December 15, 2017
Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites yesterday at the prestigious Canadian Club.
However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data.
Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.”
But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind.
The Poloz Bubble
Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness.
Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels.
Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Poloz with the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election.
Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months.
Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes.
More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians.
At the household level, the BoC’s low interest rates enticed Canadian families to borrow themselves to the hilt. Businesses haven’t been that far behind.
The upshot is that total government, private sector and personal debts are now in nosebleed territory with Canada’s economy seemingly on a knife’s edge, in danger of crumbling at the first patch of rough road.
Chained to a Ponzi
Another worry is that the Poloz BoC, by broadly mirroring the Federal Reserve’s actions, has firmly lashed Canada to a US economy which could prove to be an even bigger Ponzi than its own.
America’s “everything bubble”, like Canada’s, has been stroked by a central bank that has been pushing credit growth at a rate faster than GDP growth, a textbook Ponzi scenario.
One result, as Grant Williams, co-founder of Real Vision Television, noted in a recent presentation, is that US stock prices are currently far higher than they were during the Internet and housing bubbles. “[Central bankers] keep hoping that this time is different,” Williams warned. “But ladies and gentlemen – it’s never different.”
Refusal to ring fence Canada
Another worry for Poloz to ponder, is that although the BoC has identified financial system interconnectedness as a key concern, the central bank has done little to ring fence Canada’s economy from huge global macro threats on the horizon.
That’s particularly true of the hundreds of trillions of dollars in global derivatives books, many of which are unquantifiable, as they are trading outside of traditional exchanges. This threat is particularly acute, as it was the failure of AIG, a derivatives player, to cover its bets (not the subprime mortgage and Lehman implosions as most assume) that sparked the 2008 financial crisis.
Poloz, had he been ready to condone a recession, could have encouraged broader interest rate hikes to incentivize Canadian governments, businesses and households to pay down debts, build up savings and increase overall system stability.
Similarly, instead of building up Canada’s gold reserves to cushion against potential external shocks, the supposedly-independent BoC (as noted above) gives the money it prints to the big banks and the Canadian government to help it finance raises for politicians and bureaucrats.
Government and academic elites would argue that Poloz’s actions are understandable as he has only limited powers. They cite key constraints on the central bank’s actions.
These range from the BoC’s agreement with the Department of Finance to target 2% inflation, the fact that the government has primary authority over foreign exchange purchases and by realpolitik which dictates that Canada has to follow US policies – or else.
Tied to discredited Keynesian econometrics
Others, such as James Rickards, author of The Road to Ruin, would argue that Poloz is plagued with the same “group think” problem that faces Fed Chairmen.
Almost all the top economists these days, despite obvious brilliance, remain trapped by Keynesian/econometrics educations they endured to get their graduate degrees, which left them with few ideas regarding how to generate growth other than to print more money.
Canada’s top central banker rarely deviates from his talking points. So, it’s almost impossible to know what he really thinks.
However, a base case scenario suggests that Poloz (who has considerable private sector experience from his days at BCA Research) knows full well the treacherous position in which the BoC has placed the Canadian economy.
If that’s true, it’s little wonder that he is having trouble sleeping.