PrefBlog

I do not approve of the recent BOC defence of Quantitative Easing:

However, in its most recent Twitter thread, the bank went beyond explaining economics and took direct aim at a common attack levied against its policy decisions during the pandemic.

“#YouAskedUs if we printed cash to finance the federal gov’t. We didn’t,” the Bank of Canada tweeted on Aug. 25, followed by a series of tweets refuting the claim.

While central bank officials normally hold speeches and other events to communicate their thinking and to set expectations, Laval University economics professor Stephen Gordon says its audience has traditionally been smaller than it is today.

“The only people who pay attention are insiders and market experts. And that’s usually the only people that they have to talk to,” Gordon said.

This is obfuscation via technicality: of course the BOC hasn’t “printed cash to finance the federal gov’t.”. But they have certainly created settlement balances that can be used to buy currency (that’s how they get seignorage), assuming anyone wants to stuff their wallet with crisp new twenties. The potential for QE to ignite inflation is well known:

The biggest danger of quantitative easing is the risk of inflation. When a central bank prints money, the supply of dollars increases. This hypothetically can lead to a decrease in the buying power of money already in circulation as greater monetary supply enables people and businesses to raise their demand for the same amount of resources, driving up prices, potentially to an unstable degree.

This is implicitly recognized by the BoC itself, of course:

The goal of our monetary policy is always to reach our inflation target. We use QE to counter the risk of deflation—a dangerous decline in prices that harms everyone. QE helps stabilize the economy by making it easier for Canadians to borrow money and for companies to stay in business, invest and create jobs.

Under QE, a central bank buys government bonds. Buying government bonds raises their price and lowers their return—the rate of interest they pay to bondholders. This rate of return is also known as the bond’s yield.

Government bond yields have a big influence on other borrowing rates. Lower yields make it cheaper to borrow money. So, QE encourages households and businesses to borrow, spend and invest.
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QE is not the same as printing cash. Under QE, we buy bonds in the open market from financial institutions. And the funds that we use to pay for these purchases end up being deposited in accounts that financial institutions have at the Bank in the form of settlement balances.

This ‘oh, but we didn’t print money’ campaign by the BOC is crap. It is countering pig-ignorant disinformation by promulgating more pig-ignorant disinformation.

Did I support the BOC’s QE campaign? Yes, of course, we bloody well needed it. Did it ignite inflation? Of course it did, to some extent, that’s the whole point. There was a significant threat of deflation and that would have been far worse for everybody. Is QE responsible for current levels of 8%+ inflation? Academics will be teasing apart this question for years, but there are many other factors at work: supply and transport disruptions due to COVID, Russia’s invasion of Ukraine, a massive swing towards consumption of goods from COVID-restricted services, lots of things, all interplaying and making the question worthy of academic study..

But for the BOC to state blandly that they didn’t ‘print money’ with QE is simply a disgraceful attempt at obfuscation through technicality.

One of the great problems in the western world today is that distrust of government and its institutions has gone far beyond healthy skepticism into the realm of blanket denial and automatic rejection, encouraged by populist clowns like Trump, Bolsinaro, Putin and, here in Canada, Poilievre yearning to emulate them. The BOC’s decision to encourage this trend with a crappy Social Credit inspired pseuodo-defence of its actions cannot be allowed to escape criticism. The “Social Credit” system is brought up as a desirable thing every now and then (and has, to a certain extent, morphed into Modern Monetary Theory) – I remember a few years ago a 14-year-old made a video proposing that the BOC finance government oprations ‘the way it used to do’ and was mocked on PrefBlog and many other places for her naivety (I wasn’t mocking her so much, honest, she was only 14; I was mocking the movement that adopted her as a standard-bearer). It will be harder next time to beat back the something-for-nothing crowd. Thanks, BoC!

Also in Canada:

Canada’s economy grew at an annualized rate of 3.3 per cent in the second quarter, Statistics Canada reported Wednesday, driven by strong consumer spending and business investment in inventories.

This was offset by a fall in residential property spending and an increase in imports relative to exports, which pushed the quarterly GDP result below the Bank of Canada’s forecast of 4-per-cent annualized growth and the Bay Street consensus of 4.4-per-cent growth.

Preliminary estimates for July show that real GDP declined by 0.1 per cent. That suggests third-quarter growth is on track to undershoot the central bank’s estimate of 2 per cent, on an annualized basis, and could mark a turning point for the Canadian economy after a period of heightened economic activity that accompanied the lifting of pandemic-related restrictions.

On another note:

A chorus of European Central Bank policy makers called for decisive and swift rate hikes on Tuesday to combat soaring inflation, suggesting that the choice in next week’s policy meeting will be between a big move and an even bigger one.

With inflation likely hitting 9 per cent this month before heading toward double-digit territory on soaring gas prices, policy makers are increasingly worried that even long-term expectations may move above the ECB’s 2-per-cent target, indicating a loss of confidence in the bank’s inflation-fighting powers.

That leaves the choice for next week largely between a 50 and a 75-basis-point hike after the ECB raised the deposit rate by 50 basis points to zero last month in its first hike in over a decade.

