The Shotgun Blog
Monday, January 11, 2010
Mark Carney is the harbinger of our economic death
Bank of Canada governor Mark Carney is vowing to keep any interest rate hikes tied to whatever schedule Federal Reserve chairman, Ben Bernake in the United States comes up with. This is beyond troubling.
It's troubling because Ben Bernake has the United States on collision course with economic collapse, and there's nothing to be gained from following the US down it's current rabbit hole. There's only economic blood to be spilt.
Bernake is hell-bent on printing and borrowing the United States out of it's economic woes, which is a mirror to the strategy that Alan Greenspan employed to "stimulate" the US out of it's previous recession in 2001. By now, you should know how that worked out; it created a massive real estate asset bubble and knee-capped the entire US financial industry.
The entire strategy of the US Federal Reserve is largely based on keeping housing prices up, to maintain their equity, to fend off foreclosures and forlornment to put the US economy back on a pattern or real estate-backed growth. Bernake feels that with regulations on lending standards and derivatives, we can fend off any future disaster.
The problem is that the actual problem was not caused by lack of regulation, poor lending standards, and excessive speculation. The problem is that the Federal Reserve created an oversupply of cheap credit, that stimulated excessive-lending, which created artificial demand whilst pricing private lending capital almost completely out of the market. The lack of lending standards and excessive speculation are symptoms of the distortions to risk perception caused by government provided, artificially cheap credit.
What lawmakers and bankers are hoping, is that they can continue this forsaken paradigm of leveraging artificially cheap credit and avoid all of the aforementioned symptoms caused by the market distortions through regulation of market transactions. But in the end, all the regulation will do is reduce liquidity of the financial markets, resulting in more capital flight, making the US financial industry globally uncompetitive and leave the currency crisis unchecked. The problems that will continue to persist will predictably lead to the Federal Reserve injecting even more cheap credit into the market to compensate, pushing consumer lending even higher, resulting in more and more real estate speculation and the continuation of the bubble economy.
Every step of the way, the US economy is weakening from within. It is now at the point that all economic growth in the US is pretty much tied to economic stimulus pouring through the front doors of the Federal Reserve. But this situation cannot continue forever.
We are now in the eye of the storm, and the deadly reality of the US Government and the Federal Reserve's inflationary economic policies are going to rear themselves in the form of hyperinflation. Just like in Bolivia, Lithuania, and Argentina (I'll leave Zimbabwe out for now) before the US.
American politicians, who've long criticized the economic policies of other nations -- like the countries I've just mentioned -- for their deficit spending, inflationary monetary policies, trade barriers and so and so forth, now advocate for those same, tried and failed policies, as if the laws of gravity apply to everyone else except for them -- America is special, it always pulls through, because it's the greatest country on Earth, and it's faith in God and faith in itself will guarantee it's unlimited prosperity.
Indeed, American economists are fond of pleading to America's economic history for proof of it's economic resilience. Yet, there is nothing logical about having faith in the future simply by citing the past. Nothing at all. Citing America's past as the proof it's prosperous future is like saying that the success of the Roman Empire, the Ottoman Empire, or the British Empire are all proof that they'll be around forever. Oh, wait.
Here in Canada, Mark Carney and the Bank of Canada have committed themselves to following the same policies of the US Federal Reserve; keeping interest rates artificially low, and stimulating consumer lending. Interestingly enough, though, Carney is trying to have it both ways. His absurdly low interest rate policy is now being coupled with his dire warnings directed at consumers to control their debt. But why?
Interest rates send a message. Low interest rates signal that it's easier borrow than to save in order to increase your material well-being. So what is Carney trying to say? He wants lending rates low but he doesn't want people lending? Or he just wants some people to lend, but not others?
My sense is that Carney understands the problems his policies are creating in the economy, and his primary concern is to devalue the Canadian Dollar against the US Dollar. His primary tool for doing this is keeping rates at near-zero, to discourage currency traders from flocking to the already attractive Canadian Dollar, with it's strong commodity-backing.
The problem is, that this policy is resulting in us selling our commodities short and discouraging productivity gains in our industries. It's also contributing to a decrease in our savings rates, and enabling over-consumption that leads to excessive imports of consumer goods, which further weakens our industrial base.
This policy is, as it has always been, a short-term gain for long-term pain.
