Bank of Canada Has More Assets Than Ever

The Bank of Canada’s balance sheet is now bigger than ever. The central bank grows fat on the debts created by Ottawa.

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The rate of growth had slowed a bit in recent months, but the latest data tells us that Governor Poloz really doesn’t know what to do other than create new money and buy stuff. This is exasperating the business cycle and driving down the price of the Canadian dollar.

The Bank of Canada’s assets are 99% Canadian government bills and bonds. Buying more of these bids up their prices and pushes interest rates lower than they would be otherwise.

The newly created money enters the capital markets, and begins distorting the market’s allocation of resources. This is the cause of business cycles.

Interestingly, rates are so low in Canada that capital is nearly free, but the Eastern economy is still a mess. According to Keynesianism, the entire country should be on the verge of Utopia.

The aggressive monetary policy was kicked off by Carney, shortly after selling off the Bank’s emergency acquisitions of the financial crisis. Poloz is continuing this policy. He is trying to juice the Canadian economy by driving down the value of the Canadian dollar, thereby increasing exports, as he told us in his April 16 rate decision. This kind of short-sighted and special-interest-serving policy is to be expected from central bankers, particularly ones who worked Export Development Canada for more than a decade, like Poloz.

Hilariously, a few days ago the mainstream media churned out a puff piece about how Poloz is the “king” of central bankers and other central bankers want to be like him. The article presents Poloz as a really cool dude because when he says something, the Canadian dollar’s value is more greatly affected than the value of other currencies when their central bankers talk.

It never seems to occur to anyone that this is a horrible, horrible thing. It shows that the dollar is dangerously sensitive to the whims of central bankers, and that is not healthy for an economy. Uncertainty due to regulatory hazard is destructive to economic opportunity.

But of course, words are one thing, and the biggest impact on the economy emerges from the BoC’s actions — i.e. printing money. And as we can see, the Bank of Canada still going full steam ahead with that plan.

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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.

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Trusting Bureaucrats and Politicians Will Cost You Money

Before the financial crisis in Cyprus, the Cypriot president assured voters that the government would never seize their bank deposits.

Then guess what happened?

On April 4, CMR asked if the Canadian government would have a Cyprus-like response to a banking crisis, as was implied by the language of pages 144-145 of the new budget.

The government is trying to assure us now that they won’t steal your deposits to prop up an insolvent bank. Yet Mark Carney himself wouldn’t rule out the possibility.

“Canadian institutions have substantial unsecured debt obligations in the wholesale market and as well as other classes of capital, and they have substantial capital as well, so once you stack all of that up, regardless of whether one would look to reach into it … it’s hard to fathom why it would be necessary,” the Bank of Canada governor said.

“Hard to fathom”? That is not exactly what I’d call “comforting language.” Especially because this is from a guy who is wrong nearly every time he opens his mouth.

He admitted the queue of capital buffers for banks would likely include some types of deposits, but did not elaborate.

Yet Carney also referred to a response from Flaherty’s office, which stated:

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime. Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.”

“Nothing to do with consumer deposits.” Okay.

Remember Rockwell’s Law: always believe the opposite of what state-officials tell you. If they say you have nothing to worry about, then you should start worrying.

But let’s say for the sake of argument deposits are supposed to be excluded from any proposed “bail-in” scenario. What is the bank going to do? Canadian banks are capitalized about as well as Lehman Brothers before things went bad.

Consider TD. They have $818 billion in assets. They have $768 billion in liabilities. Very little equity is available to withstand losses in asset value or income. All the big Canadian banks are like this. A tremendous amount of special reserves need to be put aside to withstand even a 10% drop in the value of a Canadian bank’s assets.

There will be more crises. Canadian banks cannot survive a crisis without a government bailout. Don’t take any comfort in anything coming out of Ottawa and the BoC.

— Read more about this story at CBC — 

Is the gold price being manipulated?

When oil prices rise, many economically illiterate people will say something like this:

“Speculators and oil companies are manipulating the market to drive up the price of oil.”

When there is a price change that people don’t like, it’s often blamed on “manipulation.” Did the price of gas rise in the summer? It’s those monopolistic oil companies.

Of course, no one ever blames the manipulators when the price of oil falls.

When it comes to gold and silver, people behave in a similar way. The difference is that people decry the “manipulators” and “conspiracies” when the price goes down.

I read Ed’s Gold and Silver Daily in the morning because I like the charts. I find it hard to read his commentary, because he is always blaming “da boys” for any price decline. Price declines which, he claims, are “impossible” in the free market. (For example, it’s claimed to be utterly incomprehensible that gold would fall in the post-Cyprus crisis, unless the cause of the decline is manipulation.)

Yet you will never hear Ed, or anyone like him, use manipulation to account for a price increase.

Gold and oil often move together. If gold is down, see if oil is down as well. If you think manipulators are driving down oil prices, then at least you are being consistent if you claim manipulators are driving down gold also. Yet no one ever blames manipulators for driving down oil prices.

