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.
He is trying to pull a fast one over people and it got through the Line people because no one really cares enough about economics to actually learn something about it. This was a shameful piece from the Line, very incorrect analysis.
Does The Line have the needed resources to hire a financially knowledgeable person to review and edit articles on economy? While I commend the policy of allowing different perspectives (why I am a subscriber), it is important to not let people get away with ridiculous writing like in this piece. (As an extreme case, I would assume the editors would not allow a flat earther to publish their views on the topography of the planet).
It would only hurt The Line's long term credentials as a platform that publishes pieces that include correct information.
I see he's been teaching econ at Laval for 30 years this year, many publications in peer-reviewed journals. Surely The Line can dig up another 30-year-guy to simplify and summarize their peer-reviewed paper on why Dr. Gordon is wrong?
Mostly, when inflation scolds looked for a champion 15 years back, you got a P.R. guy, that is, a "think tank scholar" with papers published that the "think tank" web site. Fingers crossed that The Line can do better.
Actually, I think you're missing a crucial point: The Bank of Canada *did not buy the bonds directly* If *that* had happened, then things might have gone differently. But it didn't; the BoC purchased the bonds on the secondary market from the members of Payments Canada. Payments Canada is still sitting on the proceeds.
I think the fundamental problem here with your article, and also of people reading it, is what the boundary of the article is about and did you keep inside those boundaries. If the article is about the high-resolution details of the mechanisms of what was transferred to whom and how, then perhaps there is some accuracy in the content.
But, for many readers those details are trivial. Like, for example, the fact nobody literally printed money on a printing press. While I'm sure there are some laypeople that do think of "printing money" is meant as a literal statement rather than a metaphorical macroeconomic principle, clearly the context of the criticisms you are responding to are not referring to the literal, and rather trivial, context.
Another issue is this: "I know that this sounds to a non-economist like an odd problem to be trying to solve: what’s wrong with deflation? Wouldn’t it be great if the prices of things we wanted to buy kept falling? No, it wouldn’t be great. In fact, it would be very bad. When deflations have occurred in the past, it has always been in the context of a depressed economy: think of the Great Depression."
But that's not an explanation at all. At best it is a weak, vague empirical claim with a single data point as a reference. Using the exact same approach, critics could equally state that inflation correlates with wars or with fiat currency in general.
Yugoslavia in the early 1990s saw million+ % inflation. Yugoslav war and IMF loans have been blamed. Zimbabwe 2008 saw billion+ % inflation. They printed enormous amounts of money (figurative!) to pay off IMF loans.
In early 20th century, Hungary had highest on record of something like quintillion+ % inflation circa 1946, following WWII, mounting debt, and reduced production. Greece circa 1943-44 had thousand+ % inflation following German occupation. Germany itself saw massive inflation circa 1923 associated with the papiermark after it was taken off the gold standard in 1914 -- or some analysis suggests it was because the Weimar Republic was "printing money" (careful ...) to pay off war debts. Going back further, inflation reached 143% during the French Revolution.
If we then conclude that inflation is bad by correlation with bad times, and you concluded deflation is bad by correlation with bad times, then we're left with nothing.
You skipped the important details here. You weirdly focused on details of literal printing money, when that doesn't matter, and skipped the details for why deflation is actually a bad thing and a small amount of inflation is good. That topic is itself the key to this whole conversation. Deflation means prices are dropping and people with savings -- even under their mattress (figuratively!) -- are now better off. Inflation means that -- limited to the discussion of finances -- people are worse off every day that passes.
If it is about scale, that hyperinflation is bad but a small amount of inflation is good, say ~2%, why isn't a small amount of deflation also good or even better?
The article, and above response, then goes back into detailed mechanics again, about whether the BoC bought bonds directly or indirectly, and whether credit was or wasn't "spent". (What constitutes "spending" here?)
One could argue this is missing the forest for the trees again. During COVID economic plans, the government took on massive debt. Individuals and companies received a lot of money that did not go toward increased production of anything. That is "real" money, meaning people spent it on groceries, bills, and other expenses.
