Currency Cooperation, Crowding out and Other Myths
Belatedly, two days after the fact, the Globe picked up on Bank of Canada governor Carney’s discussion of the Bank’s model of the world economy (I blogged about that speech here) at aÂ speech to the Ottawa Economics Association (OEA) last Wednesday.
The Globe spun the story in an unusual way by suggesting that the Bank and its analysis (using a GE model) could somehow position Canada as a “mediator” between the US and China over China’s policy of pegging the Yuan to the US dollar.
This interpretation is of nonsense because Canada’s clearly playing on the same team as the US and is part of a global effort to get the Chinese to play ball, as Bill Mitchell points out in considerable detail on a recent blog post.
Setting that aside, the Globe’s frame of this piece is also bizarre because by the Bank of Canada’s own reckoning, the pursuit of fiscal consolidation ONLY makes sense if China cooperates and backs off its US-dollar peg and starts buying other people’s stuff.Â Absent that cooperation, the world is, based on the Bank’s analysis, in for a pile of deep doo-doo because of the deflationary effects of “fiscal consolidation.”Â I know I shouldn’t expect much from the stenographers at the Globe, but that interpretation SHOULD have been the real story especially since the Globe carried a story that same day which quoted senior Chinese officials saying there was little to no chance of China moving off its peg.Â Anyway, back at the G-20 it’s full steam ahead on the fiscal consolidation and damn the potentially devestating consequences…
Maybe I shouldn’t be so harsh on the Globe. The Bank of Canada-to-the-rescue piece did remind me of something that I’d forgotten — perhaps out of sheer disbeliefÂ — from Carney’s speech, namely that all the negative effects generated by a “status quo” keep-spending scenario arise from “crowding out.”
This is simply an incomprehensible claim from a central bank that runs a fiat monetary system with no reserve requirements (not that they matter either but a lot of people think they do), which has openly acknowledge (pre-Carney mind-you) that it doesn’t worry about the quantity of money (for good reason) and which has complete control over short-term rates, with the potential to target longer-term rates if it so desired.Â In fact, it is no exaggeration to say that the bank’s ability to control rates rests on an edifice where there are no monetary supply constraints and where private banks lend money first, and worry about the leakages later (as the BIS recently acknowledged).
Six months ago or so Bernanke made a number of comments to the effect that US commercial banks should lend their reserves. Since banks don’t lend reserves it was a bit odd. He has stopped saying that recently and has even proposed that reserves be abolished, which of course is the Canadian case. Presumably someone from the operations side of the New York Fed had a word with him and set him straight on the functioning of the monetary system he is in charge of. It seems Mark Carney needs someone in the operations side of the Bank of Canada to do the same.
Maybe I shouldnâ€™t be so harsh on the Globe. The Bank of Canada-to-the-rescue piece did remind me of something that Iâ€™d forgotten â€” perhaps out of sheer disbelief â€” from Carneyâ€™s speech, namely that all the negative effects generated by a â€œstatus quoâ€ keep-spending scenario arise from â€œcrowding out.â€