Flaherty wrong again; ‘Head scratcher’ inflation reading

Once again Mr. Flaherty has stuck his neck out on what will be recognized as one of his great prognostications:

No signs of Canadian housing bubble: Flaherty

“The evidence is not there that Canada has a housing bubble. In fact, the evidence with respect to affordability of mortgages in Canada is solid and we have a stable market”

Oh?

This is the man who history will judge as the great enabler of our housing boom, as he has presided over the unwarranted expansion in amortization terms and lowering of minimum down payment requirements.  More than anyone else, he is responsible for encouraging the poor financial decisions of most new home buyers.  He knows this.

In addition to being a terrible finance minister, his track record of economic prognostications leaves much to be desired:

Flaherty see economic growth ahead– August 2008

Flaherty expects surplus– September, 2008

No recession coming to Canada– October, 2008

Flaherty vows no deficit on his watch- October, 2008

Flaherty says families need financial literacy – May 2008 (He then relaxes lending standards and downpayment requirements)

Job growth will continue….economy fundamentally sound – October, 2008

 

Ah yes….Flaherty’s predictive brilliance and grasp of economics is clear to all!

 

‘Head scratcher’ inflation reading

Canadian CPI reading for October came in above expectations on the back of increased speculation inflationary pressures in the energy sector.

As I’ve said before, I think that energy prices will likely fall over the short term, but there’s no denying the supply/demand fundamentals heavily favour increased energy prices, even if monetary inflation is not present.  All this will do is eat into the disposable incomes of families as inflation is not passed on through wage growth without an increase in the overall monetary aggregate.  Bad news.

But even at that, I’m somewhat surprised at the strength of the reading.  Evidently I’m not alone.  From TD:

“In truth, the outcome in October is a bit of a head scratcher. The acceleration of inflation is at odds with the underlying economic environment and the strength in the Canadian dollar this year. As already mentioned, the pace of economic growth has slowed below trend and considerable slack remains in the economy. For example, the unemployment remains elevated at 7.9% and the odds are that job creation in the near-term will be lacklustre.”

“Looking ahead, the pace of inflation should moderate. Given the slowing in global economic growth, energy prices are not expected to continue climbing in the near term. Meanwhile, prices on discretionary consumer goods (i.e. furniture, appliances, recreation equipment, clothing and footware) should also come under pressure as consumer spending growth remains modest and competition remains fierce.”

I think that consumer spending growth remaining ‘modest’ would be a best case scenario.  I don’t see it.

“In other words, the uptick of inflation is likely an aberration and will not last.”

I don’t always agree with TD’s analysis, but I do think they nailed this one.

 

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10 Responses to Flaherty wrong again; ‘Head scratcher’ inflation reading

  1. tintin says:

    How do you define inflation?

    If defined by increased prices as measured by your choice of CPI ( http://www.bankofcanada.ca/en/cpi.html) , then we really have not had deflation save for a few months in 2010. According to prices, they have been going up for years now.

    If defined by money supply, (http://www.bankofcanada.ca/en/graphs/a1-table.html) then we have been inflating for years as well.

    The duplicitous talk of the government ministers is to be expected. They are shilling for their own interests. Politicians want to stay politicians. If Flaherty et al started saying that ” the economy is a mess, there is a housing bubble, and I have no idea what to do ” how long would they last?

    Bankster/housing economists are no different. Saying that ” housing is in a bubble, the share markets are too high, interest rates are going to go up” is not a way to keep your job at the big six nor at the cmhc.

    Do your own research and think for yourself.

    • I define inflation as an expansion in the aggregate money supply and credit. CPI is useful in calculating changes in consumer prices, which tend to be highly correlated with monetary inflation over longer periods of time, though they are at the mercy of speculators over the short term.

      To be clear, I have never said that Canada is currently experiencing deflation, rather that it will experience it when outstanding credit contracts and savings rise, both a natural byproduct of our made-in-Canada housing bubble. I have said that the US is experiencing monetary deflation, which I believe will only intensify over the next few years.

      Is your last sentence directed at me or at the general readership of this blog? If directed at me, I would suggest that you need to read a few more of my blog posts. My economic viewpoints are far from mainstream. Hard to suggest that I don’t think for myself or do my own research.
      If the comment is directed at the broader readership, I wholeheartedly agree.

      Cheers

      • tintin says:

        If inflation is expressed as an increase of monetary aggregates, then Canada has not/will not suffer deflation any time soon. The central bank has been pumping for decades. It is not stopping anytime soon. In fact, I suspect that if/when the housing bubble goes, the BOC will increase the money supply. The FOMC has set the precedent by pumping money after the dot com bubble burst in 02 and the housing bubble in 09. The preference is to print money which will destroy the currency ( inflate). Not to let the market determine the right price level ( deflate).

        Deflation is currency buying more of everything, the dollar in your pocket buys more with everyday that passes. The critical question is: Is the dollar you earn today worth more or less than the dollar you earn tomorrow? If the answer is more , we are in a deflation.

        The last comment was directed at everyone. The webmaster has given me a forum to express myself. I am grateful for that. Although, I do not necessarily agree with everything that is being said here, I do support the expression of these ideas. And have interest in expressing/debating the ideas. Not in personal attacks.

  2. Village Whisperer says:

    It’s almost comical, isn’t it?

  3. “If inflation is expressed as an increase of monetary aggregates, then Canada has not/will not suffer deflation any time soon. The central bank has been pumping for decades. It is not stopping anytime soon. In fact, I suspect that if/when the housing bubble goes, the BOC will increase the money supply. The FOMC has set the precedent by pumping money after the dot com bubble burst in 02 and the housing bubble in 09.”

