“I’m just sitting here watching the wheels go round and round” Photo Wikimedia Commons

By Michael O’Neill

Double Fantasy should be the title of the latest Bank of Canada monetary statement.  However, it was taken.  The BoC opted for a wordier, more mundane headline “Bank of Canada will maintain current level of policy rate until inflation objective is achieved, continues its quantitative easing program.”

If anything, the headline was a time-saver.  You didn’t need to read the rest of the 603 words.

But I did.

The statement said, “the rebound in the global and Canadian economies has unfolded largely as anticipated in its October Monetary Policy Report.”

No, it hasn’t.  The MPR never mentioned anything about the second-wave COVID-19 outbreak that forced lockdown measures in major cities and provinces across Canada.  In fact, they said that their economic recovery projections were based on NOT introducing extensive lockdown measures and widespread closures like what were imposed at the beginning of the pandemic.

The BoC said that “the outlook for inflation remains in line with the October MPR projection.”  Not true.  “ The October MPR asserted “overall price pressures remain subdued” while Wednesday’s policy statement noted “CPI inflation in October picked up to 0.7 percent, largely reflecting higher prices for fresh fruits and vegetables.

Inflation is the crux of the matter.  Is it high, or low, rising or falling?  Canadian’s are beginning to question the veracity of the government data as it doesn’t appear to conform to their experiences.

People are complaining that it costs more to buy the same products today than it did last year.  They also note that on many products, the price may be the same, but the package has shrunk.  These people are not using sophisticated computer models or tracking every purchase in a spreadsheet.  They simply know that their dollars don’t buy as much as they used to, also known as inflation in Economics 101.

The Bank of Canada and Statistics Canada created a CPI  “portal” to demonstrate the results of changes in prices for consumers.  It shows the change in prices for numerous consumer prices month over month.  But it misses the point.  If people aren’t travelling, or commuting less, they do not care if airline, rail, or bus tickets are cheaper, or if gas prices are down.  They only want to know why they aren’t saving any money.

Stats Canada has a Personal Inflation Calculator on the website.  Check it out.  My personal inflation rate (chart below)  n October 2020 is 2.4%.  The Stats Canada rate is 0.7%.

Source:  Statistics Canada

That is not what the government wants to hear.   They have embarked on a massive spending spree, which drastically increased the budget deficit to upwards of $400 billion after then next round of stimulus.   Much of that spending is in secret, as the coronavirus has disrupted traditional oversight.  

The CBC reported that Export Development Corp (EDC) is the government entity running the Business Credit Availability Program (BCAP).  EDC has doled out $31.6 billion in taxpayer dollars to over 791,000 businesses.  They won’t identify them, claiming client confidentiality.  That is problematic.  Canadian’s have a right to know where their tax dollars are spent.  It is even more important when you consider that it was EDC who lent CAD$52 million to a wealthy South African family to buy a jet, in 2015.  The family defaulted on the loan.  In the 2018-2019 fiscal year, EDC wrote off $196, 010,248.  No explanation offered.  Dire Straits said it best “Money for nothing”

The Canadian government cannot afford to have inflation rise, as it would derail the government’s “Great Reset.”  Prime Minister Trudeau told a United Nations panel “This pandemic has provided an opportunity for a reset.”  That reset reportedly includes guaranteed minimum incomes, national pharmaceutical programs, and national daycare programs.  Also, the government plans to transition the country from reliance on fossil fuels to green energy.

But like George Harrison sang in 1987: “its gonna take money, a whole lot of spending money, its gonna take plenty of money, to do it right

“all it takes is money”   Photo Pixabay

And there won’t be plenty of money if inflation rises because interest rates will increase, and the piper will be demanding his due.

Bank of Canada Governor Tiff Macklem appears to have bought into the Trudeau vision, lock, stock, and your future.  Mr Macklem has decided that to fulfil his monetary policy remit, he needs to “understand the implications of climate change for economic growth and inflation.”

A cynic would suggest that by incorporating another intangible variable into the inflation debate provides scope for results to be tailored to fit the message.

Global investors should be worried.  They aren’t.  The Canadian dollar has risen over 12% since March, and investor appetite for the currency has not been satisfied.

In November, USDCAD dropped below 1.2950 for the first time in over two years.  USDCAD direction is dictated by US dollar sentiment, and the consensus sentiment for 2021 is bearish.  Long-term technical analysis suggests a break of 1.2660 would extend losses to the 2017 low of 1.2050.

The real double fantasy is that historically high and rising government deficits equates to a stronger Canadian dollar.