THE DRUMMOND COMMISSION REPORT:
PROTOTYPE FOR THE FUTURE

PART I: LOCAL APPLICATION

The purpose of the Drummond Report was to consider how the government of Ontario could reduce its annual deficit, which currently stands at $16 billion (thus adding to an Ontario government accumulated debt of $240 billion). Under prevailing conditions, Drummond warns us that this debt will 'balloon' to more than $411 billion in 5 years. Severe austerity measures, we are told, are the only antidote.

Nowhere in the 362 recommendations of the two volume, 668 page Report does Mr. Drummond and his colleagues consider the clear, legal, statutory option of having the Federal Finance Minister, on behalf of the Ontario government, DIRECT the Governor of the Bank of Canada (Bank of Canada Act, sec. 14(2)) to provide loans at, for example, 0.25% (that rate which the Bank of Canada currently charges commercial banks) to assist with Ontario government deficit reduction-- by using the provisions of the Bank of Canada Act, sec. 18(c), (i), and (j) over this 5 year period.

The 2010 Ontario Budget Chapter IV: Borrowing and Debt Management states that:

"The 2011-2012 total funding requirement is primarily the result of the deficit, investment in capital assets and refinancing of debt maturities....The forecast for long-term borrowing for 2011-12 is $35 billion..."

Therefore, almost 50% of the amount borrowed goes towards servicing a deficit of, as mentioned in paragraph 1 above, $16 billion. But bear in mind that this deficit is merely the interest on the accumulated Ontario government debt of $240 billion!

We will be paying off this debt forever- in perpetuity. This may serve the interests of a vey small minority (1%?), but it is causing an unecessary and very destructive burden on the rest of us. To claim TINA (there is no alternative) is ridiculous. Don't believe it.


Nowhere in the Bank of Canada Act does it state that loans from the Bank of Canada to Canadian governments must be market competitive; e.g. that such loans must be based on or close to the interest charged by our commercial banks (5%+) for loans. (Note: Government borrowing is done by issuing interest bearing bonds to the lenders).

In fact, the Bank of Canada currently lends to the commercial banks at a prime lending rate of 0.25%. We, on the other hand, the citizens and taxpayers of Canada, because of the current borrowing practices of our provincial and federal governments, repay our governments’ debts to private lenders at commercial lending rates as determined by the credit rating agencies and market demand! For sovereign national governments this is a ruinous, illogical practice that only enriches private commercial lenders at the expense of lowering the living standards of whole countries.

The New Third World

Current government borrowing practices and the consequent growing deficits and debts are the same raison d’etre used to justify SAPs – the structural adjustment programs that so devastated third-world economies and living standards- and are now being applied to Canada and the financially troubled developed world.

Given the enormous amount of debt involved, this difference in interest rate would make a considerable difference in debt accumulation over the 5 year period, thereby alleviating pressures to implement austerity measures.

How did we get into such a mess?

Such was not always the case in Canada. From 1938-73 the Bank of Canada fullfilled its mandate: it helped get Canada out of the Great Depression; helped finance the War years; and assisted in building Canada's physical and social infrastructures through the 50s and 60s- without causing inflation.

But beginning in 1974, growing pressure from financial lobbyists resulted in a reduction of the use of the Bank of Canada's powers; and a shift of control of those powers over to dometic and foreign financial interests.

According to the 2010 Ontario budget (quoted above) "$21 billion [will be borrowed] in the domestic market...[and]...up to $14 billion in foreign markets."
But why is it necessary to rely on foreign markets to achieve its financing requirements" when Canada has its own Bank?

Using the Bank of Canada as described above would not 'cause inflation' because we are talking here only of who provides the required lending and at what cost, not how much money is lent. To be clear: the choice is having the Bank of Canada lend to federal and provincial governments at say 0.25% interest; or lending from privately owned commercial banks, at current market rates of, say, 5%+ interest.
(Note that any interest charged by the Bank of Canada beyond the cost of administration reverts, as dividends, to the Bank of Canada's sole shareholder, the Canadian Government.)

