# Canada Debt problems and the Bank of Canada



## DavidColeman (Jun 20, 2011)

Hi,

I've been learning more about our Bank of Canada. First, some interesting facts:

The Bank of Canada is a Public Bank, owned by the people, through our Government.
The Bank of Canada Act allows the Bank of Canada to provide loans to the Federal or Provincial Governments.
The interest rate on those loans, could be 0%, or could be the going rate, but if there is any interest, it goes back to the Government since the Bank of Canada is a publically owned Bank...
The Bank of Canada has a history of making these Government loans prior to the mid 1970s, but since then, the Government has turned to taking loans from Private, Commercial banks WITH interest.
We pay MANY Billions of dollars in interest every year to these private banks through our tax dollars.
Our debt is growing fast! And that means our taxes and our childrens taxes will rise as well.

WHY doesn't OUR Government use the Bank of Canada for loans instead of Private Banks? Good question. I asked. The standard answer is that it would be inflationary. Wrong answer.

When you, me or OUR Government takes a loan from a private bank, we think that they are loaning us the money that is stored in the bank through deposits, which is why they deserve to be paid interest.. right? Wrong. Before 1992, the Banks had to keep a 'reserve' amount of money to back their loans, and it was around 10%, which means they could loan out $100 if they had $10 in reserve. BUT, Brian Mulroney changed the reserve requirement to NIL, Nothing, Zero, back in the early 1990's. So, private banks are not required to have money in reserve, other than enough to hand out cash from peoples deposits. So, how do the Banks provide loans?? Simple, they just make an entry into their financial system and its created out of nothing. Its new money, created by your signature on the loan sheet. As simple as that. They have the power to create money and charge interest for it. 

So, what is the inflationary difference between the Private Bank creating money, or the Bank of Canada creating money? Nothing. Except interest payments that WE are paying for! 

If you see anything wrong with this information I am presenting to you, I'd love to hear it. Poke holes! I'm learning, and doing more research, talking to my MP, the opposition, various organizations and getting involved. We need to stand up and make changes for the betterment of Canada.

thanks for reading,
David


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## KaeJS (Sep 28, 2010)

Sorry..

But what does it matter if they create the money out of nothing, so long as you get the money for your loan/withdrawal?

Who cares where it came from.


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## ddkay (Nov 20, 2010)

AFAIK Canadian banks are intermediaries and interest is not just paid to private banks but bond investors here and around the world.

Check out this history on Chinese bonds for some reasons governments would need to tap into foreign capital markets: http://www2.standardandpoors.com/spf/pdf/index/China_Bond_Market_Concept_Paper.pdf

There is a long history of countries defaulting on debt obligations and wiping out lenders. The value of bonds is linked to credit worthiness, so they carry what's called a "credit risk". If Canada or the U.S. ever gets into deep trouble it looks like we can just default and issue a new currency and presto problems solved. Maybe.

You can sign up for email alerts from the Dept. of Finance to read when they issue new debt and the purpose it was issued, whether to build infrastructure or expand our international reserves.


> The Department of Finance Canada borrows in both domestic and international markets on behalf of the Government of Canada.
> 
> Domestic debt consists of Treasury bills, marketable bonds, retail debt, and bonds for Canada Pension Plan (CPP).
> 
> Foreign debt is issued by the Government of Canada under the government’s foreign currency borrowing program. It consists of marketable bonds; Canada bills; and euro medium term notes.


If there are any experienced bond investors on this forum they should be able to better answer some questions on this topic.


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## DavidColeman (Jun 20, 2011)

I don't really care that they create money out of nothing, although I sure wish I had that magical power... and then charge interest for that magical power.. but that's besides the point.

My point is that our Government have the option of taking loans from Private banks or our Public bank. The difference is that the Private bank charges interest, and something close to 50-60 Billion dollars of our tax dollars goes to pay that interest every year. Instead, they could take a loan from the Bank of Canada without any interest, or with interest that goes back to the Government. That is money that could be used to fund infrastructure, improve health care, education.. whatever we decide is important.

