Submitted by James Miller of the Ludwig von Mises Institute of Canada
Mark Carney Kicks The Can
Bank of Canada Governor Mark Carney takes a lot of cues from his U.S. equivalent and fellow central banker Ben Bernanke. Both took interest rates to anorexic levels in light of the financial crisis in 2008. Both used their positions of power as stewards of the people’s money to bail out the big banks. Both take credit for the gains of their respective stock markets and for guiding their economies through the global recession. Both are forever on a quest to rid of the world of the boogeyman of deflation.
And both are sewing the seeds of their own destruction by keeping interest rates artificially low and ultimately driving unsustainable investment that must eventually be liquidated. All around the world, the boom bust cycle continues to occur due to central banks attempting to induce economic growth with money printing. China’s economy is continuing to come apart as manufacturing output and real estate prices plummet. These sectors were bid up by double digit increases per annum in the country’s money supply over the past decade. Since inflationary growth, by definition, can’t go on forever, as its continuance results in what Ludwig von Mises called the “crack-up boom” and destruction of the currency, the chickens of the People’s Bank of China’s reckless monetary policy are finally coming home to roost. The PBOC has responded to the downturn by recently cutting interest rates for the first time since 2008 in what will likely be a vain effort to reinflate the bubble.
Over in Europe, the year over year change in the broad money supply has dropped dramatically since 2010. This provided the spark for the sovereign debt crisis which shows no sign of slowing down unless Angela Merkel and Germany concede to further inflationary measures by the European Central Bank. Just like her support for the big banks and the austerity measures that ensure idiotic bankers don’t take too much of a loss on their holdings of euro government bonds, Merkel will likely give in to money printing in the end as she has already endorsed the push for a political union.
And now in Canada, Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%. This announcement comes despite his previous warnings over the enormous increase in Canadian private debt. But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only. Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation. Carney won’t admit this though. Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences.
He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death.
What makes the promise of continually low interest rates especially worrisome is not only does it tell the market to keep accumulating debt, but it is also an attempt to keep what some are calling a nation-wide housing bubble from deflating. Over the past decade, Canadian home prices have shot up at a far steeper pace compared to the decades that preceded it. In recent years, the acceleration in home prices has been fueled by the Bank of Canada’s historically low overnight lending rate which went from 3% before the financial crisis to .25% in 2009 and now rests steadily at 1%. The BoC has already acknowledged that its interest rate policies directly affect mortgage rates. Many Canadian media publications and investment newsletters are pointing out this trend and warning of a potential collapse. The BBC even did a report on it. There is nothing potential about a sharp downturn in home prices however; it will happen. It’s only a question of when.
With China and Europe leading the pack, the world economy is beginning to take a turn for the worse. The orgy of money printing which took place over the past few years has slowed down significantly; even in the U.S. Central bankers are standing at a precipice in which they must decide if they will forge ahead and prime the monetary pump to paper over the various malinvestments caused by their previous interventions or actually allow for a contraction and the market to adjust to a new path of sustainable growth. If history is any indication, the latter is not a considerable option as it would be devastating to the banking sector which is reliant on piggybacking credit expansion off of an uninterrupted flow of newly printed monies.
Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality. The malinvestments will continue to accumulate and will have to be liquidated at another date. What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road. He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press. As legendary investor Marc Faber has noted,
“I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing… And once you choose that path, you’re in it and you have to print more money.”
The Austrian theory of the trade cycle developed by Mises a century ago tells us that credit expansion is bound to end in depression. To quote Herbert Stein’s Law, the business cycle theory essentially boils down to “if something cannot go on forever, it will stop.” The debt fueled boom in Canada is a house of cards. No matter how much money printing or interest rate manipulation Carney attempts, the collapse in inevitable. His record, along with Ben Bernanke’s, will eventually be one of dismal failure.