    Can the BoC increase the monetary aggregate without having willing borrowers to take on credit? They can’t simply print a stack of bills and give it to every person in the country. This is why understanding the creation and destruction of money is so important in this discussion.

    This is what you are missing: If I’m right and the massive amount of consumer leverage in the system is set to readjust as consumers begin to pay off these debts and start saving again, it doesn’t matter how much liquidity the BoC makes available, the total monetary aggregate contracts. FOMC likewise can make liquidity available to lending institutions, but it can’t put a gun to the head of consumers and make them borrow and spend. If they engage in quantitative easing by buying existing debt, it winds up being credit-neutral. It is simply a swap of credit instruments. Money is not created and monetary supply does not expand.

    This is why I see monetary deflation going forward.

    • tintin says:

      “Can the BoC increase the monetary aggregate without having willing borrowers to take on credit?”

      Yes. Here is an example:

      “Canada Mortgage and Housing Corporation (CMHC) will purchase up to $25 billion in insured mortgage pools as part of the Government of Canada’s plan, announced today, to maintain the availability of longer-term credit in Canada.” (Canada Mortgage and Housing Corporation Supports Canadian Credit Markets, CHMC Press Release, 10 October 2009)

      The government can purchase its own debt.

      “FOMC likewise can make liquidity available to lending institutions, but it can’t put a gun to the head of consumers and make them borrow and spend.”

      By inflating the currency, you are making the value of the dollar worth less and less as time goes on. Why hold onto a dollar if it will be worth less in the future? Spend it now and go into debt. You can pay it off with tomorrows dollars. It is a gun to the head of a saver. One who has worked hard to save for the future gets robbed. So figuratively, a gun is to the head of a saver in an inflationary environment.

      “If they engage in quantitative easing by buying existing debt, it winds up being credit-neutral. It is simply a swap of credit instruments. Money is not created and monetary supply does not expand.”

      Where does the government get the money to buy its exiting debt? It creates it. QE is just another form of debt monetization. It creates the debt , creates the money to buy the debt, then creates the money to buy back the debt.

  4. You haven’t answered my question. CMHC buying mortgage debt expanded the monetary supply because there was not a corresponding reduction in household credit. That’s the point. Credit outstanding dwarfs the money supply. When credit begins to contract, the same becomes exceptionally difficult. And you fail to address the issue of velocity of money and the money multiplier. If those CMHC funds sat idle as bank reserves, does it create inflation? This is the issue Japan experienced and the US is currently experiencing. If creating inflation during a widepsread debt deleveraging cycle is as easy as you seem to think, then why haven’t they been able to orchestrate it in Japan? And despite the commodity speculation of late creating price inflation, M3 is still down in the US. Why?

    “By inflating the currency, you are making the value of the dollar worth less and less as time goes on. Why hold onto a dollar if it will be worth less in the future?”

    You’ve got the cart before the horse here. It’s the expansion of credit and the money supply that CREATES the inflation. Monetary inflation is exceptionally difficult to orchestrate in our fractional reserve system if credit outstanding (+95% of the aggregate) is being reduced via consumer deleveraging.

    Check out this video:
    https://financialinsights.wordpress.com/2010/11/13/the-debt-collector/

    • tintin says:

      “You haven’t answered my question. CMHC buying mortgage debt expanded the monetary supply because there was not a corresponding reduction in household credit. ”

      There would not be a reduction in household credit because the entity holding the MBS was made whole. Not the household who is paying/not paying the mortgage that the MBS represents.

      So, by the CMHC making the MBS holders whole, the money supply increases. With little effect on the household.

      “That’s the point. Credit outstanding dwarfs the money supply. When credit begins to contract, the same becomes exceptionally difficult. ”

      So, if all households were made whole by the government buying their credit card, loans, morttgages etc etc directly, would that be inflationary?

      “And you fail to address the issue of velocity of money and the money multiplier. If those CMHC funds sat idle as bank reserves, does it create inflation?”

      Again, if inflation is an increase in the money supply, then yes the action of the CHMC is inflationary. The money supply has increased

      “If creating inflation during a widepsread debt deleveraging cycle is as easy as you seem to think, then why haven’t they been able to orchestrate it in Japan?”

      The starting point for each country is much different.

      The Japanese experience of deflation has other contributing factors: about 95% of Japan’s debt is held domestically within the country Although the savings rate in Japan is only 3% now, it has been above 10% for decades, and over 20% for a time in the 70s. The Japanese built a large pool of savings that allowed its government to borrow from its citizens.

      So the Japanese hit their downturn as follows:
      Balanced budget, high savings rate ( 15% +), low unemployment, net debt to gdp of 20%.

      The US hit its downturn in much worse shape economically: budget deficit of 1 trillion +, saving rate of 4%, unemployment rate of 8% , dept to gdp of 90% +.

      “And despite the commodity speculation of late creating price inflation, M3 is still down in the US. Why?”

      Please check the latest money supply figures, I think you shall see that M3 is rising. http://www.shadowstats.com/alternate_data/money-supply-charts

      “You’ve got the cart before the horse here. It’s the expansion of credit and the money supply that CREATES the inflation. Monetary inflation is exceptionally difficult to orchestrate in our fractional reserve system if credit outstanding (+95% of the aggregate) is being reduced via consumer deleveraging.”

      No, inflation is an increase in the money supply.

      As Mises explained in his essay “Inflation: An Unworkable Fiscal Policy”:

      “Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

  5. Pingback: Housing and the future of Canada’s economy | Financial Insights

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