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.

WHOA — here comes QE3

There’s been a lot of talk on QE3 and not a lot of action. At least not in what was reflected in the net expansion of the monetary base.

That has changed quite dramatically. Check out the short-term monetary base at the Fed now:

Fed AMB feb 2013

That is a very notable change, because last year the Fed’s policy was actually deflationary. For the first time since the end of QE2, we are seeing Bernanke and the gang really firing up the presses, without a corresponding sell-off in other assets.

The Fed is expected to add about $1 trillion dollars to the economy this year. It is unlikely to cause a surge in monetary prices. It will help bolster the price of US debt and mortgage-backed securities. But as with previous QE’s, I expect commercial banks to stockpile this newly created money in their excess reserves.

This will not help the economy — it will merely sustain the grossly distorted world economic system a little bit longer.

%d bloggers like this: