Blog

More Central Bank Trouble in Canada

More Central Bank Trouble in Canada
Profile photo of Danny LeRoy

14546039298_5ab096c6a8_oYesterday, the Governor of the Bank of Canada Stephen Poloz surprised many by not lowering the target for the overnight rate to 0.25% from 0.50%. The central bank cut this rate twice last year in an attempt to stimulate the economy. During the past nine months the TSX index has fallen from more than 15,500 to below 11,800, the Canadian dollar has depreciated from US$0.84 to below US$0.69 and crude oil prices have fallen from US$60/bbl to less than US$28/bbl. Consumer prices for imported products are rising quickly and government tax revenues are falling. In other words, the circumstances that usually motivate the Bank of Canada to act did not trigger a response from authorities this time.

The decision on the overnight rate may make the Bank of Canada an exception among other central banks that have reduced their key lending rates to zero or less. Bucking the trend does not mean that Canadians are going to escape the consequences of seven years of an overnight rate of 1.0% or less.

It is widely expected the Federal budget is going to contain borrowing $15 billion in the next fiscal year, ostensibly to “stimulate the economy”. Borrowing by the provincial government in Alberta could easily be more than half the Federal level of borrowing. Incredibly, the provincial government in Quebec may be the most parsimonious of all provincial governments.

Governments have no wealth of their own that is not first taken from someone else. There are only three sources available: current taxpayers, future taxpayers and in the case of the federal government, creating inflation by selling government bonds to the Bank of Canada. Stimulus spending likely means that future taxpayers will be confiscated to a greater extent than they would be otherwise. Inflation will erode further the purchasing power of every Canadian dollar in existence. Initial recipients of stimulus transfers will benefit; most Canadians will not.

Compounding these unavoidable, net negative consequences are the massive structural problems created by holding interest rates below what would have transpired in an unhampered markets. Myriad malinvestments will be exposed and resources painfully redeployed to more profitable ends. Rather than trying to avoid a recession or mitigate its effects, the correct policy is the polar opposite. Allow market processes to operate so the inexorable recession will be difficult but swift and complete.

More in Blog

Unilateral Free Trade Would Benefit All UK Citizens

Patrick BarronMarch 21, 2018

The EU elite are ignorant of the true meaning and importance of “comparative advantage”

Patrick BarronMarch 15, 2018
stockmarket-300x200

Don’t Trust the “Trump Boom”

Taylor LewisFebruary 20, 2018
santelli1

Inflation has Central Banks Playing Musical Chairs

Doug FrenchFebruary 8, 2018
mueller

What If Things Were Different?

Taylor LewisJanuary 30, 2018
ContainerShip_teaser-300x129

Why Comparative Advantage Matters

Danny LeRoyJanuary 29, 2018

Can an Economy Advance Without Savings?

Patrick BarronJanuary 20, 2018

Bastiat and the Hubble Space Telescope

Patrick BarronJanuary 8, 2018

The Economic Benefits of Ending the Fraud of Fractional Reserve Banking

Patrick BarronDecember 31, 2017