The reason they give for NOT using the Bank of Canada is that it is inflationary to create that money out of thin air. They say it needs to come from Private banks which 'they say' make loans based on the deposits that they hold, but that's just not true.


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## DavidColeman (Jun 20, 2011)

@ddkay.. That may have been a bad assumption on my part, I'm not sure where the interest goes. I'll have to look into that more, but so far I've had a difficult time finding exactly which banks or investors they take the loans from and pay the interest to. 

Again, my concern is that our Government is paying interest to any bank at all, other than OUR bank.


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## the-royal-mail (Dec 11, 2009)

This sounds like a lobby effort. My question to the OP is, what is the end goal of all of this? "stand up and make changes for the betterment of canada" may sound good, but I would like to know more about what is behind that vague statement. What's in it for you?

Please advise.


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## Square Root (Jan 30, 2010)

Strange first post. Seems like he has an ideological issue. I am not interested.


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## ddkay (Nov 20, 2010)

The best people to ask are those that invest in Canadian bonds (they should know what they're buying). Interest (aka yields) is most definitely paid to private investors and institutions like pension funds or banks or investment orgs like PIMCO. There's interest paid because loaning money is inherently risky, so even if an investor can't recover 100% of their principal, they get something back. Greek bondholders are likely to lose 30-70% of their principal in the case of a sovereign default. The biggest problem there is Greece can't autonomously print more Euro to pay their debt, the ECB has to do that. It's true that most deficits aren't run by debt itself but debt service (cash needed to pay interest on the loan) but federal loans are usually the safest because the government can print money at will (monetization) whereas the municipalities are limited by their ability to tax their citizens.

Chances are a local MP won't know anything about anything so thats definitely the wrong place to start your research.


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## DavidColeman (Jun 20, 2011)

@the-royal-mail.. whats in it for me, is the same as whats in it for you and everyone else in Canada, including our children and their children. The pursuit of lower sovereign debt, and in turn, lower taxes, increased funding to infrastructure, healthcare etc. The Federal debt itself is $560Billion dollars and counting. 
http://www.debtclock.ca/

I'm not looking to personally profit from this action in any way other than the potential and possible lowering of that debt. I'm not looking for monetary contributions. I AM looking for like-minded people, who can help me in my pursuit of knowledge in this matter, and people who are willing to spread this knowledge and take action towards making changes. I have no idea what the appropriate actions are yet.. I'm just getting started!

As square root pointed out.. Yes, this is my first post here. 

@ddkay.. you're right, I don't expect my MP to know anything about this. But, I still think its worth a visit to find out, and inform her of what I know. Possibly, she'll be interested, probably not, but I still think its worth a try. I do see your point about where the interest is going on the Canadian Bonds. Since only Canadians may own Canadian Savings Bonds, at least that tax money is going back into the pockets of Canadians. But, it still feels counter-productive to me, when that debt service could possibly be lowered, or in a nirvana world, eliminated.


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## HaroldCrump (Jun 10, 2009)

David, I don't believe there is any conspiracy here.

The Bank of Canada, like any other central bank, is the banker of last resort.
Since our banking sector is private and regulated, it makes sense for the govt. to borrow from the banks to ensure liquidity and balance in the system.
The interest payments that you refer to are the overnight rate.
The govt. would have to pay the same to the BoC vs. any private bank.
The interest money thus paid to the private banks then gets circulated into the money system of the country in the form of personal and business loans, etc.
It keeps the system moving and fluid.

Also, these private banks that you are vilifying often borrow from the BoC, and pay interest for those short term loans.
That interest goes back into the public coffers, so the playing field is even.

Long term govt. borrowing is through the issue of bonds, CSB, etc.

I'd imagine most of the G8 countries' banking system works this way.

I don't agree that we have a national deficit of billions of $$ as you claim simply because the govt. borrows from the 5 chartered banks.

If you are itching to take up a cause and fight for it, pick something that'll have true long term impact and value such as the environment, etc.
Save some endangered species, for example.


