You Can’t Keep the Printing Press Idle for too Long …

We have recently portrayed Canada’s new central bank governor Stephen Poloz, to whom we have alternately referred to as a comedian and a delusional bubble blower. This may perhaps strike some readers as uncharitable; then again, central economic planning bureaucrats should be fair game, especially as nearly all of them are slaves to hoary inflationism and are apodictically certain to do grave damage to the economy, based on economic theories that at best deserve to be called a form of voodoo. It’s really that bad.


0715polozMr. Stephen Poloz, Canada’s new bubble-blower in chief, gazing into the distance – presumably in a futile attempt to divine the future.

 Photo credit: Adrian Wyld / The Canadian Press


As readers may recall, Mr. Poloz has continued where his fellow bubble-blower and predecessor Mark Carney left off, by keeping the bubble blown with all his might. We imagine he may be a bit intimidated by the truly daunting size the combined real estate and consumer credit bubbles have attained in Canada. To call them monuments to monetary megalomania would be an understatement. Among developed nations, only the bubbles in a few Scandinavian countries and Australia can hold a candle to them.

Surely Poloz must be aware that there can simply be no painless way of getting out of this mess. Hence, he is trying to delay said end, possibly in the hope that the bust can be postponed beyond his watch (Carney showed judicious timing, we think, when jumping off the Canadian ship).

We were therefore decidedly unsurprised when it emerged yesterday that the Bank of Canada has cut rates again – apparently the Canadian economy has entered an official recession, which must however not be mentioned (!).Really.

According to the Financial Post:


“It was widely predicted, and now the Bank of Canada has joined private-sector analysts in acknowledging the economy likely slipped into recession in the first half of 2015 — something that hasn’t happened, technically at least, in six years.

So, with no rebound in sight for oil prices and growing concerns that global economic threats could spill over into this country —governor Stephen Poloz cut the central bank’s trendsetting interest rate for the second time this year.

While the 25-basis-point drop to 0.5 per cent on Wednesday was also anticipated by many forecasters, the previous cut by the same amount, in January, shocked markets — coming with little indication and after nearly five years of dormant rate levels.

Even so, the collapse in oil prices had already started taking its toll on Canadian output in the first quarter, where the governor had hoped it would be contained, or “front-loaded,” as he said at the time. Now into a second quarter of contraction, Poloz was still careful not to use the “R” word on Wednesday.

But he expressed strong concerns over the growing impact of low crude prices on business investment in the energy sector — as well as signs of reduced spending by non-resources-based companies and weaker demand for Canadian products in China’s slowing economy.”


So he has “acknowledged” the recession without even mentioning it once. The man is not only a comedian, he is apparently also quite an adept pantomime. How else would the Financial Post know what he “acknowledged”, if he refused to talk about it? Here is what else he failed to mention (the wording with which this was “acknowledged” is truly comical to read – wait for it):


Canada household debtCanada’s consumer debt bubble – several years go already about one third of Canadians reported in a survey that their debt worries caused them to have sleeping problems. We can certainly believe it – click to enlarge.


What to do When Beset by a Credit Bubble of Historic Proportions?

Here are a few more excerpts from the Financial Post, including the BoC’s “acknowledgment” of the small problem depicted above (best put down the coffee). It also contains the a mention of what we call output-gappery – the erroneous belief that it can be mathematically shown what economic output “should be” as opposed to what it actually is.

Aside from the fact that mathematics should be banished from economic science, as human beings aren’t inanimate objects, this is based on a serious error. The error is to think that resources are somehow just coincidentally, or perhaps even maliciously “idle”. In reality, most idle resources are simply leftovers of malinvestments made during the preceding credit-induced boom that haven’t been liquidated, transformed or absorbed yet, primarily because loose monetary policy has kept them in a state of suspended animation.


“For now, the Bank of Canada maintains additional monetary stimulus “is required at this time to help return the economy to full capacity and inflation sustainable to target.”

Policymakers have pushed back their target for closing Canada’s output gap — the difference between estimated full capacity of the economy and actual output — to the first half of 2017 from the previous forecast of “around the end of 2016.”

That matches the adjusted timeframe for reaching the bank’s overall inflation target of two per cent — the midway point of policymakers’ comfort band of between one and three per cent for the annual rate of the consumer price index.

“While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment,” the bank said in its report. And this will happen over the next few years “along two different tracks.”

“On the first rack, the resource sector is restructuring in response to the drop in oil prices since last summer, as well as the decline in other commodity prices that began several years ago.


With the help of a weaker Canadian dollar, Poloz and his policy team are hoping the non-resource track will expand and begin to lead growth in this country. That should also lift exports to the U.S., helping to strengthen business confidence and investment — two elements that have been slow to recover after the 2008-09 recession — while household spending, which has led growth after the downturn, is expected to keep rising.”


(emphasis added)

So there are slightly “elevated imbalances” that might give cause for concern, as they “could edge higher”, but what the hell – consumers are expected to keep spending their heads off with more borrowed money anyway! You couldn’t make this up if you tried.

And naturally, here we have another central banker who believes that devaluing one’s currency will magically produce prosperity! If this were actually true, all central banks in the world would do best to devalue their currencies concurrently….oh, wait.

