Weekly Newsletter – October 20, 2023 – Prioritizing Money Supply
This week, a poll was conducted to determine what concerns Canadians the most in their daily lives. Surprise – housing and inflation were the top two greatest concerns! Unfortunately, the question, "How did we get here?" was not part of the survey. I wonder if most Canadians understand the financial and government policy mechanisms that have driven housing prices and inflation to the levels causing this angst.
But let's do a quick review. Back in 2020, the world was shut down – the fear and panic that COVID created was unprecedented globally. Governments around the globe (mostly) determined that giving away as much money as quickly as possible was the only method to prevent a global financial collapse. Meanwhile, almost all businesses were shuttered, except for services supposedly deemed necessary. "Work from home" was adopted, home renovations boomed, and Netflix took off. Fast forward three years, COVID is now in the rearview mirror. Business is back to normal, people are traveling, supply chains have been fixed, and restaurants are busy!
The problem is that we are now paying for all the money supplied by our governments. After the Liberal government was re-elected in 2021, Trudeau actually said that money supply and monetary policy were not top priorities. Instead, families were his top priority. I think he should have delved deeper. By creating all this new money, he has, in fact, harmed families. Rapid money supply growth is inflationary – more money flowing through the system is like turning on a tap at full blast. At the same time, the drain's stopper was closed, so all this new money had nowhere to go except into savings, which historically would not have happened. Thus, pressure is exerted on the system, and the system eventually breaks and results in higher prices – more money chasing the same number of goods and services. Today, the taps have been turned off, the drain fully opened, and money supply is being drawn out of the system faster than it was injected. However, all that spending was created by the federal government issuing new debt. Again, more supply of new debt means prices drop (bond prices), and then yields rise. Government bond yields are used to determine mortgage rates! If our government is paying more for its debt, so will you!
Meanwhile, Canada has experienced unprecedented immigration since 2019. By the end of 2023, there will be almost 1.5 million new Canadians looking for places to live since the beginning of the pandemic. Similar to money supply, adding new money or more people into the pool without expanding or enlarging that pool quickly enough creates an overflow in the form of higher prices. It's a perfect storm – adding more people to the increased debt, and you have a pot boiling over. So perhaps making money supply a priority should have been, and still should be, a priority because that directly affects families.
