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Email this10:45 am
April 6, 2013
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Bill said
Norman1, I'm aware the money stuff is all smoothed over, my question is really about why, why after 87 years, including Great Depression and WWII, of this never once happening, has it happened now?
The recent losses are from the negative spread between the interest received from the government bonds that Bank of Canada bought as part of its quantitative easing program and the interest it has to pay now on the settlement balance credits it issued to pay for those bonds.
BNN: BoC to lose billions over next few years, … has the details.
Bank of Canada currently pays 4¼% on settlement deposits. Some of those government bonds bought pay as little as ¼%.
12:46 pm
September 11, 2013
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As my profile does not allow me to start a new thread I appreciate you doing it, Norman1.
Ok, so the conclusion is for the first time in the Bank's 87-year existence we have people who don't know how to avoid losses.
12:53 pm
March 30, 2017
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Bill said
As my profile does not allow me to start a new thread I appreciate you doing it, Norman1.Ok, so the conclusion is for the first time in the Bank's 87-year existence we have people who don't know how to avoid losses.
That is the wrong conclusion. Bank of Canada's job is not to make a profit or avoid a loss. And a loss or losses over the next few years is totally irrelevant. Its not a "bank" that you think it is. Quite the opposite.
12:54 pm
March 30, 2017
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savemoresaveoften said
That is the wrong conclusion. Bank of Canada's job is not to make a profit or avoid a loss. And a loss or losses over the next few years is totally irrelevant. Its not a "bank" that you think it is. Quite the opposite.
Read up on QE so you understand the mechanism behind it and how it saves the world economy 🙂
1:21 pm
September 11, 2013
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I understand its job is not about profits or losses. My question is why has there never been a loss in 87 years but there is now? I understand if no-one here knows, just thought I'd ask.
1:31 pm
April 6, 2013
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There has never been this kind of loss before because Bank of Canada never did quantitative easing before 2020. Consequently, the bank never before loaded up on government bonds and then hiked interest rates substantially afterwards.
Anyone can add a new discussion topic. Go up one level to the appropriate forum and use the "Add Topic" button.
3:28 pm
September 11, 2013
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Thanks for the answer, I suspected you'd know, Norman1.
Also thank you for the clear direction to find the Add Topic button, I'd never been able to find it before so assumed it was something with my profile or something like that.
7:44 am
September 11, 2013
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So, then, QE is a new tool, never before used. When I google I find a definition, "Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply."
My question: how does a central bank have the money in the first place to purchase these securities? (This part's not so obvious on the internet - ? I think we're talking trillions, among the various central banks.) I'm guessing they create it out of thin air.........?
8:14 am
April 6, 2013
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A central bank doesn't need to pay for the securities with money.
Bank of Canada pays for its QE bonds with credits it creates to the settlement accounts financial institutions have with the Bank of Canada.
Goal is not to increase money supply. It is to free up money that was previously invested in the bonds.
QE was used by some central banks around 2008. Just not by the Bank of Canada.
8:14 am
March 30, 2017
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Bill said
So, then, QE is a new tool, never before used. When I google I find a definition, "Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply."My question: how does a central bank have the money in the first place to purchase these securities? (This part's not so obvious on the internet - ? I think we're talking trillions, among the various central banks.) I'm guessing they create it out of thin air.........?
Its an accounting entry. They dont need to have the money in the first place. Like I said before, dont think of central bank as a bank, they are not.
10:16 am
September 11, 2013
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That helps.
So my understanding is (e.g.) I own a bond that I'm offering for sale on the open market, the Bank of Canada buys it but doesn't pay anything, I as usual get paid by my broker/agent (financial institution actually pays the money to the seller). And the financial institution, via the settlement account entry, in effect has a receivable from the BoC.
But I've turned my bond into cash so that frees up some money, that's the increased-liquidity-in-the-economy part? (But I was going to sell it anyway, so is the increased liquidity part that the settlement account credit means the bank has more money to loan out?)
