We’re all in this together. Okay, we weren’t in it together — but we’re really sorry about one of the greatest transfers of wealth in history. That was the takeaway from a Bank of Canada (BoC) speech earlier this week, by Governor Tiff Macklem. In a totally not ironic speech on inequality, he suggested quantitative ease can expand inequality. Shocking stuff, right? Who could have guessed?
What Is Quantitative Ease (QE)?
Quantitative ease (QE) is an unconventional policy tool to increase inflation. Central banks buy government bonds to inject cash into the economy. By adding demand from a buyer with unlimited capital, they drive bond prices higher. The result is falling yields, and it becomes cheaper to borrow. QE lowers the cost of borrowing beyond the mechanics of a rate cut, flooding the system with more cheap debt.
The flood of cheap money is to stimulate demand for large and expensive goods. Think housing and cars, which have been on fire during the pandemic. Increased demand pushes goods higher, producing more inflation. It’s designed to be used when interest rate cuts fail to stimulate demand.
A big problem with QE is some demographics are better positioned to benefit. That demographic is people with assets, who tend to be older and wealthier already. The other demographic are people who will feel the burn. These are people with few to no assets, such as the young and poor. Central banks have been reluctant to discuss this angle. Instead, they prefer to focus on the trickle-down effect it produces.
Bank of Canada Suggests QE Can Cause Wealth Inequality
During his speech, the Governor finally suggested QE can cause wealth inequality. “QE can boost wealth by increasing the value of assets such as the investments Canadians have in their registered retirement savings plans or company pension plans,” he said.
“But of course, these assets aren’t distributed evenly across society. As a result, QE can widen wealth inequality. We will look closely at the outcomes of QE here and elsewhere and will work to more fully understand its impact on both income and wealth inequality.”
Bank of Canada Reviewing QE After Support To Ban Its Use Picks Up
The Governor isn’t just examining his use after he unexpectedly observed the gap. QE’s contribution to wealth inequality was well-known before Canada’s rollout of the program. The resulting record home sales were the desired impact, not an accident. People are now informed enough to challenge the central bank narrative though.
Earlier this year, Vancouver-based housing activist Raymond Wong petitioned to restrict the central banks’ use of QE. In just a short period of time, it gained enough support, the government now has to formally respond. The governor’s statements come at a time where it appears they’re trying to claim responsible use of the program, before it gets taken away from them.
“But wasn’t it needed?” you’re probably wondering. The BoC’s research shows an interest rate cut takes 12 to 18 months to work its way to the market. If they have no more room to cut after it fails, then they are supposed to use QE. This time Canada used it along with rate cuts, and it still hasn’t been long enough for the impact of the rate cut.
We’ve only known QE causes greater wealth inequality for a decade though. How would anyone expect the Bank of Canada governor to know that?
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