Gawd, I can't remember back far enough to the last time someone tried to excuse money creation by claiming that no money was "printed". Accompanying it with a graph of "notes in circulation" is over the top.
"Money printing" actually refers to the creation of money -- not actually printing bills on a printing press.
"Issuing credit" becomes "money printing" when the credit is spent. And the governments' borrowed and spent during the pandemic. This is the cause of inflation. So, yes, money was printed.
Currency notes make up a very small percentage of what we call money in the economy. The Bank of Canada created money not by printing bills but by purchasing debt from the government at an unprecedented rate. This money doesn't come from anywhere, the Bank of Canada does not have some giant account of Canadian dollars to just doll out to the government whenever they need to stay afloat. So, the Bank of Canada creates money in a computer account and uses that newly made money to purchase the bonds and the government takes the newly created money from those bonds and spends it, but nowhere in this process is there ever actual money created. Which makes your whole post disingenuous because no central bank "prints money" but actually printing money. We do it with either central bank bond purchases or, in Canada, through the Charter banks creation of money when loans are made like for a mortgage.
Thank you, that helped me understand the problem. Economics and economies are complicated. Personally I always get twitchy when someone offers "simple commonsense" solutions to complex problems. It usually means they don't understand the issue or are trying to put one over on people. Your point about looking at what the Bank of Canada knew at the time is well taken. When looking at history and trying to figure out why people did what they did you have to remember that - You know their future.
Good analysis. The Bank of Canada's focus was undoubtedly the correct one. In fact, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.
Even conventional neoclassical economists like Greg Mankiw, in his Principles of Economics – notes that “inflation does not in itself reduce people’s purchasing power”. He lists “shoe leather costs” (walking to the bank more often); “menu costs” (changing catalogues); “confusion and inconvenience” (but “difficult to judge” how severe); “inflation-induced tax distortions” (mainly impacting on returns to saving); and “arbitrary redistributions of wealth” (if inflation suddenly changes) but the estimated losses arising are nothing like those attributed to persistent unemployment.
There has been no credible study that shows that overall the losses from these “costs” amount to millions of dollars of foregone output every day. There is ample evidence that mass unemployment results in huge permanent losses every day in foregone output and income.
And then if you study the broader literature (health, mental health, sociology, crime, family studies etc) you realise that the macroeconomic losses from unemployment are just the tip of the iceberg. The personal, family and community losses are very large and persist across generations.
Our crazy Covid measures greatly reduced the value of what the real economy was producing. Governments went on a spending spree to prevent the victims of lockdowns from suffering destitution. Instead of having that reflected in higher interest rates or massive tax increases, which would have openly spread the pain around, the government chose money creation, to temporarily hide the pain. We are feeling it now.
Too bad the lockdowns were useless, as well as catastrophically harmful. It's not like we weren't warned.
BTW, we had pandemic plans, all of which said lockdowns were a terrible idea. Governments panicked and ignored them.
Prof. Gordon takes a mostly constructive approach in his critique of monetary policy conduct during the pandemic. The focus on money creation by many critics is a heuristic - in fact the Bank affects liquidity conditions in financial markets which in turn affects the willingness and ability of the public to hold money. During crisis conditions as we had in 2020, there was an urgent need to inject liquidity. An examination of the evolution in the money supply would reveal that the growth in M2, for example, moved up sharply from a multi year trend line beginning in April 2020 to the end of the year, and although growth has moderated somewhat since then, it continues above trend. (Contact me for a copy of the chart.) It was the combination of unprecedented fiscal stimulus that was validated by similarly unprecedented monetary policy ease that laid the foundation for today's inflation. One immediate consequence of high levels of liquidity ("free money") was a rush to buy real assets (think houses and equity), and house prices especially are a meme for the impact of rising inflation. But make no mistake about it, house price increases are the result of monetary and fiscal policies. Of course there are special factors affecting specific sectors (drought, war, chip shortages), but inflation (ie a decline in the purchasing value of money) is everywhere and always a monetary phenomenon.
Was there a policy error? I think not (ie there was a need for fiscal stimulus and monetary ease), but the execution of the policy could have been more effective.
Standard, accepted analysis, very familiar to those who read the same thing (very familiar graphs, even) a dozen-odd years back during the really big financial crisis. The inflation scolds came out to scream for every "quantitative easing", which was just "printing money" and was certainly going to cause hyperinflation. Weird thing was, they hauled that out three times, and three times, economics professors had to present an analysis very much like this. And the hyperinflation of 2009-2013 never materialized.