While Canada is in the enviable position of having a strong commodity sector, relatively good government finances, and a relatively healthy economy, such that we can absorb the shocks of the economic restructuring that needs to occur in order to put us on a path towards long-term prosperity, Carney is hell-bent on following the same game plan that led the United States into economic disaster in the first place.
This makes him a fool, as he's mortgaging our economic prosperity on the false hope that American importers are key to our future success. The problem is, that American importers are not going to be able to afford to buy Canadian exports at all in a few short years. Is Carney willing to implode our currency, simply to keep Americans buying our goods? If he is, then Carney is the greatest risk to Canadian sovereignty we've ever seen in the history of Canada.
Posted by Mike Brock on January 11, 2010 | Permalink
Another excellent commentary by Mike Brock.
I'm not surprised that Carney is doing this. I think the Bank of Canada utterly panicked when the Canadian dollar went to $1.10 U.S. and since then have adopted a policy to prevent that from happening again.
Economist George Reisman refers to recessions as "inflationary refueling periods". What should happen in a recession is that malinvestments get liquidated and purged from the economy to restore business confidence and redirect investment to sustainable projects. What happens instead is that central banks set interest rates to absurdly low levels, thus setting the stage for further bubbles and busts in some other sector of the economy.
Posted by: Dennis | 2010-01-11 11:19:27 AM
There are a couple of things in play here, Mike. First, the CPC does not want a real estate meltdown before they can call an election (likely the Ides of March). Low rates and 5/35 terms are keeping the RE sector on life support.
Second, Harper is terrified of Canada striking out on its own. Despite our tremendous resource wealth, the CPC sees its majority in Ontario and Quebec. Those economies, especially Ontario's, are deeply linked to the US. To shift, as they must, away from the US and towards the world will require a number of years.
The rise of the Canadian dollar is pretty much inevitable. The question is whether it can be managed in such a way as to minimize the destruction of Ontario and Quebec's manufacturing base. (That question may be moot at this point as the collapse of the US economy and the "Buy American" policies of the more populist end of that economy, are clobbering whole sectors.)
Interest rates themselves are going to rise simply because governmental borrowing - federal and provincial - is increasing demand for debt which will, quite quickly, increase the price of that debt. Carney knows this and also knows there is sweet bugger all the BOC can do about it in even the medium run.
So, my sense is that Carney and Harper will follow the Americans until the election and then, whether by choice or circumstance, the Canadian economy will decouple from the US economy. The first sign of that will be rising mortgage rates and falling RE prices.
The real question for the Canadian economy is whether we even want to be in the manufacturing business - at least at the level of putting commodity stuff together. Where the money seems to be is in resource extraction, the creation of capital pools and the building of the high technology, intelligence intensive stuff like Blackberries.
Posted by: Jay Currie | 2010-01-11 12:26:37 PM
You're on a role ;) Excellent comment. Have you ever considered, however, a Japanese type scenario for the U.S.? All the liquidity being created by the FED could be taken out of the country and invested in other countries that peg their currencies to the USD (China for example). You'd get bubbles in those countries instead.
I still believe some type of hyperinflation or stagflation is more probable, but I do nevertheless believe it to be within the realm of possibilities.
Posted by: Charles | 2010-01-11 12:30:39 PM
Re Charles' comment:
I think that the critical difference between the U.S. and Japan is that Japan has always been, and continues to be, a nation of net savers, even through the worst of their economic slump. Those savings have allowed Japan to finance their budget deficits without trashing their currency.
The average American, on the other hand, has no savings, just massive debts. This has been the case for many years, resulting in the need to have their debts financed by foreigners. The problem is that these foreigners are becoming increasingly reluctant to take on more of this debt. The net result is going to be a dramatic decline in the value of the U.S. dollar. This could take place rapidly as a result of some dramatic event, or the Yankee buck might simply bleed value over a very long time. I don't know which scenario is more likely.
The biggest problem I have with the Bank of Canada is that their monetary policy will progressively turn Canadians into debt addicts just like their American cousins given enough time.
Posted by: Dennis | 2010-01-11 1:22:59 PM
Point taken. Just for the record, I think the scenario you outlined is the most plausible. But have you seen the Japanese savings rate since about 2000? It has plummeted from double digits to about 2% (latest number I've seen). This also corresponds to the period where the BoJ was the most aggressive. During that plummet, Yen flooded out of the country and caused bubbles all over Asia.
