Madam Speaker, the Prime Minister thinks he has discovered a cornucopia of cash. In the last fiscal year he ran a deficit of $354 billion. From February 2020 until February 2021, the Bank of Canada increased the money supply by, guess what, $354 billion. The Prime Minister thinks this is great: It is easy money. He is starting to get addicted to this idea of cash flying out of printing machines and new coins being machine-gunned off the top floor of the Bank of Canada building, only a few minutes from where we stand.
I raise this today because there is a very interesting debate that is not happening, for which the deadline is quickly approaching, about the Bank of Canada's inflation target. Starting in 1991, the bank and the government signed a deal that inflation would be targeted between 1% and 3%. They called it the “monetary policy framework”: These are sleepy, boring words that may impact the financial health of Canadians more than anything else that happens here in Parliament. That deal to target inflation renews every five years. It comes up for renewal on October 24 of this year. The Prime Minister has made it clear he is going to call an early election during the summer, meaning that if he were to win he would be able to impose a brand new rule about inflation without Canadians having anything to say about it. I suspect that 99% of Canadians do not even realize this is up for debate, but here is why it matters.
If the Prime Minister were to change the bank's mandate this coming October, he could begin to permanently fund larger shares of government spending with printed Bank of Canada cash even if it leads to above 3% inflation, as we have right now. That would have been impossible prior to the pandemic. Based on agreements with the bank, we as Canadians were protected from undue price increases and unacceptable and unjustifiable money creation, but with the renewal of this agreement, about which there has been absolutely no debate in the House of Commons or at the finance committee, the Prime Minister may be able to carry out the biggest unapproved tax increase in Canadian history: the inflation tax.
What is the inflation tax? It is very simple. When the Bank of Canada creates cash to fund the government, it provides the government with a new revenue source. Last year, cash newly created by the Bank of Canada was the single-greatest source of revenue for the government. It was not income tax, the GST, tariffs or even borrowing from private sector lenders, but new cash creation that constituted a $303 billion source of revenue for the current government. The Prime Minister might like to see this go on into the future. The problem is that, like all taxes, it increases costs for Canadians. This tax would be paid in the form of higher prices. The price of housing went up by 30%. The prices of food, lumber, automobiles and transportation have all broken recent records. That is naturally what we can expect when the government floods the marketplace with cheap money. When money is cheap, everything else suddenly gets expensive.
We might ask if it is viewed as a tax by the experts. Let me quote the experts. I will go through them one at a time.
In a 1978 lecture, Nobel prize-winning economist Milton Friedman stated:
There has never been in history an inflation that was not accompanied by an extremely rapid increase in the quantity of money. There has never in history been an extremely rapid increase in the quantity of money without inflation....
This is why Dr. Friedman wrote, in his exhaustive study entitled “A Monetary History of the United States, 1867-1960”, that “inflation is everywhere and always a monetary phenomenon”. He also said that “inflation is taxation without legislation”, thereby violating the basic principle that Parliament should approve every single tax before government is able to apply it.
Some might say that this is just a classical economist view. Let us take a look at John Maynard Keynes, who is obviously not a classical economist. He said:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.
This has been demonstrably proven. Inflation does benefit the extremely wealthy. That is why, in the last year of inflationary money printing, we saw a large increase in economic disparity between the rich and the poor. In the first six months of the central bank's money-printing bonanza, the 28 richest Canadians got 32% richer. That happened while our economy was tumbling by $120 billion.
Where did they get all the money from? The bank created cash, which inflated the assets of the super-rich while devaluing the wages of the working poor. This is one of the reasons we have the principle of no taxation without representation: It is not simply to approve the quantity of taxes, but the composition of taxes. Quantity refers to the dollar value. Of course, that was gargantuan last year, but composition refers to who pays it.
We know that the poor overwhelmingly pay the inflation tax. In fact, the governor of the Bank of Canada conceded that point to me when he came before the finance committee. He said the poor pay more in inflation because they deal more in cash. They are not able to hold their limited wealth in inflation-proof assets, like gold, land, stocks, bonds, etc. Therefore, the very small amount of money they have gets nibbled away by this silent thief we call inflation.
No one in this chamber would be able to get re-elected if they stood in their place and voted for an increase in taxes on the working poor and used the money disproportionately to inflate the wealth of the super-rich. That is why no such vote was held. The government simply passed that process on to the Bank of Canada to let money creation do the dirty deed on its behalf.
I will return to Dr. Milton Friedman, a Nobel Laureate, who said, “Inflation is the only form of taxation that can be levied without any legislation.” He was, of course, speaking as an economist. I will show the deliberate choice that the inflation tax has made and that has done so without the parliamentary approval of Canadians. I will show it by referring to the undeniable empirical evidence that Dr. Friedman produced.
He showed that, in the United States, the United Kingdom, Japan, Germany and Brazil, there was a perfect correlation between the rise in the consumer price index and the increase in the money supply for each unit of economic output. In other words, in all five of those countries on four continents, inflation rose almost perfectly in line with the growth in the money supply. That is empirical evidence proving beyond a doubt that when we create cash, we raise prices to the benefit of the rich and at the expense of the poor.
