Sunday, September 15, 2013

BoC Deputy Governor: US Fed Tapering is Eh-Okay

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Bank of Canada Deputy Governor John Murray is confident that Fed tapering won’t have any negative consequences for Canada. “The improving underlying strength of the U.S. economy should more than compensate for the drag from higher interest rates. Stronger external demand, coupled with downward pressure on our currency and support for commodity prices from a global economic recovery, will provide the lift,” he said in a speech.
As usual, Bank of Canada officials have got it wrong. In order to finance their massive debt, the United States government sells bonds to investors. Once upon a time, countries like Canada, China, and other nations gladly bought US Treasuries. But with the on-going deficit, debt and unfunded liabilities resulting in a $222 trillion sink-hole, the buyers market for US bonds is shrinking by the day. Hence the Federal Reserve’s bond-buying program. For every Treasury the rest of the world doesn’t buy, Ben Bernanke is there to soak up the supply.

By buying $85 billion a month of Treasuries and mortgage-backed securities, the Federal Reserve has successfully kept interest rates low and kept financial markets “liquid.” While mainstream economists and Bank of Canada Deputy Governor John Murray see this as benign, Austrian economists point to some disturbing fundamentals.
For starters, low interest rates and cheap money is what got the US into all these problems. There is no ounce of sanity in spending your way to a recovery when that is what got you into the mess in the first place. Low interest rates backed by cheap credit distort the production structure in the economy. All goods and services that aren’t nature-given must be produced through an array of capital goods. This delicate order of heterogeneous capital goods involve millions of people, acting as both buyers and sellers. All these capital goods must eventually produce a consumer product, and this consumer product must satisfy consumer demands. Otherwise the whole process is wasted energy. The best means of figuring out how best to organize the production structure is through the price system. Not only for prices of consumer goods or capital goods, but the price on investments as well. Interest is the discount in the valuation of future goods against present goods. It is a crucial component in the economy.
Unfortunately, the free price system that has generated prosperity for generations has slowly but surely disintegrated due to meddling government intervention. A price control here, a price control there – it all adds up in the end. Now we might be at the end. The US Federal Reserve no longer allows the market to set prices. All financial assets in the economy are priced by a Board of Directors. This monetary socialism plain and simple. The idea that the Fed can back out of its bond-buying program and have the economy stand up on its own is laughable – if it didn’t involve the massive impoverishing of an entire nation.
If the Fed isn’t buying US treasuries, then who will? John Murray insists that there is an “underlying strength [in] the U.S. economy,” but where is this strength? Distorting interest rates have dilapidated the production structure – as if exponential credit creation can be sustained on finite resources. If the US didn’t hold the world’s reserve currency status, they would have gone the way of Zimbabwe a long time ago.
Bank of Canada Deputy Governor John Murray would be best to listen to Peter Schiff and not Ben Bernanke. Bernanke insists that tapering is like pulling a table cloth off the table and having the plates, cutlery and glasses remain in place. Schiff holds that Bernanke has got the analogy mixed up. The table cloth isn’t the Fed’s “stimulus.” The table itself is the stimulus. Bernanke is trying to remove the table and have the table cloth, plates, cutlery and glasses remain floating in mid air. Obviously, this is impossible. Likewise, it’s impossible for the US Fed to get out of the mess they’ve created. John Murray is foolish to believe that the US in a recovery. While higher commodity prices will continue to generate wealth in places like Alberta, Saskatchewan and the Yukon – the effects of Canada’s largest trading partner going the way of the Soviet Union will certainly cause some unavoidable headwinds.

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