Dutch central bank chief Klaas Knot and Estonia’s Madis Müller both said that 75 basis points should at least be discussed while Bundesbank chief Joachim Nagel argued for swift action, praising the benefits of front-loading moves.

And, right on cue, came the European inflation report:

Inflation in the European countries using the euro currency hit another record in August, fueled by soaring energy prices mainly driven by Russia’s war in Ukraine.

Annual inflation in the eurozone’s 19 countries rose to 9.1 percent, up from 8.9 percent in July, according to the latest figures released Wednesday by the European Union statistics agency Eurostat.

Here’s a straw in the UK wind:

A city centre pub in York has had to close after spiralling energy costs almost trebled its monthly bill.

Brian Furey, who ran The Gillygate for eight years, said payments had risen from £900 a month to £2,500.

It comes as some of the country’s breweries called for immediate government intervention on high energy bills this winter.

Mr Furey said: “It’s almost laughable, you get your bill and look at it and go ‘we can’t do that’.”

And another one:

A Michelin-starred pub said it has been forced to close because of the cost of living crisis.

The Fontmell in Fontmell Magna, Dorset, said it was closing with “immediate effect” blaming a £58,000 increase in utility costs and rise in supplier prices.

On the pub’s website the owner said it was “not a decision which has been taken lightly”.

The British Beer and Pub Association said businesses needed an energy cap.

Fed continued to hammer home its point:

The U.S. Federal Reserve will need to raise interest rates somewhat above 4 per cent by early next year and then hold them there in order to bring too high inflation back down to the central bank’s goal, Cleveland Federal Reserve Bank President Loretta Mester said on Wednesday.

“My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 per cent by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year,” Mester said in prepared remarks to a local chamber of commerce in Dayton, Ohio.

… with the job-openings number showing continuing strength:

Demand for workers remained strong in July, a sign that the U.S. labor market remains vibrant even as the Federal Reserve tries to cool the economy by raising interest rates.

Job openings ticked up to 11.2 million, the Labor Department reported on Tuesday as part of its monthly Job Openings and Labor Turnover Survey, or JOLTS.

The survey included a large upward revision for openings in June, to 11 million from an estimated 10.7 million. The figure reached a record of more than 11.8 million in March.

PerpetualDiscounts now yield 6.15%, equivalent to 8.00% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 310bp from the 315bp reported August 24.

More huffery-puffery from the Fed:

• New York Fed President John Williams said he expects interest rates to continue higher and to remain at those levels until inflation is subdued.
• Williams didn’t specifically say where he’d like to see rates go, but he did note that he believes reducing inflation will require real interest rates to be positive.
• Williams, Fed Chair Jerome Powell and Vice Chair Lael Brainard make up the central bank’s policy brain trust.

Echoing recent comments from Fed Chair Jerome Powell, Williams told The Wall Street Journal that he also is in the higher-for-longer camp when it comes to monetary policy.

“We’re going to need to have restrictive policy for some time,” he said in a live interview. “This is not something we’re going to do for a very short period and then change course.”

More central bank huffing and puffing:

Central banks around the world risk losing public trust and must now act forcefully to combat inflation, even if that drags their economies into a recession, European Central Bank board member Isabel Schnabel said on Saturday.

Inflation is close to double-digit territory in many of the world’s top economies and any decline is likely to be slow, keeping prices above central bank targets for years to come.

“Even if we enter a recession, we have little choice but to continue the normalization path,” Ms. Schnabel told the U.S. Federal Reserve’s Jackson Hole Economic Symposium. “If there was a de-anchoring of inflation expectations, the effect on the economy would be even worse.”

She also cautioned central banks against pausing on the first sign of a potential turn in inflationary pressures. Policy-makers should instead signal their “strong determination” to bring inflation back to target quickly, she said.

Powell got hawkish at Jackson’s Hole:

Jerome H. Powell, the chair of the Federal Reserve, delivered a sobering message on Friday, saying the Fed must continue to raise interest rates — and keep them elevated for a while — to bring the fastest inflation in decades back under control.

The central bank’s campaign is likely to come at a cost to workers and overall growth, he acknowledged; but he argued that not acting would allow price increases to become a more permanent feature of the economy and prove even more painful down the road.

Stock prices plunged in the wake of Mr. Powell’s comments, as investors digested his stern commitment to raising rates and choking back inflation even if doing so damages growth and causes unemployment to rise. The S&P 500 fell 3.4 percent, its worst daily showing since mid-June, and investors in bonds began to bet that the central bank will raise rates by more than they had been expecting.

Mr. Powell’s full-throated commitment to defeating inflation began to put to rest an idea that had been percolating among investors: that the central bank might lift rates slightly more this year but then begin to lower them again next year. Instead, the Fed chair echoed many of his colleagues in arguing that rates will need to go higher, and will need to stay in economy-restricting territory for a while, until inflation is consistently coming down.

So the streets were filled with hard-nosed, tough-as-nails, whip-smart financial specialists wondering in bewilderment why inflation couldn’t be licked by the Fed waving its magic wand. Perhaps some of them were contemplating standing on a building ledge to admire the view:

The sell-off capped a week of choppy trading that left major indexes down 4% or more for the week.

