The Bank of Canada had one goal: to keep inflation close to 2%, and neither too high nor too low. (I can't remember the exact specifics, as this is similar to the other big Western central banks). It has manifestly failed at this goal. Inflation is more than 3 times what it should be. Firing the governor would be an entirely appropriate accountability measure.
The purpose of central bank independence is to prevent politicians from grabbing the control wheels (interest rates and unorthodox policy like quantitative easing) and pursuing other (ie, electoral) goals, not to protect failures.
Chris Ragan's argument against firing the governor consists of two elements: conditions have been tough so it isn't fair to fire the governor; and the Bank made an appropriate emergency response to the pandemic (ie, pursued other goals than 2% inflation).
The first is ridiculous - firing leaders for failure is actually accountability, not interference, and would encourage future governors to pursue their mandate more assiduously.
The second is contradictory - the fact that the Bank pursued something other than the low and stable inflation it was supposed to is actually evidence that it has already been politicized. The fact that this happened through ruling class groupthink rather than a prime ministerial command only makes it worse.
Poilievre's goal of firing a failed leader and returning the Bank to its focus (notice he is not trying to dictate monetary policy, only saying that Macklem has failed) is entirely correct.
Over the past two years there was a not-insignificant risk of deflation, particularly if the government hadn't stepped into to support businesses impacted by the pandemic. The productive destruction if those businesses had closed permenently (and, even with support, some have) would have have slowed the recovery significantly.
So, the central bank working to combat the prospect of deflation *was* part of its mandate. The fact that it's swung past its low end target and beyond isn't terribly unexpected -- in a volatile economy, keeping inflation between 1 - 3 % is inherently challenging. See the bank's inflation chart: https://www.bankofcanada.ca/rates/indicators/key-variables/inflation-control-target/. We have been both below and, now above the target over the last two years.
The bank is now addressing high inflation. It may cause a recession, which isn't great, but it is likely a lot easier to manage than productive destruction and deflation. Note that the Bank says that it "raises or lowers its policy interest rate, as appropriate, in order to achieve the target typically within a horizon of six to eight quarters—the time that it usually takes for policy actions to work their way through the economy and have their full effect on inflation." On that basis, it probably should have started raising the interest rate a little earlier -- Q4 of 2021 -- once it became clear that inflation was not coming down. But, that's hardly a total failure.
In short, I don't agree the Bank has failed at its mandate. It has focused on the rate of inflation, first addressing a dip below 1% and now a surge well above 3%. Tighter monetary policy and higher interest rates are being ramped up.
I suspect PP's criticism of the Bank is far less about monetary policy and more about PP being able to complain about inflation without having to start making committments as to where he'd cut government spending; much easier to just threaten to fire one guy and say: job done!
I’m in agreement with you, Tony. And, Mark - the Governor of the Central Bank IS accountable, but I haven’t seen the large failure that you are talking about.
The argument that our current inflation situation is really just fine and nobody should regard it as a failure is perfectly rational - I'll give it that (even though I disagree). And certainly better than what Mr. Ragan was saying.
But if pundits and politicians believe that, they should be saying it, rather than coming up with red herrings about political interference.
Well, I wouldn't say its "just fine" -- they did overshoot the target and waited/hoped that the external factors beyond their control would ease, when actually the opposite (Ukraine) happened. But, I think that's understandable. Raising in Q4 and having the January COVID wave have a bigger negative impact on the economy was also a possibility. Hindsight is always 20/20!
I'm cool as long as they have the intestinal fortitude to manage the situation now, which will likely require quarterly rate hikes until inflation eases. Easier said than done -- I supsect a lot of people have just bought homes with big mortgages or have significant debt in HELOCs and will be impacted by rising rates. So -- its possible political pressure will quickly shift from "why didn't the raise the rates sooner/faster" to "how can young people who could already barely afford homes survive this endless rate climb? We gotta do something ..." As long as the Bank continues its focus on inflation -- even if that means a mild recession -- I'm good. We'll see.
Ha -- that's a question way above my pay grade :-).
I have seen this playbook before in Ontario, though. Before he was elected, Doug Ford conflated rising electrical bills with the salary of the head of Hydro One; he dubbed him the $6 million man and said he needed to go. The challenge: Ontario privatized Hydro One, but the province continued to be one of the largest shareholders. To review the parallels: a politician criticising the head of a body that doesn't directly report to the government (Hydro One/Bank of Canada), implying that a problem (high electrical bills/high inflation) could be solved by firing the head of that body -- something they actually don't have the direct authority to do.
If PP were elected, I suspect there would be some negotiations with the Bank of Canada, a new, credible head would be found, and the Bank would likely stick with most of what it does now. PP could claim he'd "restored faith" in the institution. But, if he really wants to do something about government finances, at some point he'll have to come clean on what he's willing to cut, or what taxes he's willing to raise. Still waiting on that one!
Hard to disagree with a lot of that. Also, I'm a little bit out of my depth on economics, so I'll certainly grant that without much objection.
This is an honest question, because you seem to have some knowledge here (and took the time to put together an informative response). What happens if the Government runs as big a deficit as they are and the BOC isn't there to buy up the bonds? I think that's a central plank of the argument PP is making. Effectively, the government seems to have a blank cheque.
The feeling I've had - and I could absolutely be off here - is that the Government has effectively weaponized monetary policy. They are borrowing as much as they want to finance whatever they want (some legit, some ridiculous in my opinion). They're driving inflation, causing (or allowing) borrowers to become massively overleveraged. But in the end, if you're looking to increase government spending, they've created the perfect conditions in which to do so.
In this last budget, the Federal government indicated that the fiscal anchor that they're now using is debt to GDP. Inflation increases GDP, therefore allowing them to spend more and more, all the while preaching restraint (respecting the anchor). So it sure seems like the metric that they used for their anchor is cherry-picked not only to allow for significant spending growth despite radically new deficit levels, but to create a cycle. Drive inflation, GDP increases, government increases spending.
