Monetary System and Bankers Code

Canada is facing a large increase to the money supply in the context of new social programs associated with COVID-19. Your government in conjunction with financial news outlets do not want to use language like “increase the money supply” because it may be deemed alarming or inflationary. Instead, it refers to the monetary system in bankers code.

In essence, government securities are floated for distribution to commercial banks via the country’s “central bank”. The creation of this “security” (example would be a treasury bill or bond) in effect provides the directive for printing press operators to flip the switch. However; in advance of the creation of the new security, the central bank will check its “reserves” to ensure that the “vaults” are sufficiently equipped with an “asset” to merit the production of a new “security”. This is where things get interesting.

It used to be the case that gold characterized the reserve asset. However; gold lost its lustre as a reserve asset when President Nixon took the U.S. off the “Gold Standard” in 1971. President Roosevelt Roosevelt in fact ordered Americans to return gold for dollars as a mechanism to cope with The Great Depression.  

So now, we have the creation of new money without a tangible assets being served as its foundation for existence. Furthermore, we are presented with ever increasing national debts represented by the apparent financing of governments by holders of such securities which will stretch way beyond ledgers of domestic commercial banks. We also have the vast majority of economists supporting such a system and special interest groups professionally organized to acquire government funding.

What can happen when a Black Swan event such as COVID-19 compels governments to inject new money in the hands of consumers in the context of a monetary system which has no tangible asset at its root? Inflation or deflation of course. This is the great debate. Logic dictates that prices should rise with a larger monetary base. However; when social conditions deteriorate, a hoarding impulse may compel folks to store their cash thereby producing deflation. Every economist will tell you that the worst economic scenario is one of “deflation”.

 Politicians without any exposure to “Austrian Economic Theory” will naturally defer to “Keynesian” (flooding market with currency during demand drop) doctrine of mainstream economic thought. Will next generations be contented with paying interest on seemingly unsustainable national debts or will there be a consolidation at some point? Author Jim Rickard has referenced the “Special Depository Right” as a new unit of currency established by the International Monetary Fund.