A Government Debt Jubilee?

As the COVID-19 crisis continues to drag on, it appears the BoC stands ready to purchase, in an unconstrained manner, a total of $5 billion CAD of GoC bonds each week. This works out to about $260B on an annual basis, which would more than double the size of the BoC’s current balance sheet. And that, of course, is just for starters. With such a large buyer in the BoC, the green light has essentially been given for the GoC to finance increased bailout and stimulus spending to combat the current COVID-19 contraction.

This brings up an interesting question: assuming the GoC’s debt continues to grow to the sky, rather than having to one day pay all that money back, given that the BoC essentially just conjured up the money out of thin air, couldn’t the BoC simply forgive the GoC debt altogether? After all, people tend to complain about the interest payments on the debt enslaving future generations, but given that the BoC doesn’t actually need the majority of these bond interest payments for spending purposes, why not just forgive the loan entirely?

The first question that springs to mind, of course, is what does this really achieve? To arrive at a reasonable answer, we really need start off by looking at the current operational implementation of the BoC bond purchases in order to come to an understanding of what cancelling the debt would really get us. When the BoC purchases GoC bonds with newly created money, it’s important to note that the bond interest payments from the GoC count as BoC revenue. But the BoC is mandated to return its profits back to the Federal government on a regular basis, meaning that once they cover their operating expenses, interest paid by the government is simply given right back to them. Effectively the GoC has been granted a zero-interest loan which they can simply roll over in perpetuity, as it costs them nothing to do so.

This begs the question, what would really be the point of the BoC “forgiving” the government’s debt? Given the current flow of funds of its bond operations, the BoC is essentially handing over newly-created cash to the GoC for free as a “loan”, requiring no interest, and then simply renewing these loans as they come due. So one has to ask, from a practical perspective, if the BoC is already giving the government a free ride, what’s really to be gained from forgiving outstanding government debt, given that there’s currently little net cost to the taxpayer.

An even more important point, however, is whether the BoC could even tear up its stockpile of GoC bonds in the first place. The way double entry accounting works, every asset on the BoC’s balance sheet needs a corresponding liability. So the BoC can’t simply “vaporize” GoC bond assets off its balance sheet. Doing so would require it to also tear up a corresponding amount of liabilities. But we know that BoC liabilities are assets of the private sector. So the BoC could tear up cash in circulation or delete bank reserves from the accounts of commercial banks if it wanted to destroy its own liabilities, but doing so would destroy private sector wealth, which is the last thing the BoC wants to do.

The point is that the BoC really has no need to “forgive” debt of the federal government, and even if they did, they couldn’t really just tear up bonds in a figurative sense. The government already gets interest-free money from the Bank of Canada, making QE and monetary financing already somewhat of a “debt jubilee” for the Government. The most direct method to implement this de facto debt jubilee would be for the BoC to simply buy government debt on the primary market. The alternative is for the GoC to instead issue debt to the private sector in the primary market, with the BoC then buying this debt on the secondary market and thus “forgiving” the loan. And there you have it – a modern day government “debt jubilee”.