We Didn’t Print Money… Honest We Didn’t And More Baseless ClapTrap from Central Banks

Then the BoC Twitter thread states We bought the bonds with settlement balances – a kind of central bank reserve – not with bank notes.

Let’s take a step back and look at the BoC’s Balance sheet. Starting with assets.

Bank of Canada Assets

The reason that the Bank of Canada started purchasing assets in 2020 was to provide liquidity to markets in the wake of covid-induced government lockdowns.

The bank provides liquidity to markets by purchasing assets from its primary dealers and from the public.

Although the main asset it purchased was Government of Canada Bonds it also purchased mortgage bonds and other assets. For very short liquidity it purchases assets Under Resale Agreements. This is an agreement between the Bank of Canada and the Primary Dealer that the Primary Dealer repurchases the assets back on a specified date.

All of these purchases are added as assets to the BoC’s Balance sheet. The Bank of Canada expanded its assets from just over CAD$100 billion in assets in mid-March 2020 to CAD$550 billion by July of 2020.

The Bank held these assets until March 2021 when it started selling them back into the market. However, the assets on the BoC’s balance sheet currently still stand at almost $400 billion.

When the BoC purchases securities these become an asset on its balance sheet. However, this means that there must be an offsetting liability.

In other words, the BoC has to pay for this asset somehow. Also, the most efficient way for the BoC to do this is to ‘credit’ the primary dealer’s account electronically.

This then becomes part of the settlement balances on the liability side of the BoC’s balance sheet (settlement balances are referred to as excess reserves by other central banks).

This is how the money supply is created from the Central Banks’ monetary base.

Bank notes in circulation are also liabilities on the BoC’s balance sheet. (Note that both the Settlement balances and the Bank notes in circulation shown in the BoC’s Twitter post above are both liabilities of the Bank of Canada.)

This ‘electronic payment’ now becomes an asset on the primary dealer’s balance sheet that they either use to purchase other assets or use to make loans. This then expands the money supply.

The central bank, in this case, the BoC, creates what is known as the monetary base – or high-powered money. However, it is the banks that then use this base to create and expand the money supply.

They do this through taking in deposits and then making loans against those deposits. Canada, like the UK, does not have an ‘official required reserves’ requirement of 10% like the U.S.

Federal Reserve does, however, Canadian banks still need to have enough reserves to ensure smooth settlement at the end of each day. In general, this is around 10% of their M1 liabilities.

Using the 10% reserve requirement as an example. This means that when a bank receives a deposit that it only has to hold 10% of that deposit. It can lend out or purchase other assets with the other 90%.

An example of this is if Consumer A makes a deposit of $100, then the bank can lend $90 of that to Consumer B. Once Consumer B deposits that loan with their bank then Consumer B’s bank now can lend out $81 dollars and so on.

If consumers A through F all use their new bank loans to buy homes, then we have liquidity fueled debt driven housing boom.

Canada’s M1 money supply, which includes all banknotes and coins in circulation plus chequable deposits held in commercial banks. This has been increased by more than 50% (CAD$500 billion) since 2020.