Given the enormous amount of debt involved, this difference in a compounding interest rate would make a considerable difference in debt accumulation over Drummond’s projected 5 year period and thereby alleviate pressures to implement punishing austerity measures.
Again, from the 2010 Ontario Budget, Chapter IV: "For 2011-12, the impact of a 1% increase in interest rates above forecast would increase interest on debt by approximately $500 million." Assuming lending from the Bank of Canada at 0.25% rather than privately owned commercial banks at 5%, over a 5 year period, this would amount to a savings of almost $12 billion- merely by using our own Bank!

Let's talk a bit more about inflation. With regard to inflation and the recent and somewhat disastrous lending practices of privately owned commercial banks, re-regulation is in order – even in Canada where, without the Harper regime’s intervention requiring the CMHC to underwrite commercial banks’ residential mortgages, we might well be sharing in the American housing disaster.

Two essential inflation controls need to be restored to the Finance Minister’s toolbox:

(1) Reinstate variable, non-interest bearing statutory reserves held by the Bank of Canada for commercial banks.

(2) Increase the variable capital reserve requirements for commercial banks.

History demonstrates that these two levers applied in conjunction with judicious use of setting of interest rates can not only control inflation but encourage sustainable economic development and raise living standards for Canadians.

Why, then, is such initiative not taken?


PART II: NATIONAL APPLICATION

The reason is sad, but simple. We have- not only in Canada, but as a civilization overall- come to this: such an initiative would clearly be done on behalf of the citizens of Ontario (and indirectly on behalf of all the citizens of Canada), rather than on behalf of commercial financial interests. And, apparently, we can't have this!

Financial interests, it appears, must at all times maintain control over- us- by having control over- the economy. One need only look at what has happened in The US, Greece, Ireland, Iceland, etc. over the past few years: all these faillures have been due to the problematic of 'debt': and citizens must pay ('austerity') for the errors made by financial institutions. How long are we to tolerate this preposterous situation? How long?

The Drummond Report is a carbon copy of what is happening worldwide, and an indication of what's to come, should we continue on down such a disasterous path. No one is arguing the fact that we have lost our manufaturing sector (due to free trade agreements which destroyed our protective (tariff) system); and as a result of that there are not enough jobs. But to further reduce employment, wage opportunities, and services can only exacerbate the situation! There IS a better way!

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To implement the clear, workable solution we are suggesting on behalf of the people of Ontario would set a precedent on behalf of the people of the world- which financial interests would (to say the least) not be happy with. Still, the Ontario government has a chance here to set such a precedent for all the world to see: by doing the right thing, on behalf of its citizens.

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Commercial financial interests will not suffer unduly from this initiative. Instead of making $700 million or $800 million in quarterly profits, they might make 'only' $500 million. (The difference being the lack of profit from the loans to the provincial government(s), such loans instead being done through the Bank of Canada).

The single shareholder of the Bank of Canada is- the Government of Canada. The Government of Canada is therefore responsible for requiring the Bank of Canada (Act, sec. 14(2)) to optimize its performance for its shareholders- we, the people of Canada.
It is not doing so.

When, if ever, will our elected representatives start to act on behalf of we the people of Canada, we who elected them to represent us- rather than on behalf of financial interests?

Let me ask you a question: if you had your own bank, through which you could create the funding you needed, would you use it to your advantage, or would you instead go down the street to some other bank, and loan from it the money you need-- at much higher rates than you would have through your own bank?
Well, that's exactly what we do in Canada. Its absurd. And tragic. It is the Royal Road to Austerity, not just in Ontario, but worldwide.

It is time we had an open conversation about what 'debt' is, who we owe it to, why we owe it, and- most importantly- whether or not there is a better way to finance our needs. There is. Every nation-state ought to have a national bank to oversee and monitor national and regional 'debt'. The miracle, in Canada, exclusive of all other developed nations, is that we have such a bank. The tragedy is: we don't use it.

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