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.

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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.

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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?