Posted by: Charles | 2010-01-11 1:44:00 PM
I wasn't aware of the plunge in the Japanese savings rate. Thanks for pointing it out to me. That definitely changes things. In that case, the Japanese are going to find themselves in the same mess as the U.S.
Posted by: Dennis | 2010-01-11 2:31:25 PM
Wow! I just came across a NP article in which the Bank of Canada proclaims that Canada is not experiencing a housing bubble...."yet".
The problem is that "...the current rally – which has seen existing home sales climb 73% on a year-over-year basis as of November, and prices surge nearly 20%...."
With Ontario in a substantial recession, what on earth would make housing prices jump 20% in one year other than monetary policy that's far too loose?
This is an article worth archiving, just to see Carney eat his words in the future.
Posted by: Dennis | 2010-01-11 2:40:44 PM
Carney will never eat his words. He'll do what all people in his position do: he'll deny that anyone saw it coming.
Posted by: Mike Brock | 2010-01-11 2:45:04 PM
It's not only monetary policy. It's almost as if we want to guarantee that all the liquidity will go into housing. In 2008, the CMHC drastically increased the amount of securitizations it was going to insure. In 2009, that number was even higher. All evidence so far indicates that the CMHC will not stop anytime soon. The numbers are all on the CMHC's site. Just look in the MBS section.
And Carney will do what Bernanke did ... he'll bullshit us and unfortunately most Canadians will probably believe him.
Posted by: Charles | 2010-01-11 3:18:14 PM
Mike Brock - We are now in the eye of the storm, and the deadly reality of the US Government and the Federal Reserve's inflationary economic policies are going to rear themselves in the form of hyperinflation.
Hyperinflation? Mr.Brock's article curiously omits any statistical evidence to support his thesis. Virtually every indicator in the United States from M2, M3, MZM to the Federal Reserves Monetary Multiplier to commercial paper indicates a substantive contraction of 3% - 5 % in the money supply. This coupled with a core PCE of 0.1% in November and December hardly omens for hyperinflation. A more likely scenario is deflation and a double dip recession later this year.
Posted by: George Smiley | 2010-01-11 3:35:25 PM
The comments above prove what I have suspected for quite some time; I know very little about economics. I will say though, that because a country is really a bunch of individuals, speaking of us as though someone can or ought to manage it in any way is especially difficult for me to comprehend.
Posted by: TM | 2010-01-11 5:20:05 PM
I must commend you on another great column, Mike. I love reading your stuff. I actually stopped reading the Shotgun when you stopped posting, then I saw a link to one of your articles re-tweeted on Twitter.
If you stay regular, I'll stay regular. Deal?
Posted by: Michael G. Riley | 2010-01-11 6:10:50 PM
Those economies, especially Ontario's, are deeply linked to the US. To shift, as they must, away from the US and towards the world will require a number of years"
Conidering that outside interests own almost everything in this country, mostly American, I believe it will be very difficult to court the rest of the world for our finacial wellbeing. Just take one small example. If the US put out a declaration tomorrow that all automotive production and related parts production would cease as of midnight, what do you think would happen ? There would be absolute panic on the Hill.
Canada and the US are joined at the hip. The vortex that is slowly turning the US towards the centre will suck us right along with it. The only strength we have is in our banking system and even that is dependent on how the US manages its trillion dollar debt, much of it held by china. The whole situation is frightning.
Posted by: peterj | 2010-01-11 9:13:51 PM
Posted by: peterj | 2010-01-11 9:13:51 PM
conidering ??. Ah..you know. Finacial too.
One troubling aspect on this subject is that the US has never outsourced any part of its military complex, where as they have outsourced almost everything else. We all know the power behind the armament industry and war is great for business. Just a thought. When times get really tough at home its time to divert attention to a greater perceived problem. Creates a lot of employment when you have a war. The bigger the war, the higher the employment and a great lowering of expectation on living standards for the population. Just a thought.
Posted by: peterj | 2010-01-11 10:15:19 PM
peterj, good comments. Have you heard of the broken window theory? Have a look here http://mises.org/story/2868
It appears that the broken window creates employment but the truth is that it does not. Had the money stayed in the store owners pocket, it would have. The same is true when a country spends money on a perceived threat in order to create jobs. Some jobs are indeed created but wealth is reduced and over the long run, more jobs are lost.
Posted by: TM | 2010-01-11 11:10:26 PM
Posted by: TM | 2010-01-11 11:10:26 PM
Past my bedtime but will check it out tomorrow.
