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It constantly seems like the BoC and the Government are at odds when it comes to inflation. Government spends, gives out cash to help (grocery rebate program) a

by xemoka 3y ago

It constantly seems like the BoC and the Government are at odds when it comes to inflation. Government spends, gives out cash to help (grocery rebate program) and the BoC raises rates. I guess the grocery rebate is aimed at lower incomes, and it’s redistribution, but that’s not the only example. The fund and spend, but not too much growth conflict throws me for a loop.

osigurdson 3y ago
I'm certain if this is the intent, but the end result is a smaller middle class.
itsoktocry 3y ago
>The fund and spend, but not too much growth conflict throws me for a loop. This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.
- belval 3y ago
  I don't want to delve into politics, but I would not call the BoC unaccountable. Their goal is to juggle employment and inflation by setting the interest rates. Inflation is/was high and unemployment was low, that calls for increased interest rates (especially as the US is raising rates anyway). The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
  - itsoktocry 3y ago
    >I would not call the BoC unaccountable To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so. Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
    - belval 3y ago
      > Have the people of Canada been asked what the best balance of inflation and unemployment is? I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party. The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.
no_wizard 3y ago
In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at) This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank. Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money. [0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting [1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.
- gustavus 3y ago
  > In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
Tiktaalik 3y ago
The independent actions are impacting different parts of the market. The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis. Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages. (now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)
kypro 3y ago
The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion. In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist. In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government. But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt. I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing. It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.
- mitthrowaway2 3y ago
  I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
- 3y ago

by xemoka 3y ago

osigurdson 3y ago

I'm certain if this is the intent, but the end result is a smaller middle class.

itsoktocry 3y ago

>The fund and spend, but not too much growth conflict throws me for a loop. This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.

belval 3y ago
I don't want to delve into politics, but I would not call the BoC unaccountable. Their goal is to juggle employment and inflation by setting the interest rates. Inflation is/was high and unemployment was low, that calls for increased interest rates (especially as the US is raising rates anyway). The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
- itsoktocry 3y ago
  >I would not call the BoC unaccountable To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so. Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
  - belval 3y ago
    > Have the people of Canada been asked what the best balance of inflation and unemployment is? I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party. The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.

no_wizard 3y ago

In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at) This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank. Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money. [0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting [1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.

gustavus 3y ago
> In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.

Tiktaalik 3y ago

The independent actions are impacting different parts of the market. The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis. Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages. (now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)

kypro 3y ago

The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion. In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist. In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government. But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt. I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing. It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.

mitthrowaway2 3y ago
I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
3y ago