The point of this article is to describe, with a few basic examples, how QE does (and does not) create money in Canada. There’s been a lot of ink spilled over the years arguing that QE either is or isn’t inflationary, but we’re deliberately not going to try to answer that question in this piece. What we’re going to do is show, through some short examples, how the QE process works under two different scenarios and it’s overall effect on the money supply. We recognize that with all the explainers on QE over the years this is a bit like beating a dead horse, but there’s still plenty of confusion out there with respect to whether or not the Bank of Canada “prints money” via QE, and there’s certainly something to be said about having a quick easy example to break things down. So let’s get started.
When the Bank of Canada engages in QE, there are 2 possible cases:
- The Bank of Canada buys bonds from a bank
- The Bank of Canada buys bonds from a non-bank
We’re now going to show 2 different examples, 1 for each of the above cases. In each example, we’ll break down the transactions to show how new money is (or isn’t) created, where we define “money” as bank deposits (that you and I can actually spend).
Case 1: Bank of Canada Buys Bonds from a Bank
Let’s assume the Bank of Canada (BoC) buys $1000 of bonds from Bank A. In this case, Bank A will sell the bond to the BoC, and the BoC will pay for the bond by creating a new reserve deposit for Bank A. Here are the changes in their respective balance sheets:
Bank A
- Change in Assets: +$1000 in bank reserves, -$1000 in bonds
- Change in Liabilities: $0
- Net Change in Net Worth: $0
Bank of Canada
- Change in Assets: +$1000 in bonds
- Change in Liabilities: +$1000 in bank reserves
- Net Change in Net Worth : $0
For both the BoC and Bank A, there is no net change to their balance sheet net worth.
For both the BoC and Bank A, there is no increase in bank deposits – ie. “money”.
Case 2: Bank of Canada Buys Bonds from a Non-Bank
Let’s assume the BoC buys $1000 of bonds from Investor A. In this case, a Primary Dealer serves as the middle-man by first buying the bond from Investor A, and then selling the bond to the BoC. In Canada, the Primary Dealers are banks. In this example, Bank A is the Primary Dealer who will purchase the bond from Investor A and simply create a new bank deposit for Investor A as payment. Bank A will then sell the bond to the BoC and the BoC will pay for the bond by creating a new reserve deposit for Bank A. Here are the changes in their respective balance sheets:
Investor A
- Change in Assets: +$1000 in bank deposits, -$1000 in bonds
- Change in Liabilities: $0
- Net Change in Net Worth: $0
Bank A
- Change in Assets: +$1000 in bank reserves
- Change in Liabilities: -$1000 in bank deposits
- Net Change in Net Worth: $0
Bank of Canada
- Change in Assets: +$1000 in bonds
- Change in Liabilities: +$1000 bank reserves
- Net Change in Net Worth: $0
Investor A, the BoC, and Bank A experience no net change to their balance sheet net worth.
Investor A receives $1000 of new bank deposits (ie. “money”). Case 2, therefore, results in new “money” being created.