Rochon on the Bank of Canada’s Decision to Lower the Rate of Interest
Louis-Philippe Rochonâ€”who now blogs for CBCâ€”argues that almost nobody had been expecting the Bank of Canada’s recent decision to lower the rate of interest.
His post can be found here.
Follow him on Twitter @Lprochon.
Just read a related column by Neil Macdonald in the CBC which was founded on hysteria and ignorance. It’s got the people all riled up. (Kind of like saying the Russians have just launched a nuclear strike against North America: the mass media version of yelling fire in a theater.)
I think Professor Rochon should try to explain to the people in a CBC column how money actually works. (I would suggest trying to explain it to Mr. Macdonald, but that would seem pointless. He interviewed economists before writing his dimwitted diatribe.)
Here’s my humble comment; (just thought I’d share):
This column is largely nonsense. The money supply grows with the economy, at an exponential rate. The US, for example, printed “state money” which only makes up 15% of its total money supply. If one looks at the trend line, a constant rate of growth, you can trace money supply growth back years or decades, and it was actually BELOW trend during QE.
Money won’t suddenly become valueless. It doesn’t work that way. The only way the value of money can erode is through inflation. It can only loose its value entirely through hyper-inflation. (With deflation, money gains in value, but this causes real debt — or debt burden — to increase.)
The inflation rate is tied to the state of the economy. Low inflation (or deflation,) bad economic performance. Rising inflation, an overheating economy. The central banks put a limit on inflation — 2%. (Which is actually too low because inflation is reined in with recession and high unemployment. It’s largely the reason the economy collapsed: first the dot-com bust; then the housing/derivatives bust.)
The real problem with printing money is that it is trickle-down supply-side economics. It’s helicopter money dropped on the heads of rich bankers. It’s a lousy form of stimulus, which is why the Western economy is in the midst of a 7-year slump. (At least: if one looks at GDP growth, it’s more like 15 years.) In the (successful) post-war Keynesian era, stimulus was demand-side, trickle-up, putting wealth more directly in the hands of the people. This created modern living standards (what’s left of them.)
Do you have a link to the MacDonald column?
BTW, another way helicopter money is inferior to fiscal stimulus: house price inflation. This always ends badly.
According to one index I say in a Krugman blog, real house prices are over 200% (when they tend to stay at 100% in the long term.)
Speculation and people using huge lines of credit to do renovations, drive the price up. Eventually what goes up must come down.
Although it’s pretty to think your $150,000 house is suddenly worth $300,000, it usually doesn’t do any good. Want to move into another house, it costs $300,000. So nothing gained.
Of course people (baby boomers) think they can sell their houses and retire to Mexico. But what happens when a large demographic starts selling off their homes to collect their retirement savings? The bubble bursts (if it didn’t already.)
The US bubble was founded on fraud, which is why it collapsed so fast. Canada will be more like Japan, whose housing bubble didn’t go out with a bang, but a 15-year bear market. In the first 15 years, prices rose from 100% to 220%. 15 years later, they dropped back down to 100%.
In the meantime, the Japanese economy suffered a 20-year (and counting) slump. Nominal GDP is actually lower now than it was in 1995! And the country amassed 220% GDP in government debt.
The real problem with their debt is that they have too low of a tax rate. Tax revenues are 28.6% GDP, when the average of the top 25 economies is 35.6%.
Now the country is listening to New Classical crackpots who say tax consumption and cut corporate taxes to spur growth. This move, of course, put their economy back in recession.
For the record, in the post-war era, we managed very high debt with big spending and high taxes on the rich. It puts money in the hands of the people where it does some good, creating incredible GDP growth (which allowed governments to pay down most of their debt/GDP.)
The only alternative to returning to the Keynesian system is watching civilization collapse. It’s up to the people to manage their world. Insatiably greedy — and utterly corrupt — businessmen sure aren’t gong to do it.
It was posted this morning:
ANALYSIS | The spreading alchemy of central bank money-printing