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Jules Boudreau: The feds are about to bail out the Bank of Canada

Commentary

Between April 2020 and December 2021, the Bank of Canada added $360 billion of bonds to its balance sheet as part of its quantitative easing (QE) program. It mostly bought Canadian government bonds, but also provincial bonds and mortgage-backed securities. 

Outside of the first few months of the crisis, when it helped prevent Canadian financial markets from seizing up, QE probably had a negligible effect on the Canadian economy. Swapping one type of government debt (government bonds) for another (bank reserves) did not cause the current surge in inflation.

But it did have a major impact on the state of government finances going forward. We will have a preview of this “QE bomb” on public finances when the Bank reveals it generated a negative net income in 2022 and Ottawa is forced to bail it out. The Bank should be transparent about the upcoming shortfall and add safeguards around the use of quantitative easing policies going forward.

Prior to 2020, every year the Bank of Canada sent around $1 billion to the government of Canada in remittances. Those steady remittances were “seigniorage” profits: because the Bank has a monopoly on currency issuance, it can produce bank notes at close-to-zero cost, sell the notes to banks, and use the proceeds to buy bonds. The business of trading bank notes, on which the Bank pays no interest, for interest-bearing bonds allowed the Bank to self-finance its operations, “which enable[d] the Bank to function independently of government appropriations”, as highlighted in the Bank’s 2019 Annual Report. It would then send the surplus to the government. Seigniorage is the federal government’s golden goose: the feds receive a steady billion annually in exchange for granting the Bank the privilege of issuing currency.

But in 2020, the Bank ditched its ingenious zero-reserves “corridor” monetary system, in which commercial banks send funds to each other to manage their liquidity needs, for a “floor” system, in which commercial banks hold reserves at the central bank. Think of reserves as central bank money, on which the Bank pays interest. The implementation of this new system, combined with pandemic QE, means that bank notes—the golden goose—today only make up 28 percent of the Bank’s liabilities, down from 78 percent in 2019 (chart 1).

Chart 1. Graphic credit: Janice Nelson

Bank notes are now eclipsed on the Bank of Canada’s balance sheet by interest-bearing reserves and reverse repos. When the Bank hikes its policy rate, it increases the interest payments it makes to banks and other financial institutions. 

With one hand, the Bank receives interest from its bond holdings. With the other, it sends interest payments to banks. The problem is that government bonds offer a fixed interest rate, while the interest paid by the Bank on reserves scales with the Bank’s policy rate. And with Canadian rates surging, the Bank’s interest expense is about to exceed its interest revenue (chart 2). The golden goose has lost its shine. 

Chart 2. Graphic credit: Janice Nelson

Because the Bank does not have sufficient capital to cover the losses, the government will have to bail it out with a loan or transfer. Based on market expectations for Bank of Canada rates, I estimate the shortfall to be $1 billion in 2022, $4 billion in 2023, and $2 billion in 2024. Instead of receiving $3 billion over three years from its golden goose, the federal government will have to cover a shortfall of $7 billion, the equivalent of two percent of annual government revenues (chart 3). The Bank of Canada is clearly aware of the issue. It just stopped paying interest on government deposits at the Bank, an accounting trick to reduce the end-of-year shortfall. The Bank should be transparent about the upcoming deficit.

Chart 3. Graphic credit: Janice Nelson

Now, it’s very possible the benefits of QE during the crisis outweighed the costs the government is facing today. And Canada is not alone in this position; the net cost for U.S. taxpayers will likely be even higher. But policymakers should reconsider the merits of having a central bank that is taking on interest rate risk. 

By swapping reserves for bonds, the Bank effectively reduces the average maturity of government debt. When the government sells a bond to finance its spending, it chooses the optimal maturity of the bond to issue. If it wants to “lock in” an interest rate to protect itself from future changes in borrowing costs, it will issue a long-term bond, for example, a 30-year bond. But what happens to the government’s balance sheet if the Bank of Canada purchases the 30-year bond? That long-term bond is replaced by an ultra short-term bond: bank reserves, on which the Bank—and by extension the government—pays the overnight rate. Instead of locking in an interest rate for thirty years, the government locks it in for a day. 

The data shows that the impact on consolidated government debt profile is immense. When we factor in the Bank of Canada’s holdings of Government of Canada bonds, the average weighted maturity of the government’s debt drops from 6.7 years to 4.7 years, rendering government borrowing costs about 30 percent more vulnerable to a rise in interest rates. 

Should the unelected Bank of Canada have such an impact on the government’s debt profile? Especially since, outside of periods of acute liquidity shocks like April 2020, QE’s effects on the economy are debatable. Hindsight is 20/20, and we can’t blame the Bank for emptying the cupboard in unprecedented times. But going forward, the Bank should install safeguards around the use of its balance sheet to gobble up government debt. The Bank of Canada should also commit to eventually returning to its previous corridor system to reduce its footprint in the government bond market.

Harry Rakowski: How can we explain excess deaths during COVID-19?

Commentary

The pandemic caused by different variants of the SARS-CoV-2 virus has been associated with over 6.5 million deaths worldwide. That includes over 1.05 million in the U.S. alone and over 45,000 in Canada. In addition to known COVID-19-related deaths, the last two years have also seen a rise in all-cause mortality compared to historic levels. 

Those angry against previous mandates often argue that about 99 percent of our population survived COVID-19 and very few people are dying in the current low-risk phase of the pandemic. They also speculate that many excess deaths are really due to uncounted vaccine-related complications. 

