Canada’s narrow money supply is pointing to a big return to production and consumer spending. Bank of Canada (BoC) data shows the M1+ gross money supply reached a new all-time high in September. The measure of money supply has experienced the highest rate of growth seen in decades… in the middle of a recession… during a pandemic.
What Is Canada’s M1+?
The M1+ is a narrow measure of Canada’s money supply. Currency outside of banks, chequable deposits at chartered banks, trust and mortgage loan companies, and credit unions. To put it bluntly, it’s anything that can be spent in Canadian dollars with zero to no notice. The BoC uses this number for a lot of things, but it’s most useful for forecasting future economic productivity.
The BoC influences the growth of money indirectly, primarily by interest rate changes. Higher rates mean money is more “expensive.” This leads to less borrowing, and higher costs to service debts. Lower rates mean money is “cheap.” People borrow more, and it costs less to service debts. Changes in these measures are first seen in industries that use large financing, like homes and auto purchases.
Canada’s Money Supply Jumps Over 27%
Canada’s narrow money supply is experiencing very rapid growth. The M1+ gross reached $1.36 trillion in September, up a whopping 2% from just a month before. The 12-month rate of growth is now 27.69% higher than last year. This is the type of growth rarely seen in an advanced economy.
Canada M1+ (Gross) Money SupplyThe dollar value of Canada’s M1+ (gross) money supply. Source: Bank of Canada, Better Dwelling.
Canada’s M1+ Money Supply Hasn’t Grown This Fast In 30+ Years
The rate of growth is so high, Canadians haven’t seen something like this in over three decades. The 27.69% rate of growth was last beat in October 1985. That kind of growth came after a 10 point drop from the peak reached in 1981. This kind of growth typically only occurs during a booming economy, and points to increased production.
Canada M1+ (Gross) Money Supply ChangeThe 12-month change in Canada’s M1+ (gross) money supply. Source: Bank of Canada, Better Dwelling.
Is a booming economy around the corner? The M1+ joins other indicators like a higher savings rate, pointing to strong productivity in the future. The pandemic has created a noticeable divide amongst people though. While savings pile up, and wages experience growth not seen in years, it’s also accompanied by a wave of unemployment. This is further indication Canada may be setting up for a k-shaped recovery, and rising inequality.
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Does this mean higher inflation is baked in?
Not really. M2 is what’s used for inflation. M1 is near term buying of expensive goods. This would imply higher purchasing near term, but it’s not actually clear what demographic will be doing the purchasing, and if lower income households will be rallied out.
I guess if you believe in trickle down economics, you think the working class will benefit 5 or so years down the road.
You are absolutely right. This is just another data point that tells you that huge price inflation is on the way. The rich will get very much richer in the process and those at the bottom will be screwed. Then the feds will bail them out and the inflation cycle will get even worse.
Gold and bitcoin anyone.
The correlation between inflation and printing money is that the money needs to be directed toward assets which are measured to determine inflation.
If, for example, the vast majority of this money is circulated to people with a high propensity to spend it on financial assets then no, the “inflation” that concerns central banks and helps influence overnight rates would not be affected.
If these funds go to people who have a want or need to spend it on things included in the Consumer Price Index then yes, inflation goes up and watch out for interest rates rising.
Wealth inequality is the major point here I’d like to see more people elaborate on. With small business shuttering, or physically prevented from operating, all of this money will go largely to foreign multinationals. This will require much more money, to get the same desired economic growth, since they’re less domestically efficient plays than local business.
There is no sense in getting into a long discussion, but the distinction between inflation that is counted in the CPI as not is an artifice created by the government. All assets are subject to inflation, including things like houses and dollars. Don’t be fooled; if your income stays the same and inflation takes off, you will be hurt unless you use your income to buy assets that follow inflation.
But hey, how else are we going to maintain our standard of living while dramatically increasing the proportion of the population that is retired?
It’s funny to think of dollar inflation in the same context since if a dollar increases in value it would actually buy more stuff vs anything else having inflation (requiring more dollars to buy it).
Also, did y’all see the new “personal CPI” calculator that the BoC has come out with?
Whoa there with the transparency Mr.Poloz /s
Currency inflation is what happens when the purchasing power of the dollar goes down ( ie buys less, not more). Sorry, but nice try.
This data is from May…Its almost December.. I wonder what the curve.. straight line exponentially looks like today..
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