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## DavidColeman (Jun 20, 2011)

@HaroldCrump.. I'm not familiar with most of the other G8 banking practices, but I do know that the USA has no public central bank, only a private bank called the Federal Reserve. So, in that we have a major difference.

Most of our sovereign debt IS from compounding interest. According to the 1993 Report of the Auditor General of Canada, our total debt was $423Billion, $386 of which was to service the debt of the original loan of a comparatively small $37 Billion. The debt has gone up and down since then, but its still mostly in interest service. Look it up for yourself in section 5.41 here:
http://www.oag-bvg.gc.ca/internet/English/parl_oag_199312_05_e_5944.html#0.2.L39QK2.DVW2PL.2FGQFE.OA

copy/pasted here:
5.41 The cost of borrowing is the third area that affects the annual deficit. In 1991-92, the interest on the debt was $41 billion. This cost of borrowing and its compounding effect have a significant impact on Canada's annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.

I am interested in saving endangered species and the environment. But I am passionate about this because we could do so much more to help the environment if we weren't spending so much of our tax dollars in debt service...


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## DavidColeman (Jun 20, 2011)

Bill Abram lived through the history of the Bank of Canada, you may find this video enlightening:
http://www.youtube.com/watch?v=O8Zl1Wax8MI&feature=related


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## the-royal-mail (Dec 11, 2009)

DavidColeman said:


> I AM looking for like-minded people...who are willing to spread this knowledge and take action..


Thank you. A lobby effort, just as I thought.

I'm not sure this discussion forum is the best place to gather up souls for this effort. This feels like a sales pitch to me, even though I realize you're not selling anything.

For that reason I'm out.


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## HaroldCrump (Jun 10, 2009)

DavidColeman said:


> but I do know that the USA has no public central bank, only a private bank called the Federal Reserve. So, in that we have a major difference.


The US Federal Reserve is not a private bank in the sense you are using the term, such as TD or BNS here.
It is tightly controlled and regulated by the US federal govt. and the president appoints the board members.
Also, any net earnings of the Federal Reserve is sent back to the US treasury.



> Most of our sovereign debt IS from compounding interest.


Not all of it is the overnight or short term lending from private banks.
Surely, a large part of it must be the interest payments on outstanding bonds (some from nearly 30 years ago), CSB etc.


> we could do so much more to help the environment if we weren't spending so much of our tax dollars in debt service...


OK, so if that's your cause, then your solution should be to reduce govt. spending in the first place and/or increase revenue, not change the source of the funds.

To implement what you are suggesting will lock up the money supply in the country.

When govt. raises revenue by issuing debt, _someone_ has to buy that debt.
A lot of it is bought by private institutions such as banks, insurance companies, pension funds, etc. and foreign governments and institutions.

You are advocating that we need to stop that because we are paying too much interest to such private and foreign entities.
However, that is what keeps the liquidity and demand flowing.
You can't have a multiplier effect based system where the govt. can only borrow from itself and pay interest to itself.


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## ddkay (Nov 20, 2010)

Great post Harold ^^

There's a lot of great information on the internet, but there's a lot of disinformation too. There's nothing wrong with anyone coming here and sharing their opinions and research. Conspiracy theories only work when people don't understand how stuff actually works lol. You need to understand your subject in question inside-out before coming to any notable conclusions. These people advocating we stop paying interest are just giving the outsider perspective. Stopping interest payments even though we can continue to pay them would be a strategic default, and that's always a last resort because it tarnishes relationships and makes people lose confidence in a country. How many people have faith in Argentinean bonds today? Argentina is still crumbling apart. I agree with Harold, a no-brainer solution to debt problems is to cut spending where its effective and makes most sense.


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## DavidColeman (Jun 20, 2011)

Sigh.. I never said we should strategically default and stop paying the interest payments.. wow. ok, apparently I need to communicate more clearly.


