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August 2021 Inflation
September 16, 2021
5:44 am
mordko
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Because central banks buy own government bonds in huge quantities and thus manipulate price and yield. As a market player, would you like to take bets against the government?

September 16, 2021
8:02 am
Righand
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mordko said
Because central banks buy own government bonds in huge quantities and thus manipulate price and yield. As a market player, would you like to take bets against the government?  

I agree that is a good part of it but for example the Chinese hold tons of foreign debt. Of course they would shoot themselves in the foot if they dumped it all suddenly but I can only imagine what would happen to rates if they even sold a good portion of their holdings. Perhaps I'm missing something here ?

Anyway, someday this charade will end and probably very badly. They can only keep on kicking the can down the road for so long.

September 16, 2021
9:45 am
Vatox
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Righand said
What I cannot understand is why the bond market hasn't sold off forcing higher interest rates.

The 5 year bond yield is still hovering around 0.85 %

With inflation soaring this doesn't seem to make any sense at all.sf-confused  

I would say it’s because there is uncertainty for the future and bonds are being held for security. Inflation doesn’t automatically lead to bond selling, it’s the demand for higher yield that would move, because the inflation is eroding purchasing power.

September 16, 2021
9:58 am
mordko
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Righand said

I agree that is a good part of it but for example the Chinese hold tons of foreign debt. Of course they would shoot themselves in the foot if they dumped it all suddenly but I can only imagine what would happen to rates if they even sold a good portion of their holdings. Perhaps I'm missing something here ?

China wants for its currency to be weak to subsidize international sales. Buying foreign debt helps to strengthen other countries’ currencies.

Having said this, they have been selling US bonds for a while.

September 16, 2021
11:14 am
Norman1
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Loonie said
However, you slice it, inflation is now progressing at a rate we haven't seen in quite a while -AND it is increasing every month at present. It's not all due to missing computer chips.
I think that even if the press release said 2.6 over 19 months, we'd think it was high compared to what we've been used to.

CPI inflation is higher. But, prices have been climbing at a fairly steady rate since January, as this graph of the CPI shows:
CPI-graph.png
The annualized rate (represented by the slope of the red trendline) is around +5½% per annum since January.

September 16, 2021
1:11 pm
Bill
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China's foreign debt is between $US2 - 3 trillion, why would it buy USA debt and then also sell its own?

September 16, 2021
1:59 pm
Norman1
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Bill said
China's foreign debt is between $US2 - 3 trillion, why would it buy USA debt and then also sell its own?

China's foreign debt is not in US$. So, their US$ foreign reserve holdings don't offset China's debt.

US$ reserves as US$ cash in a China central bank vault does not earn interest. Holding the US$ reserves as US Treasury bonds does.

September 16, 2021
2:09 pm
Bill
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I don't understand why the currency of the holdings matters - ?

If I have $10 in my wallet why would I spend it on a GIC and then go borrow another $10 from someone to put back in my wallet, what's the point of that whole exercise? Why would China have money to buy USA debt and then have to turn around and borrow money from others?

September 16, 2021
3:11 pm
Vatox
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Bill said
I don't understand why the currency of the holdings matters - ?

If I have $10 in my wallet why would I spend it on a GIC and then go borrow another $10 from someone to put back in my wallet, what's the point of that whole exercise? Why would China have money to buy USA debt and then have to turn around and borrow money from others?  

Because, in order to purchase foreign goods, you need that specific currency. You, as an individual citizen, buy most things in Canadian Dollars. If you buy something that’s from outside Canada, you can buy foreign currency to use or your credit card will charge for the exchange. Foreign governments need to hold the currencies of their trading partners because a Canadian producer wants Canadian Dollars as payment for a shipment of goods going to China.

September 16, 2021
3:50 pm
Righand
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Norman1 said

China's foreign debt is not in US$. So, their US$ foreign reserve holdings don't offset China's debt.

US$ reserves as US$ cash in a China central bank vault does not earn interest. Holding the US$ reserves as US Treasury bonds does. 

From another source...............

