We’re all in this together. Okay, we weren’t in it together — but we’re really sorry about one of the greatest transfers of wealth in history. That was the takeaway from a Bank of Canada (BoC) speech earlier this week, by Governor Tiff Macklem. In a totally not ironic speech on inequality, he suggested quantitative ease can expand inequality. Shocking stuff, right? Who could have guessed?
What Is Quantitative Ease (QE)?
Quantitative ease (QE) is an unconventional policy tool to increase inflation. Central banks buy government bonds to inject cash into the economy. By adding demand from a buyer with unlimited capital, they drive bond prices higher. The result is falling yields, and it becomes cheaper to borrow. QE lowers the cost of borrowing beyond the mechanics of a rate cut, flooding the system with more cheap debt.
The flood of cheap money is to stimulate demand for large and expensive goods. Think housing and cars, which have been on fire during the pandemic. Increased demand pushes goods higher, producing more inflation. It’s designed to be used when interest rate cuts fail to stimulate demand.
A big problem with QE is some demographics are better positioned to benefit. That demographic is people with assets, who tend to be older and wealthier already. The other demographic are people who will feel the burn. These are people with few to no assets, such as the young and poor. Central banks have been reluctant to discuss this angle. Instead, they prefer to focus on the trickle-down effect it produces.
Bank of Canada Suggests QE Can Cause Wealth Inequality
During his speech, the Governor finally suggested QE can cause wealth inequality. “QE can boost wealth by increasing the value of assets such as the investments Canadians have in their registered retirement savings plans or company pension plans,” he said.
“But of course, these assets aren’t distributed evenly across society. As a result, QE can widen wealth inequality. We will look closely at the outcomes of QE here and elsewhere and will work to more fully understand its impact on both income and wealth inequality.”
Bank of Canada Reviewing QE After Support To Ban Its Use Picks Up
The Governor isn’t just examining his use after he unexpectedly observed the gap. QE’s contribution to wealth inequality was well-known before Canada’s rollout of the program. The resulting record home sales were the desired impact, not an accident. People are now informed enough to challenge the central bank narrative though.
Earlier this year, Vancouver-based housing activist Raymond Wong petitioned to restrict the central banks’ use of QE. In just a short period of time, it gained enough support, the government now has to formally respond. The governor’s statements come at a time where it appears they’re trying to claim responsible use of the program, before it gets taken away from them.
“But wasn’t it needed?” you’re probably wondering. The BoC’s research shows an interest rate cut takes 12 to 18 months to work its way to the market. If they have no more room to cut after it fails, then they are supposed to use QE. This time Canada used it along with rate cuts, and it still hasn’t been long enough for the impact of the rate cut.
We’ve only known QE causes greater wealth inequality for a decade though. How would anyone expect the Bank of Canada governor to know that?
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3 bedroom condo townhouse with a garage sold for 608k last month near me in KW. It was bought last year in June for 428K . No renovation at all . How long it takes to save those 180k working a regular job ? What is the point of working and saving in Southern Ontario ?
I’m in north Waterloo and townhouses are 790-1.05 in my neighborhood… it’s just wild. Mind you up here is likely one of the only places in Ontario where it can be slightly justified due to family income levels.
This is what happens when people jump the gun and start doing things without a problem even being recognized. Idiots!
I highly disagree that QE will help my RRSP. I’m trying to renew and I being offered rates less than 1%. The only thing that will help me save money for the future is a better paying job.
Err do you even know what an RRSP is? It’s just a tax sheltered retirement account, there is absolutely nothing to renew at all. Maybe an institution suckered you into one of their funds or told you to buy GICs?
You really need to look into getting some better financial knowledge for your future…. holding ZSP alone in an RSP will generate an average of 11%/annum since 1932 and over the last 13 years much higher.
The 1.3 million newcomers the Liberals are bringing in by 2023 to suppress wages will ensure that no new job you find will be better paying.
Is this all part of the planned “Great Reset” in response to the Covid crisis. Reminds me a bit of the 9/11 crisis and the subsequent invasion of Iraq.
