Thursday, September 12, 2013

Central Planning at the Bank of Canada

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I don’t understand Stephen Poloz’s appointment as the successor to Mark Carney. Nor do I understand why Mark Carney was so popular to begin with. Are artificially low interest rates policies supposed to help Canadians? Before he took off for England, Mark Carney sat down for an interview with the CBC. When asked about this absurd low interest policy, Carney responded that the goal is to get people investing into more volatile investments where there’s a higher return. I guess the idea is that the central bank can create bigger returns on riskier investments and this creates genuine wealth. I call it absurd because this policy targets middle-class Canadians that wish to save and invest their money responsibly, conservatively and constructively. The Bank of Canada – under both Carney and Poloz – are, in effect, trying to centrally plan economic growth. This didn’t work for Russia and it’s not going to work for Canada.

The problem in a nutshell is low interest rates. Typically, investments like savings accounts and government bonds are stable and offer a solid return. By manually lowering these rates, the Bank of Canada (as well as every other central bank in the Western world) are deliberately shooing people away. When savings accounts don’t offer a meaningful return, what’s the point of depositing one’s money into them? Canadians are more apt to either spend their money, or invest it into something that is offering stability and capital accumulation – such as gold or silver. However if Canadians spend their money, according to the central bankers and Keynesian economists, this will create economic growth. Not spending 100% of one’s income is considered a “savings glut” or “dead money.”
But this reasoning completely neglects the role savings and investment have in the economy. Consumption isn’t the cause of economic growth – it is a result. A stable, functioning economy requires some people that restrict their consumption for savings or investing. This necessary part of the economy allows for capital accumulation. Capital are the goods which eventually produce the consumer product. Without capital, there is no consumption. At least not the kind of consumption central bankers are trying to create. Think of the computer or tablet you’re reading this from. All the resources that went into building this machine are from the planet Earth. Nothing has been created by magic or sorcery. A complex order of capital goods went into making this product that you are now enjoying. If everybody went out and their spent money on tablets and computers and nobody invested in the production of more, there’d soon be a shortage.
Stephen Poloz, Mark Carney, Ben Bernanke, Haruhiko Kuroda, Mario Draghi, etc. don’t seem to understand this. They’re persistent in their role as “economic growth” agitators. But what has been the result? Central banks are now Politburos of central planning. They decide what interest rates should be, what the money supply should be, the optimum level of employment and consumer spending should be, etc., etc. Whereas central banks used to take their cues from the market (i.e. allow the market to set prices and only intervene to provide additional liquidity), they are now the ultimate central planners of the economy. By manipulating interest rates and other prices, they are subverting the market order for the failed central planning of Communist states. Whatever the short-term consequences of raising rates are, central bankers would be smart to disregard them as the necessary restructuring of the economy. If the market isn’t setting prices, then there is no economy. There’s only the dictatorship of central bankers.

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