What the end of QE will mean for Canada (as explained by the Bank of Canada) - Macleans.ca
 

What the end of QE will mean for Canada (as explained by the Bank of Canada)

Six things about the Fed, QE and its influence on Canada


 

Bank of Canada Deputy Governor John Murray gave a speech Tuesday, the gist of which was that Canada has benefitted in the past five years from a world awash in easy money. But we’ll have it even better, he says, when countries — namely the U.S — start to turn off the taps.

The speech to the Canadian Association for Business Economics put a good-news spin on the panic that has swept through global markets since May when Federal Reserve Chairman Ben Bernanke suggested the U.S. might start to cut back on the $85-billion monthly bond-buying spree known as quantitative easing some time this year.

The reaction, dubbed the “taper tantrum,” sent U.S. stocks and bond yields soaring and boosted mortgage rates. It’s been felt here in Canada too, through rising mortgage rates and a lower dollar. But the effect has been most pronounced in such emerging markets as Brazil, India and Indonesia, which have seen their currencies fall dramatically as investors pull out their cash. Last week, Brazil announced a $60-billion intervention to prop up its currency, the real. It has prompted warnings, including this one from International Monetary Fund head Christine Lagarde that the U.S. and other advanced economies should hold off on plans to tighten their monetary belts.

Not to worry, Murray says, it will all end well, particularly for Canada and for any country that has managed to keep its fiscal house in order during the era of unconventional monetary policy.

The end of quantitative easing in the U.S. and the eventual end to low interest rates here in Canada, he says, “should be viewed positively, as a sign that the global economy is well on the way to recovery and that it is time for interest rates to begin normalizing.”

Here are some highlights from his speech:

  • Despite the market panic surrounding the mere prospect of the end of quantitative easing, the process, he says, will be gradual. “The exit would be preceded by a gradual decreasing in the size of asset purchases, followed by the end of asset purchases, a gradual withdrawal of excess liquidity from the system, measured increases in the federal funds rates and, eventually, a normalization of the Fed’s balance sheet.”
  •  There will be spillover of the Fed policies around the world, including in Canada, but spillovers can be good. “Actions taken by one country that are in its own long-term interests (keeping its house in order) typically benefit others (keeping the neighbourhood safe).”
  •  Governments and organizations, including the IMF, who have called for more global co-ordination among central banks when it comes to ending unconventional monetary policies, are misguided. “Following the advice of their critics would oblige the United States and several other [advanced economies] to surrender some of their monetary policy independence. In our view, however, this would be a Faustian bargain.” A better solution, he says, should be “allowing exchange rates to float, while preserving the free movement of capital and monetary independence for all.”
  •  So far, says Murray, America’s extraordinary simulative monetary policies have been good for Canada, since the influence of lower interest rates and a higher loonie “were more than offset” by stronger demand in the U.S. for Canadian exports, a boost in asset prices (such as housing) and a commodities boom. “Fed easing was a net positive for Canada, making a difficult situation better.”
  •  But the end of quantitative easing will be even better still, he says. Interest rates will go up and the loonie will fall. But the improving U.S. economy will “more than compensate from a drag from higher interest rates. Stronger external demand, coupled with downward pressure on our currency and support for commodity prices from a global economic recover, will provide the lift.”
  • Granted, he warns, it’s unlikely to all go perfectly as planned. Markets have a long history of overreacting to such changes — which have caused things such as the price of stocks or bonds or houses to collapse at various points in the past. But this time is different, Murray says. Central bankers are committed to more transparency and better communication about where monetary policy is headed, which should lead to fewer nasty surprises. The end of quantitative easing in the U.S. “should be one of the best telegraphed events in monetary history,” he says. Whatever pain is felt in the economy will be “transitory, with markets settling at levels consistent with fundamentals after a short period of time.”

Let’s hope he’s right.

 

 


 

What the end of QE will mean for Canada (as explained by the Bank of Canada)

  1. Sorry, folks. I studied the same chicken entrails conducted the same analysis and came to a different prophecy forecast.