In my opinion, people should not worry themselves over gold manipulation. So short-term futures traders might cause the market to move around a bit. But every short has a long. Futures traders do not want to manipulate the price downward if prices “should” be going up with massive shorts, because if so the market will rape them when price rises. Secondly, the banks that are supposedly manipulating gold prices lend huge amounts of money to gold producers. None of the board members of mining companies that I know believe there is manipulation.

And really: if the price of gold is being manipulated to a lower-than-otherwise level, why not just buy more? If someone drives the price of a commodity below what its market price “should be”, it would be… below the price at which it should be. Good deal. If some idiot like Gordon Brown (who sold half of Britain’s gold at hilariously low prices) wants to drive the price down, good luck. They obviously can’t keep it the price down forever.

Forget the manipulators. Here is why I think the gold price is falling: the economy is slowing down. Europe, Japan, and China are in recession. I believe North America is fighting hard to avoid one, but by the end of the year there will be nowhere left to run.

A panic will cause central bankers to inflate even more, and gold will move up in response to new monetary expansion. Otherwise, slowing economies are rough on investments. People want to avoid losses and gather cash, so they sell stuff like gold and stocks. When  demand deteriorates, prices drop. This is totally normal and not at all related to “manipulation.”

The myth of the “independent” central bank

The theater of Canadian politics never ends. Its inanity would be more embarrassing if every other country’s mainstream media were not basically just as bad.

The Canadian media was making a big deal yesterday about Bank of Canada GG Mark Carney hanging out with his friend, Liberal MP Scott Brison. OMG, was he going to join the liberal party? Was he arranging special favors?

Uh, maybe I’m missing something, but the whole thing just seems to be “business as usual”. High-level bureaucrats hang out with high-level legislators and high-level businessmen who are politically connected. They are often buddies. They hang out at dinner parties, or golf together. Their wives get together to gossip. Their kids go to the same private schools. Whatever. Seriously, follow any central banker around, and see who their friends are. It’s the same story for all of them.

Why does anyone care? Because it anything that threatens the myth that central banks are “independent” is a threat to the Establishment’s most important tool — the monopoly on money creation. So a story is created where there is none.

Well, much to the relief of mainstream economists, governments, and the sycophantic media everywhere, Carney has been cleared of any misconduct. He wasn’t seeking political office when he was staying at Brison’s summer home, smoking cigars, drinking scotch and discussing the best ways to exploit the rabble. So it’s cool. I guess.

But let’s be serious — does anyone who doesn’t have a PhD in economics and write economics textbooks really believe in the idea of “independent central banks”? I know a lot of people like to think the central bank only has the public interest at heart. They like to think none of the normal monopoly problems apply to central banks because central bankers are just so noble and wise. At least that is what the textbooks say, and the idea is key to the ultimate scam of monopolized money supplies.

So now the knaves who support central banking can say to anyone ignorant enough to listen: “Hey! Don’t worry! The central bank is totally independent! It’s looking out for us!”

Central banks are not independent, by any stretch of the imagination. Central banks exist to manipulate money supplies. If you think they do this for the “public interest,” you may also believe in things like Santa, decent highways in Saskyland, or the pantheon of Greek gods. To anyone who thinks “outside the box” in regards to this for two seconds, it becomes clear that the central bank benefits their scandalous stakeholders, like inefficient export industries, debt-laden governments, and inherently insolvent financial systems.

Talking about whether Carney and Brison hanging out together constitutes a conflict of interest is just so outside the realm of importance, there is no surprise that the national media focuses on this “scandal” — rather than the scandal of central banking as such. This is theater. It pretends to be newsworthy when it is truly pointless theatre for government and media to put the shucks on the Canadian rubes.

Recession will come to Canada in 2013.

Oh Carney. What a wacky guy. He seems convinced we will only enter a recession if the US falls off the fiscal cliff. Err, I’m sorry, not a “recession,” but a “near-recession.” Central bankers don’t like to use the word “recession” in their predictions, because that serves as a confession that they are not “managing” the economy effectively.

If the fiscal cliff is resolved, he says, Canada will surge with the resultant economic relief!

So… is it the case that Canada’s only economic threat is idiots in the US Congress? (That’s redundant — I should just say “US Congress.)

Sorry, Carney. That is nonsense.

What about recession in Europe? Asia? Not to mention the general problems of the US, out biggest trading partner.

First there is Europe. The European recession is spreading, evidenced by slowing price inflation and rising unemployment (at 12% for the Eurozone). This deeply aggravates the existing European crisis. Even Germany, the ‘good’ (cough cough) part of Europe, is grinding into economic slowdown. Its central bank predicts a pathetic 0.4% for next year. It could very easily be less. As long as everyone over there relies on Keynesianism to solve their problems, they will never escape the financial death spiral.

Japan is in a recession. Other Asian export markets are slowing down, because the weight of China’s economic distortions are turning into a brutal yoke and necessitating slowdown there.

