I love how a single comment in a 6 minute video that's basically just one guy's opinion becomes the title of the video and warrants a banner across the bottom for the whole thing. No angle there at all.
Canada's money supply is increasing at its slowest rate in decades and we are currently engaged in quantitative tightening. No matter what the government does, if the money supply isn't increasing quickly and there's no shortage of goods/services, then there aren't significant internal inflationary pressures (commodity prices can still drive inflation though). Ultimately, increasing the deficit by a bit will have little impact on the rate of inflation given the numbers we're talking about. Look at the US. Their federal deficit is about 6% of GDP compared to Canada at about 1%, yet the inflation rates between the two countries are quite similar.
That's because, barring just handing out a bunch of cash to everyone, government spending generally results in an increase in aggregate supply to match the increase in aggregate demand. Without a corresponding increase in money supply (which as I noted above isn't currently happening), there isn't significant inflationary pressure from deficit spending, assuming we're not talking about obscene amounts or anything.
Not to mention, people really need to look around the world if they think Canada's spending or deficits are out of control:
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People look around and see the BoC saying there will be no rate decreases partly because of government spending, but hey, I guess they should read your post instead. That ought to bring down the monthly mortgage payment!
People look around and see the BoC saying there will be no rate decreases partly because of government spending, but hey, I guess they should read your post instead. That ought to bring down the monthly mortgage payment!
Don't worry about mortgage payments, nobody can buy a house anymore anyway
It's not really new information to be fair. The guy is just a peon (I mean all VP's are peons these days?) at Scotiabank but the Bank of Canada was pointing out the spending issue a long while back already.
With the backdrop of the upcoming budget looming and the likely shower of more new spending with the upcoming election, the Bank of Canada will have to bake in the all the additional spending into their adjustments. This is back in October.
Pace of government spending ‘not helpful’ in efforts to tame inflation: Macklem
The Bank of Canada’s efforts to tame inflation by raising interest rates are at odds with the projected pace of government spending, says governor Tiff Macklem.
Macklem was asked what impact government spending plans are having on the path for inflation. He reiterated that fiscal policy is the purview of elected officials, and that the central bank’s role there is only to bake government spending plans into its forecast.
But citing the Bank of Canada’s latest outlook, Macklem said that based on the current spending plans in the budgets of all federal and provincial governments, fiscal spending is expected to grow at a rate of 2.5 per cent next year.
“So what that means is if all those spending plans are realized, government spending will be adding to demand more than supply is growing,” he said. “And in an environment where we’re trying to moderate spending, get inflation down — that’s not helpful.”
Macklem went on to urge fiscal policymakers to consider the “inflationary impact” of their spending decisions when making up their budgets.
“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” he said.
Hopefully somebody has time to sit down with the big banks and the Governor of the Bank of Canada to tell them that they're doing their jobs wrong and that they don't know what they're talking about.
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Hopefully somebody has time to sit down with the big banks and the Governor of the Bank of Canada to tell them that they're doing their jobs wrong and that they don't know what they're talking about.
We'll send the truckers back to Ottawa to meet with Tiff and the big 5 CEOs.
Hopefully somebody has time to sit down with the big banks and the Governor of the Bank of Canada to tell them that they're doing their jobs wrong and that they don't know what they're talking about.
I mean hasn't that been the Conservative argument for years now? Didn't Poilievre basically promise to fire him mid-term, even though such a move would be completely unprecedented? I guess when he says something mildly critical of the current government, he's back to being a vaunted expert who can't be questioned.
And of course, none of that changes the fact that there's no evidence that government spending is changing the trajectory of inflation or interest rates, which is what that video was suggesting. Macklem was warning that large deficits could be inflationary if the money is targeted to the wrong places. The Bank of Canada has clearly said that things like supports for low-income people, supporting immigration, etc. tend to not be inflationary because they're not tipping the supply/demand scale.
And that's because it's a generally well-supported economic principle that normal government spending has little impact on inflation. Yes, opening a firehose of money and sending out huge amounts of direct cash supports in a short period of time like what happened with COVID tends to cause inflation, and that was clearly reflected in the significant growth in the money supply that far exceeded the growth in the economy; effectively 15-20% more dollars chasing the same amount of goods (and fewer once you account for the supply shocks). But what we're seeing in Canada now, with relatively modest deficits compared to our peer nations, and the slowest growth in the money supply in decades, is not something that is normally inflationary at all. Nominal GDP growth has been higher than the growth in the money supply, which is deflationary if anything.
And in fact, some studies have shown that increases in government spending are actually correlated with lower inflation afterwards. The Federal Reserve:
Quote:
Across the board, we found almost no effect of government spending on inflation. For example, in our benchmark specification, we found that a 10 percent increase in government spending led to an 8 basis point decline in inflation. Moreover, the effect is not statistically different from zero
And the Bank of Canada:
Quote:
We find that inflation falls following an increase in government expenditure and that the effect is relatively persistent, lasting for about one and a half years.
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I mean hasn't that been the Conservative argument for years now? Didn't Poilievre basically promise to fire him mid-term, even though such a move would be completely unprecedented? I guess when he says something mildly critical of the current government, he's back to being a vaunted expert who can't be questioned.
And of course, none of that changes the fact that there's no evidence that government spending is changing the trajectory of inflation or interest rates, which is what that video was suggesting. Macklem was warning that large deficits could be inflationary if the money is targeted to the wrong places. The Bank of Canada has clearly said that things like supports for low-income people, supporting immigration, etc. tend to not be inflationary because they're not tipping the supply/demand scale.
