Bank of Canada’s Balance Sheet: Still Trending Higher

The Bank of Canada has somewhat arrested the rate of growth on its balance sheet. The monetary base has reached a bit of a “plateau” for now, very close to all-time highs from December 2013 ($91.045 billion on the books as of April 30 2014).

It seems Poloz is trying to follow along with the general “tapering” strategy of the Fed. In order to maintain the “boom” of this business cycle (as lame a boom as it might be), the balance sheet’s size must continue to trend higher. But the flattening of the curve means that the BoC’s purchases are slowing. This will tend to push down asset prices.

boc april14

Why They Never See It Coming

Mainstream economists fail to see why crises occur.

Fed Could Delay Tapering Until After December

Frank Shostak, Mises Institute

Most economists surveyed by Bloomberg News are now of the view that the Federal Reserve will begin tapering asset purchases in December. Contrary to expectations on the 18-19 of September, Federal Reserve policymakers have decided to continue with a very loose monetary stance and postpone the tapering of asset purchases.

Most policymakers are of the view that the U.S. economy is not strong enough to generate self-sustained economic growth. Hence it is held the economy still requires support from the Fed.

If Fed policymakers were to decide to taper bond purchases, most experts are of the view Fed policymakers are likely to announce that the U.S. central bank is going to keep its near-zero interest rate policy for a prolonged period of time. This, it is held, should prevent negative side effects coming from the reduction in bond purchases.

For instance, in 1994 when the Fed started a tightening cycle the federal funds rate rose from 3.05 percent in January 1994 to 6.04 percent in April 1995. This, it is argued, caused a sharp fall in the pace of economic activity. The yearly rate of growth of industrial production fell from 7 percent in December 1994 to 2.7 percent by December 1995.

 

We suggest that it is changes in money supply rather than changes in interest rates that drive economic activity as such. Interest rates are just an indicator, as it were.

A fall in the growth momentum of industrial production during December 1994 to December 1995 occurred on account of a sharp decline in the yearly rate of growth of AMS (our measure of money supply) from 13.7 percent in September 1992 to minus 0.3 percent in April 1995.

This sharp fall in the growth momentum of AMS has weakened the support for various bubble activities that sprang up on the back of the previous rising growth momentum of AMS.

(Even if the Fed would have kept the fed funds rate at a very low level, what would have dictated the pace of economic activity is the growth momentum of AMS.)

Note that a fall in the growth momentum of AMS was in line with the fall in the growth momentum of the Fed’s balance sheet — the yearly rate of growth of the balance sheet fell from 12.7 percent in June 1993 to 4.4 percent by December 1995.

 

Whilst in the 1993 to 1995 period, changes in the Fed’s balance sheet were positively associated with changes in the growth momentum of money supply. This time around this is not the case. (Changes in money supply are not responding to changes in the Fed’s balance sheet.) The key reason for that is bank reluctance to aggressively expand lending notwithstanding the aggressive pumping by the Fed.

So far in September, the growth momentum of the Fed’s balance sheet climbed to 30.6 percent from 28 percent in August. (Despite this massive pumping banks remain reluctant to aggressively expand lending.) In September banks were sitting on massive cash reserves of $2.2 trillion against $2.17 trillion in August and $2.4 billion in January 2008.

 

Consequently, the growth momentum of our measure of money supply AMS has visibly weakened. The yearly rate of growth stood at in September at 6.7 percent against 7.7 percent in August.

We suggest that irrespective of what the Fed is currently doing it will have very little effect on the economy at present and in the immediate future. Given a decline in the yearly rate of growth of AMS from 14.8 percent in October 2011 to 6.7 percent in September this year, we suggest this likely to depress economic activity going forward.

Again, this is likely to happen irrespective of the decision the Fed is going to take with respect to the tapering of assets purchases.

Based on the lagged growth momentum of AMS we expect that the yearly rate of growth of industrial production to fall to minus 1 percent by October from 2.7 percent in August.

 

Given the possibility of a sharp decline in economic activity on account of the fall in the growth momentum of AMS it is quite likely that Fed policymakers will decide to postpone the tapering of asset purchases also in December.

We need to add to all of this the possibility that the pool of real wealth might be currently in difficulties on account of the Fed’s reckless policies.

(The near zero interest rate policy has caused a severe misallocation of scarce real savings — it has weakened the wealth generation process and thus the economy’s ability to support stronger real economic growth.)

If our assessment is valid on this, we can suggest that a stagnant or declining pool of real wealth is likely to put more pressure on banks’ lending. Remember that it is the state of the pool of real wealth that dictates banks’ ability to lend without going belly up.

Conclusion

We can conclude that regardless of changes in the Fed’s balance sheet, it is a fall in the growth momentum of AMS since October 2011 that will determine the pace of economic activity irrespective of the planned actions by the Fed. Given the possibility that the pool of real wealth might be in trouble this could put further pressure on the growth momentum of bank lending and thus the growth momentum of money supply.

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.

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 —

 

Mark Carney - HERE I COME BRITAIN YOU SHOULD SELL YOUR POUNDS BEFORE I GET THERE

Mini-Review: CBC Documentary “The Secret World of Gold”

On April 18, CBC aired a documentary called “The Secret World of Gold.” Though flawed, the program was interesting and covered many issues.

Here are some things talked about in the documentary:

  • The Bank of Canada has sold almost all our country’s gold over the last 30 years.
  • Underwater treasure hunts for gold.
  • Secret government deals to control gold.
  • Futures market manipulation (this was by far the weakest part of the show — the futures market is not explained and the case made for manipulation is very thin).
  • Buildings with gold windows.
  • Wars for gold.
  • How Chavez got all Venezuela’s gold back from the US and Europe
  • Gold shifting to the East from the West
  • Death gold from Nazi extermination camps (some of which was used to fill Hitler’s teeth — WTF).
  • Allocation of central bank gold holdings — who owns the gold? Is the gold even there?

Think about taking 45 minutes out of your weekend to check it out. You can watch it here for free, the only drawback is there are a few dumb CBC ads.

UPDATE: You no longer need to watch it at CBC. The copyright police got to “The Secret World of Gold” on YouTube, so it looks like you have to watch on CBC…

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