The articles stated the conditions for the inflation materializing (the money circulating), and now that they are met, we have inflation at last - but it only validates the economic model being touted in 2008, 2010, 2012, and now.
This model is what Harper, who'd learned this analysis in his economics degree, used to steer our economic stimulus after that crisis, whereas both the US and UK (austerity) followed ideology, and both suffered much-more-prolonged crises than Canada did, a triple-dip in the UK's case. The model did NOT indicate quantitative easing for us; Harper spent borrowed money on infrastructure instead. Good call. Canada came out of the crisis with the strongest economic figures in the whole G7.
I would also add that, during the pandemic, one of the biggest risks was the destruction of productive capacity. If a whole bunch of businesses went under, that ability to generate economic activity would disappear and need to be recreated, lengthening the recovery significantly. Keeping those businesses on a lifeline was very likely the right thing to do. Even with that support, we've undoubtedly lost a lot of smaller businesses (shops, restaurants) though those at least can be recreated relatively quickly.
Timing when to roll off this kind of stimulus is really hard. If memory serves, the Harper government was criticised for pulling stimulus back too fast after the 2008 crash, meaing Canada's recovery was slower than other peer nations. This time, it sounds like we pulled back too slow, leading to inflation. The real question now: can we fight inflation without a significant recesssion?
Okay, no-one seems to have read the part about Japan. If you're going to claim that the expansion of the Bank of Canada's balance sheet caused inflation, you're going to have explain why it didn't cause inflation in Japan.
One quibble: the number of notes in circulation is a metric without any relevance to anything.
It certainly doesn’t hold a place in a person’s mind: nobody is paid in cash anymore, nobody saves in cash anymore, nobody pays their friends in cash, and we rarely use cash even for convenience store purchases.
It’s an easy to measure number (susceptible to the drunk looking under the streetlight), but since no human has a meaningful sense of “amount of cash money in my wallet”, it is an irrelevant metric to discuss re consumer psychology.
Govt issues bonds. Chartered banks buy bonds and sell them to BoC. Chartered banks keep the money in BoC. So essentially the BoC (virtually) printed money and paid for all the spending - which is what Pierre Poilievre has been saying.
Each economists views monetary policy different and dependent on which one you listen to, you will get a different opinion. I listened to a different Professor of Economics and he tells the same story as Pierre. So instead of saying he is wrong perhaps the best thing is to say is that he has a different opinion on our economic circumstances. The money handed out to Canadians to support them, was all printed money by the Bank of Canada. That is a fact.
As for the Pandemic, Canada has an Emergency Measures Response that each Province has, that was practice across this country, for use in the case of any national emergency, such as a pandemic. The problem lay with the Globalist ideology of the Government in office and the new powers given to the WHO, UN, and all the Global Organizations, in which this government chose to listen to and act upon, over our practiced Canada wide response. Canada's Government took the same actions as China due to its influence in the practice of the Global response to which they have great input, as does a non scientific/medical, Bill Gates. They never considered monetary issues with the Globalized response, mostly because they were unqualified to make the plans for the entire global community. The Canada Emergency Response had the economic measures included with in it.
The globalist Ideology that the Trudeau Government is imbedded in is what caused the unprecedented monetary issues we are in. Instead of using our practiced response, they chose the unpracticed globalist plan made up by political and global influencers, that did not have the credentials to plan a party. Bill Gates and his Foundation admitted they did not think of monetary policy while planning the global response to which Justin Trudeau followed. Inflation is now a global issue due to the adherence to the globalist pandemic response, which caused the supply chain issues, monetary problems, and now we have the war in Ukraine added in. So you can call it what ever you like but it is Justin Flation on every account.
The primary role of the BOC is to control Canada’s money supply.
It does this by creating - or not creating money - to loan to the government and other banks as well as by setting interest rates.
(The money created is simply computer generated at the BOC and distributed by the same means.)
Money supply is increased by purchasing government and other bonds as well as by keeping interest rates low.
Money supply is decreased by reducing bond sales and by raising interest rates.
It is up to the Governor of the BOC to evaluate the optimum level of money supply should be.
The Governor must then evaluate the demand for money by the government and the other banks in order to ensure the optimum level is maintained.
The Governor and the board of advisors are responsible for approving or disapproving lending by examining the impact on the money supply.
Increasing the money supply unduly creates inflation: too much money causes too much demand on the supply of goods and services.
Decreasing the money supply causes deflation: too little money results in to little demand.
