Tuesday, October 23, 2012

Does Mark Carney Know What He's Doing?

Also available at mises.ca

Columnist Joe Castaldo of Canadian Business asks this same question. While I can't answer with one hundred percent certainty that Carney doesn't know what's he doing, I can infer from his actions. If Austrian economics is considered the only "school" describing the economic reality we all interact with, then it's fair to say that Bank of Canada Governor is completely off-base with his approach to monetary policy. Whether it's due to cognitive dissonance or an evil ploy by Goldmach Sachs to enslave the world through debt (or somewhere in between) is more or less irrelevant for the topic at hand. For I'm not interested with the reasons why Mark Carney acts the way he does, I'm concerned with how he's acting.

Today, Mark Carney announced he was going to keep interest rates at 1%. No surprise there, this is the 17th time he's done that. What's also not surprising were his warnings about household debt. He expects mortgage and consumer debt to rise over the next year before stabilizing, when the economy "is expected to pick up and return to full capacity by the end of 2013."

Joe Castaldo makes a very good point in his article,

"Carney’s frequent warnings about debt and the housing market shows he is well aware of the risks. But by talking instead of acting, he also runs the risk becoming another Alan Greenspan, the once infallible guru who infamously stuck to low interest rates and ignored the massive debt and housing bubble he helped create until it was too late. Greenspan’s legacy is now tarnished. It’s hard not to wonder if, a decade from now, we might look back at Carney in a similar way."

I'm almost positive that we will. However, just as Greenspan's image hasn't been totally tarnished, I'm sure Carney will find apologists in the media, academia and political establishment. For when crises hits, foreign actors tend to get the blame. It's happened before. Housing bubble? Must have been the Americans. Manufacturing exports lagging? It's definitely those Chinese. To someone educated in economics, it's quite clear that a variety of factors will influence Canada's "double-dip" into recession. But it was Mark Carney's low rates that got the ball rolling.

Interest rates aren't arbitrary numbers; they are inherent features of the market. Low interest rates increase the relative value of cash flows that come in the future. If a lot of people are curtailing consumption and saving, interest rates will naturally fall since there is sufficient capital for entrepreneurs to invest. When interest rates are artificially low, entrepreneurs are led to believe that the income they'll receive in the future is sufficient to cover their near term investment costs. It's not. There are no savings, just new money created from thin air.

Mark Carney likes to lecture about household debts and consumer credit. I don't know if he knows what's he doing. I think he does, but to be honest I could care less about what Carney thinks. What I care about is whether Canadians will wake up to the fact that central banks destroy prosperity.

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