And herein lies the issue of "printing money". No fiscal plans or monetary policy can create new *value* of money. That comes from productive output that people use to increase the quality of their life. Money is a placeholder -- a proxy. It represents something, and when its relationship to that thing changes, the value of money changes.
What might help everyone to understand, and perhaps even you to understand the concerns, is to go to these first principles. In old school terms, if everybody had a printing press in their basement, why couldn't that make everybody rich and have a better quality of life? In modern terms, why can we (or the bank) just digitally add a million dollars to everybody's accounts and we'd be all well off?
OK, if not us individually, and not the bank editing the account, then can the government just do it? Just hand everybody a million dollars and then we're all rich. Right?
No, you know why none of those situations wouldn't work, because it devalues the currency. In the short run we might be able to buy more, travel more, etc., but the pricing of everything is based off of the trust in the value of the currency based on the economic production that backs the currency. Doubling the amount of money with the same economic production just cuts it's value in half, the same as if you replace the CAD with the a new currency called 2CAD worth half as much. If everybody made twice as much numerically, the prices cost twice as much numerically and it all equalizes in the wash.
Ah, but we don't just "create" (aka, "print") money, whether people, banks, or government. When you get a loan, the bank does indeed just add money into your bank account. They don't get it from somewhere else to give to you; they add it to your bank account. So why is that different than the above editing of everybody's bank account to make them richer?
The answer is, of course, because the other half of the creation of that "hill" of money is the equal creation of a "hole" of money -- the loan debt. If you immediately pay off the loan with the money from your account, both the hill and the hole disappear. No net new money is created, which is true of loans, bonds, and other forms of "created" (aka, "printed") money. When it is paid off, that money disappears.
But -- and this is the critical thing -- that "no net money created" only applies in the long term when the debt (the hole) is paid back. During the time that the hill of money exists, it is functionally no different than the printing press in the basement or the bank adding money to your account. The fact that there is a debt associated with it does not matter to the day to day usage of money.
Just as if only one person printed small amounts money in their basement, or banks digitally changed the numbers on a few people's bank accounts to make them rich, it has negligible effect on the overall value of money in real terms.
But, if a massive amount of money suddenly shows up, relative to the size of the productive economy upon which the value of the currency is based, that functionally is indistinguishable in the day-to-day economy from the counterfeit case. The fact that this hill of money will hopefully disappear (be paid off) and eliminated by the equally sized debt hole created is only relevant over those long timescales; in the short term the economy can't tell the difference between newly created counterfeit money or newly created debt money.
That is the forest that needs addressing. That is what people mean by "printing money". Yes, there are trees. Yes, you make paper from trees. Yes, you can print money on paper made from trees. Those are trivialities that miss the point.
From the point of view of an economy (but not necessarily economists), massive short-term increases in money created from debt appears indistinguishable (to the economy) from counterfeiting, which necessarily devalues the currency. As does, one might add, a decrease in productive output such as if people are paid to do nothing of productive value. If you pay them with new money created from debt, that's a double-whammy toward devaluing the currency and driving inflation, which makes people poorer.
Can you address that forest? I think that is more important than arguments over the technical species of trees on which the money is printed.
Edit: As another point of where you draw the bounding box, Payments Canada is a collection of banks, domestic and foreign. Where the money comes from can have a real effect on the dynamics of the economy resulting from measures such as bonds and debt. The Bank of Canada loans money to financial institutions. From a system level, there's lot of potential for inadvertent feedback loops that have major macroscopic effects, so describing a small carve-out that is a linear approximation under one set of circumstances can give false belief of understanding. The blind man who is an expert at the elephant's tail isn't a good advisor when the elephant's tusk is at your throat. The Line was right before that "We don't know" is usually the best place to start from.
Your reference to the Bank of Canada's financing of government debt may have mislead me.
If I interpret your article as referring solely to the Bank of Canada's quantitative easing program, I agree with you that it was a useless endeavour. In fact, I would go further and say that it was worse than useless -- the Bank of Canada now has to unload those bonds at a lower price.
