Thursday, August 6, 2015

QE is “Not on the Table,” says Joe Oliver

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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 finance ministry.

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 place.

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.

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