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## ddkay (Nov 20, 2010)

David: I never said you said anything, nothing I wrote was meant to be personal. All I was saying is that it's easy to jump to conclusions without knowing all the facts. It's easy to be a speculator. We do it here all the time. Anyone can form an opinion based on other peoples opinions, but no one can form their own _objective_ opinion without a holistic understanding of how systems work. Sometimes you need inside contacts to get that info. Sometimes it's public and you don't. Why should I trust retired high school teacher Bill Abram anymore than you should trust me, some anonymous person on the internet? From the beginning I was just suggesting a different approach in your research.

No one can be upset at the public for not knowing how money is created. It's there, it's valued by decree, backed by human capital, we use it and the world goes on. Not everyone wants to spend their life studying finance and economics. You need to be an expert of a system before you can change it. Maybe after spending enough years in pain and misery doing research in grad school, you can work for the Bank of Canada. Then your opinions will matter more than any retired high school teacher that posted a video on YouTube with a few cherry picked convenient facts.

We already know Greece's debt is unsustainable and there's a 2/3 chance of default. We already know the worlds consumption rates are unsustainable and a species level threat. The markets correct itself the same way nature corrects itself. Food production rises and falls, population rises and falls, government rises and falls. Humans tend to over-engineer everything just to be humbled time and time again by nature. There are no easy solutions to a difficult problem. Maybe this is just how everything was meant to be. What if in the future, economies don't even revolve around money? Nobody even knows where chickens come from. Be conscious but be optimistic.


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## DavidColeman (Jun 20, 2011)

I'm not saying I have all the answers. And I agree, we can't trust Bill Abram to have all the facts and solutions. But he points out some interesting information that warrants investigation and discussion. I haven't found any facts that refute his information. Where I have looked I've found confirmation.. so far. What else I've found is people that know more about economics than I do telling me that there is nothing to look at here, I just don't 'get it', I'm wasting my time, another conspiracy theory, I should find something more worthwhile to stand up for... 

I'm not interested in spending 'years in pain and misery doing research in grad school' learning about a system that perpetuates the problems, so that my non-mainstream opinion can be ignored and I'm left with the debt of their 'education' as my reward. No... I pay my 43.7% Fed/Provincial taxes which gives me the right to question this system. 

I'm not an economist, financial advisor or expert, but I do know this system isn't working in our favor unless of course you are one of those at the top. Our countries are digging deeper into debt, the rich are getting richer, the middle class are becoming the poorer class, and us people who don't 'get it' are told there is no easy solution, leave it to the experts and all will be well.. 

I don't hear ANY mainstream economic experts talking about monetary reform! If anyone does, they are generally written off and given no mainstream media attention. WHY is this? Are ANY of the G8 countries actually making progress to paying down their debt? No, Canada is 'doing well' and we're on the road to actually eliminating our yearly deficit. Are the Governments going to take turns bailing one another out until all the paper money is burnt into hyperinflation? Whats THAT endgame?? Why do we continue down this clearly failing road?

What about Bills Abrams information is wrong? Do you believe our debt isn't mostly interest? Do you think the BOC didn't fund infrastructure without causing inflation or deflation or freezing up our monetary system prior to the mid 1970s? Do you like the direction this Canadian debt curve is heading?
http://www.oag-bvg.gc.ca/internet/English/att_9305ex3e_e_5985.html

In the words of Mackenzie King, Prime Minister of Canada for 22 years..
‎"Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile."


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## ddkay (Nov 20, 2010)

Even the so called experts cannot tell you anything for certain. I only believe there are better chances being heard inside the BoC than the sidewalk outside the BoC. Change nearly always needs to happen from within. I feel like if there is monetary reform, it will be a generational change. I'm not blind to the problems, but at the same time I don't have a solution for them. I don't have a solution that can't be shot down for practical reasons. With each successive recession, government tax revenues collapse and we go further into debt than we began. Canada's economy is a like Chinese bar stool with one leg left. As if the US situation isn't bad enough, I'd hate to think what would happen to commodity prices when China hits a significant speedbump. The Shanghai index is already down 13% in the past two months over concerns of slower economic growth and inflation.


