Fight the fake

“When you go fill up your car, gas prices are up. That’s pushing inflation back up.”

— Tiff Macklem, Governor of the Bank of Canada, in conversation with Matt Galloway

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.

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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.

Milton and Rose Friedman on Inflation

Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society.

It remains as true now as it [has been throughout history] that a more rapid increase in the quantity of money than in the quantity of goods and services available for purchase will produce inflation, raising prices in terms of that money.

Today, when the commonly accepted media of exchange have no relation to any commodity, the quantity of money is determined in every major country by government. Government and the government alone is responsible for any rapid increase in the quantity of money. That very fact has been the major source of confusion about the cause and the cure of inflation.

No government is willing to accept responsibility for producing inflation, even in less virulent degree. Government officials always find some excuse greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems even remotely plausible. No doubt, businessmen are greedy, trade unions are grasping, consumers are spendthrifts, Arab sheikhs have raised the price of oil, and weather is often bad. All these can produce high prices for individual items; they cannot produce rising prices for goods in general. They can cause temporary ups or downs in the rate of inflation. But they cannot produce continuing inflation for one very simple reason: none of the alleged culprits possesses a printing press on which it can turn out those pieces of paper we carry in our pockets; none can legally authorize a bookkeeper to make entries on ledgers that are the equivalent of those pieces of paper.

Excerpted from the chapter titled “How to Cure Inflation” in Free to Choose: A Personal Statement by Milton and Rose Friedman (1980).

File under “government officials always find some excuse”:

Early in the COVID-19 pandemic, inflation in Canada was sparked by global forces, including supply chain disruptions and a spike in global demand for goods. Russia's invasion of Ukraine last year drove inflation even higher, particularly for energy and agricultural commodities. But domestic forces have increasingly contributed to inflationary pressures. The Canadian economy began overheating as the economy fully reopened. People still wanted to buy goods, and demand for services soared as households tried to catch up on the many services they had missed out on through the pandemic. Employers could not find enough workers to keep up, and businesses were quick to pass on increased costs to consumers.

– Tiff Macklem, Governor of the Bank of Canada, in a speech given to the Toronto Region Board of Trade on May 4th, 2023.

The part that Tiff left out:

In response to the economic shock brought about by the COVID-19 pandemic, the Bank of Canada undertook a range of extraordinary policy actions to provide exceptional liquidity to support the economy and ensure a stable and efficient Canadian financial system. These policy actions resulted in a rapid expansion in the size of the Bank’s asset holdings, which resulted in a corresponding increase in liabilities to fund those assets. Much of that liability expansion was in the form of settlement balances. Reflecting that rapid expansion, on March 23, 2020, the Bank made the unprecedented move of allowing settlement balances to grow unconstrained. Settlement balances increased more than 1,500-fold—from $250 million before the pandemic (0.2% of the Bank’s balance sheet) to a high of $403 billion (about 69.8% of the Bank’s balance sheet)—in just under 12 months.

– Parnell Chu, Grahame Johnson, Scott Kinnear, Karen McGuinness and Matthew McNeely in Settlement Balances Deconstructed, a Bank of Canada Staff Discussion Paper, June 9th, 2022.

The pale green area in the chart above (labelled “Payments Canada members’ deposits”) reflects the unprecedented growth in settlement balances, i.e., quantitative easing, which dramatically increased the supply of money (see below for M2 in Canada). Inflation is not an increase in prices. It is an increase in the supply of money beyond an increase in the supply of goods and services. When more dollars are chasing fewer goods, prices rise. As Milton has taught us so well, “Inflation is always and everywhere a monetary phenomenon.”

Repeat after Milton

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is a disease. It’s a dangerous disease for a society. It is sometimes a fatal disease for a society. It’s a disease that if allowed to rage unchecked can destroy a society, and we have many such examples.”

— Milton Friedman, winner of the 1976 Nobel Memorial Prize in Economic Sciences

And one of these examples is the once beautiful country in which I was born.*

Viruses do not wreck economies. Government overreaction wrecks economies. People do not “lose their jobs” to a pandemic. People’s jobs are stolen from them by governments which enforce scientifically and morally unjustifiable lockdowns. Governments follow this injury by printing enormous sums of money to support the people that they have forced into unemployment. In this one-two punch, governments decrease the production of goods while simultaneously increasing the supply of money chasing those goods. This causes inflation. Inflation is not merely a disease. It is theft on a grand scale. Government reserves to itself the monopoly right to print money, and therefore only government can debase the currency. Debasement does not happen by accident. It is carried out as a willful act by those in power over us. It is morally corrupt. It is evil.

Related reading: The Ethics of Money Production by Jörg Guido Hülsmann.

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*In Zimbabwe, inflation rose from an annual rate of 32% in 1998, to an estimated high of 11,200,000% in August 2008 according to the Central Statistical Office. This represented a state of hyperinflation, and the central bank introduced a new 100 trillion dollar note. In January 2009, in an effort to counteract runaway inflation, acting Finance Minister Patrick Chinamasa announced that Zimbabweans would be permitted to use other, more stable currencies to do business, alongside the Zimbabwean dollar. In an effort to combat inflation and foster economic growth the Zimbabwean dollar was suspended indefinitely in April 2009. In 2016, Zimbabwe allowed trade in the United States dollar and various other currencies such as the rand (South Africa), the pula (Botswana), the euro, and the pound sterling (UK).