In terms of Canada’s current fiscal situation, it is clear that the BOC allowed the increase in the money supply to exceed that necessary to deal with the economic impacts of the covid crisis.
The BOC underestimated the inflationary pressure as well as its duration.
Give the initial circumstances, such an underestimation is understandable.
As, however, the circumstances became clearer, so did the need for a reduction in the money supply.
The BOC failed to act on this clarification by reducing bond purchases and by increasing interest rates thus exacerbating monetary oversupply.
That the government was overshooting the need for covid relief should have been apparent to the BOC but for some reason, it did not act. (A significant amount of government spending was also being financed by BOC thus exacerbating the situation).
As well, it it totally misjudged the trajectory of the inflation that has resulted.
It is clear that the money supply needs to be curtailed and it remains to be seen how the BOC will accomplish such a reduction given the governments penchant for deficit spending.
It's always nice to hear from Stephen Gordon. Though he does seem like a status quo kind-of guy. The status quo has always been a frustration for me, personally, and I think there are many who can say the same.
I still believe that we can maintain GDP and improve our quality of life by disrupting the power of the upper classes with a little controlled deflation and a more clear understanding of our supply side of the economy.
-the pandemic was presented as a once in a lifetime crisis that deserved extraordinary response....as were the Financial Crisis and 9-11. This reminds me of the much used excuse that government borrowing is sustainable as government debt relative to GDP is falling. That is only true if one neglects the years when it wasn't true (i.e. the trend is down except for when it went up massively after the Financial Crisis and pandemic)
-along the same lines, the deflation concerns seem to be asymmetric. Central Banks warn that deflation of asset values would be a problem but at the same time don't consider inflation of asset values. I agree that sudden drops in the prices of goods and services would be cause for concern, but not so much sudden drops in home prices or equity markets. Seems like the "Wealth Effect" of surging assets prices doesn't count when measuring inflation, but is a big risk as it could cause deflation
-if the extra money supply simply ends up as bank reserves not being lent out, what is the point of the whole exercise other than suppressing government borrowing costs thereby enabling government to avoid priority calls?
Gawd, I can't remember back far enough to the last time someone tried to excuse money creation by claiming that no money was "printed". Accompanying it with a graph of "notes in circulation" is over the top.
"Money printing" actually refers to the creation of money -- not actually printing bills on a printing press.
"Issuing credit" becomes "money printing" when the credit is spent. And the governments' borrowed and spent during the pandemic. This is the cause of inflation. So, yes, money was printed.
Currency notes make up a very small percentage of what we call money in the economy. The Bank of Canada created money not by printing bills but by purchasing debt from the government at an unprecedented rate. This money doesn't come from anywhere, the Bank of Canada does not have some giant account of Canadian dollars to just doll out to the government whenever they need to stay afloat. So, the Bank of Canada creates money in a computer account and uses that newly made money to purchase the bonds and the government takes the newly created money from those bonds and spends it, but nowhere in this process is there ever actual money created. Which makes your whole post disingenuous because no central bank "prints money" but actually printing money. We do it with either central bank bond purchases or, in Canada, through the Charter banks creation of money when loans are made like for a mortgage.
Thank you, that helped me understand the problem. Economics and economies are complicated. Personally I always get twitchy when someone offers "simple commonsense" solutions to complex problems. It usually means they don't understand the issue or are trying to put one over on people. Your point about looking at what the Bank of Canada knew at the time is well taken. When looking at history and trying to figure out why people did what they did you have to remember that - You know their future.
Good analysis. The Bank of Canada's focus was undoubtedly the correct one. In fact, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.
Even conventional neoclassical economists like Greg Mankiw, in his Principles of Economics – notes that “inflation does not in itself reduce people’s purchasing power”. He lists “shoe leather costs” (walking to the bank more often); “menu costs” (changing catalogues); “confusion and inconvenience” (but “difficult to judge” how severe); “inflation-induced tax distortions” (mainly impacting on returns to saving); and “arbitrary redistributions of wealth” (if inflation suddenly changes) but the estimated losses arising are nothing like those attributed to persistent unemployment.
There has been no credible study that shows that overall the losses from these “costs” amount to millions of dollars of foregone output every day. There is ample evidence that mass unemployment results in huge permanent losses every day in foregone output and income.
And then if you study the broader literature (health, mental health, sociology, crime, family studies etc) you realise that the macroeconomic losses from unemployment are just the tip of the iceberg. The personal, family and community losses are very large and persist across generations.
