Andre Gouslisty
Former Professor of Economics

September 25 2003

According to the newspaper La Presse of Friday September 19, 2003, Mr.Paul Martin, candidate at the post of Prime Minister of Canada, delivered a significant speech in front of the members of the Chamber of Commerce of Montreal, in which he indicated the broad outline of his economic vision.

Mr. Paul Martin wants to reduce the debt of the country. Elected Prime Minister, he promises to bring back the Debt /GDP ratio from 40 % to 25 % of gross domestic product (GDP)

It thus seems that, for M.Martin, the debt is a heavy weight on the shoulders of the State and the payment of the interests on this debt which rise to 36 billion of $ for 2002, a national catastrophe. He adopts in that, the economic and financial vision of the businessmen for which the budgetary surpluses are, at the level of the State, the equivalent of the profit (surplus of the receipts on expenditures) and the vision of the accountants, for which the debt, the liabilities, reduces the assets.

These two groups, the businessmen and the accountants, are mistaken on these two points.

The accountants, when they draw up the balance sheet of an individual or a company, start by making an inventory of the assets, without wondering from where it comes. Then, they make an inventory of the liabilities. Finally, they deduce from the assets the liabilities, to calculate the net worth. As the liabilities reduce the assets, the accountants deduce from this ,that if there were no debts, the assets would be more significant and that it would be the height of virtue, first, to not have debts and, second, to refund the debts as soon as possible.

Economics have another vision of things. When they have to draw up the balance sheet of an individual or a company, the economists, the real not the false ones, start by making an inventory of the resources, the inventory of the liabilities, which they divide into two categories, the own funds and the borrowed funds. Then they make an inventory of the assets, which they describe as uses. For economic science, the resources generate the uses, it is the liabilities that generates the uses, the assets. The borrowed funds, the debts, are not then any more a disaster, but a resource, which one not only try not to reduce but try on the contrary to increase as much as possible as it should be for a resource. When thus Mr. Martin announces that he will reduce the debt, he announces that he will reduce the financial resources of the state. Even a businessman, without the least talent, would not make such a silly thing for his company

But, let us forget the accountants for whom the debt is a disaster, let us put aside one moment the economists for whom the debt is a resource, let us put aside too the expert in finance and the military strategists for whom the payment in the commerce like the war, must be delayed as much as possible, let us be pragmatic and let us try to know:

  1. who are the creditors of Canada;
  2. to whom goes the 36 billion $ that Canada paid in 2002 in interests;
  3. and let us see, after this exercise, if the refunding of the debt as recommended by Mr. Martin constitutes a virtuous and a rational act or simply a supreme stupidity.

The following table, shows who are the creditors of Canada.

Government of Canada direct securities: Distribution by type of holders at December 31 2002.

In million $
In % of the total
Non public
1. Bank of Canada
42 263
9,62 %
2. Canada pension Plan including non market bonds
4 988
47 251
3. Chartered Banks
73 008
4. Trust or mortgage loan companies
7 822
5. Investment dealers
8 841
6. Investment funds
38 417
7. Local and central Credit unions and Caisses populaires
2 465
8. Life insurance companies
31 867
9. Other insurance companies
14 946
10. Non depository credit intermediaries
11. Trusteed pension funds
75 165
12.Non-financial corporations
8 293
13. Provincial governments
24 743
14. Municipal governments
3 983
15. All other holding of market issues by Canadian residents
17 540
16. Canada saving bonds and other retail instruments
22 897
Total residents of Canada
310 320
70.66 %
17. Non- residents
81 583
18.57 %
Total general public
391 903
89.24 %
Total securities and loans outstanding
439 155
Source: Bank of Canada Banking and Financial Statistics, September 2003

Let us imagine now, that in the name of a certain virtue, real or supposed, a Canadian government directed by Mr. Paul Martin not only reduced the debt but refunds completely the debt which we have just seen, since it is for him the ideal to be reached. What would be the results on each holder?

