Increased money supply raises inflation concerns

The money supply in Canada and the United States has increased significantly, and some believe that inflation will inevitably continue to rise.

The Bank of Canada tripled its balance sheet between early March and the end of April 2020 as the federal government’s response to the pandemic created a large deficit. This resulted in a 30% increase in the cash and checking money supply. This is far more than the usual 7% annual increase in recent years.

According to Philip Cross, a senior researcher at the McDonald’s Laurier Institute, traditional economics suggests that inflation needs to continue.

“We all grew up believing that Milton Friedman quoted’inflation as a financial phenomenon anytime, anywhere.’So when the money supply is growing so rapidly, we stand up. We need to be careful, “Cross said in an interview.

“With the surge in the money supply in both Canada and the United States, those who still believe in the Quantity Theory of Money, who consider the money supply to be a major determinant of inflation, need to worry about something. . “

The Quantity Theory of Money thinks that the money supply multiplied by the speed at which it is used is equal to the average price level multiplied by the volume of transactions in the economy. Simply put, if other factors are constant, inflation will increase as the money supply increases. As more money circulates in the economy, consumer demand and spending will increase and prices will rise.

So far, the reason more money isn’t causing inflation is that anti-pandemic measures are hampering normal spending. Still, some commodity prices have skyrocketed in recent months.

William Robson, President and CEO of the CD Howe Institute, watches the numbers carefully.

“Canada’s money supply seemed to have a very interesting ability to predict changes in the economy and inflation, so I wrote about this on a regular basis,” Robson told The Epoch Times. Told.

This money supply is rising, according to all measurements.

“That is, we can see that inflation expectations have risen considerably. Bond investors are starting to get a little more nervous about inflation,” he said.

“If interest rates rise and this growth rate continues, that will be one of the factors that raise my eyebrows. And I’m OK, maybe next year, 18 months, 2 years of inflation. I start to think that the rate will be higher than I had expected before. “

Even today, timber prices are “insane,” he said, and the opening of the post-pandemic economy would increase the cost of other commodities.

“We will see a lot of spending, and it will feel great, but at the same time, it becomes clear that all the stresses of COVID and the supply chain are undermining the productivity of the economy. It will be very difficult to meet all that spending, so I’m worried about inflation. “

Robson believes the Bank of Canada may feel pressure to maintain federal pressure longer than necessary, but that’s not the only consideration.

“It’s inevitably a very complicated debate, and it’s not hard to imagine if you really feel the pressure from those who say,’How do you compete if the exchange rate goes down?'” How to market to the US and how to compete with Chinese? “He said.

“If you’re worried that the housing market will collapse suddenly, it may discourage you from doing something really dramatic by raising interest rates.”

Ian Lee, a professor of business administration at Carleton University, said low interest rates will not last long.

“When someone says that interest rates will be maintained at unprecedented levels in human history,’Well, if there is no precedent, how can we stay there?'”

Lee recalls being a mortgage broker in the 1970s, as experts claimed that interest rates couldn’t be raised any further. Now he suspects an expert who argues against it.

“There is nothing tolerate uncertainty there. I think we need to be skeptical when dealing with such macroeconomic variables.”

He said higher mortgage rates would hurt people in the overheated Vancouver and Toronto areas. However, almost half of Canada’s homeowners no longer have mortgages, and Canada’s record high debt burden is also worth the prospect.

“Our total assets owned by us individuals in Canada [far more than] Its famous $ 2 trillion debt is everyone’s attention in the media and tears hair. “