In a world where central banks are given free rein over the supply of
money and credit, and where any examination of these secretive
institutions is considered interference with their “independence,”
Finance Minister Joe Oliver’s comments about QE have not gone unnoticed.
The other week Oliver was quoted as saying that quantitative easing was
“not on the table” as a tool to combat the “economic downturn.”
Economic professors and commentators around the country criticized the Finance Minister, saying that he overstepped his power. Ian Lee of Carelton’s University’s Sprott School of Business said, “You
may think that, you may privately say that, but that’s not the sort of
thing I think the minister of finance should be saying.” Stephen Gordon, an econ professor at Laval University, agreed, calling the comments “worrisome.”
Because, you know, the Finance Minister is not supposed to comment on
the country’s finances. Especially when the federal government is the
sole shareholder of the Bank of Canada.
In October 2013, the late Jim Flaherty told reporters something
similar. He did not support the US Fed’s bond-buying program known as
QE. At the time, Flaherty’s stance was at odds with Bank of Canada
Governor Stephen Poloz’s. However, Poloz has stated that a QE decision
would be a joint-effort between the Bank and the federal government’s
Quantitative easing, for those who don’t know, is when the central
bank prints money and then uses the fiat to purchase government bonds.
The new money, once circulating in the economy, appears as a liability
on the central bank’s balance sheet, whereas the new bonds are supposed
to resemble interest-earning assets. Central bankers do this when they
can’t push interest rates any lower. Often it’s after a solid hour of
head-scratching when they decide that the problem is that they simply
haven’t created enough inflation.
Yet, like pushing interest rates below their market level, QE only
serves to worsen the problems created by the central bank in the first
Far from engaging in counter-cyclical polices, the BoC and federal
government are pouring gasoline onto the fire. When a market correction
occurs, if interest rates are set by the market, businesses will tend to
return to an equilibrium pattern of investment expenditures. The excess
of capital goods in the boom sectors are specific to those sectors.
Contrary to what Stephen Poloz thinks, these capital goods represent
wasted capacity that need to be written off. Capital goods are specific
things, not a homogeneous blob denoted by K. Wasted capital goods
from the boom sectors are not “excess capacity” that can find new
employment in non-boom sectors. The resumption of capital formation will
require time to make up for previous malinvestments.
Of course, issues occur when interest rates are never allowed to normalize. Throw in QE and watch the problems compound.