All told, the S&P 500 fell 141.46 points to 4,057.66. The benchmark index is now down almost 15% for the year.

The Dow lost 1,008.38 points to close at 32,283.40. The last time the blue-chip average had a 1,000-point drop was in May.

The Nasdaq slid 497.56 points to 12,141.71, its biggest drop since June.

The Russell 2000 index of smaller companies fell 64.81 points, or 3.3%, to finish at 1,899.83.
…
The Toronto Stock Exchange’s S&P/TSX composite index ended down 299.05 points, or 1.5%, at 19,873.29, its biggest decline since July 14 and its lowest closing level since Aug. 9.

For the week, the index was down 1.2%, its second straight weekly decline.

Here’s another straw in the wind for those following the effects of monetary tightening:

The veterinary sector has seen some of the most intense buying by large corporations in the past few years, with industry figures reporting purchase prices sometimes reaching nearly 30 times EBITDA (earnings before interest, taxes, depreciation and amortization) at its peak. That is far beyond the four- or five-times multiple a practice may have fetched in years past.
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Consolidators in health fields typically take on large debts to purchase the practices, and industry leaders in other markets have said the increasing cost of borrowing is putting pressure on that business model.

“With interest rates expected to increase, we may start to see multiples soften,” Michelle Kellaway, chief operating officer of Australia’s Greencross, told industry publication VIN News in June.

Brent Matthew, an Ontario veterinarian who consults others on how to run their practices, said he is aware of some practice owners who say their offers from VetStrategy have been put on hold but he has not heard from the company directly.

Dr. Matthew helps to value practices and says he has seen the market soften after witnessing intense bidding wars earlier in the pandemic.

Assiduous Readers will remember that I have often ranted about Marginal Effective Tax Rates on the poor, most recently on August 31, 2020. There are now indications that the problem will get some political attention:

Mr. Poilievre cites as an example a single mother with three children, earning $55,000 a year. If she were to earn an additional dollar, he says, clawbacks and taxes would eat up 80 cents – creating a marginal effective tax rate (METR) of 80 per cent.

Interestingly, the Conservative candidate makes the case for tax and benefit reform not on the typical right-wing terrain of economic efficiency but rather through an appeal to equity. Olivier Rancourt, economist with the Montreal Economic Institute, said that framing is more effective political marketing and more likely to directly appeal to the middle class. “It’s a message that conservatives are trying to embrace more and more,” he said.
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Mr. Poilievre’s solution is broad-based tax reform: cuts to income and payroll taxes, what he describes as a cap on government spending, simplification of the tax code and a joint federal-provincial effort to reduce clawback rates in order to lower METRs. (And, of course, he says he will scrap the current federal fuel charge.)

That joint effort is an acknowledgment that much of the problem is at a provincial level, and is particularly acute for Canadians who face clawbacks of social assistance payments once they start to earn income. The Finance Department analysis found that one-third of social assistance recipients had a marginal effective tax rate of 70 per cent or more – far beyond what even the highest earning Canadians pay.

I can’t say I’m a big fan of Poilievre or the hillbilly base to which he is in thrall, but it’s nice to see the issue get some political attention. On a brighter note, I was pleased to learn of a Department of Finance examination of the subject, which was even linked in the Globe article on-line (God, I love the Internet!):

Among non-SA [Social Assistance] recipient workers, the average EMTR [Effective Marginal Tax Rate] was 33% in 2017. The largest proportion (63.4%) faced EMTRs that were in the 30-49.9% range. About 29.3% faced EMTRs that were below 30% and 7.3% faced EMTRs of 50% or more.
The distribution of EMTRs is different among workers who also rely on SA income. Workers with SA income in their family are more likely to face a 50% EMTR or more. Among them, the proportion facing such a high EMTR varies between 22.7% and 44.9% – depending on the assumption used for estimating SA claw back ratesFootnote3 – compared with 7.3% among non-SA recipients.

I’ve said it before, I’ll say it again: universality is the way to go. A Universal Basic Income. Give every Canadian $X per year, include this $X in their income and adjust the tax rates accordingly to pay for it (reductions in entitlement programmes will also help). Start off small; X=1000. Increase gradually until marginal tax rates for recipients of government assistance do not discourage these people from taking part-time jobs, or picking up an extra shift, or moving to take a better job. Bang. Done.

TXPR closed at 617.19, up 0.50% on the day. Volume today was 1.24-million, slightly below the median of the past 21 trading days.

CPD closed at 12.27, down 0.24% on the day. Volume was 61,300, above the median of the past 21 trading days.

ZPR closed at 10.34, up 0.19% on the day. Volume of 112,170 was slightly above the median of the past 21 trading days.

Five-year Canada yields were up to 3.25% today.

Today’s action, particularly the pop after 4pm, was probably due to tomorrow’s redemption of BMO.PR.D and reinvestment of the proceeds by index and other funds.

PerpetualDiscounts now yield 6.16%, equivalent to 8.01% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 315bp from the 310bp reported August 17.