It has felt less like the BOC has been watching inflation and more like they've been carrying water for the LPC. PP is giving voice to that impression. Is the impression completely inaccurate, or just oversimplified (i do recognize that he's oversimplifying regardless).
If the BOC doesn't buy the bonds, rates rise. (Which lends support to Doug's point, below, that the BOC should have been banned from doing this). Unless there is a lot of spare capacity in the economy. Which there wasn't really, during lockdowns, since the spare capacity was being legally prevented from being used.
So not buying the bonds would have forced the government to run less of a deficit, or provoke a disastrous recession.
For my edification - rates rise because if the BOC didn't buy them, the rates need to be higher in order to be of interest to other investors?
In all honesty then, this really sounds like the same thing (though with more moving parts) as what PP is saying. The BOC backstopped the Federal Government. They may not have been directed to do so, and it may not have even been "wrong" to do so. But they have (sort of) been doing the dirty work of the Federal Government.
To say "they've been running the printing presses" is obviously an oversimplification and possibly an exaggeration. But I feel like the soundbites aren't actually that divorced from the reality of the situation. In fact, it's probably closer to the truth than most things that have come out of Ottawa in the last couple of years.
Now, it didn't look like much change was afoot. The most likely PMs were either Trudeau or O'Toole. Trudeau didn't have much to say about the mandate, which indicated it wasn't likely top of mind to change (and, as far as I tell, it was renewed with an continued mandate to focus on inflation and keep it in a band between 1 - 3%).
From the G&M article: "Conservative Leader Erin O’Toole said at a Thursday news conference that he favours sticking with the Bank of Canada’s existing 2-per-cent inflation target. People’s Party Leader Maxime Bernier put out a statement Thursday saying the central bank should aim for zero inflation – a target well below what academic economists and central bankers consider either feasible or desirable."
So, it was likely that, whatever the likely outcome of the election, that the mandate wasn't going to substantially change, but it was up for renewal and there was the outside possibility of change. Again, from the article:
"The current mandate review, which started in 2017 under the direction of former bank governor Stephen Poloz and former senior deputy governor Carolyn Wilkins, has been particularly ambitious. For the first time since the 1980s, the bank is running a “horse race” looking at six models to see which does the best job maintaining price stability and fostering economic growth amid a variety of shocks.
"The leading alternatives to the existing flexible inflation-targeting regime are a “dual mandate,” where central bankers target employment alongside inflation, and “average inflation targeting,” where central bankers explicitly aim for above-target inflation after periods of slow consumer price growth. The U.S. Federal Reserve adopted a form of average inflation targeting last summer, while maintaining the dual mandate that it has had since the 1970s."
Both dual mandate or average inflation targeting could have impacted the Bank's approach post mandate. As it happens, we stayed the course.
So -- while its possible to guess at political interference, I'd wager its more likely that an election combined with a mandate renewal from potentially a new government may have influenced the Bank's rate of response.
I didn't say a politician interfered. I said there was an election. The BOC as with the US Fed seems to want to stay out of the fray and don't make big changes during the final election run. Had the BOC raised rates and stated a rising rate policy to address inflation, it would have signaled that inflation was rising and Canadians would be paying more for mortgages, car loans etc. Not something they want to do during an election campaign. It would tend to hurt the party currently in power.
Since inflation is hardly just a Canadian issue, should all the world's bank leadership be fired? The global economy stopped. That's never happened before...at least in the last 100 years. And as mentioned, anyone who jumps into the job can't fix it...so what's the point?
Good question....because as with everything in life, you're supposed to have goals? And this is a once in 100-year experience...like COVID itself initially, no one handled it very well. Some things you can control, others...even with all the tools at your disposal, are beyond you skill set.
I guess so, but true professionals set realistic goals and adjust them with circumstances. Otherwise it's just posturing.
You mention tools, which is a good point. The bank claims to have policy tools at its disposal, but then claims to be helpless in the face of world events and almost nothing it does has any material impact on inflation. They can't have it both ways.
That's why this is so frustrating to regular boneheads like me.
But haven't they been realistic for the last 30 years? The world hasn't been through something this...well ever, where the entire economy shut down. Businesses, to protect themselves didn't ramp back up quickly enough in some areas, but demand is wiping out supply. Add to that the number of small businesses that have morphed into giants so that if one thing goes wrong, calamity ensues ( baby food for example). It was only 24 months ago that oil had a negative value.
I'm not sure anyone has tools for this, and really, isn't what they're doing little more than educated guessing?
I don't understand it enough either...hence, why I'm a little more hesitant to dump on the
I think what's missing from the criticisms of what Poilievre is doing here is the American angle. He is copying the Tea Party/MAGA approach. "Audit the Fed" is a war cry down there shouted, usually, by people who have no idea what "the Fed" is. PP knows that substance does not really matter here because it's all about riling up a certain portion of the population. The same is true with his support of trucker convoys. The cynicism comes from the fact that Poilievre knows these people are ignorant and misguided but passionate and can be easily manipulated. Just as Donald Trump would never hold a rally on the grounds of Mar-A-Lago because he wouldn't want any Trumpanzees near his home, PP is using the same energy to secure conservative leadership.
The problem is like The Sorcerer's Apprentice. Once you've got them all riled up what do you do with them? I would suggest this approach is not going well in the US right now. Their very democracy is on life support.
I guess my point is that this is the opposite of actual leadership. The people that PP is targeting need help - their (our) problems are real. They do not need to be used now and then tossed aside for the general election.
Thank you. Not being said enough in the larger media that this political concern for the BoC is literally foreign to Canada. I spent years in the riding of Rob Anders, and American politics don't fly in Canada. Rob has ended up in a bad place; but on his way down, he did a little damage to Canada, and a lot more to the Conservative party.
When you hear American politics being echoed, just run from the guy. PP has shown his colours very clearly now; he's a political foreigner, those politics are not winners here.
It's only American in the sense that not being deferential to established ruling class cliques is automatically viewed as American by those in Canada who are habitually deferential to or members of established ruling class cliques.