The first touched holder would be the Bank of Canada. It holds 42 billion $ of governmental securities. To make its operations in the open market it will have to replace the governmental securities by private securities in which securities emitted by companies like Enron or like WorldCom would not miss. It will have misery to sell them and all its Balance sheet would be a precarious assessment. Nobody would rely on the Bank of Canada and its disappearance would be assured. First beautiful result of the refunding of the national debt.

The second holder of securities of the Canadian government touched by the refunding of the debt would be the Canada Pension Plan . It holds nearly 5 billion $ of securities. Without governmental securities it will have to hold private securities whose principal characteristic is the high probability of default of the debtor. The precariousness of Canada Pension Plan would be assured. Other beautiful result.

The third holder of governmental securities touched would be the Chartered Banks. They hold for 73 billion $ of governmental securities acquired with the deposits of the public. For lack of governmental securities the banks would be brought to acquire securities emitted by individuals or private companies whose default risk is very great. The confidence of the depositors in the banking system is likely to disappear and the banking structure itself is likely to disappear with. Another beautiful result of the refunding of the debt.

The fourth holder of governmental securities which would be touched by the refunding of the debt would be the Investment Dealers. They hold, for their trade, securities for nearly 9 billion $ and it is through them that the Bank of Canada places the securities of the government. The replacement of these securities by private securities would make the activity and the trade of the Investment dealers very risky. Still another activity which is likely to disappear thanks to the virtuous refunding of the national debt.

The fifth holders of government securities touched by the refunding of the debt would be the Investment Funds. They hold about 38 billion $ of securities. Replacing the securities of the government by private securities would endanger the existence of these Funds. Another pillar of the financial system is likely to disappear.

The sixth holders of government securities are the Local and central credit unions and Caisses populaires. They hold about 3,5 billion $ of government securities. Their replacement by private securities would increase the risk for the public to trade with them.

The seventh holders of government securities are Life Insurance Companies. They hold nearly 32 billion $ of governmental securities. Replacing these securities by titles emitted by private entities would decrease the confidence of
the public in the life insurance companies. Another side of the financial system which is likely to break down.

The eighth holders of government securities are the Other Insurance Companies. They hold for nearly 15 billion $ of governmental securities acquired with the funds provided by their customers. The replacement of governmental securities by private ones will increase the risk to deal with them.

The ninth holders of government securities are the Trusted Pension Funds . They hold for more than 75 billion $ of government securities. Refunding the national debt would oblige these private pension funds to constitute their assets with risky private securities and not with governmental securities free of default risk of the debtor. It is all the system of the private retirement which would break down in the event of refunding of the debt of the Canadian Government.

The tenth holders of government securities are the Non-financial Corporations. It is their cash money that is placed in
Government securities whose weaker relative return is largely compensated by the absence of the default risk of the debtor. By having a more precarious portofolio because of absence of government securities their customers could desert them and their existence called into question.

The eleventh holders of the Canadian government securities are the Provinces of Canada. These provinces hold securities for nearly 25 billion $. In the event of refunding the debt of the Canadian government the default risk of the provinces would increase appreciably and oblige the government of Canada to intervene and make pay the Provinces the price of its intervention.

The twelfth holders of securities emitted by the government of Canada are the Municipal government of Canada. They hold securities for nearly 4 billion $. Refunding the debt of the Canadian government would increase the financial precariousness of the municipalities which could cease paying if, being obliged to place the money of the tax payers in private securities, they ceases to pay.

The thirteenth holders of government of Canada securities are what the Bank of Canada in his classification calls « All other holding of market issue by Canadian residents » . This group of Canadian residents holds securities for more than 17 billion $. If these residents of Canada who chose to put in their portofolio securities of the Canadian government because of the absence of the default risk of the debtor cannot make it, they will turn over risky securities or even quite simply will cease to save.

