Tiff is Hostage

Steve Saretsky -

During a Q&A this past week with Canadian university students, Bank of Canada governor Tiff Macklem acknowledged, “QE can boost wealth by increasing the value of assets such as the investments Canadians have in their RRSPs or company pension plans. But of course, these assets aren’t distributed evenly across society. As a result, QE can widen wealth inequality. We will look closely at the outcomes of QE here and elsewhere and will work to more fully understand its impact on both income and wealth inequality.”

It is certainly no secret that the younger generation is bearing the consequences of a monetary policy that is designed to boost asset prices, after all these university students are not only short on assets but saddled with student debt. They remain rightfully skeptical that the system isn’t quite working for them. Ironically, the very last question in the Q&A period, a brave student asked, ““if lumber costs 250% more year-over-year and house prices are up 24% is it safe to say inflation is still 2%??”

Unfortunately the system isn’t working for everyone. The inflation debate rages on, focused on a CPI that fails to discern between demographics. After all, a millennial in the city of Toronto has a much different rate of inflation than a boomer in rural Manitoba. But anyways, Tiff says they will be looking closely at these policies as it might be creating inequality, however, later went on to contradict himself when suggesting the Bank was concerned about a strengthening loonie.

The Canadian dollar is up 4.9% so far this year, the best performing major currency. “If it moves a lot further that could have a material impact on our outlook and it’s something we’d have to take into account in our setting of monetary policy,” Macklem said Wednesday. “If the dollar were to continue to move — particularly if its not reflecting good developments for Canada — that could become more of a headwind on our export projection.”

In other words, you can’t eat your cake and have it too. You can not reduce QE and tighten monetary policy for the sake of equality while also advocating for a cheaper loonie- at least not when the rest of the world is actively debasing their currency through excessively loose policy.

The reality is the Bank of Canada is hostage to global monetary policy. We essentially import our monetary policy from our global peers. It doesn’t take long to see the Americans, the British, the Australians, and the Kiwis have cut rates all the way down to 0%. Meanwhile, the Europeans, the Japanese, the Danes and the Swiss have all slashed rates below zero.

Furthermore, as my friend at IceCap Asset management point out, Canada is not alone in completely destroying their local bond markets through QE. Yes Canada owns 42% of the Government bond market, yet Japan sits at 44%, the Euro Zone at 42%, the Aussies at 39%, the UK at 36%, and the US at 23%.

In other words, everything Macklem says about inequality is merely lip service, we are cornered and entirely hostage to what other central banks are doing. There will be no hawkish rate hike crusade from Macklem just because the younger generation is priced out of housing. Gen Y & Gen Z are the sacrificial lambs and will become more reliant on a wealth transfer from their parents in order to access the housing ladder.

Three Things I’m Watching:

1. Central banks are absorbing government bond markets across the world. (Source: IceCap Asset Management).

2. Canadian dollar continues to climb, now sitting at $0.82 USD.
3. Canada’s money supply is growing at its fastest pace since 1980.

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