I see what you're saying and I fear that you may be correct. I'm honestly not sure though that PP is that cynical. He sure comes across (to me) as being fairly sincere. And I guess part of my issue is that if he's not sincere, I don't see a single party leader who is. I think JT has been gaslighting us since 2015 at least. This is a do nothing, virtue signalling government if Canada has ever had one. Jagmeet has literally traded all of his values for some magic beans. And the thing that was great about MB was that he collected all of the rifraf that have been crapping up the CPC for years. And the Green Party turned on it's leader for not being anti-semitic enough. So seriously, if not PP, who?
I agree with most of this. I am a little concerned though that the BOC has been pouring gas on this. I do agree that most of the inflation issue isn't CAUSED by the central bank. And I see that this is happening all over the world, but that's only because all central bankers made the same error, not because it was unavoidable.
I guess my feeling is that I think that the relationship between the central bank and the gov has been pretty cushy. With Carney now openly a liberal, it just makes it look more and more like this is a nice cozy relationship between the LPC and the BOC.
I'm not talking conspiracy theory here, I don't think there's an alliance, or that anyone is taking direction from anyone else. I just don't know if I buy that the bank has been staying as politically neutral as they're saying they need to be.
There were warning signs LONG before we started measuring high inflation and rates stayed too low, too long. Lots of people (including PP) have been saying this for some time and have been dismissed and derided as economic lightweights. Now, we have the BOC admitting that they should have/could have acted sooner and that they misunderstood the nature of this bout of inflation, and that it wasn't as transitory as they thought. So they kept pouring gas on the fire.
Now Canadians are in trouble. We've got high inflation, overleveraged households (and governments). Government and BOC have been dismissing these concerns for two years. Now it's happening and we're being told that the people raising the concerns shouldn't mess with the independence of the BOC.
Also, if the BOC's mandate is 2% inflation, and we're hitting 6-7% (and i feel like those numbers may underrepresent the problem), it's not unfair to question the policies and position of the BOC.
It's not my favorite thing that PP is doing, and I think he's overplaying the card a little. I'm just not so convinced that the BOC is this paragon of uninfluenced virtue. We know that the PMO has no problem applying any pressure they can inappropriately on officeholders should be above the political fray (SNC Lavalin).
Countries worldwide are experiencing inflation due to the reasons outlined by Mr. Ragan.Mr. Poilievre knows this and is simply using the Central Bank as a club for electoral purposes. If he actually is not aware, he is not fit to stand for Leader of the CPC.
Every country in the world has been pumping their money supply...or are dependent on other national currencies [specifically the US$]...which is being inflated at an astronomical rate.
Great article. However, Central Banks' mission creep has left them exposed to criticism. They increasingly weigh into policy areas such as climate change and inequality. They increasingly feel obligated to act to sustain what would otherwise be unsustainable government finances. Polievre is correct to implicate Central Banks as problems, but his proposed solutions are completely wrong. Instead his prescription should focus on:
-narrowing Central Bank's mandate to containing inflation. Nothing more and nothing less. An undemocratic institution like a Central Bank should have no authority or commentary on other issues
-calling some sort of commission to look at methodologies of how inflation is measured. Considerable evidence exists that Central Banks have underestimated the effects of asset price inflation for some time
-limit the amount of government bonds the Bank can purchase, so that it doesn't face the moral hazard of enabling government borrowing
Firing the Governor for blowing the inflation target would be a powerful way of narrowing their mandate and avoiding moral hazard. I don't like limiting the purchase of government bonds, just in case that is needed at some point in order to hit the inflation target.
Central Bank transaction of government bonds potentially compromises the Bank's independence. The Bank should never consider government finances or honestly any government priority other than maintaining the inflation target in its decision making. For example, the BoC likely saved NL and AB from default in mid 2020. In doing so it has created expectation that it would do so again when future governments spend themselves into oblivion. NL and AB should have defaulted and enacted extreme austerity to bring their budgets into balance instantly.
Firing the Goveneror at this point would be grandstanding. The Bank's mandate is too muddled to measure performance.
This problem started after the Financial Crisis when Central Banks started expanding their balance sheets and maintaining historically low interest rates in an attempt to "stimulate" the economy. Instead, the efforts seem to have encouraged speculation in risk assets like crypto and growth stocks, driven housing prices to unaffordable levels and reinforced reckless government spending.
Poilievre wants to fire Macklem BECAUSE he enabled the Government's deficit spending without taking into account the BoC's own inflation mandate - essentially signalling that he was in lock step with the govt and NOT INDEPENDENT of it.
The rhetoric is not from Poilievre. It is from writers such as this who reduce the entirety of his criticisms to "politicians interfering with BoC".
To suggest that the Governor of the Bank of Canada is not political and totally separated from the Government of Canada is correct in a sense that the bank is to act independently from Government. Unfortunately the Governor of the Bank of Canada answers to the Minister of Finance with in the Government of Canada. When the Government tells him what they are going to do, it prepares him to aid in the printing of billions of dollars to which has put us into the dire situation we are in. How can he possibly be independent when his actions are to aid this government in their massive spending and printing of money? If indeed he was independent and was worth a grain of the salt to which got him into his position, he would have demanded the Government of Canada stop spending. He is no more independent from the Government of Canada than he is from the Rothchild's, considering they own all the shares in the Bank of Canada. If you don't think they influence the workings of Banks then your not very astute. They influence everything, including the Government of Canada and especially the Laurentian Elites. Is it right for them to interfere in our monetary and political discourse, no, but that does not stop them, or the Government from putting their hands in where they don't belong.
The central function of the central bank, i.e. the Bank of Canada, is to protect the Canadian dollar from the depredations of inflation. It is written into the core mandate of the BOC that inflation is supposed to be in a narrow band at about two per cent per annum.
You can argue that the current inflation is due to external factors and I certainly do understand that position. But, but, but. You will recall that Mr. Macklem asserted very vigorously for quite some time that this bout of inflation was "transitory." In that analysis he was wrong and he should bear the consequences.