The fourteenth group of holders of securities of the Canadian government are the holders of Canada Savings Bonds. They hold for nearly 23 billion $. Refunding the debt the Canadian government would put in danger the small savers which would give up saving or would take the risk to lose all their savings by lending them to

The fifteenth group of holders of securities emitted by the Canadian government are the Non-residents i.e. the foreigners. They hold for nearly 82 billion $ of securities, about 18,57 % of the whole debt of the Canadian government. To refund this debt would undoubtedly save in the interests to pay, but if we remember that a debt is a resource this would oblige Canada to give up such a resource and to reduce as much the assets that they can acquire.

In 2002, the Canadian government paid for its debt almost 36 billion $ in interests. Nearly 71 % of this amount or 26 billion approximately went to the residents like:

  • the Bank of Canada (9,62 % of the 36billion interests)
  • the Pension Plan of Canada (1,13 %)
  • the Canadian Chartered Banks (16,62 %)
  • the Trust and mortgage loan companies (0,18 %)
  • the Investment dealers (2,01 %)
  • the Investment Funds (8,74 %)
  • the Local and central credit unions and the Caisses populaires (0,56 %);
  • the Life Insurance Companies (7,25 %);
  • the Other Insurance Companiesm(3,40 %);
  • the Trusteed Pension Funds (17,11 %);
  • the Non-financial Corporations (1,88 %);
  • the Provincial governmemt of Canada (5,63 %);
  • the Municipal government of Canada (0,98 %);
  • all Other holdings of market issue by Canadian residents (3,99%)
  • the Holders of Canada Saving Bonds (5,21 %)

The non-residents, the foreigners, have perceived 18, 57 % of the 36 billion paid by the Canadian government in interests for 2002 about 6,7 billion in $, which represent 0,58 % of the GDP of Canada for 2002, evaluated at 1 154 billion $.


Carl von Clausewitz, the great theorist of war at the time of Napoleon and Wellington, compared the war with the payment in the trade. It was to be delayed as much as possible.

It is astonishing that in 2003 and in spite of the lessons of financial Science, a former Minister of Finance of Canada and candidate at the post of Prime Minister like Mr. Paul Martin, do not knows , first, that a debt must be refunded the latest possible and, then, that a national debt should never be refunded because of its economic and social role.

The role of the debt must be appreciated not by the importance of its capital value or by the importance of the versed interests or the importance of its percentage of GDP, but by the social and economic role which it plays in the financial system and the formation of saving.

We already showed in an article entitled " The richness of the Canadians cut down by 358 G thanks to Paul Martin " and published in our Internet site that the annual Saving is equal to the Investment + the Surplus the Foreign Trade + the Budget deficit and that, consequently, the budget deficit and the debt generated by it are absolutely necessary for the constitution of the saving and the solidity of the financial system.

To avoid the budget deficits and to want moreover to refund the debt like M. Paul Martin, at first glance an excellent businessman and candidate of the Liberal Party of Canada for the post of Prime Minister of Canada, wishes to make, it is not the program of a statesman, but, we should unfortunately said it , it is the program of a shopkeeper of third class. Canada and, especially, the Canadians, deserve better than that.

The shopkeepers and the grocers members of Chamber of Commerce and Industry and of associations of businessmen like the Conseil du patronat du Quebec, can applaud, until the day of the last judgement, automatically and without understanding anything, at the divagations of one of them which have delusions of grandeur. They will regret to not have at the head of the Canadian government an authentic statesman, which knows that the national debt is, first and above all, a service to the community and the Nation and constitutes the principal pillar on which rests all the banking and financial. system.

We have nothing neither against the shopkeepers neither against the grocers nor against the barbers and even less against the ladies hairdressers, but each one must be at his place. The shopkeeper at his shop, the grocer with his grocery, the barber in his saloon, the ladies hairdresser at her beauty parlour and Mr. Paul Martin at the Canada steamship lines and not at the head of the Canadian State.

If Mr. Martin, at the Canada Steamship lines, wants to try out his ideas on the debt, in particular, the need for its reduction and its refunding, he will realise quickly that his company, acquired itself thanks to a loan of 180 million $, could probably not make long life and long fire.