Tiff Macklem & Deflation

Bank of Canada Deputy Governor John Murray isn’t the only BoC official to jump ship. After former Governor Mark Carney went off to England, it didn’t take long for Senior Deputy Governor Tiff Macklem to announce his resignation as well. In his last speech as the central bank’s senior deputy governor, Macklem said he and everyone at the BoC are “trying to determine why inflation has been on the decline since 2012.” I’m trying to determine why the outgoing senior deputy still holds any credibility. Inflation is the money supply, and according to Statistics Canada, Canada’s M3 Money Supply grows every year. The Bank of Canada and Chartered Banks broke a new record by adding $17,423 million in 2013. It seems to me that inflation has not been on the decline but has seen a steady increase since at least 1970.


 

Deflation is the ruinous hell where prices of goods and services fall while money retains or increases its purchasing power. “We need to do our best to determine why inflation is below target, but no matter how hard we try, there will be uncertainty about our diagnosis,” Macklem said. Perhaps he’s uncertain because of some of unknown inflation-uncertainty principle. The Bank of Canada is, after all, an institution that examines economics as if it were an empirical science. Macklem reminisced about the inflation of 1970s, citing it as a learning lesson for central banks to keep inflation “low, stable and predictable.” He warned of “sustained negative inflation – or deflation” which is “even more pernicious.” Macklem didn’t elaborate, as no central banker likes to do, as to why deflation is so “pernicious.” I’ve sent several e-mails to the Bank of Canada regarding this irrational fear, but have received no response save for the typical condescending thank-you-for-your-inquiry jargon.

 

Deflation has two causes. The first one is simple: an increase of the supply of goods. If the Bank of Canada were to improve its monetary policy (i.e. not destroy savings) or if new technologies come onto the market that allow us to produce more for less, then prices have a tendency to fall. So in other words, the “pernicious” hell of deflation is really just the purchasing power of your money increasing in value. It’s having your paycheck take home more every year. I don’t know why anyone would openly rob people of this luxury and announce it as beneficial.

 

Tiff Macklem may cite the second cause of deflation as basis for his “pernicious” statement. As the Bank of Canada keeps inflation “low, stable and predictable” what they are actually doing is steadily increasing the money supply. So the Bank of Canada is perpetuating an increased demand for money as purchasing power decreases. If the Bank of Canada stops inflating (i.e. stops adding to the money supply) any money created by the BoC or the Chartered Banks above its reserve quantity would be liquidated. In other words, there’s real wealth out there represented by “real” money. Bankers have a tendency to pyramid counterfeit money on top of that real money. The pyramid scheme only lasts as long as the bankers keep pumping more money into the system. If they were to stop, the gig would be up. The “fake” wealth created by the counterfeit money would disappear (along with the counterfeit money) leaving decrepit investments and half-finished projects. This has to happen eventually (counterfeit money can’t create more resources where none exist), so Macklem’s replacement would be wise to exert some self-control.

 

Falling prices caused by increased production do not reduce profits or make debts unpayable. This is evident in electronics. In 1981 a gigabyte of storage cost $300,000; in 2010 it cost 10 cents. How did this happen? Sales have risen and companies have gotten better through market competition. Even with continual price declines, the electronic industry is booming. Now if falling prices are a result of a monetary contraction, the decline of money makes debt repayment more difficult which usually lead to bankruptcies. However, far from being “pernicious,” this decline is a necessary readjustment from an economy based off of unbacked credit from the central bank.

 

To maintain a functioning economy one does not need to secure “low, stable and predictable” inflation. One needs to allow prices to work. Free market prices allow entrepreneurs to coordinate the various factors of production that ultimately serve consumer ends. An honest savings rate facilitates the coordination of resources over a period of time. The Bank of Canada and the Chartered Banks are wilfully altering these rates to serve their interests. These interests ultimately harm consumers by robbing them of their purchasing power. From a natural rights standpoint, bankers engaging in fractional reserve banking are no better than common thieves. A central banker claiming moral authority is even more repulsive.

 

But Macklem doesn’t stop there. Remember that the outgoing deputy governor thinks inflation is on the decline. So his confusion over “declining inflation” must mean that the prices of goods and services – not the money supply – are declining. As Macklem tells 100 students at Montreal’s Concordia University, “Much of the recent decline in global total inflation can be explained by the recent fall in world energy and food prices.” So why the fear of deflation? There is no inherent economic principle that says consumers won’t buy stuff if prices are falling. That is, essentially, the argument for inflation: a market where prices fall leads to a situation where consumers won’t buy stuff because of anticipation of lower prices in the future. As the concept of time preference can be deduced from the action axiom, I see no reason why anyone (let alone an economist) should still be propagating this myth. At one point consumers will break down and buy stuff. If my daily cup of coffee is going to be $1.90 tomorrow, I won’t wait till then. I’ll pay two dollars now. I obviously value my coffee now more than my 10 cents. Of course, if Tiff Macklem understood time preference, he’d understand why centrally planning interest rates is so destructive and why his outgoing speech should have been more thought-provoking then a discussion on inflation targeting.

Also available at Mises Canada