KEEN: The DNPP* saves us all - Part 1

KEEN: The DNPP* saves us all - Part 1

Postby Oscar » Wed Mar 31, 2010 8:26 am

The DNPP* saves us all - Part 1 by John Keen
(*Damn Near Perfect Party)


March 25, 2010

It is alarmingly obvious that the financial world, (intent on increasing profit to the maximum), will not lead the working world out of the morass. Why would a culture that exists by charging interest, and buying and selling paper, rescue the real world?

During a collapse there are huge opportunities to gain wealth by buying low priced assets, especially if governments are providing low priced money. Any improvements to general finance could mean lost profit.

Solving a problem is often not too difficult. Finding out what the problem is may be the real problem. We are told a lack of credit has caused this crisis. Au contraire, a surfeit of credit has caused the crisis. The mountain of debt, world wide, and the cost of carrying that debt, has exceeded the carrying capacity of the productive side of society.

The answer is simple -as indeed most answers are… reduce debt and/or the cost of that debt. But to do that means impinging on the ability of those with large amounts of money to make large amounts of money. This will not make those people happy, and they have influence. We reformers will have to convince government that wide spread prosperity is better than unstable elitism.

First we fix Canada!

To do that we need two road maps. One showing the path we followed into trouble and another showing the way out. Most of what is being said here will apply to Canada starting in 1968. But could be used widely.

We need some ground rules. For figures on government debt, interest, deficits, and surpluses, we will use the Fiscal Reference Tables from Statscan. To make things human, we will use some humans.

Permit me to introduce Jimmy Jones and Jennifer Johnston, the "JJ's" as they call themselves. A nice couple from Mythical, Saskatchewan. They were married in 1968. In June, of course, shortly after lucky Pierre became king of Canada. At the reception, the happy couple were approached by Jimmy's uncle, Socred Jones (known by his political beliefs.) "Well," said Socred, "It is nice to see another young pair shouldering their share of the countries debt and the annual interest thereon."

Socred could get away with that. He had just given them a huge wedding present. A square mile of prime land, to be paid for by crop share, interest free, during Socred's lifetime. Sort of a retirement annuity.

The couple would have that land plus 320 acres rented from Jenny's dad. Jimmy would work part time at the Co-op, delivering fuel, and Jenny would keep working in the accounting department of Sask. Power. Life was going to be good in Mythical, Sask.

Neither "J" paid much attention to Socred's strange comment. They had other things on their mind that day. But a few months later Jenny was working on figures to do with an expansion proposal for SPC. She noticed interest costs were rising and suddenly remembered Uncle Socred's odd remark.

An intelligent person who liked working with figures, Jenny decided to find out just how much she and Jimmy did owe, and what their annual interest costs were. It did not take long to obtain figures from Statscan. And took even less time to discover there were several definitions of debt. Sorting through net debt, interest bearing debt, gross debt and accumulated deficits, Provincial debt, Federal debt, municipal debt, Crown Corporation and hospital debt, Jenny decided to use gross debt (Federal) as a touchstone.

After all, what she wanted was an estimate. So she decided to use Federal Gross debt +60% as an approximation of total Government debt. Interest charges were in Total Government Expenditures table (13-001). That seemed accurate enough for casual interest. She reminded herself, this was just a little game to please Uncle Socred.

Using part of another lunch hour Jenny calculated the countries total 1968 debt (33bn Federal+ 60% other)= 53bn. Divided that number by the population (53bn/23.5m)=$2280 per citizen. Then multiplied by 2 to arrive at $4560.00 for the Jones family. She was surprised to find that their share of debt was well over half of what they had paid for a nice big house on several lots in Mythical. Of course, that was in 1968.

The JJ's share of interest @ 5% was $228, or $19.00 a month. Remember, each of those 1968 dollars was worth more than six 2008 dollars.

For the next few years the Joneses struggled, but in 1973 grain prices took off. By their 10th anniversary they were (to put it bluntly) rolling in it. Jimmy, heeding Uncle Socred had avoided debt, so the couple, along with Jewell Jones and Joshua Jones, (newcomers in duplicate) had a fair amount of cash.

Jenny, liking her work, had stayed at SaskPower and was now also managing the family fortunes. Interest rates had risen. So Jenny was investing in Govt. paper.

It was at this time she persuaded Jimmy to incorporate the farm. That permitted him to draw a regular wage. Now he could pay into Canada Pension and RRSP's. If the farm lost money in any year, Jimmy could lend money back as an interest free shareholder's loan.

One day she decided to see if her country was doing as well as her family.

1978. Tenth Anniversary. Doing the math was easier the second time around. Gross debt 99bn +60%= 160bn. Bit of a shock there. Population 26.5. Per capita debt almost $6000.00 Then came a real shock. Now there were four in their household…the JJ's share was $24,000.00. Then a huge shock. Jenny knew interest rates were up. But this much? $24,000 @7.8% = over $1800.00 for the year. (multiply by $3.50 for 2008 dollars). Jenny decided she had made some kind of an error. Things could not have changed that much without a public fuss. So she put the numbers away. And avoided them for the next ten years. She was one of the few who regretted Joe Clark wasn't able to stop our slide.

Then 1988 came along. And with the 20th anniversary came a morbid fascination. The Jones were doing well. Good land makes good farmers. Grain prices were down, but that happens in next year country. And a steadily employed wife is great insurance. No debt had meant the 25% operating loan interest of Aug 1981 passed them by.. So the RRSP's were slowly filling up and all was well.