10:22 am
March 30, 2017
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Not just to free up the money, but also by bidding up the bond price, bond yield falls. This has the same effect as lowering interest rate to stimulate the economy. It also dodges the bullet for BoC to have to take nominal rates to negative territory.
11:39 am
April 6, 2013
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Bill said
…
But I've turned my bond into cash so that frees up some money, that's the increased-liquidity-in-the-economy part? (But I was going to sell it anyway, so is the increased liquidity part that the settlement account credit means the bank has more money to loan out?)
You were going to sell it anyways. But, there was no buyer or no buyer left at the usual price for the bond. For example, the best bidder left could have been a low baller at a price that would give the buyer a yield-to-maturity of 7% instead of the usual 1%. 
So, Bank of Canada steps in and buys your bond, providing liquidity at the 1%-yield-to-maturity price.
When the Bank of Canada buys up the bonds from the inventory of investment dealers, the investment dealers end up with bank balances and depleted inventory. The investment dealers afterwards will spend those bank balances to replenish their inventory by buying bonds, including newly issued ones.
12:46 pm
September 11, 2013
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So we're kind of back to where we were. The investment dealer is in the same position, I own one less bond and the BoC owns one more bond. So what's been accomplished? Is it that I've got money in my pocket to spend in a moribund economy?
I suppose, as smso indicates, when the BoC does this on a large scale they increase the demand for bonds thereby raising their prices thus lowering their yields which translates to lower rates in the economy, is that it?
3:46 pm
April 6, 2013
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Yes, you now have money in your pocket to spend. But, QE wasn't targeted at individual investors.
Bank of Canada really didn't buy your bond directly. The bank bought bonds from the inventories of the financial institutions, like your broker. The broker will then spend the money received to buy bonds to replenish its bond inventory. Mostly, the broker will buy bonds issued at the time by borrowers, like the governments. Occasionally, from an investor like yourself who wanted to sell some of their bonds.
Bank did this repeated over weeks and months so that borrowers could issue bonds and dealers would buy or underwrite them at low rates appropriate for the low Bank of Canada rate at the time.
Other bond buyers had to follow Bank of Canada's lead or they would be outbid by the Bank of Canada and end up with no bonds from their dealer.
6:35 pm
September 11, 2013
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Ok, I get the mechanics. Question remains, so how is this good for the economy, at the end of the day how does this work to help a stalled economy? Is the answer that the BoC bond buying, by elevating demand, has served to depress bond (and therefore other) interest rates, is that basically it?
7:14 pm
March 30, 2017
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Bill said
Ok, I get the mechanics. Question remains, so how is this good for the economy, at the end of the day how does this work to help a stalled economy? Is the answer that the BoC bond buying, by elevating demand, has served to depress bond (and therefore other) interest rates, is that basically it?
Yes, that’s exactly why it’s called quantitative easing. It’s the easing of interest rates. By targeting different bond maturity, it can effectively force the interest rate down on the targeted part of the yield curve.
The other effect I believe is also true is that by increasing the settlement account balance of the banks, the banks can effectively loan out a bigger amount and at more favourable rate (since they now have more capital at favourable rate).
8:30 pm
April 6, 2013
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QE helped the economy by restoring the usual demand for bonds at that time.
A lending prime rate of 2.45% is meaningless if the banks can't raise enough low-rate deposits or issue enough low-rate bonds to fund loans at that rate.
A Bank of Canada policy rate of 0.25% is meaningless if there isn't enough buyers for the Government of Canada treasury bills and bonds yielding around that rate.
Some creditworthy businesses found demand for even their banker's acceptances, that were guaranteed by a bank, evaporated at that time.
7:13 am
September 11, 2013
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Ok, thanks. So my takeaway is that QE keeps money moving around instead of being stalled and that's a good thing for the economy. And that google-found definition of QE is incorrect, i.e. QE does not increase the money supply (which gets rid of those "printing money thus debasing the currency" arguments).
9:29 am
April 6, 2013
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QE is intended to maintain a certain availability of money and not to necessarily increase the supply of money.
There is a subtle difference between money available for borrowing and the total supply of money.
Please write your comments in the forum.