Poloz should perhaps ask the Japanese how they are getting ahead on that particular front. It seems monetary debasement has failed to enrich them. What a surprise – they have been uniquely unable to get richer by making themselves poorer. Their policies were however endorsed by one Paul Krugman as we recall (we believe Krugman likes the Japanese because they believe in alien invasion magic too. Who know, the aliens may bail us all out one day).

  Here is what more than four decades of unfettered fiat money inflation have produced in Canada:

 Canada money supplyCanada’s monetary aggregates M1 (narrow) and M2 (broad). There are different definitions of Canadian money supply measures. We have picked the M1 measure that appears to be the most inclusive (here is a paper that has a little background information), but the trend is of course the same in all definitions. M2 has the usual problem that is contains non-money items that are better described as credit transactions than money, mainly money market mutual fund investments. However, the bulk of Canada’s M2 actually consists of money substitutes that are (theoretically) available on demand, so we felt is made sense to show it as well – click to enlarge.

Do Mr. Poloz and his colleagues seriously think the economy can be “fixed” if only more creation of money and credit from thin air can be induced? Oh well, we told you it’s voodoo.

Meanwhile, we learn that the relentless housing bubble in Canada continues to expand at a breakneck pace:


“Canada’s housing boom continued in June, with data released today from the Canadian Real Estate Association showing the average price of a home sold in Canada at $453,560 — a rise of 9.6 per cent from the same month a year earlier.

“Low interest rates are unquestionably helping boost consumer confidence and home sales activity this summer,” CREA president Pauline Aunger said.”


(emphasis added)

At a pedestrian 9.6% annualized price inflation, this little boomlet clearly needs a shot in the arm!

 Canada house pricesCanadian residential property prices until the end of 2014. Clearly, this is not enough, hence interest rates needed to be cut to 50 basis points – click to enlarge.


Note here that Canada’s house price inflation is strongly concentrated in Vancouver and Toronto, with price-to-income ratios of 10.22 and 11.32 respectively. This should be little consolation, because it means the bubble is even more pronounced there than the average pace of price increases above suggests, and a great many people live in these cities.

Once a bust begins, it will probably start in these cities and radiate outward from there, as Canada’s banks will get into major trouble – as will its state-owned mortgage insurer, which is a major bubble-enabler. Even at a central bank lending rate of just 75 basis points, mortgage payments were eating up 40% of Canadian mortgage debtors’ incomes on average.


fp0716_boc_ratecut_c_jrCanada’s central bank lending rate – from a “mighty” 1% where it was frozen for 6 years, to just 50 basis points in three months.


Finally one must wonder, what can a 50 basis points central bank lending rate possibly achieve that a 1% lending rate couldn’t? Aside from dispossessing savers, that is. Just asking.



Stephen Poloz, comedian, gifted pantomime, delusional bubble blower and hoary inflationist, sprung directly from the John Law School of economics (just as the rest of the developed world’s central planners), is trying to prolong the bubble’s life some more. So far, he has been successful, but he is riding a tiger. The sooner such policies are discredited, the better it will be for all of us, even though the process is likely to be painful for many. However, it is already too late to avoid that, and as Ludwig von Mises has pointed out, there are only two possibilities:


“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”


(emphasis added)

We are in doubt it will help, but we sent Mr. Poloz a link to Ludwig von Mises’ Human Action (pdf, via The Ludwig von Mises Institute), one can always hope …


Charts by:  St. Louis Federal Reserve Research, Financial Post / Bloomberg




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6 Responses to “Bank of Canada Decides More Bubble-Blowing is Needed”

  • No6:

    Mises is of course correct. The trouble is we don’t know how to protect ourselves since the two alternative outcome require different protective measures.

  • Solon:

    Aside from the fact that mathematics should be banished from economic science, as human beings aren’t inanimate objects, this is based on a serious error.

    I get your point, but would still like to pick this nit.. Being an inanimate object is not a requirement for mathematics.

    We would not know about demographic issues for example, without the branch of mathematics known as statistics being applied to human beings.

    But yes, other than the collecting the statistics of the outcomes, mathematics shouldn’t be applied to human decision-making. But that’s different than saying “should be banished from economics.”

    Mathematic modelling on the other hand…

  • During the subprime mortgage crisis Canada was one of the more stable countries of the Western World.

    • jimmyjames:

      During the subprime mortgage crisis Canada was one of the more stable countries of the Western World.


      So the story goes but it’s not true ..

      “Ever since the global financial crisis struck in 2008, Canadians have been subjected to a constant refrain: Canada has the ‘most sound banking system in the world,’” MacDonald writes in the report. “During the worst of the crisis — 2008 to 2010 — the official line was that Canada’s banks did not require the extraordinary bailout measures that were being offered in other countries, particularly in the U.S.

      “At its peak in March 2009, support for Canadian banks reached $114-billion

  • Kreditanstalt:

    “…the non-resource track will expand and begin to lead growth…”

    Hahahaha. Joking, right?

    Canada? What “non-resource track”?? I live there nine months of the year and let me assure everyone that without the forest industry, oil-and-gas (creaking a bit just now) and government cheques there WOULD be no economy whatsoever.

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