The issue should be the degree to which Central Banks facilitate government borrowing. A truely indepedent Central Bank should never feel obligated to buy government debt, nor be involved in policy decisions. Unfortunately, the US Fed's mandate to manage employment in addition to inflation, pushes it into the policy arena and drags other Central Banks with it.
It is now obvious that government spending during the pandemic went too far. For example, in Canada and the US, government aid more than replaced lost income. Central Banks added fuel to the fire by expanding the money supply to provide additional stimulus.
My big fear is that Central Banks are concerned about the too big to fail situations in:
-government debt
-mortgage debt
-equity markets
and will temper its inflation response. To maintain credibility as inflation fighters, Central Banks should completely disregard the above and let governments deal with the blowback of austerity, let over-indebted homeowners default and watch from the sidelines as stock markets fall due to deleveraging and asset reallocation. AB and NL may have defaulted on bonds in 2020 without BoC action. They fully deserved to due to bad financial management leading up to the pandemic.
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.
I still can't understand how you think it's OK to pretend COVID simply didn't happen and that no action needed to be taken. With the restrictions that were put in place, healthcare systems across the country collapsed or were on the brink of it. Every restriction related to COVID was about protecting the healthcare system. You're just lucky it didn't impact you.
That was indeed the excuse, but the evidence was clear, right from the start, that lockdowns didn't work. All of the field hospitals stayed empty and unused simply because they were never needed. Since 2020, more and more evidence to prove the ineffectiveness of lockdowns, and to prove their immense net harm, in terms of lives alone, not to mention economic devastation, has mounted higher and higher.
I never pretended that Covid didn't exist - in fact, I supported test/trace/isolate/support early on. Of course I was wrong and that didn't work either - but it would have been so much less harmful than lockdowns.
No restrictions would have been best of all, perhaps with a prayer service to mollify the people who wanted action, any action, whether it was useful or not.
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.
I *say* it's irrelavant: "Economists have long stopped making a direct link between anything in the central bank’s balance sheet and money, mainly because so few transactions involve cash or anything that the Bank of Canada can control."
Japan has been in a low growth environment still the early 90's for a number of reasons:
-rapidly aging population
-80's asset bubble that has never burst
I would argue that the fiscal and monetary stimulus in Japan has done nothing other than increase government debt and the money supply without producing economic growth. It has protetected against revaluing assets, but why is that important?
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.
Agree, but if I understand the arguement correctly, it is a big part of the argument pro-crypto folks put forth -- the cryptocurrencies are limited. That's essential to Polivere's 'arguement' that crypto is a hedge against inflation.
I will admit that I find the crypto-bros a bit boring to listen to so I haven't tuned in that closely to the nuances of their arguements :-) I think digital currencies could be useful, but recycling arguements for the gold standard doesn't make them any more current!
Except that there is no connection between the amount of printed physical paper/metal money and the amount of “money” that exists. If this is in fact his response to something about cryptocurrencies having limited supply, the author misunderstands both physical money and cryptocurrencies.
Crypto isn’t directly related to inflation in any way, but it is reasonable to say “maybe governments are fallible and corruptible, and maybe there should be stores of value that exist outside the constraints and influence of government.”
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?
Most GDP to debt comparisons of this sort ignore the very high program responsibilities of provinces in Canada relative to other countries. And the provinces have worse ratios. Our metrics for all government debt levels to GDP don't compare so well, and our deficit to GDP level metrics compare even worse.
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.
He is trying to pull a fast one over people and it got through the Line people because no one really cares enough about economics to actually learn something about it. This was a shameful piece from the Line, very incorrect analysis.
We have some disagreements with his column: however, we have an open policy of welcoming rebuttals and we find Gordon's response valuable. JG
Does The Line have the needed resources to hire a financially knowledgeable person to review and edit articles on economy? While I commend the policy of allowing different perspectives (why I am a subscriber), it is important to not let people get away with ridiculous writing like in this piece. (As an extreme case, I would assume the editors would not allow a flat earther to publish their views on the topography of the planet).
