Thread by @tim4hire

This is a pretty slick production, but it is not entirely accurate. A few points to note where @AndrewScheer has gone wrong. (🧵).

TL;dr: The Bank probably wasn't perfect, but Mr Scheer's characterization of what it did is largely wrong.
#cdnpoli #cdnecon

1/12

https://twitter.com/AndrewScheer/status/1577388971335770117

First, Mr Scheer takes issue with the Bank of Canada's claim that it did not "flood" the economy with "billions of dollars of new currency."

Except that this claim is correct. There was not a major increase in the amount of currency. The money printer was not going "brrr".

2/12

Currency outside of banks went from about $90 billion before the pandemic to about $105 billion at the end of 2020, $111 billion at the end of 2021 and $116 billion in July of this year (not seasonally adjusted). Not hundreds of billions of new cash.

3/12

What did grow, as the Bank already explains (see bankofcanada.ca/2022/06/unders…) is that settlement balances grew. Settlement balances are very special accounts that only certain financial institutions like banks have, and are used for payments systems.

4/12

Why did the Bank of Canada do this? To maintain the proper functioning of the government bond market. Who benefits from this? Mr Scheer says "primarily the government" but this is incorrect. The entire financial system, and through it the economy, benefits from this.

5/12

The yield on a Government of Canada bond will always be the lowest yield on any domestically issued marketable bond denominated in Canadian dollars of a similar maturity. This is because it will always be the lowest-risk bond of that type.

6/12

Do you want a 5-year fixed rate mortgage from BMO? The interest rate on it will be slightly higher than the yield on a 5-year bond issued by BMO, which in turn will be somewhat higher than the yield on a 5-year Government of Canada bond.

7/12

So, if the government bond market isn't functioning properly, corporate finance, mortgages and other debt markets also stop functioning properly.

This would be bad.

8/12

Mr Scheer also says "There were many economists who called out the Bank of Canada's policies."

Well, not really. Some economists started to call for QE to end sooner than it did. But there was general consensus that exceptional monetary stimulus was needed.

9/12

Almost everything closed at the start of the pandemic. The economic disruption was massive and unprecedented.

Mr Scheer notes that Bank officials were predicting that Canada was going into a deflationary crisis. Initially, Canada *did* briefly go into deflation.

10/12

We avoided a deflationary crisis. And because deflation is worse than high inflation, this is a big success. The economy bounced back from 2020 faster than it had in previous recessions. Through exceptional monetary policy interventions, a crisis was averted.

11/12

Could the Bank of Canada have done a better job? Probably. Hindsight, yadda yadda. But it is now taking action to bring inflation down, with quantiative tightening along with higher interest rates. The Bank's balance sheet is (gradually) going back to more normal levels.

12/12