The Bank of Canada now owns over 30% of the Canadian bond market, and at its current pace will own over 50% of the bond market by this time next year. It’s no surprise that the central banks actions are now coming under increasing scrutiny, particularly from opposing lawmakers. There are growing concerns the central bank is financing government spending beyond COVID-19 emergency measures. Some are calling it the early stages of MMT (Modern Monetary Theory), a radical policy idea which ultimately suggests that there are no limits on fiscal spending when you have a central bank which can print money in your own currency.

An idea, which finance minister Chrystia Freeland was quick to dismiss despite saying fiscal anchors, which constrain spending, will only be re instituted once the pandemic has passed. “I am not among those who think Canada should have a fling with Modern Monetary Theory, which holds that deficits don’t matter for a government that issues debt in its own currency.”

Still, the lines are becoming increasingly blurry between the actions of the federal government and the central bank. It appears to have prompted the Bank of Canada to dial back its QE (money printing program) in order to avoid further backlash, announcing they will reduce government bond purchases from $5B down to $4B per week. Instead, the Bank is “recalibrating” the QE program to shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses.

These programs will remain in play until the recovery is “well underway.” In addition, Governor Tiff Macklem, doubled down on his message that interest rates will remain pinned to the floor for the foreseeable future. The central bank now says they won’t hit their inflation targets until at least 2023, meaning there will be no interest rate hikes until then.

f you’re confused by all of this central bank lingo, let me simplify it for you here. The central bank is manipulating interest rates lower, interest rates will remain at zero for a long time, the currency is being devalued at an unprecedented pace.

If you’re still wondering why house prices are going higher during a recession, I can’t help you.

Three Things I’m Watching:

1. At its current pace, the Bank of Canada will own 50% of the bond market by this time next year.

2. Home sales across Canada have rebounded sharply.

3. The taller the building, the bigger the decline in Greater Toronto condo prices.

2 COMMENTS

  1. Some are calling it the early stages of MMT (Modern Monetary Theory), a radical policy idea which ultimately suggests that there are no limits on fiscal spending when you have a central bank which can print money in your own currency.

    LOL, nope. MMT just states the now widely-acknowledged fact that countries with sovereign currencies like Canada do NOT borrow or tax to fund spending, but that spending MUST come first. It’s a pretty clear point when you get down to it: the central bank is the only source for Canadian dollars. That’s been how currencies have worked for centuries, it’s just not discussed.

    Once you realize that we are not fiscally constrained, then that invites a lot of follow-up questions. Like: what are our constraints?

    • That’s not really true.

      Additional funds beyond tax revenues have traditionally been raised in bond markets.

      Bond markets are international, meaning our debt was owned by foreign countries.
      Our credit worthiness was of high importance as it would dictate the amount of bids and the ultimate coupon price we could list on our long term debt.

      That was the ultimate constraint – don’t lend more money to a drunk unemployed sailor, or at the least make the terms so egregious that the deal is not appealing.

      I’m trying to educate myself on how MMT is supposed to work in this context – I admit I don’t fully understand the confines of MMT.

      Would it not be the case in theory that as long as inflation is low, and unemployment high we could continue to print near limitless amounts of money with no repercussion?

      It seems too easy.

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