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## jmlz1987 (Jun 8, 2011)

DavidColeman said:


> I'm not saying I have all the answers. And I agree, we can't trust Bill Abram to have all the facts and solutions. But he points out some interesting information that warrants investigation and discussion. I haven't found any facts that refute his information. Where I have looked I've found confirmation.. so far. What else I've found is people that know more about economics than I do telling me that there is nothing to look at here, I just don't 'get it', I'm wasting my time, another conspiracy theory, I should find something more worthwhile to stand up for...
> 
> I'm not interested in spending 'years in pain and misery doing research in grad school' learning about a system that perpetuates the problems, so that my non-mainstream opinion can be ignored and I'm left with the debt of their 'education' as my reward. No... I pay my 43.7% Fed/Provincial taxes which gives me the right to question this system.


Question all you want, but if you don't find the answers you're looking for yourself, don't expect to get any without paying more tax dollars for it. If a study was commissioned (fat chance) it will just waste more government revenue and more than likely be skewed in favour of the government in the first place. Again question, discuss but don't try and rally up some anti-government BoC fun-time group here.



DavidColeman said:


> I'm not an economist, financial advisor or expert, but I do know this system isn't working in our favor unless of course you are one of those at the top. Our countries are digging deeper into debt, the rich are getting richer, the middle class are becoming the poorer class, and us people who don't 'get it' are told there is no easy solution, leave it to the experts and all will be well..


Who's "we"? For the most part, everyone on this forum is doing pretty well unless they're in a public place (ie library) typing their replies. Poverty is becoming so much more a public issue (as it should) and is garnering the attention of the respected provincial and federal levels of government. Action is being taken, however it may be too late for some already. The people on the top, however are the ones manipulating the system so they stay rich through tax-evasion tactics and other wealth management attributes.

Like any major country out there, liquidity is based off of debt and debt issues. Without it, circulation of money would be far and from between, countries would almost seem closed off to one another. Keep the money flowing and the system works. Take the flow out, and watch it all crash.

And if you're still arguing for reform, should done it when things could have actually changed. I still think our system, while not perfect, is adequate for it's purposes.


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## HaroldCrump (Jun 10, 2009)

DavidColeman said:


> I haven't found any facts that refute his information. Where I have looked I've found confirmation.. so far. What else I've found is people that know more about economics than I do telling me that there is nothing to look at here, I just don't 'get it', I'm wasting my time, another conspiracy theory, I should find something more worthwhile to stand up for...


So, is this a research project for you, is that it?
A thesis for your Masters Degree in Economics?



> but I do know this system isn't working in our favor unless of course you are one of those at the top. Our countries are digging deeper into debt, the rich are getting richer, the middle class are becoming the poorer class


And it is all because of the overnight borrowing between the BoC and the private banks?
What's next? It's causing World Hunger, too?



> What about Bills Abrams information is wrong? Do you believe our debt isn't mostly interest?


Even if it were, it is not the interest being paid to the private banks for the overnight or short term "in flow" borrowing.
For a govt. interest payments are indeed a substantial part of the national expenses.
Let's say you got your way and managed to get your MP to pass a bill through Parliament forbidding the govt. from borrowing any money.
What do you think our tax rates will be if that happened?
What do you think will happen to money supply, liquidity and multiplier effect?

I'm not saying the govt. should keep increasing its debt.
However, the solution to that is not to stop borrowing money from the banking system, but instead, reduce expenses and/or increase revenue.
Given a current state of revenue and expenses, _who_ the govt. borrows from is irrelevant, as long as the interest rates are aligned with the BoC prime rates (+/- spread for longer term bonds, as applicable.)

Not only are you barking up a wrong tree, you are barking up a tree that doesn't even exist.


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## peterk (May 16, 2010)

I'm also quite interested in this topic, as I have a limited grasp of it. From the layman point of view, it seems quite obvious that the government is screwing itself by borrowing privately instead of printing money throught the BOC. Since the borrowed money is actually printed money anyways, just printed by the chartered banks and not the BOC. It seems like a topic to easily get up in arms over because "big banks" are profiting from the government. If it were the fact that goverment borrowed all needed money with the issuance of bond to private citizens then no one would get upset about it I think.