And what of the US? The perception is that if “something” is done about the fiscal cliff, everything will be rosy. Shockingly, the US is still considered a safe haven. But foreigners are not scooping up US debt like they used to. China is reducing its exposure; Japan’s purchases are slowing. Bernanke’s surprise announcement to expand the Fed’s balance sheet by an additional $45 billion a month to buy US debt is a telltale sign that he understands the problem, at least to some extent. Yet I do not believe that Bernanke’s action will deflect the recessionary pressures coming from both sides.

Then there is Canada. Everyone here thinks we are special. “Well, if the world goes into recession, we will be okay — we’re CANADA!” they say. The myths spawned during the 2008 financial crisis have sunk deep into the nation’s collective unconscious. Canadians feel invincible. That is dangerous. So the debts continue to grow. Harper continues growing the government, thinking it’s perfectly acceptable to do so because Canada is not as bad as other countries (ignoring the fact that it is still bad).

I frequently speak with executives in the oil industry. There are big deals being made, plenty of excitement as usual. But I’ve noticed people seem strangely oblivious to even the prospect of slowdown in 2013. We are largely a resource based economy, so if the entire world is slowing down, they are not going to buy as much of our stuff. It’s a fairly easy prediction to make. Myanmar and Laos are not going to make up for lost demand from China. Canada’s slow growth will drop mid-to-late 2013 unless some new crisis speeds the world’s decline. Canadians should get ready for this. Hold cash. Get ready to use it when prices fall.

Carney is off to the Bank of England — Pray for England

Bank of Canada Governor and ex-Goldman bankster Mark Carney was selected to become the next Governor of the Bank of England. He will now be overseeing a central bank with nearly ten times the assets of the Bank of Canada. That is a big promotion in the world of central planners! Carney will now be able to create even larger disturbances in economic systems.

Truly, the worst rise to the top.

Good riddance, I say. Not that I expect him to be replaced with anyone much better. But there is always a chance.

I feel bad for England, though. They have no idea what they are getting themselves into (from Bloomberg):

Carney, who holds an economics degree from Harvard and a doctorate from Oxford University, swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

Did you see what they did there?

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout … 

an economy which bounced back from the global recession without witnessing a single bank bailout …

without witnessing a single bank bailout

Excuse me? The banks that pushed for Carney to be their man in England have surely put the shucks on the rubes.

Of all the deleterious myths that persist about the Canadian financial system, none are more harmful or obnoxious than the bogus story that its banks never needed and/or never got a bailout.

Anyone who says this is simply lying or has no idea what they are talking about. Those are the only real possibilities. We have covered this at CMR previously, but let us quickly review.

The mainstream news doesn’t even try to deny it anymore. The Canadian banks got a bailout. Now they simply try to play down the significance of it. Even though it is was much bigger than anyone was led to believe.

So is this “no bailouts in Canada” proposition challenged by anyone in the UK? Carney is being sold on the pretense that there were no bailouts?   

(Side note: We could also mention that Canadian banks received assistance from emergency Federal Reserve lending facilities, which by itself is very interesting. We could also mention that rather material fact that Canadian banks are basically in a state of “perma-bailout” by virtue of the Canadian Deposit Insurance Corporation. The existence of the CDIC amplifies the level of risk banks are willing to engage in — it is classic “moral hazard.”)

So it would seem one is more likely to see bank bailouts with Carney, rather than less. That is precisely why the UK banking cartel wants Carney in this position.

Yet that is not the only reason citizens of the UK should worry.

Mark Carney is not only a believer in bailouts — he is a believer in Keynesianism and mercantilism. This means nothing more than this: he sees a connection between depreciating the currency and growing the economy. This he shares with nearly all central bankers (except, perhaps, those in Singapore): he regards a strong currency as harmful to “the nation”. Because when he talks about “the nation,” he is not talking about the consumers (i.e. everyone) who use their stronger currency to buy and invest in more goods. For men such as Carney, “the nation” instead refers to politically-connected export industries that are benefited by making it cheaper for foreigners to buy their stuff.

That being the case, Carney will tend to increase the money supply by adding assets to the central bank’s balance sheet whenever he thinks it’s a good idea. But this means prices must rise and debts will deepen. Britain already has big problems in these areas.

This should be the last thing someone in the UK should desire. The British pound has plummeted in value the last five years against stronger currencies like the yen. Here in Canada, it seems Carney’s manipulations have been obscured by strong demand for Canadian commodities, yet with the slowdown in Asia, Europe, and soon the US, I doubt this will persist. The Bank of Canada has been growing its balance sheet for nearly two years now, since offloading some of its emergency acquisitions during the financial crisis.

Also, it should be known that Carney likes to troll citizens whose currency he manages by blaming them for behavior that is strongly encouraged by his own central bank policies. What a jerk.

I am happy to see Carney go. While I am happy he no longer oversees the Canadian dollar, I am apprehensive about who his replacement will be. Most of all, I must also bemoan the lack of justice. Carney should be serving a prison sentence for counterfeiting, rather than getting $1 million a year to manipulate huge economies.

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