One of the principle problems with inflation, when it takes hold, is that it runs up interest rates. The relationship of inflation to interest rates is not "chicken and egg stuff." First you have inflation, and then you have a run up on interest rates. The cycle goes as follows: government prints more money and brings on inflation and, in turn, confidence in the inflated currency goes down, which, in turn, brings on higher interest rates.

And now I turn to deal with, yet, another piece of "crank" conspiracy literature, Shooting the Hippo by Linda McQuaig, hot off the Viking Press (Penguin).

The title of Ms. McQuaig's book comes about, she explains, because, down under in New Zealand, they ran out of government money and the country had no way of getting more because of its huge debt. One of the things that New Zealand might have otherwise done, if it had the money, would be to expand its facilities at one of its zoos, so as to accommodate another hippo baby. The authorities, rather than expanding the hippo pool and increasing the budget for herbage decided to shoot it. Apparently, a Canadian TV news program, "W5", used this story, the shooting of this little unwanted hippo, as a concrete example of what can happen when an overspent country "hits the wall." Its not a pretty sight; and, according to Eric Malling, the host of that particular TV program, it is a sight, or a similar one, however, which is bound to happen right here in Canada; that is, if we don't get rid of our annual deficits, and get rid of the suffocating debt2 with which Canada has now burdened itself.

McQuaig then proceeds to tell us that there are certain types in Canada that have conspired to impose their own political agenda upon us all; that the debt is not really a problem; and to the extend that it is necessary to reduce the country's debt, then all that is needed is some cheap money which might readily be provided by the Bank of Canada. But the man who had been in charge of the Bank of Canada, John Crow, for his own particular perverse reasons, didn't want to give us a deal on low interest rates. For, you see, in Ms. McQuaig's wonderful world, we need only lower interest rates and our economic problems will be solved. Thus, we can all keep as many baby hippos as might happen to come along; and as for the accompanying inflation: no problem.

Well, I read the book; and Linda McQuaig, I suggest, while she may be a fair writer, knows "beans" about economics. She labelled Lord John Maynard Keynes, a "great" economist; well, he's the one who sort of got us into all of this trouble in the first place. As for Milton Friedman, Ms. McQuaig describes him as an eccentric who "bays in the wilderness" and spouts "complicated & pseudoscientific theories." Permit me to give a short run down on Professor Friedman: Friedman has taught at the University of Chicago since 1946 and in 1976, he won the Nobel prize in economics. Friedman is a believer in the free market system, which will account for his views from everything from the US army draft (he's against it) to monetary policy (floating exchange rates). He is for a negative income tax, and, thus, for the elimination universal poverty programmes. He was one of the founders at Chicago of a "school" of economics known as the School of Monetary Economics, a school which stresses the importance of the quantity of money as an instrument of government policy and as a determinant of business cycles and inflation, "monetarism." The Chicago School, is one which has come to its conclusions by the use of the empirical approach, viz., knowledge is gained through the use of the five senses and a process of reflection. Friedman was of the view that minimum wage laws, drug prohibition laws, union monopoly laws, government schools and other welfare state policies exploit poor people. Friedman's written work concentrates on monetary theory, including books such as the Studies in the Quantity Theory of Money (1956), Capitalism and Freedom (1962), A Monetary History of the United States (1963), Free To Choose (1980), Money Mischief: Episodes in Monetary History (1992); just to name a few of his works. As for Keynes, to get back to him for a moment: he was a man, who, by and large, has been misinterpreted. His theory was that a government should spend in the bad times (incur a debt) and save in the good times (pay back the debt). The problem is that the politicians liked only one side of the equation.

The role of the central banker, the Bank of Canada, is to see that the country has a stable currency with which it might do its business (barter being a most inefficient way to go about things). It does this by controlling the ratio of money in the economy to the productivity in the economy. If this ratio goes up then the economy experiences inflation. The only substantial control stick which the central banker has is his authority over the level of money within the economy; he does not, and cannot set interest rates -- the international money market does that. Oh! He might suggest rates; and he might even nudge them along a point or two, for a day or two, by his selling and buying activities; but this is for sure, and Ms McQuaig and those who follow her line will have to understand: No Bank Can Set Interest Rates.

