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Originally Posted by Shazam
Bond rates are contingent on prime, not the other way around.
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Bond yields are based on whatever investors are willing to pay to get the coupon rate. They're heavily influenced by central bank overnight rates, but other factors can influence them as well. If the market expects a recession, it's totally possible for overnight rates to be high while longer-term bond yields drop.
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Regardless, it takes years to quell inflation. Years, boyos. Last time this idiocy happened it took two decades before rates normalized in Canada.
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Only because they kept printing money through that whole period. During the 1970s and early '80s, Canada's M2 increased by about 16% a year; that's roughly equivalent to COVID money supply increase carried out repeatedly for almost a decade and a half. As soon as they cut that out, inflation dropped back down within a year or two.
Long term, inflation in Canada roughly correlates with M2 increases minus economic growth and productivity gains, with the difference between M2 growth and inflation being about 5% on average over the last 50 years. So given the timing of M2 increases in recent years (basically one outlier year in 2020) and the lag that normally occurs between supply changes and inflation, I don't think it's unreasonable to think that inflation can be brought down significantly in a relatively short period of time.
With the M2 growth in the last handful of years:
2017: 4.9%
2018: 5.4%
2019: 7.7%
2020: 18.6%
2021: 8.4%
2022: 5.2% (annualized)
We should be back on the long-term trajectory within a year or two if they continue with the modest growth. Will inflation follow? It's hard to say, but there are significant differences between now and money supply increases that happened during the runaway inflation of the '70s:
1970: 9.5%
1971: 12.6%
1972: 13.3%
1973: 19.2%
1974: 16.8%
1975: 13.7%
1976: 17.0%
1977: 13.0%
1978: 14.2%
1979: 18.8%
1980: 16.4%
1981: 11.6%
1982: 10.8%
1983: 5.86%
And unsurprisingly based on the numbers above, inflation dropped from 12.5% in 1981 to 4.3% by 1984. Once M2 growth slowed to single-digit levels, inflation dropped. Canada has already significantly slowed M2 growth, so it's decent bet that inflation will follow in the next year or two (unless they change their course).