Modern financial sector experts say the same. HSBC's senior economic adviser, Stephen King, wrote in The Financial Times last year that “inflation and taxes are, in many ways, simply two sides of the same coin”. He further said that this is because “higher-than-anticipated inflation serves to redistribute wealth away from private creditors, pensioners for example, to public debtors. At this point, we come full circle: the distinction between the printing press and taxes begins to break down.”
Warren Buffett, the greatest investor of all time, said:
The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn't seem to notice that 5 percent inflation is the economic equivalent.
Let us say that a widow has $100,000 of savings. If she earns 5% on that, and if inflation is 5%, then she gains nothing. All of her savings income is vaporized by inflation. That would be the equivalent of the Parliament of Canada passing a bill effectively taxing her at a rate of 100% on all of her savings income, something we would never do but yet something that ultimately happens because the central bank does it without politicians being held accountable.
Mr. Buffett's business partner, the famous Charlie Munger, said:
I think democracies are prone to inflation because politicians will naturally spend excessively, they have the power to print money and will use money to get votes. If you look at inflation under the Roman Empire, with absolute rulers, they had much greater inflation, so we don't set the record. It happens over the long-term under any form of government.
Onward to John Kenneth Galbraith, a famous Canadian economist on the left, who said, “Nothing so weakens government as persistent inflation.”
Other international economists, Nouriel Roubini and David Backus, wrote, “Note that since the government, by printing money, acquires real goods and services, seigniorage is effectively a tax imposed by the government on private agents. Such a seigniorage tax is also called the inflation tax.” They go on to explain what impact that tax has, particularly on the poorest people.
This is not simply an opinion. This is a mathematical fact backed up by some of the most renowned economists on planet earth, many of them winning the Nobel Prize for their work, many of them having done hundreds of years of empirical research that proves the taxation effect of inflation. These are the insights of some of the world's best-ever investors. They all concur that inflation, when created by central bank money creation, is nothing more than a tax.
This kind of a tax has been mostly done by the worst possible leaders. We think of Henry VIII, for example. They used to call Henry VIII “Old Coppernose”, and that is because, despite the fact that he inherited a monstrous fortune from his father, and I do not know if that reminds members of anybody, he spent the cupboard bare. He kept running out of money, and the British pound, which was literally a pound of silver, was becoming more and more scarce to him.
He needed more coins, but he did not have enough silver to make them all, so what he did was melt down the existing coins and reconstitute them by making them of copper but putting a tiny, thin layer of silver around the outside. He had his face, of course, on the coin because he was an egomaniac, and his face pointed outward from the coin; it was not a profile picture. Because his nose protruded on the coin, it would rub against the inside of pockets and money sacks and the silver would rub away, leaving nothing but a red copper nose. Everybody would know that King Henry had given them a fraudulent, fake silver coin by virtue of the fact that his nose was red. We often say politicians' fibs can be exposed through the length of their nose. In the case of Henry VIII, it was the colour of his nose.
In fact, he did undergo the mass debasement of the currency. Originally, when he took reign, the British pound was 92% silver. It dropped to 75%, then 50%, then 33% and finally to 25% by 1551. His successor brought it down further. The result was, ultimately, that the amount of silver in each coin dropped by about 87%, and guess what happened to the prices. They rose by about 75%. Things got more and more expensive. Life got better for him. Of course, he was known for having the king's disease, gout, which people get from massive self-indulgence, orgies of food and drink. Therefore, life was very good in the king's court because he had created all of this fake cash that enriched him and his friends, but it was terrible for the peasants and the common people who actually did the work of the land. They got poorer and poorer as their money got more and more worthless.
That is the inflation tax, so this Prime Minister of ours teaches us nothing new. This is not a new concept. In fact, if we look throughout history on these matters of economics, we see that leaders make the same mistakes over and over again. As Kipling would say:
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire—
Therefore, we get burned again and again by making the same mistakes of our predecessors.
That brings me back to the Bank of Canada. The bank recently has been talking about all kinds of different things that have nothing to do with its mandate. For example, the former governor Stephen Poloz regularly commented on things that were completely out of his domain, inappropriately commenting on social policy when he proposed government takeover of child care. That is well out of the realm of the Bank of Canada's mandate. We have seen recent comments by governors and deputy governors of the Bank of Canada on everything from fiscal policy to environmental policy to a whole plethora of things that find their place nowhere within the bank's mandate. Even on the bank's website, Paul Beaudry, a deputy governor, talks about, in his words, “the great reset”, whatever that means. He believes this is part of the Bank of Canada's mandate, and of course it is not.
The worry is that the bank will simply become a political instrument for the agenda of a left-wing government, trying to do undemocratically what it could never convince Canadians to support democratically.
Canadians would never support a massive tax increase on the poor in order to fund the ideological fantasies and the enrichment of the super rich and the super elite. That is why we in Parliament have to reclaim our powers, the powers that have been invested in this chamber and in its predecessor chambers in the mother Parliament for 800 years: that governments, including central banks, cannot tax what the commoners have not approved; that the principle of responsible government remains; that Parliament reigns supreme; that citizen goes before state and commoner ahead of Crown.