While Ms McQuaig works in a few figures, her book is generally barren of tables and numbers, nowhere can be found a breakdown of where our tax dollars are now going these days compared with where they have gone over the years. Such a comparison brings the problem of our debt starkly into contrast.3 We have now come up against what might be described as a "tax wall" as is represented by a burgeoning underground market. Government's revenue producing ability is just about tapped out, and short of breaking out the printing presses (which McQuaig thinks might be a good idea) government has no choice but to cut back. Government is limited as to where it can spend it's scarce revenues and this because of the huge interest payments that it must now make on the ever increasing debt.

The federal budget this year -- as is the case for a number of provinces, and as has been the case for all our Canadian governments for years, now -- figures that the government will bring in less then it intends to spend (deficit financing). Where to get the extra money to cover off the deficit, has been, at least, to date, no problem for high flying politicians: they see a slightly overweight, middle-aged man with a big diamond on his pinky, in New York; he'll make up the difference, for a price, and add the amount to a growing tab (the debt). The point is that the federal government will get together all the loot it needs this year and then start spending it, proportionately, as follows:

Here are a few other interesting figures (read facts): the net public debt as a percentage of GDP [I don't know what that "D" is in there for; I use to know it as GNP (Gross National Product); some label hanging economist must have got his or her way], for twenty years, through to 1981, hung around 21%; in the past 12 years it has taken a steady climb, standing, in 1993 at 70%.4 Further, the combined federal and provincial debt went, in the same 12 year period, from 10 billion to around 70 billion (20 for the provinces, 50 for the feds.) What's that? Oh, what -- 700% increase? Nice goin'! Now, to be fair, they kept it steady from '86 to '90 at about 45 billion. The graph shows the steepest rise to have occurred in the last four years. If you are not now staggered by the billions our government has spent on us in the past few years, hang on, you will be when you fathom the next set of figures which results when this question is asked. How have the spending priorities of the federal government changed in the past twenty years? The Fraser Institute, a respected western right wing think tank (whether right or left, the facts are the same) was asked the question and it turned its economists lose. The cost of servicing debt has eaten into some sacred areas; as a proportion to the whole, the money spent on education and health has gone down. The money that the government spends on "protection of persons & property" has been reduced proportionately by more than one half, from 20% to 9%. Likewise spending has gone down in "general services," transportation, resource conservation & industrial development, down 6% to 3«%. Only social services (28% to 33%) and labour, employment & immigration («% to 1«%), aside from transfers to the provinces (5% to 6%), and, of course debt payments, have gone up. Debt payments is our star, front and centre: from 12«% to 25%, and climbing with no choice. These essentially are facts given to us by the people who run our government; but they preach mightily, "We are going to do better." Do better! Compared to what? What Canada needs is a Ralph Kline. And after our saviour has straightened out this mess, then maybe he can just bring some of these political buggers to the courts of justice. But, -- I digress.

As to Ms. McQuaig's unsupported argument that countries can indefinitely run, with deficits and thus a larger and larger debt: Well, -- there is no sensible arguments to be made on the point. The questions of how such deficits and debts as have been run by our government in Canada, and how they impact on all of us have been canvassed and acutely answered by Robert Crozier. Crozier, now retired, was the former Director, National Division, Statistics Canada; and who was the former Head of Forecasting and Economic Analysis at the Department of Trade and Commerce, and former Senior Economist at both the Economic council of Canada and the Board Conference Board in Canada. Now, that I have qualified my expert, let me refer to his findings.5 Crozier showed, using accepted statistical techniques (more generally, just plain math) "how much the deficit has to be cut in order to get ahead of the avalanche of spending, accelerated by the force of compound interest interacting with the significant projected deficits that will persist for the next several years in spite of the spending cuts and tax increases in the current budget." That is an important conclusion and cannot be ignored by those who are in charge of this country's check book, and, more generally, the welfare of the people in this country. Crozier's work is thoroughly buttressed with charts which need little by way of comment. They clearly show how the Canadian economy has suffered as a result of the spending habits of our politicians. The plain fact is the bill collector is at the door and we have got to find a payment. We have cut things to the bone and we are down to staring at two sacred cows: our constructed educational system (of long standing) and our constructed medical system (of more recent standing). Both are crumbling, but the knock on the door has turned into a bang, and assuming we could do more to keep these socialistic systems together: -- "We ain't got the money." But I am beating up wind here and getting entirely off my subject: I must get back to Mr Crozier.