And that's because it's a generally well-supported economic principle that normal government spending has little impact on inflation. Yes, opening a firehose of money and sending out huge amounts of direct cash supports in a short period of time like what happened with COVID tends to cause inflation, and that was clearly reflected in the significant growth in the money supply that far exceeded the growth in the economy; effectively 15-20% more dollars chasing the same amount of goods (and fewer once you account for the supply shocks). But what we're seeing in Canada now, with relatively modest deficits compared to our peer nations, and the slowest growth in the money supply in decades, is not something that is normally inflationary at all. Nominal GDP growth has been higher than the growth in the money supply, which is deflationary if anything.
And in fact, some studies have shown that increases in government spending are actually correlated with lower inflation afterwards. The Federal Reserve:
And the Bank of Canada:
Regarding that research:
Quote:
University of Calgary economics professor Trevor Tombe said that according to this theory, people choose to work more when government spending rises because they anticipate taxes to rise as well.
"This is presented as somewhat counterintuitive results, that an increase in government spending can lower inflation," Tombe said.
However, Tombe cautioned against drawing any definitive conclusions from one research finding.
"Certainly, it's interesting. That's a valuable contribution. But no single paper is the end of the conversation," he said.
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I love how a single comment in a 6 minute video that's basically just one guy's opinion becomes the title of the video and warrants a banner across the bottom for the whole thing. No angle there at all.
A report from Oxford Economics noted that the working-age population of those 15 and older rose 90,700, or +0.3%, in March, due to continued strength in international migrant inflows into Canada.
So, 90K people arrived in Canada of a working age, and we didn't have a job for any of them. I'll add to this that the job bank is pretty useless, as there are so many phantom jobs for accounting and policy purposes that it's actually hard to shift through. Not as many open positions as politicians like to state.
For some reason the image won't embed, but it's in the article. The image maps out job growth by month, with March losing 2200 jobs nationwide.
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Last edited by Harry Lime; 04-07-2024 at 08:11 PM.
Sure, I do think we should be cautious in assuming that additional government spending reduces inflation based on a few reports, which is what Tombe is saying. But there doesn't seem to be any demonstrable correlation between additional government spending of the type we're seeing in Canada and higher inflation afterwards.
Reason for my asking is I do follow the author of that graph. This author if you have followed recent BoC rate announcements also has some new recent insight (and who fully agrees with the BoC's comments on government spending and the headline conclusion from the previously linked video that you dismissed).
It appears you are trying to deliberately mislead on the conclusion which the BoC, strategists and economists mutually agree on: current government spending is not helpful (too high) and has a detrimental inflationary impact. Curious on your reason to why you would choose this route.
A fair conclusion: Canada is in better shape than its G7 peers in terms of fiscal freedom, however high government spending is causing unnecessary inflationary pressure. Would you at least agree to this conclusion?
More damning is this report a year later from the same author. Effectively our government policies are clearly ####ing us. While he still believes in a rate cut is likely to occur (as the latest BNN video shows) it's not at all for positive reasons (he's clearly hinting we are in for a recession).
When it comes to the real economy, it seems
anything we Canadians can do, Americans can do better.
Take real GDP for instance. We haven’t fully closed the books on
2023, but it’s obvious that Canadian output grew much slower than
in the U.S. last year. The consensus view and our own forecast would
see a relative GDP performance gap extending into 2024.
Fresh U.S. CPI data are due to arrive Tuesday. But as we write this,
underlying inflation momentum is as at least as brisk/strong in
Canada as in the U.S. Again, that’s despite a northern economy that
seems to be more clearly falling short of its potential.
The failure to secure marginal inflation relief links to one area where
Canada is vastly outgrowing the U.S.: POPULATION! With so many
new Canadians looking for a home, it’s perhaps of little surprise that
shelter cost inflation has so much momentum in Canada. A quick fix
to Canada’s shelter inflation problem is hard to see. If anything, the
surge in Canada’s working age population reported in Friday’s LFS
report hints at upside to 2024 population growth (vs. prior thinking).
So in the greatest and most painful of ironies, Canada gets the stick
(i.e., relatively slower growth) without the carrot (i.e., relatively tamer
inflation). With the Bank of Canada reluctant to look through shelter
inflation, it suggests a delay in interest rate relief. Specifically, we’re
pushing back our first projected BoC rate cut from April to June, as
our upcoming issue of Fixed Income Monitor will detail.
Notwithstanding this delay in the expected policy rate pivot, our
baseline macro forecast (including noted GDP weakness and serious
non-shelter inflation relief) still makes a case for rate cuts. But we
must acknowledge that now, more than in recent memory, Canada’s
interest rate trajectory hinges on the country’s demographic impulse.
Simply put, more heads could mean fewer (and slower) cuts.
Last edited by Firebot; 04-07-2024 at 08:46 PM.
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I have no doubt people work more in periods of high gov't spending, but I'm highyl skeptical of that reasoning about anticipating future tax increases. Seems like there would just be more work available...
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Conservatives won’t be taking advice from “so-called experts” when it comes to carbon pricing, the party said in a statement Wednesday after more than 200 economists signed an open letter challenging leader Pierre Poilievre’s stance.
I have no doubt people work more in periods of high gov't spending, but I'm highyl skeptical of that reasoning about anticipating future tax increases. Seems like there would just be more work available...
Yeah when I read that quote from Tombe I had to shake my head a little.
“Uh oh taxes might be going up, I’d better force my employer to give me more hours”
