Wednesday, March 4, 2009

BoC Runs Out of Ammo; Reaches for Grenades

The Bank of Canada joined a growing list of other Central Banks Tuesday in demonstrating without a doubt that they are incompetent.

The Bank reduced their benchmark rate to 0.5% in a last-ditch effort to stimulate lending. A video clip discussing the cut can be found here. A Globe and Mail article doing the same can be found here. And here is the official release from the BoC.

None of it is worth your time.

It all amounts to a bunch of senseless drivel promoting one of the biggest frauds and morally bankrupt policies of our time: inflationism. This is a completely apolitical issue. It has been endorsed by every party in the legislature for decades. It is thoughtlessly taught as gospel in nearly every university across the land. The media, which is supposed to be the last line of defense against tyranny, has neglected that duty - toeing the line all the way to the poor house we find ourselves in now. The rich and powerful banks can only benefit from it. The poor are patted on the head as if to say, "there there little ones. You're too stupid to understand it all."

This madness needs to stop.

If I sound angry this morning, it's because I am. The insanity has gone on for too long and has gone way too far. I am asking my readers to contact their members of parliament and tell them that you are against their policies of inflationism and that you are demanding the Bank of Canada to renounce it's mandate. You can find a list of MPs and their contact addresses here. Following is a template for what they need to hear:

Dear Mr./Ms./Mrs. Member of Parliament,

I am writing you today to express my consternation at the course our government and central bank are taking, and have taken in the past, to deal with economic crisis.

It is falsely assumed by nearly all that a growing amount of money and credit in our economy will automatically lead to an increase in our quality of life and our wealth in general. Yet over the decades, as the supply of money has risen tenfold, Canadians have not experienced either. Poverty is every bit of a problem as it was decades ago. And saddled with debt, countless Canadians living paycheque-to-paycheque are one pink slip away from joining the impoverished. That fact alone should be making us think twice about our unwavering dedication to the Bank of Canada's mandate of positive inflation.

Yet there is a host of other adverse effects that inflation has on the average person and the economy in general. I will list but a few of them here:

1) Inflation Benefits the Already Wealthy and Destroys the Poor

You have probably heard the catch-22 phrase of "you need money to make money." This is a function of inflation. Those with collateral and access to credit are able to have first access to newly created money. Because a rising supply of money and credit (the true definition of inflation) is mandated by the BoC, it can be assumed that asset prices will generally rise over time. So by buying assets with debt, the rich can become richer as prices inevitably rise. They can buy goods at today's prices with tomorrow's wages.

Those without easy access to credit, renters and the poor bear the brunt of these rising prices. They are always using the wages of yesteryear to buy goods at today's prices. Their wages rise with a lag. Compounded over the years, this has the effect of widening the gap between the rich and the poor.

2) Inflation Stokes the Fires of Irrational Speculation

When prices constantly rise for long periods of time (decades), the culture of rising prices becomes entrenched. We saw this recently with home prices. By ensuring that prices will rise through the inflation mandate, the BoC sends subliminal signals to society that instead of prudently saving their money for a rainy day (like now), people need to purchase assets in order to preserve their wealth. This is the primary cause of asset bubbles. As people rush into the real estate market, prices begin to rise even faster than inflation (supply of money and credit). People then believe that if they don't buy now, they will never be able to. The bubble goes manic.

3) Asset Manias Lead to Asset Crashes

When asset prices (stocks, real estate, commodities) begin to rise to the point that no normal person is able to afford them, the demand naturally peters out and prices begin to fall. Those who were last in (typically those who were suckered in by the hype) and purchased nearly all of the asset with credit, are hurt first. They are forced to sell at a loss, further adding supply to the market and causing prices to fall further. Only those that were the first in to the mania (the already wealthy) are left relatively unharmed, and are then able to scoop up the assets at firesale prices - further consolidating their wealth.

4) The Culture of Inflation Degrades Society

Rising prices become ingrained in the collective conscience of society. Frugality, prudence and living within your means are shunned in place of the "gotta have it now" mentality. Saving and investing are replaced with instant gratification and speculation. Society rots from the inside as a result. People become more willing to commit immoral acts in order to "get ahead." Mistrust of one's fellow citizen becomes the rule rather than the exception. Helping the unfortunate becomes a sign of weakness.

Above is just a short sample of the adverse effects rampant inflationism has on our economy and our society. There are many more. But much of that deals with the causes of our current situation. Inflation is no longer a problem today. The mother of all credit bubbles has burst and prices of all assets are tumbling along with the availability of credit to buy them with.