The future, that so many of us have been talking about, for years and years now, has arrived. A number of us have placed our bets and the ball has fallen in; is it red or is it black. Forget the prediction stuff, its time we looked at what is happening. Mr Crozier, in the most important part of his paper, was not making forecasts (the principle occupation of an economist); he presented a damage report; he described what is happening to us right now. The Crozier charts show that the over all debt in this country has been just going up, and up. This is something you already know. What you might not have realized is that people's savings are going down, and down, at the same time their consumption is going up, and up (eat, drink, and be merry philosophy has solidly taken over). Corporate profits, incidentally, are, generally, down, in spite of the poppycock that has been dished out.

I set forth Crozier's two concluding paragraphs of his essay.

"The underlying source of the economy's problems is the huge and chronic deficit in the public sector, as described in the preceding analysis and charts. The deficit is growing at a compound rate, and so are the debt and the interest payments associated with it. The orders of magnitude are now so large that they are threatening to defeat discretionary efforts at deficit reduction unless these efforts are very substantial. The longer action is deferred, the greater the difficulty, for compounding effects do not wait upon the pleasure of governments.
The most compelling message that this analysis provides is how critically important it is that the deficit be eliminated, and quickly. The economy must be relieved of the gross distortions and imbalances imposed on it by two decades of public sector borrowing. And time is of the essence, for if action is not soon taken, the escalating power of the deficit, debt and interest payments will have pushed the numbers beyond any reasonable possibility of our gaining control over the process."

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2 The federal debt now stands at above 500 billion, that's $500 thousand million, $500,000,000,000; it averages out to approaching $20,000 dollars of federal debt for every man, woman and child in this country. It does not include, I should add, the unfunded liability of the Canada Pension Plan, if it did, the figure would be over a trillion. Now, here is another little known fact: 330 billion of our 500 billion debt is owed to foreigners. [See Robert Crozier's study published by the Fraser Institute (Forum, March, 1994.)] This 330 billion represents about 45% of our GDP: to be compared with the U. S. at 7%. Germany and Japan do not owe money to any one outside of their countries, as a matter of fact its other countries that owe them: Germany, -22%; Japan, -12%. (See "Survival of the Fittest," Report on Business Magazine, June, 1993; and see the February '93 edition of Consensus, The National Citizens Coalition).

3 Ms. McQuaig finds the "voluptuous curves" of such graphs and charts "pornographic" and diverting (p. 253).

4 "Martin Report," Department of Finance. From the Fraser Forum (July 1994, p. 7.) one can determine there is a wide divergence from one province to another: Atlantic provinces, 150%; Ont., 101%; Man & Sask, 123.2%; Alberta, 86.7%; B.C., 89.4%; Quebec, 134%; and "ROC," 105%. I should note: only Alberta and B.C. are net contributors to confederation, the rest of us are on the take. These provinces have gotten their houses in order, but are now being drained by the rest of us. (And we worry about Quebec separating.)

5 I take my figures, etc. from an essay of Mr Crozier's, "Charting the structural economic effects of the deficit." This essay "represents only part of a larger paper presented to the Minister of Finance as he prepared the federal budget for 1994-95." (Published by the Fraser Forum, March 1994, pp. 5-20.)