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Andre Gouslisty
Professor of Economics ( retired )


November 9 2003



In September 1992, at the time of the Treaty of Maastricht, the members of the European Union concluded a pact known as the financial stability pact.  Under the terms of this pact, the signatory members committed themselves to respect the following ratios:

-    Debt /Gross domestic product or GDP ratio , equal or smaller than 60 %; 

-    Deficit / GDP ratio equal or smaller than 3%.


Now, in October 2003, and in the light of 10 years of experiment, this pact of stability is qualified by Germany and France, the two pillars of the European Union and by some of the High Administrators of the Union as a pact of stupidity. And to play with the word « stable » it is described as a pact of stable stupidity.


It is not because in Europe one qualifies, with reason, as stupid, a national debt equal or lower than 60 % of the GDP and a budget deficit equal or lower than 3% of the GDP than we qualifies also, as stupid ones, the budget surpluses of the liberal government of Jean Chrétien and Paul Martin, but it is also because we can prove it.


Indeed, each time the customer of a bank and almost always a tax payer deposits an amount in his account, the bank puts in reserve a certain percentage of it , around 5 %, and lends or places the remainder against interest.  For example if a customer deposits 1 000 $, the bank pours in a reserve 50 $ and lends the remainder 950 $ against interest.


The purpose of the reserve is to face the withdrawals of funds from depositors.  It is held in a very liquid form as for

example  banknotes or a deposit at the Central Bank.


When the bank draws from its reserves and loses some, it must reconstitute them by buying liquid funds in the market of the short-term funds.  For example, if a depositor withdraws 1 000 $, the bank having drawn in its reserves 1000 $ must reconstitute them by borrowing liquid funds for an amount equal to 1 000 $ minus 5% that  is 950 $. The small difference comes from the fact that having lost a deposit of 1000 $ the bank  does not have to put any more in reserve 5% of this deposit.


When the customer of a bank draws a check on his account to pay another customer, the bank draws from its reserves to

carry out the payment order but, because the recipient of the check in turn put it in his account the bank recover the funds drawn from its reserve and does not have to reconstitute them by presenting itself on the market of the liquid funds.  In this case the bank did not lose reserves.


When the customer of a bank draws from his account to refund the bank of a loan that it granted to him in the past, the bank as always draws from its reserves to carry out the payment order but in this case it loses reserves because there is not on the other hand as in the preceding example a deposit.  The counterpart is a cancellation of a claim of the bank and not fresh money.  There is thus a loss of reserves that the bank must reconstitute by presenting itself in the market of liquid funds as purchaser. That increases the demand for liquids funds all other things remaining equal.  There is here and in this case a pressure to the rise of the interest rate.


When the customer of a bank draws on his checking account an amount to pay a tax, the bank as always draws from its reserves to carry out the payment order but this payment is not compensated by a payment of funds because the government sends the check of the taxpayer to the Central Bank for cashing.  The latter debits  the account of the bank at it and credit the account of the government.  In this case there is a loss  of cash for the bank and for the

whole banking system The banks must reconstitute the reserves lost by presenting themselves in  the market of the liquid funds as demanders which made a pressure on the interest rate.


When the government engages in a policy of budget surpluses, when for example the Minister for Finance announces like made M.Manley in the week of October 20 2003 that for the 2002-2003 government carried out a surplus of 7 billion $, that means that the banking system has lost during 2002-2003 , 7 billion $, and that it has to almost entirely reconstitute them by presenting itself as asker on the overnight money market . Such a request does not pass unperceived and exerts on the interest rate a significant pressure to rise.


If the interest rate at the time when are carried out the budgetary surpluses is the good interest rate i.e. the rate wished by the Central Bank, the pressure on the interest rate coming from the banking system obliges the Central Bank to intervene and to inject liquid funds by purchasing  treasury bills. These purchases are an expenditure for the Central Bank but also an expenditure for the State if the State is the Government + the Central Bank.


Another way of countering the pressure for the rising of the interest rate coming from the budgetary surpluses and by the channel of the reserves of the banking system, is to inject liquidities in the market by repurchasing bonds of the national debt i.e. by refunding before term the national debt.  This is an expenditure, a national expenditure if the State, it is the Government + the Central Bank + the Administration of the National Debt.


As one can note it the budgetary surpluses i.e. the surplus of the receipts on the expenditure are not possible if the Central Bank and the Administration of the national Debt  does not engage in expenditure.


The great nonsense of the Accounts of the Canadian government is to regard as an expenditure the payment of the interests of the national debt but not its refunding.


Do the statistics confirm or invalidate our remarks?


Our remarks are confirmed if during the exercise which goes from April 2002 to April 2003 the securities of the Canadian government held by the Bank of Canada increased and if the securities of the Canadian government, held by the public decreased by an amount roughly equal to the 7 billion $ of budgetary surpluses.