Posted by: peterj | 2010-01-11 11:25:27 PM
In addition to the consequences of Bastiat's "Broken window fallacy" there is the problem of the incredible waste of human life and limb in time of war.
Posted by: DML | 2010-01-11 11:42:56 PM
DML, yes, and that is the biggest loss of all.
Posted by: TM | 2010-01-12 9:00:02 AM
Our banks are buying bonds instead of making loans, our government is subsidizing banks. The money is being printed as if there is no tomorrow.
Economically, there might not be.
Double dip recession? We haven't stopped the first dip yet, the GDP "grew" in the 3rd QTR only if you count government debt spending as part of the real economy.
Its much worse than anyone is saying.
Posted by: Floyd Looney | 2010-01-13 12:12:47 AM
"Our banks are buying bonds instead of making loans"
Of course they are. They're being given essentially free money and they can buy bonds which give them 2 or 3%.
Posted by: Charles | 2010-01-13 9:07:02 AM
"This coupled with a core PCE of 0.1% in November and December hardly omens for hyperinflation."
The whole concept of core inflation really gets my blood boiling. Sure. If you take out everything that's volatile from the index you won't get any rising prices. Last time I checked, people still have to heat their homes, fill their tanks with gas, and eat. I'd love to be able to announce to my clients that in 2008, if I stripped out all the volatile stocks, their portfolios were up 15%. But I'd be lying. So are our monetary authorities when they concentrate on "core" inflation.
As for MZM or M3, although the figures have been falling over the last few months, they have exploded over all of 2008 and most of 2009. Your comment was pretty selective.
Posted by: Charles | 2010-01-13 9:14:59 AM
Consider that Ontario and Quebec make up over 50% of Canada mfg. exports.
Jobs are key in these areas.
Careful what you wish for.
Carney is trying to save jobs, buy time, whatever you want to call it.
I don't think he wants Alberta and Sask. to be the only winners here.
Posted by: Mark | 2010-01-13 10:32:12 AM
peterj, good comments. Have you heard of the broken window theory? Have a look here http://mises.org/story/2868
Very interesting and certainly food for thought.
Posted by: peterj | 2010-01-14 10:30:47 PM
Who pays Marc Carney? Who signs his pay chegue?,
Canada is being gutted.Check SEDI follow the money what are our finance minister and his chronies doing with their money,here comes the IMF!
Posted by: steve | 2010-02-19 11:24:41 AM
I do not know a lot about Canada's economy but I would say if you are more solvent than the USA, and do not have suicidal trade policies like the USA you are probably better off. What I am concerned about is the shadow government in this country both Republicans and Democrats seem hell bent on shoving us into this "New world Order" even if it means the destruction of the dollar, middle class, national sovergnty, and control over our own economy(China has more control over the US economy than do voters). I am also concerned that it is rumored this shadow government( 95% of politicians in this country are members and support the Committee on Foreign Relatioins-cover for the illuminati). They supposedly want to do the same thing to the North american continent that they did to Europe;common currency, common governmental control of the continent(New world order agenda).
What disturbs me about US policy is it seems our leaders are intent on turning this country into a 3rd world country, destroying the dollare as well as taking away any economic control from the average citizens. The force behind this agenda do not seem to care how it adversely affects or destroys the average americans ability to earn a living or feed their families. MY QUESTION I POSE TO YOU ABOUT CANADA IS THIS: HOW DO YOU KNOW IF THERE IS NOT A SIMILAR AGENDA ON THE PART OF YOUR LEADERS TO REDUCE CANADA TO A WEAK ECONOMIC POSITION SO THAT SOME OUTSIDE GROUP CAN JUST WALK IN AND TAKE OVER YOUR CURRENCY-ECONOMY WITHOUT A FIGHT FROM IT'S CITIZENS SUCH AS INTRODUCE THE COMMON NORTH AMERICAN CURRENCY AS A REPLACEMENT THE "AMERO" IT WAS RUMORED THAT EXPRESIDENT BUSH HAD ALREADY STARTED MAKING TRADE DEBT PAYMENTS IN AMERO'S EVEN THOUGH IT IS NOT YET OUR CURRENCY BUT WAS TO be:INTRODUCED IN 2010?
Posted by: Realitybetraysusall | 2010-04-06 8:16:53 PM
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