Thread by @RomanchukBrian

I want to write a short rant, but my internet connection is down (and I don’t want to blow through my wireless data plan).
So I’ll do it here for now...

I keep seeing arguments like “the Bank of Canada is propping up the bond market, what would happen if they stop?”

That’s like saying “the 46 defence wouldn’t have been good if the Bears defenders couldn’t tackle people.”

The point is: that’s the way the system works.

(Shameless plug: Buy the inexpensive “Understanding Government Finance” so that you can, umm, understand government finance.)

books2read.com/understanding-…

UGF is somewhat distinctive in that I do MMT-style operations analysis on a simplified version of the Canadian system.

The main thing to note: what people call “reserves” are *normally* zero in the Canadian system.

That is, private banks aimed to keep their balance with the payments system/BoC zero at the end of the day.

Since the Ministry of Finance banks with the BoC, that means the BoC *has* to cancel all net transactions.

That is, if they issue a bond (and do nothing else), the BoC *has* to send money to the banking system to compensate. Normally - buy bonds, repos (relatively small in Canada).

So guess what: if the MinFin borrows, that is offset by BoC “lending” (counting secondary market bond buying as lending, which it de facto is).

So the BoC is always there.

The difference now is that the BoC is doing what all the other cool New Keynesian kids are doing, and launched QE. So purchases are even bigger, to create excess bank settlement balances (“reserves”).

Let’s say some brain surgeon had the idea of “weaning the MinFin off the BoC.” What would that entail?

They would launch bond sales to build up their balance. But the BoC needs to offset this.

So the BoC bulks up its balance sheet, and almost nothing changes. The only effect on the private sector is that banks get corporate welfare based on flipping bonds from auction to the BoC.

I think we should get banks off welfare. Perhaps they could spend less on takeout coffee.

Correction: I am perpetually behind the times. It’s the Department of Finance.

The Receiver General is the one with the bank account. Which is a cool title, brings to mind a militarised CFL offence.

Wrote up the above discussion in long form. Main advantage versus the previous thread is that I can refer to the BoC balance sheet chart.

“Central Banks are Always Involved in Government Finance”

bondeconomics.com/2020/10/centra…