The recent verbal skirmish between Conservative leadership contestant, Pierre Poilievre, and PM Justin Trudeau, over the role of the Bank of Canada was more interesting for what it didn’t allude to than what it did.
“The Bank of Canada Governor has allowed himself to become the ATM machine of this government…. Money printing government deficits have caused more dollars chasing fewer goods, driving higher prices.” Pierre Poilievre
‘The independence of the Bank of Canada from the government of the day is a really important principle that ensures the stability and the good reputation of Canada in international economic circles.” PM Justin Trudeau
Let’s start with Poilievre’s accusation that the inflation we are seeing in our stores is caused by the Bank of Canada's enthusiastic creation of money to fund government spending. That's not really true.
Most government funding that is not raised through taxes comes from the government's issuance of interest bearing treasury bills and bonds. Currently only 10% of these are purchased by the Bank of Canada. The remaining 90% are sold to financial institutions. The money raised in this way is in the form of government debt owed to these institutions. During the pandemic Canada took on a large debt load to finance CERB payments, a decision that made sense to most Canadians.
So if the Bank of Canada isn't printing huge amounts of money and dishing it out to government through the purchase of new treasury bills, does that mean our Central Bank isn't a source of inflation. Yes and No. I don't think Poilievre is correct in blaming the Bank of Canada for the price hike of goods. But the explosion in property values and share prices can definitely be linked to Bank of Canada policies.
It has to do with Quantitative Easing.
Quantitative Easing: Who benefits? Who is neglected?
When COVID hit, our Central Bank began using the money it can create out of thin air to buy treasury bills and bonds, but not directly from government. Instead, the great majority of the purchases were in the secondary market - from commercial banks and other financial institutions that had purchased these assets at an earlier date. The strategy is called Quantitative Easing (QE).
The rationale for QE has been that these financial institutions will then use the money they have received through selling their bonds to the Bank of Canada to create additional loans directed at the business sector That will stimulate the economy and create jobs. Sounds good!
Except, that is not what commercial banks have been doing. Instead, they have preferred to loan money to to investors who buy real estate, stocks, bonds and other financial instruments. Those who benefit are rarely citizens, workers or local businesses, but rather the 1 to 10 percent of the population who can afford to speculate in this kind of way.
In other words, while the Bank of Canada's QE initiatives may be guilty of causing inflation in property and shares, they have, arguably, had very little to do with price rises in the ordinary things we consume. Certainly, at present, these hikes have much more to do with shortages caused by supply chain problems.
For a clearer description of how Quantitative Easing works check out Jim Stanford's article in The Monitor.
Whose interests does the Bank of Canada serve?
Let’s turn now to our Prime Minister’s assertion that the Bank of Canada needs to be independent from government. One has to ask the question: Where has that independence led Central Banks?
Those in control of Central Banks in Europe and North America have known for years that the money they were injecting into the banking sector through QE's buyback of treasury bills and bonds was not trickling down to the main street economy. Yet they have continued with what is, in reality, a very harmful practice. Why is that? Could it be that the independence of Central Banks from government that Trudeau so values, has led to them being joined at the hip with self-serving private sector bankers on Wall Street, Bay Street, the City of London, etc.? Why would the phenomenon be any different in Canada?
Last October the Bank of Canada announced that it would end its experiment with Quantitative Easing. Perhaps, leadership there finally had some qualms about the staggering rise in real estate prices, precipitated by all that money competing for Toronto properties.
But does that mean that Quantitative Easing is necessarily a bad thing? Not at all. It very much depends on how it is used.
A Quantitative Easing approach that serves the people
What if the money created by the Bank of Canada was not used principally to buy bonds from the private sector? What if, instead of only 10%, a sizeable part of it was directly loaned to the government of Canada to be used to stimulate infrastructure development and the jobs that go with that? That’s not a farfetched idea. In fact, Canada did exactly that for 35 years.
In 1938 the Bank of Canada, until then a private sector bank, was nationalized by the liberal government under Prime Minister McKenzie King. The next year, the Bank began buying treasury bills and bonds directly from the Canadian government. What that meant, in essence, was that the Canadian government was borrowing money from itself and paying itself interest, instead of doing so through private sector financial institutions.
That money was used initially to fund the war effort. Post war, it was infrastructure projects including the TransCanada Highway, the St Lawrence Seaway, multiple universities across the country, and, of course, the many infrastructure projects that were initiated here in our province once we joined confederation. It was an amazing period with multiple employment opportunities for those of us lucky enough to come of age during that period.
Then, in 1974 the Canadian government abruptly ceased to borrow money through our Central Bank and began, instead, to issue bonds and treasury bills to be bought by private financial institutions. Look what happened to our debt load once that started.
Most Canadians are unaware of just how golden the postwar period was for ordinary people. But our prime minister shouldn’t be. It was under the government of his father, Pierre Trudeau, that the Bank of Canada, no doubt under pressure from the international bankers who absolutely hated Canada’s unique experiment, suddenly ceased loaning money to government,
Will the King government’s QE model ever be resurrected? Apparently not with our current pool of political parties. It’s as if that golden era has been expunged from the history of parliamentarians. There’s never any discussion or reference to it.
But there should be. And my generation, Baby Boomers who benefited so easily from past QE policies, should be pushing for it.
Pierre Poilievre is right to demand reform of the Bank of Canada. He's right to want to ban the Bank's introduction of a digital currency. But like economists in the Modern Monetary Theory movement, I would disagree with his enthusiasm for constricting the money creation powers of the bank in the name of controlling inflation.
The problem is not the excessive creation of money. It's where the money has been going. It's how that money has been used to enrich the already rich and powerful, while, meanwhile, the job and housing opportunities for so many of our young people continue to shrink, in spite of their multiple degrees or levels of training.
We need to fix that inequity, but an independent Bank of Canada is never going to do that on its own. It needs a push.
What we really need are political leaders with the vision and insights of the McKenzie King era - leaders that would be committed to the development of local infrastructure and the jobs that would go with that.
And if we can find these leaders we need to support them.