Election campaigns are in full swing, and at the centre of the political debate is the cost of living. CPI inflation just ticked in at 3.7% in July, one of the highest readings over the past two decades. Furthermore, housing inflation is out control, with national home prices accelerating at their fastest pace on record, officially up 22% year-over-year in July. According to RBC, housing affordability, or the lack thereof, is the worst it’s been in 31 years.

While central bankers are convinced this problem is merely “transitory”, there’s no question monetary policy is being rightfully scrutinized. It’s been over a decade with a near zero interest rate policy that has crushed savers and forced capital into alternative assets such as housing. The resulting house price inflation is no coincidence. In fact, just take a look at the growth in mortgage credit, which is now running at its fastest pace since 2007. It’s a cheap debt housing bonanza.

I mention this because it is rather perplexing that the prime minister of Canada, who is ultimately responsible for setting the Bank of Canada’s mandate every 5 years, and which is also up for renewal this year, was quoted this past week saying, “When I think about the biggest, most important economic policy this government, if re-elected, would move forward, you’ll forgive me if I don’t think about monetary policy. You’ll understand that I think about families.”

How can you campaign for housing affordability and the middle class without incorporating monetary policy into your framework? You would think monetary policy, which involves setting the price of money and monitoring inflation, would be considered a relatively important economic metric that effects all of our lives.

Things get even more interesting when you consider the Bank of Canada has been essentially funding the Governments budget deficit over the past several years. Since Q2 2019, the Bank of Canada has funded 87% of the governments budget deficit via QE (quantitative easing), which involves purchasing government debt in order to suppress bond yields. The Bank of Canada now owns 40% of the entire government of Canada bond market. Despite this, people still think the Bank of Canada and the Federal government are independent. Hint: they are not.

Anyways, regardless of your political views, I don’t expect any of this to change no matter who gets elected. We are trapped, no politician wants to face the consequences of moving off a zero interest rate policy and away from free money, especially when they can use it to buy votes.

In case you needed more evidence, let’s take a look at the NDP’s most recent election promise. Jagmeet says, “Since Justin Trudeau became Prime Minister, your rent has gone up $4,200/yr. We will give $5,000 to people who rent.”

Ironically this will only enrich the landlords, even though it is intended to help the renters. A subtle reminder that economics and politics don’t mix well.

Three Things I’m Watching:

1. Mortgage credit growth in Canada running at its fastest pace since 2007. (Source: Bloomberg)

2. Bank of Canada has funded 87% of Governments budget deficit since Q2 2019. (Source: Richard Dias)

3. Canadian dollar has now given back all of its gains for this year. (Source: Keith Dicker)

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