Our crazy Covid measures greatly reduced the value of what the real economy was producing. Governments went on a spending spree to prevent the victims of lockdowns from suffering destitution. Instead of having that reflected in higher interest rates or massive tax increases, which would have openly spread the pain around, the government chose money creation, to temporarily hide the pain. We are feeling it now.
Too bad the lockdowns were useless, as well as catastrophically harmful. It's not like we weren't warned.
BTW, we had pandemic plans, all of which said lockdowns were a terrible idea. Governments panicked and ignored them.
Prof. Gordon takes a mostly constructive approach in his critique of monetary policy conduct during the pandemic. The focus on money creation by many critics is a heuristic - in fact the Bank affects liquidity conditions in financial markets which in turn affects the willingness and ability of the public to hold money. During crisis conditions as we had in 2020, there was an urgent need to inject liquidity. An examination of the evolution in the money supply would reveal that the growth in M2, for example, moved up sharply from a multi year trend line beginning in April 2020 to the end of the year, and although growth has moderated somewhat since then, it continues above trend. (Contact me for a copy of the chart.) It was the combination of unprecedented fiscal stimulus that was validated by similarly unprecedented monetary policy ease that laid the foundation for today's inflation. One immediate consequence of high levels of liquidity ("free money") was a rush to buy real assets (think houses and equity), and house prices especially are a meme for the impact of rising inflation. But make no mistake about it, house price increases are the result of monetary and fiscal policies. Of course there are special factors affecting specific sectors (drought, war, chip shortages), but inflation (ie a decline in the purchasing value of money) is everywhere and always a monetary phenomenon.
Was there a policy error? I think not (ie there was a need for fiscal stimulus and monetary ease), but the execution of the policy could have been more effective.
After reading the article and then the comments, I find my longstanding views on economics confirmed:
1. I do not understand economics
2. I have no idea how to figure out who actually does
Standard, accepted analysis, very familiar to those who read the same thing (very familiar graphs, even) a dozen-odd years back during the really big financial crisis. The inflation scolds came out to scream for every "quantitative easing", which was just "printing money" and was certainly going to cause hyperinflation. Weird thing was, they hauled that out three times, and three times, economics professors had to present an analysis very much like this. And the hyperinflation of 2009-2013 never materialized.
The articles stated the conditions for the inflation materializing (the money circulating), and now that they are met, we have inflation at last - but it only validates the economic model being touted in 2008, 2010, 2012, and now.
This model is what Harper, who'd learned this analysis in his economics degree, used to steer our economic stimulus after that crisis, whereas both the US and UK (austerity) followed ideology, and both suffered much-more-prolonged crises than Canada did, a triple-dip in the UK's case. The model did NOT indicate quantitative easing for us; Harper spent borrowed money on infrastructure instead. Good call. Canada came out of the crisis with the strongest economic figures in the whole G7.
I would also add that, during the pandemic, one of the biggest risks was the destruction of productive capacity. If a whole bunch of businesses went under, that ability to generate economic activity would disappear and need to be recreated, lengthening the recovery significantly. Keeping those businesses on a lifeline was very likely the right thing to do. Even with that support, we've undoubtedly lost a lot of smaller businesses (shops, restaurants) though those at least can be recreated relatively quickly.
Timing when to roll off this kind of stimulus is really hard. If memory serves, the Harper government was criticised for pulling stimulus back too fast after the 2008 crash, meaing Canada's recovery was slower than other peer nations. This time, it sounds like we pulled back too slow, leading to inflation. The real question now: can we fight inflation without a significant recesssion?
Okay, no-one seems to have read the part about Japan. If you're going to claim that the expansion of the Bank of Canada's balance sheet caused inflation, you're going to have explain why it didn't cause inflation in Japan.
One quibble: the number of notes in circulation is a metric without any relevance to anything.
It certainly doesn’t hold a place in a person’s mind: nobody is paid in cash anymore, nobody saves in cash anymore, nobody pays their friends in cash, and we rarely use cash even for convenience store purchases.
It’s an easy to measure number (susceptible to the drunk looking under the streetlight), but since no human has a meaningful sense of “amount of cash money in my wallet”, it is an irrelevant metric to discuss re consumer psychology.
How did this get printed on The Line?
To summarize:
Govt issues bonds. Chartered banks buy bonds and sell them to BoC. Chartered banks keep the money in BoC. So essentially the BoC (virtually) printed money and paid for all the spending - which is what Pierre Poilievre has been saying.