But how was Canada doing? Gross debt was…. could this be true? The debt had increased over four times in ten years. From $150bn to ($421bn +60%)=670bn. Population 30.5 million. Per capita debt $22,000. All the Joneses were still home. Family share of debt close to 90,000.00. (Times it by $1.80 for 2008). That was way, way more than their net income. Family share of interest 90,000x9.2%=$8180.00 For a family who avoided debt, this was dreadful. (Uncle Socred's influence lived on although, sadly, he did not).

But, for the rest of us, life goes on. Jewell and Josh were approaching University life. Jenny had been promoted and promoted. She was much busier at work and at home. Jimmy was farming their land and her father's. None of her friends wanted to hear about debts and deficits. So she put the whole distasteful mess to one side. Someone else could figure out why a rich country was sliding into deeper and deeper doodoo….

Silver Anniversary, 1993, 25 years of what had been a wonder-full life. Jenny (now Jenn) had risen in the Corporate ranks before it was common. Jimmy had been able to repair and replace equipment and pay bills on time. Great stuff if you are a farmer. Two good kids, one studying nursing, the other in pre-law, and money in the bank.

Jenn resisted the temptation to check on her other interest. It seemed those who should be steering the ship weren't concerned. Why should she fret?

But she did fret. In 1992, a friend in Ottawa, (knowing of her concern about debt) had sent her a study (by a P. Cross and H. Mimoto) reviewing the growth of the Federal debt. One of the two, H. Mimoto, was the Chief of Analysis, Public Institutions Divisions. That gave the study credibility.

Put simply, the study from the years 1975-1990, showed that tax cuts, not wasteful spending, had created a need to borrow, and then the interest caused increased borrowing. Sort of like bailing faster instead of fixing the leak.

Jenn tried to talk about the problem with friends, but she soon realized her concerns were not shared. "Don't worry," Her friends said, "the debt doesn't matter, we owe it to ourselves". But she did worry. If she was paying over $2000.00 a year in interest, then so was every one else in the country. The interest dollars the Jones's were responsible for they could afford. And a good deal of what they paid (in various ways) was returned as interest (tax free) on bonds they held in (tax deductible) RRSP's. (Jewell and Joshua had joined the RRSP owner's group at the first opportunity).

That meant the JJ clan paid less taxes, and so Canada borrowed more money, and paid more interest to people like them who could afford to buy bonds. Low income families paid their share by doing without services.

The whole setup smelled to high heaven. The $8000.00 the Jones family could have afforded to pay, plus the lost services low income people did without, would make a world of difference to those who needed help.

Better health care, better housing, better schools and, yes, better farm programs. Grain prices had tanked in the mid-80's and only two years of the last ten had been decent.

The loss of the Crow Benefit in 1996 had been a real problem for Jimmy. For those who don't know, the Crow rate had been a method of subsidizing the cost of moving prairie grains to market. It had been in place since settlement days and in 1996 was now paying about 650 million a year. That money reduced shipping costs and was spread from Manitoba to Peace River.

As Jenn pointed out to Jimmy, the interest charged on all gov't debt in 1996 (76 billion) would have paid the Crow for over 100 years. Jimmy's remarks cannot be printed here.

Jimmy's other (more practical response) to the proposed loss of the freight subsidy had been to expand his production of top quality oats and hay for local horse owners. Somehow, we have overlooked the fact that James Jones was one hell of a manager. Put him together with a really smart accountant and you realize why it is hard to keep up with the Jones.

But Jennifer was having troubles of her own. In 1990 she had joined a group of people working to eradicate child poverty. A goal that had been promoted by the Federal Government.

Jenn soon recognized the dilemma facing most reformers. To accomplish her group's purpose would mean taking money from her and Jimmy and all their friends. Really rich folks were not about to agree to tax increases and really poor people didn't have any money to give.

Then came the revelation. That 76 billion of Gov't interest paid in 1996, which could have paid the Crow Rate for over a 100 years, could be matched by the 76 billion in interest from 1995 which could have eliminated child poverty for over 25 years. It was truly unbelievable.

Even more Unbelievable. If that Mimoto report was valid --- (and it certainly seemed to be) there had been no need for a debt. And, if indeed, there had been no debt, there would have been no $700 billion in interest paid. And, no $421+60%= 680 billion increase in our total gov't debt. And all that just for the decade 1987-96. That was a whole bunch over a trillion dollars, in just 10 years. (1,360 billion). We were paying the interest by borrowing.

When Jenn thought about going back to 1975, the beginning of the Mimoto study, or indeed, to her wedding day in 1968, when Socred, (may he rest in peace) had started her on this path, her very being rebelled. Just imagine adding up all those billions and trillions of dollars wasted. She thought of a line from one of Tommy Douglas's speeches "til we have built Jerusalem in our green and pleasant land". As a country, we could have built several large Jerusalems. And our land could have been much more pleasant, maybe even greener.

1998 Taking the pulse. Gross debt $721+60%=$1.360 trillion. With 33 million Canadians, each billion represents 30 dollars. Times that by 1.360 and you have that Mythical family of four owing $40,000 X 4=$160,000.00. The rumbling noise is Uncle Socred rotating.

John Keen
Riceton, SK
Oscar
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