Bon Appetite

Steve Saretsky -

The consumer price index registered a donut in July. Inflation ticked in below market expectations, as consumer prices remained flat, and when seasonally adjusted actually fell 0.1%. While one can certainly debate the merits of the consumer price index, since real world inflation is, in reality, much higher, central banks would disagree. In fact, July’s figures scream deflation, the Bank of Canada’s worst nightmare. With an official policy mandate of a 2% inflation target, the Bank of Canada is falling further behind.

In fact, recent inflation figures dangerously re-affirm to policy makers that they can conjure money out of thin air with no repercussions. Print as much as you want and still no inflation. So far the Bank of Canada has pumped liquidity into the market an unprecedented pace, with their balance sheet having grown from $120B pre-COVID to nearly $550B today, and it’s about to get much larger.

With a new finance minister at them helm in Chrystia Freeland, the liberal government announced a four week extension of the CERB program, which will then transition people to a revamped employment insurance plan that looks incredibly similar to CERB. The new EI program allows self-employed Canadians and those with 120 insurable hours—which equates to a mere 3.5 weeks of work in the last 52 weeks—to apply and receive a minimum payment of $400 per week. These benefits will last a minimum of 26 weeks.

In addition, we now have The Canada Recovery Sickness Benefit (CRSB), and The Canada Recovery Caregiving Benefit (CRCB) which offer $500/ week to those who are eligible. If you’re getting confused with all the acronyms, you’re not alone. Long story short, these programs are expected to cost an additional $37B over the coming 12 months.

Of course, none of this will ever be repaid. Instead, it is likely to end up on the Bank of Canada’s balance sheet. They call this Modern Monetary Theory, which has the basic premise that Governments can run unlimited deficits when directly financed by the central bank, and any inflation can simply be taxed away. In other words, it turns out we were wrong all along, there is such a thing as a free lunch.

Bon appetite.

Three Things I’m Watching:

1. A central banks nightmare. Deflation hits in July.

2. Home Depot sales surged a record 25% in Q2. More time spent at home is fuelling home improvements.

3. No jobs, no problem. Canadian housing sales hit record highs in July.

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The Saretsky Report. December 2022