Monday, August 25, 2014

Poloz is Gonna Leave ‘em Low

As Janet Yellen talked about the possibility of raising interest rates, Poloz’s comments followed with a definite no. We’re already bumped up to 1% and Canadian markets tend to react to American news anyway.
Instead adding more speculative fire to the monetary inferno, Poloz is staying mum on his next move. His strategy, according to the Globe and Mail,

“is counting on new exporters to replace those wiped out by the recession, creating an incentive to leave borrowing costs low to help those entrepreneurs get started.”

It is mistakes like these that make economic reporting sound as if the journalists are groping in the dark.

Granted, Poloz is creating an incentive to “help those entrepreneurs get started” by keeping borrowing costs low. But Poloz isn’t a very good economist; he’s a central banker.

In economics one must look to the unseen consequences. Poloz is helping business get started, but many of them won’t finish their projects thanks to the very policy that make borrowing costs low.

What’s unseen is the literal capital consumption that takes place when entrepreneurs ignore the wearing out of their existing capital goods. Because many longer-term investments are time-sensitive, their profitability increases as interests rates fall. Entrepreneurs are given the go-ahead to hire new workers and buy more raw materials.

Interest rates are vital for Canada’s modern, complex economy. That can be seen. What isn’t always seen is the trade-off between consumption and investment. So long as savings and production come before consumption, nothing is afoot.

The problem is when the Bank of Canada decides to interfere with interest rates by offering no economic trade-off. Poloz’s strategy is to ignore the unseen, and give everyone a good time in the short-run.

But a bank can’t eliminate scarcity. We’re not rich because interest rates are low. Low rates are a reflection of our savings and capital. All the bank does by keeping “monetary stimulus” in place is consume capital that makes all of us poorer in the long-run.

The Bank of Canada erodes savings, distorts production, misallocates credit, and creates unnecessary uncertainty in the marketplace.

Far from leaving borrowing costs low to help entrepreneurs get started, Poloz is enticing them with a policy that leads to debt and bankruptcy.

Poloz is not aiding an economic recovery, he is sowing the seeds of the next crisis.

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