Bank of Canada rolls the dice with in­ter­ven­tion

The Standard (St. Catharines) - - Opin­ion -

If des­per­ate pan­demic times de­mand des­per­ate govern­ment ac­tions, the Bank of Canada just de­liv­ered big-time.

It’s print­ing money out of thin air to fund an es­ti­mated $200-bil­lion-plus spend­ing-spree in­tended to keep the na­tion’s econ­omy alive.

The best name for this his­toric and, frankly, alarm­ing in­ter­ven­tion is quan­ti­ta­tive eas­ing, and ev­ery Cana­dian should pay close at­ten­tion to what amounts to a roll of the dice by their cen­tral bank.

That’s be­cause while quan­ti­ta­tive eas­ing is jus­ti­fied un­der the cir­cum­stances, it’s un­con­ven­tional, con­tro­ver­sial and highly risky. Our 85-year-old cen­tral bank has never tried it be­fore, and no won­der. It may cure what’s ail­ing the Cana­dian econ­omy to­day only to in­fect it with new ill­nesses a year from now.

It all be­gan at the end of March when the Bank of Canada an­nounced it would spend at least $5 bil­lion a week in the com­ing months to buy Govern­ment of Canada bonds on the open mar­ket. In other words, it would buy up much of the fed­eral govern­ment’s debt.

That ac­tion was meant to ease the pres­sure on the fed­eral govern­ment’s grow­ing debt bur­den while in­ject­ing badly-needed cash into an econ­omy rav­aged by the COVID-19 pan­demic.

And that part of quan­ti­ta­tive eas­ing makes sense be­cause it works. The mind-bend­ing part of it comes with the re­al­iza­tion that all these bil­lions of dol­lars are be­ing cre­ated dig­i­tally.

It’s as if Bank of Canada Gov­er­nor Stephen Poloz had donned a ma­gi­cian’s cape, put his hand into a top hat and — poof — the Cana­dian econ­omy had what it needed to buy its way out of this cri­sis.

What Poloz did was cor­rect, ac­cord­ing to ex­perts such as former Bank of Canada gov­er­nor David Dodge. At the time of Poloz’s in­ter­ven­tion, the rapid spread of COVID-19 across Canada had al­ready trig­gered govern­ment-im­posed busi­ness shut­downs, huge job losses and what could be­come the na­tion’s sharpest eco­nomic down­turn ever.

The fed­eral govern­ment was mo­bi­liz­ing its fis­cal forces to prop up rev­enue-starved busi­nesses and ex­tend a fi­nan­cial life­line to the newly un­em­ployed, whose num­bers could reach 2.8 mil­lion this month.

Other gov­ern­ments around the world were do­ing the same. And other cen­tral banks, most no­tably in the United States, the United King­dom and the Euro­pean Union, were also play­ing their part by mak­ing new money to ease the debt loads of their gov­ern­ments.

The Bank of Canada dou­bled down on that strat­egy this week when it ex­panded its bond-buy­ing pro­gram to in­clude pur­chases on the open mar­ket of the debts of pro­vin­cial gov­ern­ments and cor­po­ra­tions. They need help, too, but it will mean pulling an­other $50 bil­lion in new, dig­i­tally-cre­ated money out of Poloz’s magic hat.

The sheer mag­ni­tude of all this newly man­u­fac­tured cash is wor­ri­some. If coun­tries can get ev­ery­thing they want by sim­ply print­ing more money, why doesn’t ev­ery­one do it all the time?

The an­swer is the world’s fi­nan­cial mar­kets wouldn’t let them get away with it. The U.S. Fed and the Euro­pean Cen­tral Bank are con­sid­ered to be pow­er­ful enough to do what they deem nec­es­sary.

Canada prob­a­bly won’t be cut the same slack. The value of its cur­rency may slide if quan­ti­ta­tive eas­ing lasts too long. In­fla­tion could rise to un­man­age­able lev­els even as mil­lions of Cana­di­ans re­main un­em­ployed and the na­tion’s eco­nomic en­gines are strug­gling to fire on all cylin­ders.

This spring, the Bank of Canada had no choice but to ex­per­i­ment with quan­ti­ta­tive eas­ing. In short or­der, it must pro­vide Cana­di­ans with a plan and timetable for get­ting out of it.

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