I would argue that the BOC creation of money by purchasing Government of Canada bonds was absolutely a large factor in creating that inflation. If the BOC had not purchased those bonds then the Government would have had to finance the extraordinary spending by way of market sale of bonds. That may, indeed, have caused interest rates to rise which, in turn, might well have assisted in keeping inflationary pressures moderated.
You have asserted that the "additional" money created is essentially meaningless as it is held on deposit with the BOC. I - again - respectfully disagree with your assertion. Deposits with the BOC are a normal course circumstance. With the "additional" money created the various regulated institutions have "additional" money with which to make those deposits. In other words, to your argument, I - respectfully - say, nuts!
I would also note that the purchase of government bonds and the resulting money creation made the BOC an accomplice to the policies of the government of the day, i.e. the current Liberal (mal)administration.
Further, you argue that the "politicization" of the BOC is a bad thing. I quite understand the argument but, I ask you, if the head of the BOC is doing a bad job, is it not the responsibility of the government of the day to discharge the individual doing that bad job. Carrying that thought further, if the Governor of the BOC is himself an accomplice in carrying out government policy, has he not himself by his actions politicized his job?
Ragan can tell us where the credit side of the unprecedented bond buying (loaning) the Bank of Canada has done with the federal government sits, but he fails to mention that accounting is double-entry that there is another ledger with that much debit to hand out as cash. The government got that money and used it to fund spending levels never seen before in Canada. Pandemic justified or not this is without a question contributing to inflation. It has nothing to do with the interest being collected on the debt on the Bank of Canada side and everything to do with the economic activity that is stimulated with government spending, especially when it gives money directly to people like it did during the pandemic. Although, that is a whole other issue in and of itself because something no one seems to be talking about is what happens when those bonds need to be repaid in the future...
This is the kind of "soapbox sword rattling" that makes Pierre unelectable. Pointing fingers and pretending that they're things that Canadian the government has any real control over is pure spin. That's not leadership.
I fully agree with Pierre Poilievre on his stance regarding inflation and replacing the current governor of the BoC. I am a retired senior who has watched the money that I saved and invested for my 40 working years decrease annually but with a much lower inflation rate. Seeing the value of my portfolio drop by 5-7%/annum, coupled with the artificially low inflation rate, is a hard pill to swallow. The higher inflation numbers increase the burn rate on my savings which I had hoped to use to keep me out of the publicly funded senior care facilities, aka covid charnel homes, and not be a burden on society in my dotage. We need the BoC to get back to keeping inflation down, and not parrot the economic ignorance of the current PM. Replacing Tiff would be a good start.
Take a deep breath and calm down, all you Laurentian elites. PP is just sewing and harvesting resentment in a time-honoured Canadian way, blaming eastern bankers for the woes of the country – especially woes in the west. Have you forgotten funny money and Social Credit? So, of course he favors Bit Coin (and I hope he has some!). And of course, he also aspires to the Trump role on The Apprentice: You’re fired!
It is all political theatre, just like Justin and his socks. And his audience loves it. It he’s “owning the Libs” too!. And being “transgressive. Isn’t that good?
Just don’t look for traditional conservative principles or even consistency, because you won’t find them – for example, a preference for free markets or respect for property rights. Remember: wheat board, bad, dairy monopoly, good? Or aboriginal interference with commercial and property rights (bad!); truckers’ interference with personal and property rights, (just “freedom”, and good for selfies too)?
We are dealing with a politician here, and a Marxist one at that. Which is to say Groucho, not Karl. Because remember Groucho’s pronouncement: “those are my principles and if you don’t like them, I have others”. That’s PP. Situational ethics.
PP sees a successful path to the leadership and maybe even to wooing People’s Party folks, back into his tent. It involves playing tunes that his audience likes. Sound public policy has nothing to do with it. That’s not what the game is about.
As for real courage: like telling people that they can’t vote themselves rich; or bringing about free trade in Canada itself; or invoking the notwithstanding clause to over-ride a real elite like the Supreme Court (see this morning’s decision, on voluntary intoxication which will make feminists and MADD mad); or holding referendums; or saying no to the US (as Chretien did over Iraq) …well…that is years away. If ever. For now it’s the Apprentice. Or maybe the WWF, fight night.
So don’t get caught up in the opera. PP is just doing his own version of virtue signaling - playing to the populist bleachers, where he thinks his success will lie. And maybe it will turn out like his bet on Bit Coin – if he actually had some.
Sir Humphrey Appleby would approve of this column. Monetary policy is far too important to be entrusted to simple people who shuffle onto trains, through malls and into the House of Commons.
I hold the opinion and will maintain it to my death bed that something can never be created from nothing. Expanding the money supply in excess of real productiviry growth has never been and will never be a path to prosperity.
Don't die on us yet. However, commercial banks DO create money out of nothing. That's not the same thing as creating real, usable products/services, but aside from making banks more profitable, such money creation also enables economic expansion (building new businesses, etc.).
But it doesn't create real value. Only productivity growth does that. Any money created in excess of real productivitiy is always inflation. Obviously, quantifying real productivity growth is challenging, so growth in the money supply that targets 2% inflation is good enough.
The Bank of Canada had one goal: to keep inflation close to 2%, and neither too high nor too low. (I can't remember the exact specifics, as this is similar to the other big Western central banks). It has manifestly failed at this goal. Inflation is more than 3 times what it should be. Firing the governor would be an entirely appropriate accountability measure.
The purpose of central bank independence is to prevent politicians from grabbing the control wheels (interest rates and unorthodox policy like quantitative easing) and pursuing other (ie, electoral) goals, not to protect failures.
Chris Ragan's argument against firing the governor consists of two elements: conditions have been tough so it isn't fair to fire the governor; and the Bank made an appropriate emergency response to the pandemic (ie, pursued other goals than 2% inflation).
The first is ridiculous - firing leaders for failure is actually accountability, not interference, and would encourage future governors to pursue their mandate more assiduously.
The second is contradictory - the fact that the Bank pursued something other than the low and stable inflation it was supposed to is actually evidence that it has already been politicized. The fact that this happened through ruling class groupthink rather than a prime ministerial command only makes it worse.