So.... What exactly is this writer's point?
Each economists views monetary policy different and dependent on which one you listen to, you will get a different opinion. I listened to a different Professor of Economics and he tells the same story as Pierre. So instead of saying he is wrong perhaps the best thing is to say is that he has a different opinion on our economic circumstances. The money handed out to Canadians to support them, was all printed money by the Bank of Canada. That is a fact.
As for the Pandemic, Canada has an Emergency Measures Response that each Province has, that was practice across this country, for use in the case of any national emergency, such as a pandemic. The problem lay with the Globalist ideology of the Government in office and the new powers given to the WHO, UN, and all the Global Organizations, in which this government chose to listen to and act upon, over our practiced Canada wide response. Canada's Government took the same actions as China due to its influence in the practice of the Global response to which they have great input, as does a non scientific/medical, Bill Gates. They never considered monetary issues with the Globalized response, mostly because they were unqualified to make the plans for the entire global community. The Canada Emergency Response had the economic measures included with in it.
The globalist Ideology that the Trudeau Government is imbedded in is what caused the unprecedented monetary issues we are in. Instead of using our practiced response, they chose the unpracticed globalist plan made up by political and global influencers, that did not have the credentials to plan a party. Bill Gates and his Foundation admitted they did not think of monetary policy while planning the global response to which Justin Trudeau followed. Inflation is now a global issue due to the adherence to the globalist pandemic response, which caused the supply chain issues, monetary problems, and now we have the war in Ukraine added in. So you can call it what ever you like but it is Justin Flation on every account.
The primary role of the BOC is to control Canada’s money supply.
It does this by creating - or not creating money - to loan to the government and other banks as well as by setting interest rates.
(The money created is simply computer generated at the BOC and distributed by the same means.)
Money supply is increased by purchasing government and other bonds as well as by keeping interest rates low.
Money supply is decreased by reducing bond sales and by raising interest rates.
It is up to the Governor of the BOC to evaluate the optimum level of money supply should be.
The Governor must then evaluate the demand for money by the government and the other banks in order to ensure the optimum level is maintained.
The Governor and the board of advisors are responsible for approving or disapproving lending by examining the impact on the money supply.
Increasing the money supply unduly creates inflation: too much money causes too much demand on the supply of goods and services.
Decreasing the money supply causes deflation: too little money results in to little demand.
In terms of Canada’s current fiscal situation, it is clear that the BOC allowed the increase in the money supply to exceed that necessary to deal with the economic impacts of the covid crisis.
The BOC underestimated the inflationary pressure as well as its duration.
Give the initial circumstances, such an underestimation is understandable.
As, however, the circumstances became clearer, so did the need for a reduction in the money supply.
The BOC failed to act on this clarification by reducing bond purchases and by increasing interest rates thus exacerbating monetary oversupply.
That the government was overshooting the need for covid relief should have been apparent to the BOC but for some reason, it did not act. (A significant amount of government spending was also being financed by BOC thus exacerbating the situation).
As well, it it totally misjudged the trajectory of the inflation that has resulted.
It is clear that the money supply needs to be curtailed and it remains to be seen how the BOC will accomplish such a reduction given the governments penchant for deficit spending.
It's always nice to hear from Stephen Gordon. Though he does seem like a status quo kind-of guy. The status quo has always been a frustration for me, personally, and I think there are many who can say the same.
I still believe that we can maintain GDP and improve our quality of life by disrupting the power of the upper classes with a little controlled deflation and a more clear understanding of our supply side of the economy.
Nice article, Stephen!
Three random thoughts:
-the pandemic was presented as a once in a lifetime crisis that deserved extraordinary response....as were the Financial Crisis and 9-11. This reminds me of the much used excuse that government borrowing is sustainable as government debt relative to GDP is falling. That is only true if one neglects the years when it wasn't true (i.e. the trend is down except for when it went up massively after the Financial Crisis and pandemic)
-along the same lines, the deflation concerns seem to be asymmetric. Central Banks warn that deflation of asset values would be a problem but at the same time don't consider inflation of asset values. I agree that sudden drops in the prices of goods and services would be cause for concern, but not so much sudden drops in home prices or equity markets. Seems like the "Wealth Effect" of surging assets prices doesn't count when measuring inflation, but is a big risk as it could cause deflation
-if the extra money supply simply ends up as bank reserves not being lent out, what is the point of the whole exercise other than suppressing government borrowing costs thereby enabling government to avoid priority calls?