News & Events

March 2010 Market Commentary: "Budget deficits and inflation. Do deficits lead to inflation?"

March 4th, 2010

One of the lingering effects of the past recession is large government budget deficits (spending exceeding revenue collection) that have been created. Investors are concerned that budget deficits ultimately lead to higher inflation, as governments may resort to “printing” more money to pay for these deficits. We have reviewed the economic literature and the answer appears to lie with the independence or lack of independence between a country’s central bank and its elected government.

In the developed world with independent central banks (U.S., Canada) there is little evidence that budget deficits lead to higher inflation, but in some developing countries with less independent central banks running persistent deficits do appear to lead to higher inflation.

Running a government’s financial affairs is similar to running a household. As in any household, it must pay for its bills. Households have three ways to pay for their spending. They can work to earn income, live off the income generated from their assets (interest/dividends or rental income) or they can sell some of their assets. Should household spending exceed their earnings they will need to borrow the difference, likely from a financial institution. Governments have this same option of borrowing when spending exceeds revenue (tax collection or asset sales) by issuing bonds. Bonds are nothing more than a promise to pay in the future the borrowed money. In general, governments issue bonds to the public. Financing budget deficits, in this manner as is currently being done by Canada and the U.S., is not inflationary as the money the government has to spend by issuing bonds to the public is money the bond purchasers (the public via mutual funds and/or pension funds) no longer have to spend, so this financing of the deficit merely shifts spending from the private sector to the public sector. There has been no “new money” that has been created.

Please see the complete commentary attached below:

MacDougall, MacDougall & MacTier Inc. invites clients and friends to join us at two scheduled events to celebrate the Firm's history "Staying Connected".

February 24th, 2010

The events will take place on Thursday, March 25th 2010 as follows:
 

• As part of the Atwater Library "Lunchtime Series", on Thursday, March 25th at 12:30 p.m. Michael Harrison will talk about the book he co-authored with James Ferrabee, entitled “Staying Connected” – How MacDougall Family Traditions Built a Business over 160 Years.

• The Nicholas Hoare Book Store invites you to attend a book signing and reception on Thursday, March 25th from 6:00 to 8:00 p.m. to celebrate the publication of Michael Harrison & James Ferrabee’s new book “Staying Connected” – How MacDougall Family Traditions Built a Business over 160 Years.

Admission to both events is free; all clients and friends of "3Macs" are warmly welcome.