Poilievre's goal of firing a failed leader and returning the Bank to its focus (notice he is not trying to dictate monetary policy, only saying that Macklem has failed) is entirely correct.
Over the past two years there was a not-insignificant risk of deflation, particularly if the government hadn't stepped into to support businesses impacted by the pandemic. The productive destruction if those businesses had closed permenently (and, even with support, some have) would have have slowed the recovery significantly.
So, the central bank working to combat the prospect of deflation *was* part of its mandate. The fact that it's swung past its low end target and beyond isn't terribly unexpected -- in a volatile economy, keeping inflation between 1 - 3 % is inherently challenging. See the bank's inflation chart: https://www.bankofcanada.ca/rates/indicators/key-variables/inflation-control-target/. We have been both below and, now above the target over the last two years.
The bank is now addressing high inflation. It may cause a recession, which isn't great, but it is likely a lot easier to manage than productive destruction and deflation. Note that the Bank says that it "raises or lowers its policy interest rate, as appropriate, in order to achieve the target typically within a horizon of six to eight quarters—the time that it usually takes for policy actions to work their way through the economy and have their full effect on inflation." On that basis, it probably should have started raising the interest rate a little earlier -- Q4 of 2021 -- once it became clear that inflation was not coming down. But, that's hardly a total failure.
In short, I don't agree the Bank has failed at its mandate. It has focused on the rate of inflation, first addressing a dip below 1% and now a surge well above 3%. Tighter monetary policy and higher interest rates are being ramped up.
I suspect PP's criticism of the Bank is far less about monetary policy and more about PP being able to complain about inflation without having to start making committments as to where he'd cut government spending; much easier to just threaten to fire one guy and say: job done!
I’m in agreement with you, Tony. And, Mark - the Governor of the Central Bank IS accountable, but I haven’t seen the large failure that you are talking about.
The argument that our current inflation situation is really just fine and nobody should regard it as a failure is perfectly rational - I'll give it that (even though I disagree). And certainly better than what Mr. Ragan was saying.
But if pundits and politicians believe that, they should be saying it, rather than coming up with red herrings about political interference.
Well, I wouldn't say its "just fine" -- they did overshoot the target and waited/hoped that the external factors beyond their control would ease, when actually the opposite (Ukraine) happened. But, I think that's understandable. Raising in Q4 and having the January COVID wave have a bigger negative impact on the economy was also a possibility. Hindsight is always 20/20!
I'm cool as long as they have the intestinal fortitude to manage the situation now, which will likely require quarterly rate hikes until inflation eases. Easier said than done -- I supsect a lot of people have just bought homes with big mortgages or have significant debt in HELOCs and will be impacted by rising rates. So -- its possible political pressure will quickly shift from "why didn't the raise the rates sooner/faster" to "how can young people who could already barely afford homes survive this endless rate climb? We gotta do something ..." As long as the Bank continues its focus on inflation -- even if that means a mild recession -- I'm good. We'll see.
Tony - if PP were serious and became PM, could interference in the Canadian banking system have a similar impact of Erdogan in Turkey?
Ha -- that's a question way above my pay grade :-).
I have seen this playbook before in Ontario, though. Before he was elected, Doug Ford conflated rising electrical bills with the salary of the head of Hydro One; he dubbed him the $6 million man and said he needed to go. The challenge: Ontario privatized Hydro One, but the province continued to be one of the largest shareholders. To review the parallels: a politician criticising the head of a body that doesn't directly report to the government (Hydro One/Bank of Canada), implying that a problem (high electrical bills/high inflation) could be solved by firing the head of that body -- something they actually don't have the direct authority to do.
So, what happened? Ford got elected and Ontario negotiated an early retirement for the head of Hydro One (https://www.cbc.ca/news/canada/toronto/former-hydro-one-ceo-to-receive-millions-from-stock-options-pension-benefits-1.4746914) that ended up costing a lot more than originally claimed. They appointed someone else ... and electrical rates didn't go down!
If PP were elected, I suspect there would be some negotiations with the Bank of Canada, a new, credible head would be found, and the Bank would likely stick with most of what it does now. PP could claim he'd "restored faith" in the institution. But, if he really wants to do something about government finances, at some point he'll have to come clean on what he's willing to cut, or what taxes he's willing to raise. Still waiting on that one!
Hard to disagree with a lot of that. Also, I'm a little bit out of my depth on economics, so I'll certainly grant that without much objection.
This is an honest question, because you seem to have some knowledge here (and took the time to put together an informative response). What happens if the Government runs as big a deficit as they are and the BOC isn't there to buy up the bonds? I think that's a central plank of the argument PP is making. Effectively, the government seems to have a blank cheque.
The feeling I've had - and I could absolutely be off here - is that the Government has effectively weaponized monetary policy. They are borrowing as much as they want to finance whatever they want (some legit, some ridiculous in my opinion). They're driving inflation, causing (or allowing) borrowers to become massively overleveraged. But in the end, if you're looking to increase government spending, they've created the perfect conditions in which to do so.
In this last budget, the Federal government indicated that the fiscal anchor that they're now using is debt to GDP. Inflation increases GDP, therefore allowing them to spend more and more, all the while preaching restraint (respecting the anchor). So it sure seems like the metric that they used for their anchor is cherry-picked not only to allow for significant spending growth despite radically new deficit levels, but to create a cycle. Drive inflation, GDP increases, government increases spending.
It has felt less like the BOC has been watching inflation and more like they've been carrying water for the LPC. PP is giving voice to that impression. Is the impression completely inaccurate, or just oversimplified (i do recognize that he's oversimplifying regardless).
If the BOC doesn't buy the bonds, rates rise. (Which lends support to Doug's point, below, that the BOC should have been banned from doing this). Unless there is a lot of spare capacity in the economy. Which there wasn't really, during lockdowns, since the spare capacity was being legally prevented from being used.
So not buying the bonds would have forced the government to run less of a deficit, or provoke a disastrous recession.