    • Same here. Like 2007 and early 2008, when I went to cash as I could see 2008 Sep crash coming, I am again in a high cash position. Best not to put too much credence into economists these days as they all ignore the utter failure of the Bernanke Doctrine which is essential the fraud of printing money for government debt.

      http://en.wikipedia.org/wiki/Bernanke_doctrine

      No legitimate lender is lending USA the trillion plus each year. Its entirely a currency devaluation tax, an inflation tax on everyone doing legitimate business. And unsustainable. Its all fraud.

  2. @neuroticdog – I love your pithy posts. I have my own definition of an economist.

    economista practitioner in the dismal science of predicting what happened yesterday.

    I remember when Allen Greenspan et. al. were proclaimed by TIME magazine as “The Committee To Save the World”.

    In hindsight, maybe that was a mistake, like the time they anointed Adolf Hitler with the “Man of the Year” honour.

    Hey — sh*t happens. Or, if one is talking about a paradigm shift, Hey — shift happens.

    • Good post as most economists are employed by people profiting from the propaganda and deception. US Fed has to QE print money so the governemtn doesn’t fail. The result is an inflation tax on the currency. Debt is never free, jsut a mater of who and how it is paid for.

      Adolf had the same prolem Obama has, being bankrupt, devaluing currency Hittler needed expansion to get more acceptance of the Mark so he could print more. It relied on funding military via expansion of currency.

      Same reason so many want war with Syria and Iran. Bankers would love to reneg on the 100s of billions Iran has in credits, as they did with Libya. Libya was about a no debt Libya bank refusing to carry depreciating USD reserves and getting oil cheap for fiat currency. Bet a lot of Libya 144 tones of gold is missing, and maybe even why the temporary dip in gold prices.

      The reality is the western monetary system is morally, ethically and financially bankrupt. Its only now a mater of time before J CU PIIIGGGS in debt countries all go bankrupt, one at a time.

  3. we need to pay off our debts, buy up some gold like china and russia or we are screwed when the dollar collapses

    • Yep, just go to major Canadian banks and buy physical gold. Do NOT buy certificates. Certificates are scams as there is no real gold behind them. The scam was started to depress gold prices, as gold should be $3000/oz but the virtual certificate fraud keeps prices down. But as the system collapses, so will certificates.

      Don’t use the Canadian Mint, their prices are utterly stupid greedy government prices. Gold, real money the governments can’t just create for fraud and perpetual devaluation.

  4. He is missing a huge point in above. But first, I hate the term QE/Quantitative Easing. It is deceptive. I much prefer the term electronic counterfeiting for buying US Treasure debt no one else is buying. If you or I paid our monthly debts with photo copied no value money would we not be called counterfeiters?

    But to the point of QE, it increases money supply but without any value, it will eventually become hyper inflationary as fiat money loses value. As money is like stock in an economy. If you just create twice as much, then each existing share is ultimately worth 1/2 as much.

    As Bernanke took office in 2006, then his economics of fraud interest rates and money creation caused the 2007 credit crisis, then the 2008 crash. BTW, I made a lot of money seeing this coming as I got lots of quality stocks ever so cheap as I was in cash for the crash.

    This fraud caused the depression. With inflation pressures mounting, it was controlled by depressing the economy as people didn’t get value out of QE, they got 2006 wages in in much less value todays wage.

    http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

    Economists want to ignore the above, but hey, they do push good propaganda. But the 2006 money print for debt, the Bernanke Doctrine caused this depression. And when you reflect on inflation and currency loses, we never left the Great Debt/Currency Fraud Depression of 2007-20??.

  5. Young people should save gold. The system is bankrupt, printing thin air money in the ruse of solvency. Our fiat fraud money system is going to fail. Might take 10 years, but fiat money is going to devalue very fast into hyper-stagflation.

    Sort of like 1933, when currency was devlaued form $19 / ounce of gold to $35 / ounce of gold, 75% overnight devaluation of money. Imagine buying $35,000 of gold in 1971 and today its worth $1,400,000 CAD…..gold, oil, food, homes didn’t go up in cost, the value of money is a steady stream fraud, and as of Bernanke/2006, its accelerated.

    USD and CAD “thin air money” dollars are now created faster than we use sheets of toilet paper. Isn’t going to be that many more years before todays fiat money fails. Eventually, the debtor fraud nations will fail.