Saturday, December 6, 2008

Robbing Peter to Pay Paul

Now that Garth Turner is no longer a Member of Parliament, he's been focusing more on economics and real estate than on politics in his blog. Happily, this has resulted in most (but not all) of the more repugnant trolls losing interest, but it hasn't always made for the most fascinating reading for the rest of us political junkies.

Today's post is a notable exception:

Toxic Cash?

Do you know what’s backing your money? You should. Because in the last 90 days this has changed drastically. There’s a big gamble been taken by politicians which was never explained, never debated, never questioned, and yet could affect us all.

Here is the way the system is supposed to work, and until this autumn, did.

* Our money’s printed by the Mint and backed by the Bank of Canada. The central is expected to hold assets equal to the amount of cash in circulation, which is more than $50 billion.
* Because our nation no longer owns gold reserves, our money is backed by the safest of securities, long-term government bonds and Treasury bills. This is what gives our money true value. At least, until recently.

But in the last 90 days, without public notice, the Bank of Canada has sold off more than $11 billion of those secure T-bills, plus cashed in billions more of its bonds. As stock market researcher John Paul Koning discovered last week, the central bank now lists on its balance sheet a stunning $32.4 billion in “other” assets, which comprise a whopping 42% of everything it owns.

That means more than two-fifths of the total assets backing our money supply is – what, exactly?

Well, let’s flip back a month to the middle of November, when finance minister Jim Flaherty announced the federal government was purchasing $50 billion in residential mortgages from the Big Six banks, following an earlier deal to buy another $25 billion in mortgages. “At a time of considerable uncertainty in global financial markets, this action will provide Canada’s financial institutions with significant and stable access to longer-term funding,” he said, adding, “with no additional risk to the taxpayer.”

So, the “other” assets the Bank of Canada has swapped for secure, near-cash holdings appear to be tens of billions of dollars in high-ratio mortgages. The money to buy those assets apparently came from the central bank, through CMHC, and ended up in the vaults of the Big Six banks.

You know, I had been wondering how Flaherty managed to pull $75 billion out of his ass without toppling his little budgetary house of cards. Now I guess we know.

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