Read on Twitter
There’s a lot going on in Mr Poilievre’s video, but let me unpack a little on his concerns regarding quantitative easing and his claims that wealthy investors are profiting on bond buybacks.
1/ https://twitter.com/pierrepoilievre/status/1350412488089751553
1/ https://twitter.com/pierrepoilievre/status/1350412488089751553
Mr Poilievre correctly notes that the Bank, as Canada’s fiscal agent, sells government bonds and treasury bills to investors (the primary market). The Bank also buys bonds from investors (the secondary market). It is possible the Bank is buying bonds that it had just issued.
2/
2/
Mr Poilievre worries that the Bank is selling something for $100 and then buying it back for $105, and that it is doing this on a very large scale. He feels that the large investors that are buying on the primary market are making large profits, at our expense, this way.
3/
3/
However, as the Governor noted, these are competitive auctions that are oversubscribed. The scenario set out by Mr Poilievre cannot happen. Arbitrage prevents this.
4/
4/
If an investor can simultaneously or near simultaneously buy a financial asset and then resell it at a higher price, the investor is earning a *risk-free* profit. This would literally be getting money for nothing, and everyone wants in on something like that.
5/
5/
The instant an arbitrage opportunity presents itself, a competitive market will correct it. Because if anyone sees a risk-free way to immediately turn $100 into $105, they want in on the action. Market forces then cause the prices to correct.
6/
6/
Investors immediately start offering to sell their bonds to the Bank. And while they would love to sell at $105, they would also make profit at $104, or $103, or even $100.01. The Bank doesn’t have to pay $105 — it will accept the lowest-price offers.
7/
7/
Arbitrageurs will actually work both sides of the transaction. If they can immediately sell the bonds for $105, they’d be willing to pay $104.99 for them. So what happens is the initial price for the bond rises and the resale price falls to the same point.
8/
8/
Now, I assume Mr Poilievre is not opposed to competitive capital markets in principle. And while financial markets don’t always work as well as we would like, arbitrage opportunities generate the purest form of efficient competition there is.
9/
9/
So, despite his attempt at a simple explanation and selected statements from the Governor, the scenario Mr Poilievre described does not, and cannot, occur in financial markets.
10/
10/
As for his comments regarding inflation hurting us little people, I tackled that subject in an earlier thread.
11/ https://twitter.com/tim4hire/status/1345805552262197251
11/ https://twitter.com/tim4hire/status/1345805552262197251
Whether Mr Poilievre is being wilfully disingenuous or whether he is just obtuse is beyond my ability to judge. But this is a particularly dangerous area for disinformation, as it politicizes the Bank.
12/
12/
Economies run on certain expectations regarding the future, including expectations regarding inflation. The confidence people have in the economy depends, in no small part, on how the Bank operates.
13/
13/
For instance, it is possible for the Bank to literally create enough Canadian currency to pay off all government debt (federal, provincial, municipal, whatever) denominated in Canadian dollars. But the Bank isn’t doing this.
14/
14/
The reason is that suddenly flooding the economy with more than $1 trillion (just for federal debt), roughly 4x the value of what we produce each year, would cause hyperinflation. Zimbabwe, here we come. Want a coke? $5,000, please.
15/
15/
If people have any real fear that something like this will happen (even to a much smaller degree), they will change their economic decisions and investments to reflect that risk. And this will lower GDP growth and make us poorer.
16/
16/
For this reason, while the Bank’s policy target is set periodically by the Government, how the Bank conducts monetary policy and how it operates are independent of any political interference. And independent of any *perception* of political interference.
17/
17/
Mr Poilievre, however, seems to be insinuating that the Bank is implementing a political agenda; helping the current government achieve its policy goals as opposed to independently conducting monetary policy to achieve its stated objectives.
18/
18/
It is entirely open to Mr Poilievre to criticize the current government’s economic policies. There are undoubtedly many legitimate points to criticize. But it is dangerous to undermine the Bank to score a political point.
We need better opposition than this.
19/19
We need better opposition than this.
19/19