It would only hurt The Line's long term credentials as a platform that publishes pieces that include correct information.
I see he's been teaching econ at Laval for 30 years this year, many publications in peer-reviewed journals. Surely The Line can dig up another 30-year-guy to simplify and summarize their peer-reviewed paper on why Dr. Gordon is wrong?
Mostly, when inflation scolds looked for a champion 15 years back, you got a P.R. guy, that is, a "think tank scholar" with papers published that the "think tank" web site. Fingers crossed that The Line can do better.
Navigators sailed the seas for hundreds, if not thousands, of years with the assumption that the earth was flat. Just saying.
As I explain, the credit *wasn't* spent. It's still sitting at the Bank of Canada.
Actually, I think you're missing a crucial point: The Bank of Canada *did not buy the bonds directly* If *that* had happened, then things might have gone differently. But it didn't; the BoC purchased the bonds on the secondary market from the members of Payments Canada. Payments Canada is still sitting on the proceeds.
I think the fundamental problem here with your article, and also of people reading it, is what the boundary of the article is about and did you keep inside those boundaries. If the article is about the high-resolution details of the mechanisms of what was transferred to whom and how, then perhaps there is some accuracy in the content.
But, for many readers those details are trivial. Like, for example, the fact nobody literally printed money on a printing press. While I'm sure there are some laypeople that do think of "printing money" is meant as a literal statement rather than a metaphorical macroeconomic principle, clearly the context of the criticisms you are responding to are not referring to the literal, and rather trivial, context.
Another issue is this: "I know that this sounds to a non-economist like an odd problem to be trying to solve: what’s wrong with deflation? Wouldn’t it be great if the prices of things we wanted to buy kept falling? No, it wouldn’t be great. In fact, it would be very bad. When deflations have occurred in the past, it has always been in the context of a depressed economy: think of the Great Depression."
But that's not an explanation at all. At best it is a weak, vague empirical claim with a single data point as a reference. Using the exact same approach, critics could equally state that inflation correlates with wars or with fiat currency in general.
Yugoslavia in the early 1990s saw million+ % inflation. Yugoslav war and IMF loans have been blamed. Zimbabwe 2008 saw billion+ % inflation. They printed enormous amounts of money (figurative!) to pay off IMF loans.
In early 20th century, Hungary had highest on record of something like quintillion+ % inflation circa 1946, following WWII, mounting debt, and reduced production. Greece circa 1943-44 had thousand+ % inflation following German occupation. Germany itself saw massive inflation circa 1923 associated with the papiermark after it was taken off the gold standard in 1914 -- or some analysis suggests it was because the Weimar Republic was "printing money" (careful ...) to pay off war debts. Going back further, inflation reached 143% during the French Revolution.
If we then conclude that inflation is bad by correlation with bad times, and you concluded deflation is bad by correlation with bad times, then we're left with nothing.
You skipped the important details here. You weirdly focused on details of literal printing money, when that doesn't matter, and skipped the details for why deflation is actually a bad thing and a small amount of inflation is good. That topic is itself the key to this whole conversation. Deflation means prices are dropping and people with savings -- even under their mattress (figuratively!) -- are now better off. Inflation means that -- limited to the discussion of finances -- people are worse off every day that passes.
If it is about scale, that hyperinflation is bad but a small amount of inflation is good, say ~2%, why isn't a small amount of deflation also good or even better?
The article, and above response, then goes back into detailed mechanics again, about whether the BoC bought bonds directly or indirectly, and whether credit was or wasn't "spent". (What constitutes "spending" here?)
One could argue this is missing the forest for the trees again. During COVID economic plans, the government took on massive debt. Individuals and companies received a lot of money that did not go toward increased production of anything. That is "real" money, meaning people spent it on groceries, bills, and other expenses.
And herein lies the issue of "printing money". No fiscal plans or monetary policy can create new *value* of money. That comes from productive output that people use to increase the quality of their life. Money is a placeholder -- a proxy. It represents something, and when its relationship to that thing changes, the value of money changes.
