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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 5, 2018 | The CBers

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Shocking as it may be to the economists populating this blog’s demented comment section, CBs know what they’re doing. It was central bank actions which stopped a financial crisis from becoming a depression ten years ago. Since then these dudes have – despite profligate, misguided politicians and quixotic, volatile voters – brought us to this point. The world is growing again. Inflation’s back. Companies are making big coin. Europe survived. We crept to the edge, were pulled back, and survived.

The bankers did it by dropping rates, adding massive stimulus, flooding the world with credit, restructuring debts and coordinating monetary policy. Yeah, low rates brought big borrowing and inflated assets (like houses in Toronto), but debt-snorfling buyers were equally to blame.

The bottom line: it worked. Now we’re on the other side. Rates, inflation, profits and growth up. Borrowing and asset values down. Despite the run-up in debt of all kinds (and Trump), there is no crash on the horizon and no depression. Not even a recession. Those sitting in cash will once again fall behind. You should be fully invested – but keep it balanced and diversified.

By the way, do you know what a central bank is? What’s in the vault?

The Bank of Canada came into being almost a century ago (1935) when the world was struggling to shrug off a depression which threw 30% of workers onto the street. The need to try and organize the economy better was obvious, since politicians had royally screwed things up (with a trade war, ironically).

So our central bank is a publicly-owned Crown corporation and operates (thank God) independently from Parliament. It issues the only legal money (other than Canadian Tire, of course), sets interest rates and has a mandate of stabilizing the currency, moderating inflation and supporting the economy. Yes, just like this blog.

Lately our CB has been trying to wean people off the cheap mortgage and LOC rates that turned crap houses into million-dollar mansions and pickled the entire nation in debt. It’s a slow process. Move too fast, jack rates too much, and things slide. Go too slow or fall out of step with the Fed (the American CB) and inflation roars as the dollar swoons. Nonetheless, interest rates will be normalized even if many over-extended families are squished in the process. C’est la vie. You were warned.

By the way, what’s in our central bank? What do we own?

The Bank of Canada’s assets are called ‘reserves’ and comprise a bunch of stuff – some tangible assets, some on loan to the chartered banks plus credits with other CBs. These reserves are the things which (along with the government’s power to tax) actually back our currency. Long ago when men were men, shaved in streams, had callouses and no Netflix, central banks kept piles of rocks (gold) in order to give paper money value. But that ended decades ago. In fact, our CB now holds no gold whatsoever, having sold the last of it three years ago.

Currently the Bank of Canada is sitting on just over $91 billion, or $69.3 billion US. Two-thirds of that amount is held in American dollars, ($47.5 billion), with the rest in Euros ($14 billion), Sterling ($7 billion) and yen ($1 billion). As mentioned, gold = zero.

How do we rank in the world?

Not bad. Canada has the 38th biggest population on the planet, yet the Bank of Canada is No. 28 when it comes to reserves. Compare that to the US – whose central bank ranks 21st in terms of assets – despite America being the third most-populous place with the loudest leader.

Number one? By an incredible margin, it’s China – sitting on over $3 trillion in CB assets. But the real winner? Switzerland, baby. The little spec of a place is the 98th biggest country and yet has a central bank stuffed with $757 billion US worth of assets – ten times our level – and number three in the globe. No hat, big cattle.

Lessons: these guys have a massive influence on the world economy and without central banks we’d be spending every weekend gathering firewood and stalking moose (which is hard in the GTA). There’s a global CB push to normalize interest rates. You cannot resist. So get ready. And if those in control of your money think gold is a useless possession, so should you.

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July 5th, 2018

Posted In: The Greater Fool

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