Between the end of April 2002 and at the end of April 2003 and according to the information contained in the "  Bank of Canada Banking and financial Statistics ",  October issue of 2003, page S88, the securities of the government of Canada held  by the Bank of Canada rose by  1 billion 393 millions of $.


Between the end of April 2002 and at the end of April the 2003 assets of general public in securities of the Canadian government decreased by 8 billion 881 million $.


Consequently between April 2002 and April the 2003 Bank of Canada, which manages also the National Debt, injected liquidities for more than 10 billion $ to counter the pressures to the rise of the interest rate coming from the budgetary surpluses of 7 billion $ and coming from other sources.


As one can note it, budgetary surpluses cannot be made without impunity.


The first harmful effect of the surpluses is a rise of the interest rate.  The budgetary surpluses cause, at the level of the banking system, a loss of reserves, that must be reconstituted  by borrowings  in the money market by an amount equal to the budgetary surplus.


The second harmful effect of the budgetary surpluses is that it obliges the Bank of Canada to inject into the money market

liquidities equal to the budgetary surplus to prevent a rise of the interest rate.  It is a national expenditure not accounted in the narrow budget of the government.  The Bank of Canada never informed the public that they are,  its injections of liquidities and its refunding of the debt, which make the budgetary surpluses and not the contrary, the budgetary surpluses which allow the refunding of the debt.


The third harmful effect of the budgetary surpluses is that they generate sterile expenditure in opposition to fertile expenditure.  A fertile expenditure is an expenditure  which the counterpart   is a real asset and not simply a financial asset. Refunding of the debt, an expenditure, cancels a claim but does not create a real asset, the only really useful for the tandard of living.  To inflate the financial assets of the Bank of Canada has much less value than to increase the real assets of Canada like roads,  bridges, hospitals, schools etc.


The fourth harmful effect of the false budgetary surpluses of the federal government is to excite the covetousness of the

provincial governments  and to cause the requests to share the false surpluses, requests coated with very high considerations such tax imbalance.


The last harmful effect of the budget surpluses and the desire to reduce the national debt is to induce the government of the

liberal party to camouflage its intellectual penury, its lack of imagination and its lack of dynamism.  To want to reduce the national debt to 25 % of the GDP with false budget surpluses as M.Paul Martin wishes it, allows the government to lie behind this objective to do nothing. One could then expect that a government directed by Paul Martin will gives the management of the Canadian State to a fiduciary like Canadian Steamship Line was given to a fiduciary.


When thus M.Paul Martin announces to whom wants to hear him  that he will follow a policy of budget surpluses to refund the debt, he makes a proof of his total ignorance of the public financial mechanisms, because it is the refunding of the debt and the injections of liquidities by the Bank of Canada that finance the budgetary surpluses and prevent them from causing the rise of the interest rate and not the opposite as to many people believe it wrongly.


That a pettifogging lawyer or a businessman, become Minister for Finance, while playing with their  elbows, proclaim, that it is the budget surpluses that allow the refunding of the debt we can understand that. What we cannot  understand is that the Governor of the Bank of Canada lets accredit in the public such an idea whereas he knows very well or he  is supposed to know very well, that they are the purchases of governmental securities  by the Bank of Canada and the

refunding of the debt before term which make  possible for the liberal government to spread out budgetary surpluses.  Undoubtedly the Governor of the Bank of Canada has duties of recognition towards the Minister of Finance who named him  but he has also duties of honesty towards the Canadians and has the duty to give them the right hour.  On this last

point we can say that he  failed and that he undermined the credibility of the Bank of Canada.


To want to bring back, as Mr. Paul Martin declares it , the Debt / GDP ratio to 25 % whereas in the European Union one regards more and more a Debt / GDP ratio equal or lower than 60% as a stupidity and to want to make budget surpluses, as still M.Paul Martin wishes it, whereas in the European Union and in the light of 10 years of experiment, one regards a Budget deficit / GDP ratio  equal or lower than 3% as another stupidity, it is for M.Paul Martin to want to lead in Canada a policy of double financial stupidity.


Under the appearances of a rigorous financial management and an extra lucid one which made run tears of joy at this community of ignoramus of  public businesses and public finance which is the businessmen community , the years of the liberal management of Paul Martin, from 1993 to 2003, were ten years of impoverishment of the Canadians .
(see our article " The wealth of the Canadians amputated by 350 G thanks to Paul Martin " published in our internet site www.gouslistyandre.com).


Only if Mr. Paul Martin changes his ideas and starts to make deficits, which would be a disavow of his  convictions, if he  really has some, and of his electoral program, it is extremely probable that the next years will be still years of impoverishment for the Canadians if he accede at the highest magistracy of the  country.