Monday, April 20, 2020

The Wheels Are Coming Off the Wagon

That''s 'funf' followed by 9 zeroes

It wasn't that long ago that we snickered at people walking around with wheelbarrows of money, just enough to buy a loaf of bread. It happened in Weimar, in Zimbabwe, in Venezuela. Chaos ensued. Are we heading down that same road to hyper-inflation?
The U.S. Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank – and, yes, the Bank of Canada, too – are pushing into areas they have never gone before, buying up a dizzying assortment of assets with newly created money. 
In the eyes of skeptics, these aggressive monetary manoeuvres risk an outburst of inflation down the road. Others, however, see the wave of money printing as simply an acknowledgment that drastic action is necessary to contain the stresses created by an imploding global economy. 
What is beyond doubt is that policy makers are going to lengths they never would have considered a few years ago – or, for that matter, even a few weeks ago.
The Fed is now the buyer of last resort for vast swaths of the U.S. debt market. Rather than lending only to stable, solvent borrowers, as central banks traditionally have, it is rushing to “backstop virtually any part of the domestic financial system in trouble,” as Oliver Jones of Capital Economics puts it. 
The Bank of Canada isn’t venturing quite as far as the Fed, but it, too, is breaking new ground. It is buying large amounts of federal government bonds – at least $5-billion of them each week – to help sop up the imposing amounts of debt Ottawa is issuing to help fund its stimulus program. 
Such bond-buying manoeuvres, known as quantitative easing or QE, are old hat for most central banks, but they are a new experience in Canada. Meanwhile, the bank has embarked on a slew of new initiatives that will see it gobble up provincial bonds and corporate debt as well.

So who is paying for this massive wave of purchases by the Fed, the Bank of Canada and others? For now, nobody. Central banks are simply crediting themselves with the funds they need. In a fiat money system, they can do so with a few key strokes.
 America's ticking time bomb.
The Federal Reserve’s balance sheet shows how dramatic the impact has been. Before 2008, the Fed held less than US$1-trillion in assets. As it bought up wonky assets during the financial crisis, and declined to reverse the purchases, its balance sheet doubled to more than US$2-trillion.

That was just the start. Waves of QE propelled the Fed’s holdings to more than US$4-trillion by 2014. Since the start of the pandemic, the balance sheet has taken another huge leap upward, expanding by a couple of trillion dollars in a matter of weeks. It now tops US$6-trillion and is continuing to grow at warp speed.
Followers of modern monetary theory or MMT, once considered a fringe school of economics, argue governments should ignore deficits and happily create as much money as is necessary to support the economy, create jobs and achieve other objectives.
Only a few months ago, MMT seemed revolutionary. Now it simply looks like a description of what central banks are already doing.
It's hard to imagine how the global economy won't be hit as confidence in national currencies fluctuates, country by country. Will reckless fiscal and monetary policy in Washington be the death knell for the greenback as the world's reserve currency?


Hugh said...

I remember the inflation period in Canada around 1974. Interest rates then rose to a high of around 18% by 1980. The interest rate now is almost zero.

Trailblazer said...

I was caught with the 18% rate, thought it could go not higher and took out a one year mortgage waiting for rates to go down.
They rose to 21 %.

Cannot quantify this but did the rates go high because Mexico and Brasil defaulted on large loans?

This time we are lending to ourselves regardless of need.
I foresee horror stories of who gets bailouts.
The rush to repair the economy will be led by those with power and influence, not those in need.

Will we still allow part time employment with no benefits and payments to CPP etc?


The Disaffected Lib said...

I too remember the high-interest era. I think my first mortgage was at 20%. That certainly drove housing prices down but I bought at the very bottom of a massive Vancouver housing slump. As I recall those days 35+ years ago, interest rates took a while to come down. The last mortgage I had was at 6 and then 5%. Today they're far lower than that.

In my bankruptcy practice I learned that many people confuse value and price. In terms of value, my house is worth about the same as the house next door. Its price has tripled since I bought it. Price is an unreliable indicator of value. It rises and can fall precipitously. High ratio mortgages are a trap for the unwary. While the price of your house can fluctuate, debt is as solid as concrete. I represented many wonderful young couples who, with a baby on the way, were panicked into buying a house at the very limits of their budgets only to have the whole thing blow up in their faces. Some took it with resolve, cheerfully enough. For others it was more than they could bear and their families fell apart. The banks didn't give a shit one way or the other. When the odd file came my way giving me an opportunity to tear into a bank, I was merciless. After a few maulings, the banks clued in to what I was likely to do to them. Before long they became amenable when I presented reasonable settlement offers. That gave me great satisfaction but I loathe those bastards to this day.