None of that can be prevented. It has already happened. What can be prevented are the damaging effects of prolonging this agony over many years as was done during the Great Depression and still being done in Japan. Ultimately, asset prices are going to fall to a level commensurate with the incomes of average Canadians. If the average person cannot buy a home without putting their solvency in jeopardy, they won't. And there is the additional issue of a wave of baby boomers waiting to sell their assets to a less numerous younger generation. There is no conceivable way to prevent prices from falling to their appropriate levels. The only question remaining is, "how do they get there." In a sharp correction, where the average Canadian who still has a job can step in and buy them? Or in a long and drawn out process where millions lose their jobs and the only remaining solvent purchasers are the excessively wealthy or government itself?

I can guarantee you that in the event of the former, the damage will be far less.

Every single action taken by the Bank of Canada and by the Ministry of Finance have been in an effort to support prices - or at least to slow down their decline. This is the opposite of what needs to occur. Assets need to be liquidated and prices of everything need to fall. There are still solvent and financially healthy Canadians with savings. But if the economy is left to suffer for years with hundreds of billions in mispriced assets hanging overhead, those Canadians will be forced to dip into their savings to pay for everyday expenses.

The only way employment producing investment can occur again in our economy is if investors perceive a low risk environment. They will not do that while prices are still many standard deviations above their historical norms relative to incomes. It is too risky. So they will wait. No amount of jawboning by government officials will succeed in coercing savers to buy again. The issue is not one of confidence. The issue is of solvency and the amount of risk involved in investing their savings. As prices fall, the perception of risk will decline. Eventually, prices will get to the point where savers would be foolish not to buy. But that is a long way away.

Deflation does not have to be considered an evil. In fact, during the first 30 great years of this country, we were 'mired' in deflation. It also happened to be the most prosperous years of our existence. Investment in new technologies boomed. Our cities became some of the most advanced in the world. And the quality of living for everybody rocketed higher. Also note that this occurred without an income tax. It occurred on it's own accord.

We can also look to the last few decades for guidance. The areas where prices were constantly falling (technology, transportation, communications) have seen greater affordability for the average person, increased industry competition and rapid advancements.

There are a number of ways to ensure this deflation is done properly. First and foremost, the current mandate of the Bank of Canada needs to be destroyed. Their reckless focus on rising prices was the original cause of this crisis. By common logic, we know that it cannot also be the solution. Their mandate should be moved away from price fixing and toward the defending of the purchasing power of our currency. A stable currency will also have the added benefit of attracting foreign capital that is currently terrified by the worldwide attack on their values.

I ask you to set aside your political partisanship and do what is best for the average citizen. You are our elected representatives. This is your only mandate. Allow prices to fall to levels where citizens are able to purchase them. A recovery will not occur until this has happened. Continually propping up prices benefits only the insanely rich, and it should come as no surprise that they are also the leading proponents of these policies.

It does not take one who is schooled in economics to understand these basic truths. We see them every day. The time has come to act.

Hesitation will lead to disaster.

Yours Truly,

Jane. Q Citizen

You may feel free to alter that as you please. From talking with many MPs in Canada, it is not an unwillingness to question our monetary policies that holds them back. It is a lack of education on the issues. Many of our representatives are just simple civil servants doing what they think is best for their community. They delegate any of their responsibilities regarding the economy to the "higher ups." We need to educate our representatives on why this system is made by and for the wealthy to our detriment.

Enough is enough. The Bank of Canada has lost control and has proven unequivocally to be a lapdog of it's elite banking buddies. It is time that we take it back.

E-mail this to your own and as many MPs as you can (of any party). It only takes a minute. Here is the list again: Listing of Members of Parliament.

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Frank said...

Great post. Agree 100%

mannfm11 said...

I would agree myself,but if we were to start over again, I would go for the government figuring what taxes were going to be, mail everyone a check and outlaw interest altogether because the inflation game has to go on or it all implodes. At least once it starts. Thus if you had 10,000,000 people and the budget was going to be $100 billion, send them all $10,000. Make all the taxes voluntary except one final head tax if there is a shortfall. People would have their other money and they would figure out really fast if government was inflating or deflating or if the economy was growing or shrinking. If they needed a little money growth, they might send out $10,100. This is kind of a joke of a plan, but I have racked my brain and haven't been able to figure out one that worked. If people wanted to lend money at interest, they would have to do so knowing full well they were going to lose it eventually

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This won't really have success, I believe this way.

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