Thank you!
For my edification - rates rise because if the BOC didn't buy them, the rates need to be higher in order to be of interest to other investors?
In all honesty then, this really sounds like the same thing (though with more moving parts) as what PP is saying. The BOC backstopped the Federal Government. They may not have been directed to do so, and it may not have even been "wrong" to do so. But they have (sort of) been doing the dirty work of the Federal Government.
To say "they've been running the printing presses" is obviously an oversimplification and possibly an exaggeration. But I feel like the soundbites aren't actually that divorced from the reality of the situation. In fact, it's probably closer to the truth than most things that have come out of Ottawa in the last couple of years.
Exactly so
Perhaps they started late because we were having an election and raising rates would have hurt the Liberals. jes sayin'
Probably of greater impact was the fact that the Bank's five-year mandate -- which does come from the government, was due to be renewed right after the election. See: https://www.theglobeandmail.com/business/article-what-the-bank-of-canadas-mandate-for-inflation-really-means/.
Now, it didn't look like much change was afoot. The most likely PMs were either Trudeau or O'Toole. Trudeau didn't have much to say about the mandate, which indicated it wasn't likely top of mind to change (and, as far as I tell, it was renewed with an continued mandate to focus on inflation and keep it in a band between 1 - 3%).
From the G&M article: "Conservative Leader Erin O’Toole said at a Thursday news conference that he favours sticking with the Bank of Canada’s existing 2-per-cent inflation target. People’s Party Leader Maxime Bernier put out a statement Thursday saying the central bank should aim for zero inflation – a target well below what academic economists and central bankers consider either feasible or desirable."
So, it was likely that, whatever the likely outcome of the election, that the mandate wasn't going to substantially change, but it was up for renewal and there was the outside possibility of change. Again, from the article:
"The current mandate review, which started in 2017 under the direction of former bank governor Stephen Poloz and former senior deputy governor Carolyn Wilkins, has been particularly ambitious. For the first time since the 1980s, the bank is running a “horse race” looking at six models to see which does the best job maintaining price stability and fostering economic growth amid a variety of shocks.
"The leading alternatives to the existing flexible inflation-targeting regime are a “dual mandate,” where central bankers target employment alongside inflation, and “average inflation targeting,” where central bankers explicitly aim for above-target inflation after periods of slow consumer price growth. The U.S. Federal Reserve adopted a form of average inflation targeting last summer, while maintaining the dual mandate that it has had since the 1970s."
Both dual mandate or average inflation targeting could have impacted the Bank's approach post mandate. As it happens, we stayed the course.
So -- while its possible to guess at political interference, I'd wager its more likely that an election combined with a mandate renewal from potentially a new government may have influenced the Bank's rate of response.
I didn't say a politician interfered. I said there was an election. The BOC as with the US Fed seems to want to stay out of the fray and don't make big changes during the final election run. Had the BOC raised rates and stated a rising rate policy to address inflation, it would have signaled that inflation was rising and Canadians would be paying more for mortgages, car loans etc. Not something they want to do during an election campaign. It would tend to hurt the party currently in power.
Dear Line Editor: Can we get this commenter to issue a rebuttal? He seems to have more common sense than Chris Ragan.
Dammit. While i was typing my post, you made similar, but better and more eloquent points...
You're very kind! I think both our approaches are valid.
Since inflation is hardly just a Canadian issue, should all the world's bank leadership be fired? The global economy stopped. That's never happened before...at least in the last 100 years. And as mentioned, anyone who jumps into the job can't fix it...so what's the point?
If (as claimed) inflation in Canada is largely due to external causes, why does the Bank set a target at all?
Good question....because as with everything in life, you're supposed to have goals? And this is a once in 100-year experience...like COVID itself initially, no one handled it very well. Some things you can control, others...even with all the tools at your disposal, are beyond you skill set.
I guess so, but true professionals set realistic goals and adjust them with circumstances. Otherwise it's just posturing.
You mention tools, which is a good point. The bank claims to have policy tools at its disposal, but then claims to be helpless in the face of world events and almost nothing it does has any material impact on inflation. They can't have it both ways.
That's why this is so frustrating to regular boneheads like me.
But haven't they been realistic for the last 30 years? The world hasn't been through something this...well ever, where the entire economy shut down. Businesses, to protect themselves didn't ramp back up quickly enough in some areas, but demand is wiping out supply. Add to that the number of small businesses that have morphed into giants so that if one thing goes wrong, calamity ensues ( baby food for example). It was only 24 months ago that oil had a negative value.
I'm not sure anyone has tools for this, and really, isn't what they're doing little more than educated guessing?
I don't understand it enough either...hence, why I'm a little more hesitant to dump on the
I think what's missing from the criticisms of what Poilievre is doing here is the American angle. He is copying the Tea Party/MAGA approach. "Audit the Fed" is a war cry down there shouted, usually, by people who have no idea what "the Fed" is. PP knows that substance does not really matter here because it's all about riling up a certain portion of the population. The same is true with his support of trucker convoys. The cynicism comes from the fact that Poilievre knows these people are ignorant and misguided but passionate and can be easily manipulated. Just as Donald Trump would never hold a rally on the grounds of Mar-A-Lago because he wouldn't want any Trumpanzees near his home, PP is using the same energy to secure conservative leadership.
The problem is like The Sorcerer's Apprentice. Once you've got them all riled up what do you do with them? I would suggest this approach is not going well in the US right now. Their very democracy is on life support.
I guess my point is that this is the opposite of actual leadership. The people that PP is targeting need help - their (our) problems are real. They do not need to be used now and then tossed aside for the general election.
Thank you. Not being said enough in the larger media that this political concern for the BoC is literally foreign to Canada. I spent years in the riding of Rob Anders, and American politics don't fly in Canada. Rob has ended up in a bad place; but on his way down, he did a little damage to Canada, and a lot more to the Conservative party.
When you hear American politics being echoed, just run from the guy. PP has shown his colours very clearly now; he's a political foreigner, those politics are not winners here.