The problem I have is that any explaination I see explaining the merits of the current system goes right over my head. I can only understand the side saying how the government is getting screwed by interest payments. Maybe someone could explain in a more intermediate fashion why the current system has to be like it is, and why monetizing the debt is a bad thing compared to borrowing from CBs who makeup the money themselves anyways?
Fascinating subject, I should really go back to school and study economics.


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## DavidColeman (Jun 20, 2011)

@PeterK... Here is some more information, that you may find interesting:

Pretty unprofessional video, but contains some interesting information and interviews with former PMs, Jack Layton, and our Finance Minister:
http://www.youtube.com/watch?v=OYRdlegDYwo&NR=1

Canada Action Party website on monetary reform:
http://canadianactionparty.ca/policies/monetary-reform/bank-of-canada/

COMER website (Committee on Monetary and Economic Reform)
http://www.comer.org/about/index.htm

Some information about a rescinded Municipal Improvements Assistance Act which allowed the BOC to make loans to Municipalities:
http://www.sustecweb.co.uk/past/sustec12-5/New Deal for Municipalities.htm

Perpetual Debt: Bank of Canada & why we should use it instead of wall st:
http://www.youtube.com/watch?v=mUjBLLzYPGg

Net Debt Chart from Auditor General (1868 to 1992):
http://www.oag-bvg.gc.ca/internet/English/att_9305ex3e_e_5985.html

Canada Debt Clock:
http://www.debtclock.ca/


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## DavidColeman (Jun 20, 2011)

@HaroldGrump... Yes, its causing World Hunger, the killing of baby seals, and the invasion of Libya too!!! Thanks for your constructive thoughts on taking my thoughts and questions to extremes. "Constructive" people like you are a big reason why discussions for change fail. I'm not an expert so I should just shutup.. Thankyou, you are entitled to your say, I heard it loud and clear.. we have different perspectives.. Respectfully, moving on...


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## the-royal-mail (Dec 11, 2009)

DavidColeman said:


> @HaroldGrump... Yes, its causing World Hunger, the killing of baby seals, and the invasion of Libya too!!! Thanks for your constructive thoughts on taking my thoughts and questions to extremes. "Constructive" people like you are a big reason why discussions for change fail. I'm not an expert so I should just shutup.. Thankyou, you are entitled to your say, I heard it loud and clear.. we have different perspectives.. Respectfully, moving on...


^ Thank you for proving yourself as a troll. Your last post was anything but respectful. Harold has no agenda, which is more than what I can say for you.


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## HaroldCrump (Jun 10, 2009)

DavidColeman said:


> Thanks for your constructive thoughts on taking my thoughts and questions to extremes. "Constructive" people like you are a big reason why discussions for change fail.


I did give you my point of view and what my understanding of the system is.
Too bad I don't have scores of links to YouTube videos and other propaganda websites handy to explain/defend my position.
Sounds like you are fishing for like-minded people to further your cause.
I wish you best regards for that.


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## CanadianCapitalist (Mar 31, 2009)

OP is wrong. Govt. of Canada does not take loans from commercial banks. The Bank of Canada regularly holds auctions of T-bills and bonds to fund Government debt.

http://www.bankofcanada.ca/about/what-we-do/funds-management/


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## KaeJS (Sep 28, 2010)

DavidColeman said:


> @HaroldGrump... Yes, its causing World Hunger, the killing of baby seals, and the invasion of Libya too!!!


The killing of baby seals definitely has no correlation whatsoever to the Canadian Banking System.


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## v_tofu (Apr 16, 2009)

KaeJS said:


> The killing of baby seals definitely has no correlation whatsoever to the Canadian Banking System.


Are you sure? I'm pretty sure I read somewhere that the higher number of baby seals killed every year will result in more pain and suffering for the vegetarian pansies. 

The fiat currency is dead!


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