On the other hand, those still struggling with the risk of infection argue that too many deaths continue to occur and we may need to mandate boosters and continue with restrictions, especially if new variants emerge. The World Health Organization has speculated that many excess deaths were due to uncounted COVID-19 deaths, primarily but not exclusively in countries with incomplete reporting systems. India alone was suspected of having over 4 million uncounted deaths. 

Now, however, case counts, hospitalizations, and ICU admissions all continue to fall around the world. Life is returning to near normal. Even the ArriveCan app is at long last no longer mandated. While this news is very reassuring, the effects of the pandemic on mortality are not yet over. Daily U.S. deaths remain stubbornly above 400 per day. In Canada, there are about 32 per day. 

As we move forward into this new reality, how do we evaluate why people have died during the pandemic? And how do we determine and mitigate our ongoing risk? 

Death rates and their causes varied during the different phases of the pandemic. In 2020, prior to the availability of vaccines and sensible public health policy to protect older people in congregate homes, deaths were rampant in the very elderly and infirm. Rates were also higher in people of lower socio-economic status who were often deemed essential workers and thus more likely to become infected. In 2020, deaths from COVID-19 were the third leading cause of death in Canada, responsible for about five percent of all deaths. 

The recent graph below from the New York Times shows the whipsaw of U.S. deaths from the start of the pandemic. Canadian patterns are similar. Early deaths in 2020 were most often due to COVID-19 pneumonia. Rates decreased later that year with warmer weather and barrier protection against exposure.

Then the development of more contagious variants increased case counts and deaths in the fall of 2020 and through the winter.

Source: New York Times. Graphic credit: Janice Nelson.

As vaccination became widely available in the first half of 2021, cases and mortality declined significantly. However, in the latter half of 2021, as the highly dangerous Delta strain dominated, serious illness and death spiked again. It was primarily, however, a disease of the unvaccinated or those immune compromised. 

In late 2021, the emergence of a series of more contagious Omicron variants dramatically increased cases regardless of vaccination status. While the virus was much less dangerous and did not cause much pneumonia, the sheer number of those infected led to a rise in deaths. 

Now that over 90 percent of the population is relatively protected from serious outcomes by either full vaccination or previous infection and with the availability of Paxlovid for those older, the impact of infection and the numbers of deaths continue to decrease. 

Who was at greatest risk of death?

Statista reported the number of deaths by decade of age, which all along was the most important risk factor for mortality. Very few young people have died during any phase of this pandemic. Beyond age, male sex, obesity, hypertension, and diabetes were the most important risk factors. 

Source: Statista. Graphic credit: Janice Nelson.

Excess overall deaths 

The total numbers of excess deaths during the pandemic were not just related to those infected. The graph below highlights excess U.S. deaths beyond direct deaths from infection. 

Many argue that these excess deaths were related to uncounted COVID-19 deaths or due to the indirect effect of missed care for common diseases such as heart attack or stroke. Others argue that there are many hidden deaths due to the suppressed risks of vaccination. 

Graphic credit: Janice Nelson.

Excess cardiovascular deaths 

Over the past 50 years there has been a major and steady decline in death from cardiovascular disease. There was, however, a significant increase during the pandemic. Much of this increase was likely due to missed care as admissions for heart attack and stroke decreased in 2020 as people were afraid to present to hospital for life-saving treatment. In addition, increased stress and less rigorous control of risk factors likely contributed to higher event rates. 

Heart attacks are often related to the effects of inflammation on the inner walls of blood vessels of the heart and brain. Infection itself is pro-inflammatory and likely accounts for some of the further increased rates. A U.S. Department of Veteran Affairs study of 153,760 people with COVID-19 showed (when compared to controls) a significant increase in heart attacks and strokes even in non-hospitalized patients.

While there is some data that vaccination can increase inflammation in the walls of arteries, there is no clear proven significant direct risk from vaccination. However, it requires ongoing monitoring. 

There are also concerning reports about the increased risk of sudden death in athletes, with some temporal relationship to vaccination. The presumption is that some of these deaths may have been arrhythmic sudden death due to unrecognized myocarditis, that is heart muscle inflammation. While this may be related to vaccination in a small number of people, it is more likely due to infection itself, given the known higher risk of myocarditis from COVID-19 infection.

The pandemic has also caused a major increase in mental health issues and a heartbreaking increase in overdose deaths, most commonly in young people.  

Vaccination did account for some rare serious risks. Blood clotting deaths occurred in a small number of people due to allergic-type reactions, especially to earlier viral vector vaccines. A U.S. physician reported a major acceleration of his T cell lymphoma following vaccination. While he was criticized by many as promoting vaccine hesitancy, the worsening of his cancer had validity given the stimulation of T cells by vaccination. Cancer deaths in total have remained stable. 

We do require ongoing surveillance of ongoing higher rates of excess deaths and careful analysis as to whether vaccines may have some additional complications. For most deaths, there is a reasonable explanation for pandemic-related direct or indirect causes. Ongoing access to care and the danger of delayed care for serious illness remains a major concern for our fragile health-care system

At current rates, COVID-19-related deaths now account for about three percent of all daily deaths. This may be an overestimate since many deaths reported may have been patients with COVID-19, but death was primarily due to another serious illness. Nevertheless, it remains an important challenge to limit unnecessary death. Every year about 0.75 percent of the population in North America dies, often of preventable death. 

No one willingly wants to die a preventable death, yet we often ignore the major predictable risk factors. People continue to smoke, eat the wrong foods, drink too much, tan excessively, and take addictive drugs. Vaccination with bivalent boosters remains an important way to voluntarily reduce the burden of disease in those older or more vulnerable. Becoming healthier and mitigating the risk factors of unhealthy living are even more critically important for the lingering effects of the pandemic and well beyond.