It's only American in the sense that not being deferential to established ruling class cliques is automatically viewed as American by those in Canada who are habitually deferential to or members of established ruling class cliques.
I see what you're saying and I fear that you may be correct. I'm honestly not sure though that PP is that cynical. He sure comes across (to me) as being fairly sincere. And I guess part of my issue is that if he's not sincere, I don't see a single party leader who is. I think JT has been gaslighting us since 2015 at least. This is a do nothing, virtue signalling government if Canada has ever had one. Jagmeet has literally traded all of his values for some magic beans. And the thing that was great about MB was that he collected all of the rifraf that have been crapping up the CPC for years. And the Green Party turned on it's leader for not being anti-semitic enough. So seriously, if not PP, who?
I agree with most of this. I am a little concerned though that the BOC has been pouring gas on this. I do agree that most of the inflation issue isn't CAUSED by the central bank. And I see that this is happening all over the world, but that's only because all central bankers made the same error, not because it was unavoidable.
I guess my feeling is that I think that the relationship between the central bank and the gov has been pretty cushy. With Carney now openly a liberal, it just makes it look more and more like this is a nice cozy relationship between the LPC and the BOC.
I'm not talking conspiracy theory here, I don't think there's an alliance, or that anyone is taking direction from anyone else. I just don't know if I buy that the bank has been staying as politically neutral as they're saying they need to be.
There were warning signs LONG before we started measuring high inflation and rates stayed too low, too long. Lots of people (including PP) have been saying this for some time and have been dismissed and derided as economic lightweights. Now, we have the BOC admitting that they should have/could have acted sooner and that they misunderstood the nature of this bout of inflation, and that it wasn't as transitory as they thought. So they kept pouring gas on the fire.
Now Canadians are in trouble. We've got high inflation, overleveraged households (and governments). Government and BOC have been dismissing these concerns for two years. Now it's happening and we're being told that the people raising the concerns shouldn't mess with the independence of the BOC.
Also, if the BOC's mandate is 2% inflation, and we're hitting 6-7% (and i feel like those numbers may underrepresent the problem), it's not unfair to question the policies and position of the BOC.
It's not my favorite thing that PP is doing, and I think he's overplaying the card a little. I'm just not so convinced that the BOC is this paragon of uninfluenced virtue. We know that the PMO has no problem applying any pressure they can inappropriately on officeholders should be above the political fray (SNC Lavalin).
This is the kind of comment I really enjoy reading here. Thanks for the thoughtful analysis.
👍👍👍👍👍👍👍♥️🇨🇦⚡️
Countries worldwide are experiencing inflation due to the reasons outlined by Mr. Ragan.Mr. Poilievre knows this and is simply using the Central Bank as a club for electoral purposes. If he actually is not aware, he is not fit to stand for Leader of the CPC.
Every country in the world has been pumping their money supply...or are dependent on other national currencies [specifically the US$]...which is being inflated at an astronomical rate.
Great article. However, Central Banks' mission creep has left them exposed to criticism. They increasingly weigh into policy areas such as climate change and inequality. They increasingly feel obligated to act to sustain what would otherwise be unsustainable government finances. Polievre is correct to implicate Central Banks as problems, but his proposed solutions are completely wrong. Instead his prescription should focus on:
-narrowing Central Bank's mandate to containing inflation. Nothing more and nothing less. An undemocratic institution like a Central Bank should have no authority or commentary on other issues
-calling some sort of commission to look at methodologies of how inflation is measured. Considerable evidence exists that Central Banks have underestimated the effects of asset price inflation for some time
-limit the amount of government bonds the Bank can purchase, so that it doesn't face the moral hazard of enabling government borrowing
Firing the Governor for blowing the inflation target would be a powerful way of narrowing their mandate and avoiding moral hazard. I don't like limiting the purchase of government bonds, just in case that is needed at some point in order to hit the inflation target.
Central Bank transaction of government bonds potentially compromises the Bank's independence. The Bank should never consider government finances or honestly any government priority other than maintaining the inflation target in its decision making. For example, the BoC likely saved NL and AB from default in mid 2020. In doing so it has created expectation that it would do so again when future governments spend themselves into oblivion. NL and AB should have defaulted and enacted extreme austerity to bring their budgets into balance instantly.
Firing the Goveneror at this point would be grandstanding. The Bank's mandate is too muddled to measure performance.
This problem started after the Financial Crisis when Central Banks started expanding their balance sheets and maintaining historically low interest rates in an attempt to "stimulate" the economy. Instead, the efforts seem to have encouraged speculation in risk assets like crypto and growth stocks, driven housing prices to unaffordable levels and reinforced reckless government spending.
Poilievre wants to fire Macklem BECAUSE he enabled the Government's deficit spending without taking into account the BoC's own inflation mandate - essentially signalling that he was in lock step with the govt and NOT INDEPENDENT of it.
The rhetoric is not from Poilievre. It is from writers such as this who reduce the entirety of his criticisms to "politicians interfering with BoC".
To suggest that the Governor of the Bank of Canada is not political and totally separated from the Government of Canada is correct in a sense that the bank is to act independently from Government. Unfortunately the Governor of the Bank of Canada answers to the Minister of Finance with in the Government of Canada. When the Government tells him what they are going to do, it prepares him to aid in the printing of billions of dollars to which has put us into the dire situation we are in. How can he possibly be independent when his actions are to aid this government in their massive spending and printing of money? If indeed he was independent and was worth a grain of the salt to which got him into his position, he would have demanded the Government of Canada stop spending. He is no more independent from the Government of Canada than he is from the Rothchild's, considering they own all the shares in the Bank of Canada. If you don't think they influence the workings of Banks then your not very astute. They influence everything, including the Government of Canada and especially the Laurentian Elites. Is it right for them to interfere in our monetary and political discourse, no, but that does not stop them, or the Government from putting their hands in where they don't belong.
Came for the article, stayed for the commentary!
Totally agree, so nice to see a big thread on a contentious topic with some good ideas and respectful disagreement.
