Bank of Canada’s Balance Sheet Continues to Swell

The Bank of Canada’s balance sheet shed about a billion dollars in August, but remains at record high levels.

Governor Poloz, like everyone else, is watching the Fed. With no taper in September (as we predicted), he is unlikely to do much to change BoC policy. To keep the Canadian dollar from appreciating too greatly against the US dollar, the BoC must maintain a level of quantitative easing consistent with the Fed’s own. Poloz is a mercantilist, and is therefore opposed to having a strong Canadian currency.

BoC as of October

The Bank of Canada’s Balance Sheet: Bigger than During the Financial Crisis

During the 2008 financial crisis, the Bank of Canada intervened with an unprecedented 50% expansion of its balance sheet to a total of nearly $80 billion. This was done by creating money and purchasing assets from the big banks in order to add liquidity to the market.

By mid-2010, they had unloaded these emergency acquisitions and their balance sheet returned to pre-crisis levels.

But now, after years of growth, the Bank of Canada’s balance sheet is bigger than ever. The BoC holds nearly $90 billion in assets.

boc july 2013

But the crisis is over, isn’t it? The Bank of Canada is trying to keep the Canadian dollar down and interest rates low. They are acting like the crisis is not over, or like another crisis is waiting to emerge.

David Rosenberg on Canada vs. the US

Debate rages on about how sustainable or even real the economic recovery is in the US.

David Rosenberg, former chief economist at Merrill Lynch, showed a presentation at one of John Mauldin’s recent conferences. It is entitled: “The Fed Is Trying Like Crazy, But Nothing It Does Can Save The Economy.”

The presentation consists of 60 slides that collectively devastate the case for expecting serious economic recovery in the US. The charts are extremely convincing. The argument he builds with his evidence seems irrefutable.

You can see the entire presentation here. It is worth your time.

While Rosenberg is very bearish on the US, he seems optimistic about Canada. He thinks the “short Canada” trade is a huge mistake.

He draws his conclusion about Canada mostly by looking at 2013 Q1 data, but overall he underestimates Canada’s problems. Canada’s housing sector is more distorted by intervention than he realizes, and our employment data is terrible.

He also downplays the interventions of the Bank of Canada. He says Canada has performed better than the US “without nearly as much … expansion of the central bank balance sheet.”

Is this actually true? The BoC deflated in the immediate aftermath of the financial crisis, but it has been busy making acquisitions in the last couple years. In two years, the BoC has expanded its balance sheet by about 30%, whereas the Fed has expanded by about 20% in the same time.

The Fed:

FRED Graph

Here is the BoC monetary base (this chart uses data from here):

boc chart

I think Rosenberg is right on the US and a bit off-base for Canada.

Carney vs. the British Pound

UK citizens are running out of time before Mark Carney takes over their central bank.

Carney got the Bank of England job because he was a friend of bank bailouts and has shown no reluctance when it comes to printing money.

Mike Amey, head of sterling bonds at PIMCO, believe that’s what Carney plans to do when he takes over the BoE. He predicts Carney will devalue the pound by as much as 15%. That’s because Britain is desperate, and central bankers don’t really have any solutions other than “MOAR PRINTING.”

I’m so glad Carney’s going to be gone, not that I expect Stephen Poloz to be any better. But we should feel bad for the citizens of the UK. The pound has already lost significant value in recent years.

— Read more at The Telegraph —



Yield on Canadian Government Bonds Rising

About three weeks ago, I speculated that the bottom on interest rates had come and gone, and interest rates were rising.

This now seems more and more certain. Because of Abenomics, yields on Japanese government bonds have shot up and set off an ugly chain reaction. Bond prices are falling and yields are rising. Rather quickly, I might add.

Take a look at these charts of yields for selected Canadian government bonds. Pay extra attention to the longer-term bonds.

First, marketable bonds. The average yield on 1-3 year bonds:

Government of Canada marketable bonds - average yield - 1 to 3 year

Now 3-to-5 year bonds:

Government of Canada marketable bonds - average yield - 3 to 5 year

5-10 year:

Government of Canada marketable bonds - average yield - 5 to 10 year

Here’s the average for 10+ year bonds:

Government of Canada marketable bonds - average yield - over 10 years

Now the benchmark bonds.

First, the 2-year:

Government of Canada benchmark bond yields - 2 year

The 3-year:

Government of Canada benchmark bond yields - 3 year

The 5-year:

Government of Canada benchmark bond yields - 5 year

The 7-year:

Government of Canada benchmark bond yields - 7 year

The 10-year:

Government of Canada benchmark bond yields - 10 year

Long-term benchmark bonds:

Government of Canada benchmark bond yields - long-term

Here’s the long-term real return bond yield:

Real return bond - long term

You can draw your own conclusions from this data, I’m sure.

Bank of Canada Should Raise Rates to Pop Bubbles, Says Former Carney Advisor

Paul Masson, former advisor to Mark Carney, says the Bank of Canada should raise interest rates and pop the housing and debt bubbles.

He says years of low interest rates have distorted the economy and driven people to take higher risks. The accumulation of debt has left Canadians and their institutions stretched thin, ill-prepared to withstand the impact of another financial crisis.

Mr Passon correctly describes our situation.

The Bank of Canada could raise rates very quickly by selling assets. It will definitely not do this, because it would cause a depression. All talk about “maybe” raising rates “in the future” is just that: talk.

Should the BoC raise rates? Well, the Bank of Canada should be closed down, so really all of its assets should be sold. Central banks exist to empower governments and the elite at the expense of everyone else.

But in the context of having the BoC and Canadian dollars, I am sympathetic to the argument that the BoC shouldn’t really do anything. It would be reasonable to leave the money supply as it is and let the market determine interest rates from there. The BoC shouldn’t be jacking the rates around, whether to raise them or lower them. Let the market set interest rates free of further invention. This would give us a bit more time to prepare for the crash, versus an active contraction of the BoC’s balance sheet. “Laissez-faire.”

— Read more at The Financial Post

Poloz Prepared to “Nourish” Economy. Translation: He Will Inflate

Poloz thinks it will be necessary to “nourish” the economy.

To a Keynesian central banker from the EDC, this means “buy assets” i.e. inflate.

The boneheaded idea that this strengthens the economy is characteristic of cranks throughout history.

Currency depreciation cannot ever boost the economy. If Poloz were to announce that he will start expanding rate of growth in the money supply, the outcome on the foreign exchange market would be for other currencies to appreciate versus the loonie. Domestic producers would want to increase exports due to increased international demand, and would borrow from commercial banks to fund production at interest rates lower than otherwise. Resources would shift away from other industries into Canadian export industries. Exporters would record higher profits, but in real terms, the citizens of Canada would be getting fewer imports for each export. Basically, Canada would gain more foreign exchange, but they would get getting fewer real goods in exchange. Canadians in general would therefore become poorer.

And those higher exporter profits? As time goes by, monetary expansion would cause prices to rise and those artificial, subsidized profits would disappear. The end result is a weaker economy where resources have been misallocated due to credit expansion and interference with market exchange rates, and along the way some politically-connected export industries would make a bit of extra money.

Poloz needs to read Mises:

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.

The Canadian dollar will surely suffer under Poloz’s governance.

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