Note the smirk on Poloz face when housing is questioned:
https://financialpost.com/news/economy/prices-may-be-rising-but-heres-why-stephen-poloz-isnt-too-concerned-about-it
No questions on housing here in this tax paid infomercial. Lots of forced smiles though:
https://www.youtube.com/watch?v=XqDe_ANny5I
Not sure how Pierre Poilievre answers tough questions but some of Tiff Macklem’s answers are complete BS:
https://www.youtube.com/watch?v=uckM5i_z6ek
https://www.youtube.com/watch?v=62JSstSp-qA
Something more to chew on. Have not quite digested all of this but the part of financialization rings true:
https://www.abc.net.au/radionational/programs/bigideas/can-democracy-tame-twenty-first-century-capitalism/12266862
Great article/essay. Thanks for the tip about Raymond Wong’s petition – just signed.
QE is a frankensteinian experiment with disastrous and inequitable results.
Most of the people who are adversely affected by it don’t quite understand the intricacies of the deception, but the anger is palpable and worrisome because it usually brings out the worse in people and is often manifested in social and political disorder.
I hope people wake up and do the protests across the country.
But people who can raise voice are already benefitted and poor nobody cases irrespective of in first world or third world.
You don’t pay for political campaigns so will just keep revolving across new articles and understand what wrong has happened to you after decades of it has hit you. And by that time, it’s anyway too late.
Shameless government policies that are not able to control home price rise as it benefits section of people who invest in them I feel.
If they raise interest rates the people that want to buy their first house will pay higher mortgage rates but the house price might be possibly lower net effect is zero.
Second thing that may happen is some people may go into bankruptcy and not afford their mortgage payments causing some people to eventually go from middle-class into poverty for a decade. Third thing that might happen is banks will be stricter in lending money potentially to first-time buyers. Raising interest rates makes things harder for everyone including the government paying back the national debt.
I think it would be really foolish to raise interest rates suddenly it would be less jobs potentially also. The interest rates are 3/4 of a percent higher than they were in early February. Home prices will cool down this summer in July or Aug.
How about the people that think ahead and actually save money ? I remember the time when interest rates where 4% . Real estate was much more affordable and it made sense working for a paycheck.
I have never seen such a stooge as our BoC Gov. This guy is a MORON!
We’ve had the best in the world for decades when it comes to our BoC, but this guy really is a train wreck. He hasn’t said anything relevant since he came to power, whatever that is. He Actually created the latest RE FOMO by telling the country that the rates won’t go up for a couple of years. This guy has a tiny brain!! He is not able to think what he says may have an impact on the economy!
He’s been working at the BOC for longer than any other governor if I’m not mistaken. He’s just a sociopath that doesn’t practice his speeches or anything.
100% it is Jim.
If they raise interest rates the people that want to buy their first house will pay higher mortgage rates but the house price might be possibly lower net effect is zero.
Second thing that may happen is some people may go into bankruptcy and not afford their mortgage payments causing some people to eventually go from middle-class into poverty for a decade. Third thing that might happen is banks will be stricter in lending money potentially to first-time buyers. Raising interest rates makes things harder for everyone including the government paying back the national debt.
I think it would be really foolish to raise interest rates suddenly it would be less jobs potentially also. The interest rates are 3/4 of a percent higher than they were in early February. Home prices will cool down this summer in July or Aug.
We live in one of the best countries with the most opportunities for young people in the history of this nation. There will always be people that complain and you know complaining gets us nowhere. We are 100% responsible for everything that happens to us in our life let’s take control and make progress.
They didn’t call it QE back when Hayek and Mises wrote their Noble prize winning economics research and books, but both talked about the inequity effects of Central Bank bond buying… There is no way this should be a surprise
Guys, this is just a smokescreen. Take care your health, store real money not currency. The system is broken. Nobody can do anything at this point. Thats why everyone including politicians are talking about a reset. This reset will happen. Everyone will lose, rich will lose even more except people close to monetary control.(Cantillon effect). Then wealth will be redistributed via some form of socialism. Probably high tax and UBI. If governments can agree on high tax all over the world, people wont flee to other countries. If not, people will flee to lower tax countries. Goverments create these problems on purpose and when everything fails, they will support people and pretend that they are always there to support us. So they will be heroes. However this is not something new. It is just a human history and governments have to deal with this kind of tool to handle human greed. This is called long term debt cycle. https://www.investopedia.com/terms/c/credit-cycle.asp