October 15, 2019
The Bank of Canada’s recent appointment of Toni Gravelle to its governing council drew barely a yawn from mainstream media.
Gravelle has all the usual qualifications for membership on the prestigious body, which broadly determines interest rates, asset valuations, and consumer prices.
The Bank of Canada’s latest recruit brings to the table international experience and a Ph.D. from the University of Western Ontario, which has been producing many of the country’s top economists.
Indeed, Western alumni increasingly dominate Canada’s financial system.
Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins have graduate degrees from Western, as do four of the BoC’s six governing council members.
Bill Morneau, Canada’s Minister of Finance, and the CEOs of the Royal Bank of Canada and BMO could also be described as members of the “Western Mafia.”
A small town in Western Ontario
How the University of Western Ontario—which is located in a small town in the middle of nowhere—came to be so successful is far from clear.
Western’s Ivey Business School has long had a great reputation.
However, the only private sector innovation to speak of in the region that could spark an incubator talent effect appears to come from an armored vehicle factory, an insurance provider, and a couple of small tech firms.
Indeed, what the elites would regard as the University of Western Ontario’s economics department’s “success” appears to stem directly from what Misesian free market economists would regard as its failures.
Western, like peers Harvard University and the London School of Economics, specializes in cranking out experts who can demonstrate why governments can spend your money better than you.
That research is increasingly valuable.
A licence for unlimited borrowing, spending, and printing
That’s because mainstream economics hasn’t evolved much since John Maynard Keynes—as interpreted by academia—gave governments unlimited licence to tax, borrow, spend, and print.
However, five decades of increasing government dominance in the economy have proved to be a disaster:
- GDP hasn’t grown in more than a decade as calculated on a debt-adjusted basis using a realistic deflator.
- Average real household income has stagnated to the point that families increasingly can’t afford kids. Canada must rely on immigration for growth.
- Governments—through interest rate suppression —are providing vast hidden subsidies for special interest groups ranging from the fossil fuel and automotive industries to cattle production and real estate development. This is spurring environmental despoliation that free markets would stop cold.
- Canadian system debts (public, private, household and financial) according to Statistics Canada hit $8.3 trillion at the end of Q2 2019, up 45% since Poloz took office six years ago. That works out to nearly $1 million in debt for each Canadian under the age of 19.
Governments—ever hungry for more power—are starved for econometric models that “demonstrate” how previous setbacks were caused by free market “failures” and how just a bit more intervention will set things right.
Graduates of elite economics programs, who aren’t exposed to compulsory courses in economics history , are thus uniquely suited to produce such models, as their narrow focus enables them to ignore “externalities.”
“Group think” in public policy circles
The growing dominance of elite economists has spawned another problem: the “group think” that dominates public policy circles.
One example illustrates the point.
The two parties to the “inflation targeting agreement” that the Bank of Canada negotiates every five years with the Finance Ministry—Finance Minister Bill Morneau and Stephen Poloz—are both graduates of the dirigisme taught at the University of Western Ontario.
It is thus only natural that they decided to maintain the ban on free currency markets and to continue government controls on interest rates, money supply, and consumer prices.
The example illustrates that without diversity in Canadian government institutions—particularly openness to new ideas about credit cycle theory, sound money, and the economic calculation problem—things are unlikely to change.
Governments will thus almost certainly continue to suck capital from productive sectors, debase the currency, and foster a growing secular credit bubble of increased system debt relative to GDP.
A final interesting point relates to whether Governor Stephen Poloz is using his influence to pack the Bank of Canada’s governing council—and possibly internal posts as well—with members of the Western Mafia.
The Bank of Canada’s ban on Alt-Media from its public events and policy conferences , where discrete inquiries could be made, makes it hard to say.
Just as important: was Poloz’s decision to ban Alt-Media spurred by a desire to cover up his growing cronyism at the central bank?
For investors, those details are moot.
Their focus will be on preserving capital in an environment in which governments, special interest groups, and other insiders milk the system dry.