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One Fundamental Problem with the Bank of Canada

One Fundamental Problem with the Bank of Canada
Profile photo of Caleb McMillan

boc-300x225According to Bank of Canada Governor Stephen Poloz, “The economy clearly no longer needs as much stimulus as we’ve been giving it.”

Which means interest rates are moving back up, but as Poloz reminds us, “Interest rates are still very low.”

What the Bank does is “a data dependent quarter by quarter analysis.”

And that, in essence, is what’s wrong with the central bank — data dependency.

Artificial credit creation fuelling asset bubbles? Sorry, no time for that I’m afraid, the Bank is more concerned about an economy “working at full capacity,” while they “target inflation” and work to “close the output gap.”

All this a more roundabout way of saying — since the Federal Reserve is slowly raising rates, the Bank of Canada will follow suit.

Credit expansion leading to financial ruin doesn’t necessitate that we should abolish the central bank and replace it with nothing. Canadians need more convincing than that.

Perhaps there is some “proper” or “correct” interest rate the Bank should aim for. But what set of infinite factors could determine what’s “correct?” 

Right now, Poloz and his cohorts study price inflation and an invention called the “output gap.” The output gap is the apparent difference between the actual output of the economy and the “potential” output.

What’s “potential output?” Whatever the Bank claims to measure it as. They’ll use data manipulation as “tools” to define trends, create models and predict a homogenous, collective “economic output.”

Of course, as Murray Rothbard has so eloquently stated: “People are contrary cusses whose behavior, thank goodness, cannot be forecast precisely in advance. Their values, ideas, expectations, and knowledge change all the time, and change in an unpredictable manner. … Every economic quantity, every price, purchase, or income figure is the embodiment of thousands, even millions, of unpredictable choices by individuals.”

But as Poloz would argue, “We’re not just forecasters… we’re policy-makers… It’s our job to be very skeptical of short-term movements in data.”

Yes, the Bank of Canada isn’t in it for profit, they aren’t manipulating the innermost personal choices of individual consumers — they’re crafting monetary policy for the greater good. They have a long-term interest.

So goes the argument.

Of course, Hoppe’s critiques on democracy put that idea to rest. And Murray Rothbard is right — you can’t forecast human behavior.

Yet, Poloz and the Bank of Canada still fall into this data-trap, this dependency on computer models, this idea that, “the economy is approaching full capacity” when in fact it’s in a financial bubble.

The Bank describes price inflation as if it were a natural phenomenon. For “Austrians,” inflation is the growth of the money supply.

Because, as Poloz said, if the Bank could predict all future inflation, “it would appear as if interest rates were being adjusted up or down for no reason.”

Exactly.

The Bank of Canada strives for a balance between a self-defined “price inflation index” and an imaginary “output gap.” Poloz and the Bank expect it to close by the end of this year, then the economy will be running at full capacity.

Or as Fed Chairwoman Janet Yellen might say, another financial crisis is unlikely “in our lifetime.”

So one fundamental problem, among many, for Canada’s central bank — collecting data on capitalists and consumers to use as macroeconomic variables in a computer model that bears no resemblance to reality.

Or as Frank Shostak asked,

What purpose can this type of information serve? In a free unhampered economy, this type of information would be of little use to entrepreneurs. The main indicator that any entrepreneur relies upon is profit and loss. How can the information that the so-called “economy” grew by 4 percent in a particular period help an entrepreneur make profit?

Central bank policy doesn’t aid the coordination of prices and production. The Bank of Canada hinders this cooperation. They undermine it.

They don’t target inflation, they create it.

By targeting the “output gap,” the central bank creates an artificial expansion of credit.

Money-creation and interest rate manipulation don’t help or guide economic prosperity. They set in motion a boom-bust cycle that ultimately impoverishes.

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Profile photo of Caleb McMillan
@Caleb983

Caleb McMillan is a writer that lives in Vancouver, British Columbia.

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