Thursday, September 6, 2012

Bewilderment at the BoC

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For a while now Mark Carney has been talking about raising interest rates. This past Wednesday was no exception. Carney predicted the Canadian economy to "gain momentum" this year and in 2013 despite the obvious European recession and the US debt problem.

Instead of letting the market set interest rates, Carney and his gang of central bankers at the Bank of Canada centrally plan what they think is "normal" for the Canadian economy. Apparently, the key overnight rate is ideal at 1 percent, despite the growing debt-to-income ratio of Canadians. The idea that low interest rates may be responsible for the debt bubble Canadians find themselves in is considered absurd. In fact, compared to other countries that have kept their rates at 0, the Bank of Canada has been targeted as pursuing a "tight" monetary policy.

The Bank released a policy announcement, using language that pointed toward interest rate hikes if the "economic expansion continues and the current excess supply in the economy is gradually absorbed." In other words, when the global economy drops and pulls the Canadian economy with it, the idea that interest rates need to be higher will vanish. In fact, higher rates in response to a recession will be deemed laughable, if not outright dangerous.

"Economic growth is expected to pick up through 2013, with consumption and business investment continuing to be its principal drivers," the Bank forecasts.

With the Bank of Canada full of Keynesians that believe consumption grows an economy and that lower rates can reduce scarcity, it should come as little surprise that these central planners can't see the economic storm in front of their eyes.

It is a logical and empirical fact that artificially lowering interest rates will wreck an economy. There is nothing inherently flawed with the free market. The problems arise when central banks like the Bank of Canada expand credit via inflation via artificially low interest rates. Without a central bank, low interest rates indicate a high savings rate, thus sufficient capital to finance long-term projects. By injecting this new money into the system banks are partaking in capital consumption. Thus, long term projects are financed while consumers are spending in the here and now. Eventually the lack of sufficient resources becomes apparent and the boom becomes a bust.

Mark Carney's policies are ensuring that Canadians use long-term resources for short-term gains. Perhaps environmentalists should forget about carbon footprints and focus on the destruction of capital through centrally planning.

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