Bank of Canada Governor Mark Carney addressed the Greater Kitchener Waterloo Chamber of Commerce this past Monday. In his remarks, he admits that purposive efforts by the central bank to increase “domestic demand” have put Canadians on a path to financial ruin.
Obviously, he didn’t accept any blame for this embarrassing acknowledgement.
First, he explains the strategy employed by the Bank of Canada in response to the 2008 financial crisis:
The broad economic strategy in response to the global financial crisis has been to grow domestic demand and to encourage Canadian businesses to retool and reorient to the new global economy.
On the former, we have been successful. Even as pressure on the export-oriented manufacturing sector has intensified, domestically oriented sectors such as services and construction have remained resilient. With strong domestic fundamentals and a well-functioning financial system, stimulative monetary and fiscal policies proved highly effective in supporting a robust recovery—and now expansion—in domestic demand.
Let’s get this straight. We had a financial crisis brought about by malinvestment during a credit-induced boom. It was enabled by central banks. As Peter Schiff analogizes: the elementary school teacher handed out pixie sticks and soda pop, left the classroom, and returned to find that the kindergarteners had wrecked the place.
How did the Bank of Canada respond? Liquidate the malinvestment? Nope. Allow the market to determine interest rates to encourage saving and capital accumulation? Guess again. Marco? Polo.
The Bank of Canada responded by further lowering interest rates to stimulate debt-financed consumption. In other words, they continued to do the exact same thing that caused the crisis in the first place. And now they are patting themselves on the back over it. They celebrate this “robust recovery” in the useless Keynesian macroeconomic metric of “domestic demand.” It is assumed that this time will be different.
It won’t. As Carney explains, the malinvestment financed by cheap credit also leads to unsustainable debt:
However, even these strongly rising incomes were not enough to finance the rapid growth in household spending. Canadians bridged the gap by tapping the wealth in their homes to finance up to one-fifth of consumption growth. As a result, household debt levels rose steadily relative to income through this period.
Since the onset of the crisis, however, real income growth has been weaker and household spending has become more heavily dependent on stimulative financing conditions and high levels of net worth, notably house values. As a consequence, the debt burden has increased further. Moreover, much of the financing for the recent increases in household indebtedness has come from abroad.
These trends are unsustainable over the medium term.
How big a problem is Canadian household debt? From The Globe & Mail:
The debt burden of Canadian households has surpassed levels of both the United States and the United Kingdom and, by at least one measure, they are hurtling toward those countries’ peak levels of 2007, new Statistics Canada data show.
And, as if this confession wasn’t enough, Carney kicks us while we’re down with this concluding remark:
The Bank will take whatever action is appropriate to achieve the 2 per cent CPI inflation target over the medium term. This is our contribution to ensuring that Canadians can save and invest with confidence.
Yes, confidence that every dollar saved will earn one penny in interest and lose (at least) two through depreciation.
You can take that to the bank.