted, the main device for defaulting on government obligations was that of debasing the content of the coinage. Modern currency presses are just a technologically advanced and more efficient approach to achieving the same end.”
Perhaps the most creative of all of the modern monetary theorists was an emperor named Dionysius, from 2,500 years ago. He thought it was a modern idea then too. He was the dictator of the city state of Syracuse, and of course because of all of his sumptuous living and his ridiculous war fighting, he needed cash. He took the drachmas from his people, and on every one-drachma coin he stamped the number two. Then all of a sudden he had twice as much money.