"China has steadily accumulated U.S. Treasury securities over the last few decades. As of January 2021, the Asian nation owns $1.095 trillion, or about 4%, of the $28 trillion U.S. national debt, which is more than any other foreign country except Japan.Mar. 16, 2021"
https://www.investopedia.com/articles/investing/040115/reasons-why-china-buys-us-treasury-bonds.asp#:~:text=China%20has%20steadily%20accumulated%20U.S.,other%20foreign%20country%20except%20Japan.

September 17, 2021
12:23 pm
Norman1
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Bill said
I don't understand why the currency of the holdings matters - ?

If I have $10 in my wallet why would I spend it on a GIC and then go borrow another $10 from someone to put back in my wallet, what's the point of that whole exercise? Why would China have money to buy USA debt and then have to turn around and borrow money from others?

The money that the central bank has is not spending money for the government.

In Canada, the federal government can't raid the Bank of Canada's balance sheet for expenses.

September 17, 2021
12:54 pm
cgouimet
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Bill said
I don't understand why the currency of the holdings matters - ?

If I have $10 in my wallet why would I spend it on a GIC and then go borrow another $10 from someone to put back in my wallet, what's the point of that whole exercise? Why would China have money to buy USA debt and then have to turn around and borrow money from others?  

Technically it could be a zero sum gain financially if lending and borrowing rates are the same or close.

But considering how China likes to play ball, they likely enjoy having some in hand for the opportunity to squeeze really hard ... If you follow my drift . ..

CGO
September 18, 2021
12:07 pm
Bill
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Speaking of inflation, I read the real estate folks' data indicates the price of houses in Canada is up about 13%, average, for the year ending Aug 2021. The Stats Canada CPI data shows cost of shelter has risen under 5% in the same period. Can anyone explain the discrepancy, it's not even close?

A person told me that gov't money printing has caused this inflation, I told him Norman1 says no, so we started looking stuff up.

September 18, 2021
12:27 pm
Loonie
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You would have to look at how the CPI defines cost of shelter.
I'm pretty sure it doesn't refer to the purchase price of real estate.
For starters, about a third of Canadians are renters.
https://financialpost.com/real-estate/almost-33-of-canadian-households-rent-their-homes-who-is-going-to-help-them-in-the-coronavirus-crisis

September 18, 2021
1:56 pm
Norman1
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Statistics Canada does recognize a similar increase in home prices. This is from The Daily -- Consumer Price Index, August 2021:

Homeowners' replacement cost index rises at the fastest pace in more than three decades

The homeowners' replacement cost index, which is related to the price of new homes, continued to trend upward, rising 14.3% year over year in August—the largest yearly increase since September 1987. This was the fourth consecutive month of double-digit price growth.

Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, rose 14.3% year over year in August.

September 18, 2021
2:03 pm
Norman1
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The Shelter category in the CPI includes quite a few things in addition to house prices:

Shelter.png

September 18, 2021
3:02 pm
Loonie
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homeowner replacement costs only amount to about 18% of the allocation for "shelter".
https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2017001-eng.htm

September 18, 2021
8:48 pm
mordko
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CPI does not account for house prices directly. Houses are considered an asset - like stocks or gold - and are excluded. CPI reflects the cost of renting or, if you live in an owned house, the costs “as if you were renting”.

“Cost of replacement” accounts for inflation in the cost of newly built houses, which is a small fraction of house price inflation. Regardless, eventually house price inflation feeds through into CPI.

However there is a lag of 1 to 2 years between house price changes and CPI. Will be reflected in future inflation stats.

September 19, 2021
1:36 am
Bill
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I get all that, I'm just pointing out that for a lot of people the annual inflation/cpi increase number of 4% really doesn't mean much. In this example, all the young folks who got added in the last year to the list of those who can't afford a house due to another 13% increase, irrelevant to them that their other costs only went up 4% or so, they'll now never own a home.

September 19, 2021
7:40 am
Norman1
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CPI shelter is a blend of rented (24%), owned (60%), and utility (16%) costs.

Shelter is then 26.8% of the overall CPI basket.

It isn't really possible to reflect everyone in a single number.

As well, that single August-to-August 4.1% number doesn't reflect the +5½% per annum trajectory of the price of the CPI basket since January.

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