Forward Guidance

Steve Saretsky -

The Bank of Canada was back at it with their latest views on the direction for monetary policy. The latest dove at the helm, Tiff Macklem, signalled his commitment for a zero interest rate policy, and unprecedented levels of Quantitative Easing.

Both interest rates and QE are here to stay, until the recovery is well underway, and that will take at least a few years. In other words, as Macklem so eloquently put it, “Interest rates are very low, and they’re going to be there for a long time. We recognize that Canadians, and Canadian businesses are facing an unusual amount of uncertainty, and so we have been unusually clear about the future path for interest rates. So If you’ve got a mortgage, or if you’re considering to make a major purchase, or you’re a business and you’re considering making an investment, you can be confident that interest rates will be low for a long time.”

In central bank lingo, they call this forward guidance. On main street, we call it a green light to lever up on cheap credit. Borrow to your heart’s content.

It’s a slippery slope, however. Canada currently ranks third amongst the G-20 in terms of private debt loads. Canadian households and businesses combined have amassed over 260% of debt to GDP, creating a potentially de-stabilizing mountain of debt as incomes and revenues contract.

But then again, there appears little appetite from policy makers to inflict a painful debt deleveraging. Instead, our central bank appears committed to financing government fiscal spending, sopping up $5B per week in Government of Canada bonds.

It’s hard to argue we aren’t all MMT’ers now (Modern Monetary Theorists) For those wondering, MMT is a theory that fiat currency can be continually issued by a central bank to achieve full employment, without a traditional regard for budget deficits or risk of inflation. MMT theorists believe that government spending will not necessarily lead to increased inflation, which can be addressed by raising taxes.

MMT’s main tenets are that a government that issues its own fiat money:

  1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment.
  4. Can control demand-pull inflation by taxation which remove excess money from circulation (although the political will to do so may not always exist);
  5. Does not compete with the private sector for scarce savings by issuing bonds.

Since the pandemic, the Canadian Government has spent about $174 Billion on emergency aid, and that number will only balloon further with many subsidies being extended to the end of the year. Under no circumstance can this ever be repaid, and higher taxes will only result in a further slump in consumer spending.

Furthermore, the Bank of Canada is also discussing yield curve control (pinning interest rates to a desired target) and adjusting official inflation metrics to their liking. In simpler terms, they are telling you the currency is about to be debauched at an incredible pace. Enjoy.

Three Things I’m Watching:

1. Nearly $50B has been paid out in CERB cheques so far.

2. The number of new job postings is beginning to slow.

3. The number of new permanent residents admitted into Canada is falling as COVID slows migration.

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The Saretsky Report. December 2022