The Line has some of the best commentary in Canadian substack - too bad there is a time limit to make comments.
Mr. Ragan, I respectfully and firmly disagree.
The central function of the central bank, i.e. the Bank of Canada, is to protect the Canadian dollar from the depredations of inflation. It is written into the core mandate of the BOC that inflation is supposed to be in a narrow band at about two per cent per annum.
You can argue that the current inflation is due to external factors and I certainly do understand that position. But, but, but. You will recall that Mr. Macklem asserted very vigorously for quite some time that this bout of inflation was "transitory." In that analysis he was wrong and he should bear the consequences.
I would argue that the BOC creation of money by purchasing Government of Canada bonds was absolutely a large factor in creating that inflation. If the BOC had not purchased those bonds then the Government would have had to finance the extraordinary spending by way of market sale of bonds. That may, indeed, have caused interest rates to rise which, in turn, might well have assisted in keeping inflationary pressures moderated.
You have asserted that the "additional" money created is essentially meaningless as it is held on deposit with the BOC. I - again - respectfully disagree with your assertion. Deposits with the BOC are a normal course circumstance. With the "additional" money created the various regulated institutions have "additional" money with which to make those deposits. In other words, to your argument, I - respectfully - say, nuts!
I would also note that the purchase of government bonds and the resulting money creation made the BOC an accomplice to the policies of the government of the day, i.e. the current Liberal (mal)administration.
Further, you argue that the "politicization" of the BOC is a bad thing. I quite understand the argument but, I ask you, if the head of the BOC is doing a bad job, is it not the responsibility of the government of the day to discharge the individual doing that bad job. Carrying that thought further, if the Governor of the BOC is himself an accomplice in carrying out government policy, has he not himself by his actions politicized his job?
Ragan can tell us where the credit side of the unprecedented bond buying (loaning) the Bank of Canada has done with the federal government sits, but he fails to mention that accounting is double-entry that there is another ledger with that much debit to hand out as cash. The government got that money and used it to fund spending levels never seen before in Canada. Pandemic justified or not this is without a question contributing to inflation. It has nothing to do with the interest being collected on the debt on the Bank of Canada side and everything to do with the economic activity that is stimulated with government spending, especially when it gives money directly to people like it did during the pandemic. Although, that is a whole other issue in and of itself because something no one seems to be talking about is what happens when those bonds need to be repaid in the future...
This is a terrific explanation of the issue!
This is the kind of "soapbox sword rattling" that makes Pierre unelectable. Pointing fingers and pretending that they're things that Canadian the government has any real control over is pure spin. That's not leadership.
I fully agree with Pierre Poilievre on his stance regarding inflation and replacing the current governor of the BoC. I am a retired senior who has watched the money that I saved and invested for my 40 working years decrease annually but with a much lower inflation rate. Seeing the value of my portfolio drop by 5-7%/annum, coupled with the artificially low inflation rate, is a hard pill to swallow. The higher inflation numbers increase the burn rate on my savings which I had hoped to use to keep me out of the publicly funded senior care facilities, aka covid charnel homes, and not be a burden on society in my dotage. We need the BoC to get back to keeping inflation down, and not parrot the economic ignorance of the current PM. Replacing Tiff would be a good start.
Take a deep breath and calm down, all you Laurentian elites. PP is just sewing and harvesting resentment in a time-honoured Canadian way, blaming eastern bankers for the woes of the country – especially woes in the west. Have you forgotten funny money and Social Credit? So, of course he favors Bit Coin (and I hope he has some!). And of course, he also aspires to the Trump role on The Apprentice: You’re fired!
It is all political theatre, just like Justin and his socks. And his audience loves it. It he’s “owning the Libs” too!. And being “transgressive. Isn’t that good?
Just don’t look for traditional conservative principles or even consistency, because you won’t find them – for example, a preference for free markets or respect for property rights. Remember: wheat board, bad, dairy monopoly, good? Or aboriginal interference with commercial and property rights (bad!); truckers’ interference with personal and property rights, (just “freedom”, and good for selfies too)?
We are dealing with a politician here, and a Marxist one at that. Which is to say Groucho, not Karl. Because remember Groucho’s pronouncement: “those are my principles and if you don’t like them, I have others”. That’s PP. Situational ethics.
PP sees a successful path to the leadership and maybe even to wooing People’s Party folks, back into his tent. It involves playing tunes that his audience likes. Sound public policy has nothing to do with it. That’s not what the game is about.
As for real courage: like telling people that they can’t vote themselves rich; or bringing about free trade in Canada itself; or invoking the notwithstanding clause to over-ride a real elite like the Supreme Court (see this morning’s decision, on voluntary intoxication which will make feminists and MADD mad); or holding referendums; or saying no to the US (as Chretien did over Iraq) …well…that is years away. If ever. For now it’s the Apprentice. Or maybe the WWF, fight night.
So don’t get caught up in the opera. PP is just doing his own version of virtue signaling - playing to the populist bleachers, where he thinks his success will lie. And maybe it will turn out like his bet on Bit Coin – if he actually had some.
Sir Humphrey Appleby would approve of this column. Monetary policy is far too important to be entrusted to simple people who shuffle onto trains, through malls and into the House of Commons.
No mention of Central Bank interest rate policy? Falling rates for the last 40 years? Extreme credit expansion? Huge and unsustainable debt levels?
Creating 'money' out of thin air is bad long term policy. And now we're starting to pay the piper with steadily rising producer and consumer prices.
I hold the opinion and will maintain it to my death bed that something can never be created from nothing. Expanding the money supply in excess of real productiviry growth has never been and will never be a path to prosperity.
Don't die on us yet. However, commercial banks DO create money out of nothing. That's not the same thing as creating real, usable products/services, but aside from making banks more profitable, such money creation also enables economic expansion (building new businesses, etc.).
But it doesn't create real value. Only productivity growth does that. Any money created in excess of real productivitiy is always inflation. Obviously, quantifying real productivity growth is challenging, so growth in the money supply that targets 2% inflation is good enough.