“When you go fill up your car, gas prices are up. That’s pushing inflation back up.”
In today’s edition of The Current, too-deferential host Matt Galloway pretends to interrogate the Governor of the Bank of Canada about inflation while dutifully running damage control for him. In the flagship morning radio show of Canada’s state broadcaster, we find soft-spoken Tiff Macklem gently patronizing Canadians with pablum and disinformation. Though he holds a PhD in Economics from the University of Western Ontario, Tiff pretends that his understanding of inflation is the same as the average person’s. Witness the quotation above, taken from this interview, which sounds like the unsophisticated opinion of any man in the street—and is an outright falsehood.
Inflation is not caused by the increase of any one price, as Tiff very well knows, even if it is the price of a fundamentally important commodity. Inflation is not even a general increase in prices. Rather, inflation causes a general increase in prices. Inflation is a rapid increase in the supply of money relative to the supply of stuff. It is a debasement of the currency, a weakening in the purchasing power of the dollar. Inflation is always and everywhere a monetary phenomenon.
Tiff makes himself out to be the good guy doing the difficult and thankless job of wrestling down inflation. This is ironical because he quietly played a large part in causing the inflation that he is now outspoken about containing. By buying a huge volume of Government bonds—including on the secondary market (a practice called quantitative easing)—Tiff rapidly expanded the balance sheet of the Bank of Canada to unprecedented levels during the Covid pandemic and injected massive liquidity into an economy that was already juiced by historically low interest rates.
Behold the sudden and dramatic increase in the Bank’s holdings of Government of Canada bonds in 2020-2022, which flooded the economy with hundreds of billions of dollars of new money at the same time that productivity was in free-fall: a recipe for inflationary disaster. To its credit, as the chart affirms, the Bank of Canada is now actively engaged in quantitative tightening (selling its bonds, or allowing them to mature) which is deflationary.
In response to the criticism by Pierre Polievre, leader of the Federal Conservative Party and probable next Prime Minister of Canada, that the Bank’s policy of buying Government bonds at the height of the pandemic—”printing money” in his words—caused the inflation that now afflicts the country, Tiff said:
We took emergency measures in the depths of the most severe recession that this country has ever experienced. It worked. We came out of that. Have we been surprised by how much inflation there is? Yes. It’s happened in Canada. It’s happened around the world. And we have responded very forcefully to get inflation back down. It’s working.
I find this response very telling. Tiff did not deny that buying Government bonds was tantamount to “printing money.” He also did not deny the causal connection between “printing money” and inflation. If anything, he tacitly conceded the validity of the logic of the Opposition Leader. He knew that the Bank’s Covid policy was inflationary, which is why quotations such as the one at the top of this post should be infuriating to all Canadians. It’s as if we are to believe that a general increase in prices is a force of nature, like a tsunami, and not something that results from our own poor decisions. If we have the monetary tools to combat inflation (“very forcefully”) is it not logical that we also have the tools to exacerbate it (“very forcefully”)? They are the same tools, after all.
In my view, this charade of an interview had only one purpose, which was to set expectations. In the words of Ceyda Oner, one-time deputy division chief in the IMF’s Finance Department:
Central bankers are increasingly relying on their ability to influence inflation expectations as an inflation-reduction tool. Policymakers announce their intention to keep economic activity low temporarily to bring down inflation, hoping to influence expectations and contracts’ built-in inflation component. The more credibility central banks have, the greater the influence of their pronouncements on inflation expectations.
It remains to be seen how credible Tiff is in the eyes of the Canadian public. I for one have written him off.