What might help everyone to understand, and perhaps even you to understand the concerns, is to go to these first principles. In old school terms, if everybody had a printing press in their basement, why couldn't that make everybody rich and have a better quality of life? In modern terms, why can we (or the bank) just digitally add a million dollars to everybody's accounts and we'd be all well off?
OK, if not us individually, and not the bank editing the account, then can the government just do it? Just hand everybody a million dollars and then we're all rich. Right?
No, you know why none of those situations wouldn't work, because it devalues the currency. In the short run we might be able to buy more, travel more, etc., but the pricing of everything is based off of the trust in the value of the currency based on the economic production that backs the currency. Doubling the amount of money with the same economic production just cuts it's value in half, the same as if you replace the CAD with the a new currency called 2CAD worth half as much. If everybody made twice as much numerically, the prices cost twice as much numerically and it all equalizes in the wash.
Ah, but we don't just "create" (aka, "print") money, whether people, banks, or government. When you get a loan, the bank does indeed just add money into your bank account. They don't get it from somewhere else to give to you; they add it to your bank account. So why is that different than the above editing of everybody's bank account to make them richer?
The answer is, of course, because the other half of the creation of that "hill" of money is the equal creation of a "hole" of money -- the loan debt. If you immediately pay off the loan with the money from your account, both the hill and the hole disappear. No net new money is created, which is true of loans, bonds, and other forms of "created" (aka, "printed") money. When it is paid off, that money disappears.
But -- and this is the critical thing -- that "no net money created" only applies in the long term when the debt (the hole) is paid back. During the time that the hill of money exists, it is functionally no different than the printing press in the basement or the bank adding money to your account. The fact that there is a debt associated with it does not matter to the day to day usage of money.
Just as if only one person printed small amounts money in their basement, or banks digitally changed the numbers on a few people's bank accounts to make them rich, it has negligible effect on the overall value of money in real terms.
But, if a massive amount of money suddenly shows up, relative to the size of the productive economy upon which the value of the currency is based, that functionally is indistinguishable in the day-to-day economy from the counterfeit case. The fact that this hill of money will hopefully disappear (be paid off) and eliminated by the equally sized debt hole created is only relevant over those long timescales; in the short term the economy can't tell the difference between newly created counterfeit money or newly created debt money.
That is the forest that needs addressing. That is what people mean by "printing money". Yes, there are trees. Yes, you make paper from trees. Yes, you can print money on paper made from trees. Those are trivialities that miss the point.
From the point of view of an economy (but not necessarily economists), massive short-term increases in money created from debt appears indistinguishable (to the economy) from counterfeiting, which necessarily devalues the currency. As does, one might add, a decrease in productive output such as if people are paid to do nothing of productive value. If you pay them with new money created from debt, that's a double-whammy toward devaluing the currency and driving inflation, which makes people poorer.
Can you address that forest? I think that is more important than arguments over the technical species of trees on which the money is printed.
Edit: As another point of where you draw the bounding box, Payments Canada is a collection of banks, domestic and foreign. Where the money comes from can have a real effect on the dynamics of the economy resulting from measures such as bonds and debt. The Bank of Canada loans money to financial institutions. From a system level, there's lot of potential for inadvertent feedback loops that have major macroscopic effects, so describing a small carve-out that is a linear approximation under one set of circumstances can give false belief of understanding. The blind man who is an expert at the elephant's tail isn't a good advisor when the elephant's tusk is at your throat. The Line was right before that "We don't know" is usually the best place to start from.
Your reference to the Bank of Canada's financing of government debt may have mislead me.
If I interpret your article as referring solely to the Bank of Canada's quantitative easing program, I agree with you that it was a useless endeavour. In fact, I would go further and say that it was worse than useless -- the Bank of Canada now has to unload those bonds at a lower price.
Still, shame on you for the "printing" allegory.
The issue should be the degree to which Central Banks facilitate government borrowing. A truely indepedent Central Bank should never feel obligated to buy government debt, nor be involved in policy decisions. Unfortunately, the US Fed's mandate to manage employment in addition to inflation, pushes it into the policy arena and drags other Central Banks with it.
It is now obvious that government spending during the pandemic went too far. For example, in Canada and the US, government aid more than replaced lost income. Central Banks added fuel to the fire by expanding the money supply to provide additional stimulus.
My big fear is that Central Banks are concerned about the too big to fail situations in:
-government debt
-mortgage debt
-equity markets
and will temper its inflation response. To maintain credibility as inflation fighters, Central Banks should completely disregard the above and let governments deal with the blowback of austerity, let over-indebted homeowners default and watch from the sidelines as stock markets fall due to deleveraging and asset reallocation. AB and NL may have defaulted on bonds in 2020 without BoC action. They fully deserved to due to bad financial management leading up to the pandemic.
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.
Biggest. Bond. Purchase. Spree. In. History (but nothing to see here, right): https://www.ratespy.com/wp-content/uploads/2020/09/Historic-Bank-of-Canada-Bond-Buying-1.png
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.
...until the uncertainty around predicting future costs due to inflation causes business to reel in investment which pushes up unemployment.
If you aren’t being sarcastic about the CRA reviewing “any” overpayments or abuse I wish that I could share your optimism.
Lol. I’m sure they’re good people there but it would be quite the task.
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.
I still can't understand how you think it's OK to pretend COVID simply didn't happen and that no action needed to be taken. With the restrictions that were put in place, healthcare systems across the country collapsed or were on the brink of it. Every restriction related to COVID was about protecting the healthcare system. You're just lucky it didn't impact you.
That was indeed the excuse, but the evidence was clear, right from the start, that lockdowns didn't work. All of the field hospitals stayed empty and unused simply because they were never needed. Since 2020, more and more evidence to prove the ineffectiveness of lockdowns, and to prove their immense net harm, in terms of lives alone, not to mention economic devastation, has mounted higher and higher.
I never pretended that Covid didn't exist - in fact, I supported test/trace/isolate/support early on. Of course I was wrong and that didn't work either - but it would have been so much less harmful than lockdowns.
No restrictions would have been best of all, perhaps with a prayer service to mollify the people who wanted action, any action, whether it was useful or not.
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.
Canada had better finances heading into the Financial Crisis and benefited from high oil prices coming out of it.
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.
Fair enough. Are you going to defend the utterly irrelevant metric of “physical money in circulation”?
I *say* it's irrelavant: "Economists have long stopped making a direct link between anything in the central bank’s balance sheet and money, mainly because so few transactions involve cash or anything that the Bank of Canada can control."
So you mentioned it and included it in your graphs because…?
Japan has been in a low growth environment still the early 90's for a number of reasons:
-rapidly aging population
-80's asset bubble that has never burst
I would argue that the fiscal and monetary stimulus in Japan has done nothing other than increase government debt and the money supply without producing economic growth. It has protetected against revaluing assets, but why is that important?
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.
Agree, but if I understand the arguement correctly, it is a big part of the argument pro-crypto folks put forth -- the cryptocurrencies are limited. That's essential to Polivere's 'arguement' that crypto is a hedge against inflation.
I will admit that I find the crypto-bros a bit boring to listen to so I haven't tuned in that closely to the nuances of their arguements :-) I think digital currencies could be useful, but recycling arguements for the gold standard doesn't make them any more current!
Except that there is no connection between the amount of printed physical paper/metal money and the amount of “money” that exists. If this is in fact his response to something about cryptocurrencies having limited supply, the author misunderstands both physical money and cryptocurrencies.
Crypto isn’t directly related to inflation in any way, but it is reasonable to say “maybe governments are fallible and corruptible, and maybe there should be stores of value that exist outside the constraints and influence of government.”
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?
Most GDP to debt comparisons of this sort ignore the very high program responsibilities of provinces in Canada relative to other countries. And the provinces have worse ratios. Our metrics for all government debt levels to GDP don't compare so well, and our deficit to GDP level metrics compare even worse.
Becuase the government can borrow money doesn't mean the government should borrow money. I question what lasting benefit that borrowing has delivered