Another Nail in the Coffin

Yesterday, in accordance with practically everyone’s expectations and often their desires, the Bank of Canada lowered interest rates in this country by fifty basis points. The markets had certainly expected this move, for the exchange rate of the dollar barely moved (but then, it’s most tightly coupled with the price of oil these days, even if the US Senate thinks passing legislation that stop the US from importing half of the oil they do every day from Canada because they don’t like its oil sands source (and all the attendant ecological issues surrounding it) is a wise move. It’s not, of course — we are the Americans’ largest single source of petroleum; allowed to stand, fuel in the US would skyrocket to over US$5.00 per US gallon in the wake of rationing line-ups as in the 1970s. (Mind you, it would reset the NAFTA targets for minimum amount to export, something we might be thankful for a few years from now. But it won’t stand; it’s so destructively stupid that it won’t become law.)

50 basis points! The Bank of Canada almost never moves in chunks that large. The fear, of course, is for Central Canada, which they perceive as being in trouble. Which, I suppose, there’s some concern for. Mind you, a lot of that trouble can be laid directly at the feet of the US Department of Homeland Security and their asinine approach to cross-border commerce, and another chunk of it – a goodly one – at the speed and depth of the collapsing economy in the United States. With an insolvent banking system, even the debts of solid corporations get called, credit lines get cancelled, and business freezes up. There’s nothing this rate cut does to mitigate any of those causes of distress, but you wouldn’t know it for the cheering section’s noise.

What it does do across the country, of course, is pump a little more air into the leaking balloon that was the housing bubble, by lowering the cost of money. It also makes savings a pathetic choice, which will see even more free cash swept up into our own version of high-risk mortgage lending: yesterday, at a North Vancouver Starbucks, while I spent two hours using the WiFi for research before a meeting, no less than six transactions went on around me of younger couples putting their savings into one mortgage pool or another. Good luck with that.

Good heavens, VanCity (the “big bank” around here, even though it’s a credit union) already paid a higher interest rate on a particular type of ordinary savings account — not even a term deposit — than the previous Bank of Canada rate. That’s what it took to attract deposits, for without deposits there is no fractional reserve banking, no multiplication of money by lending it out five or six times on the strength on one deposit. In essence their rates to borrow had to stay higher than what they need to pay out to attract the base from which to work. Now that the Bank of Canada rate is 0.5% lower, will it move their rates? Or will the system stay right where it is — maybe even see lending rates rise to make ends meet and cover risk? — because liquidity is poor already?

Your guess is as good as mine. But, hey! What a feel good factor, eh?

Of course, this is precisely the wrong interest rate policy for Western Canada, whose economies continue to boil along, with shop windows filled with “Help Wanted” signs and ever-escalating real estate prices even if the transaction rate slowed a bit this winter. (How much of that is the normal winter slowdown no one’s saying: we’ve become used to the idea that each and every month should see “growth”.) In essence, a roaring fire in the West has just had another tanker truck or six of kerosene dumped on it.

What goes up, must eventually come down. Great differentials do not persist without fundamental reasons, and although resources have been a powerful reason for the health of the West that doesn’t keep housing stock high, high, high in the sky on its own, nor does it support the notion of minimum wage rates as “just a suggestion” (because no one will take a job for so little money with costs rising like mad). None of it, anywhere in this land, deals with food inflation, rocketing onward at 20-30% and with real shortages emerging in staples (tried to buy any white rice, other than the hyper-processed Minute Rice or Uncle Ben’s lately?), or fuel inflation (premium is about to hit $1.40/litre, and regular is at $1.27.6 this morning), or escalating taxes, or escalating utility costs…

We who live in Canada’s new economic engine need what the Australians have been getting: not rate reductions, but rate rises, to dampen down the fervour and create an updraft in the currency exchange rate to offset the commodity price increases driven by global demand and ever-shortening supply. Of course, Australia is lucky: it doesn’t have a Central Canada built on being branch plants part of a continental supply chain trading on a poor dollar exchange rate and never giving two hoots about productivity, about new markets or about “what happens if”. So, once again, we get to accelerate our upwave and really suffer in the following downdraft to make life good in the Toronto-Ottawa-Montréal axis.

Many years ago, in her Cities and the Wealth of Nations — and in her following works — Jane Jacobs pointed out the obvious: cities are the economic engines. Even the resource economies of the “Canadian Empty Quarter” (Saudi Arabian oil is mostly concentrated in a part of that country known as the “Empty Quarter”, a place big on non-renewable wealth and short on people) are centred in cities (although the wealth itself is “out in the country”): money is raised there, support services are found there, expertise is concentrated there, etc. As such, each city that actually creates economic value (some don’t: Ottawa and Washington DC obviously not, but even big cities like Atlanta can be very low value-add places) needs its own exchange rate. Big currency areas, in other words, punish the successful by amplifying the booms and busts, and reward the indigent by setting policy to ameliorate their failures to adapt and change.

I have for many years now held that the continental-scale countries will not hold together. As energy gets ever shorter in supply and more expensive, “big” becomes (in many cases) an expensive luxury. Local conditions begin to matter much more — and so the premium of not having a monetary and fiscal policy framework attuned to those local conditions eventually becomes too much to bear, and separation begins.

(It always amazes me that the drumbeat that the fast-growing European Union countries would “break the Euro apart” has not abated since the single European currency was put forward, yet the same argument applied to North America is laughed out of court. Yet we didn’t have money in this country unified until 1935 — before that, individual banks and corporations “created” banknotes, which traded against each other at premiums or discounts — and the US didn’t have it until 1913.)

Separation will begin here in the West one day because of Eastern economic mismanagement lashing the West one too many times. It won’t take another “National Energy Policy” to do it. Just stupid moves like lowering interest rates when they should have been raised to let the balloon down and restore a degree of equilibrium in conditions in different sectors of the economy. Eventually, when the West goes, the East can have a cheap dollar again, and we can have the strong dollar our economies will need and want.

Remember, when it happens out in the 2020s-2030s, that it isn’t coming out of the blue.

In the meantime, though, a lot more suffering in Canada has just been created. More risk will be taken on, with more losses as a result. More people living on fixed incomes will find their straits tightened, perhaps to the breaking point. More of the aware of the East will take their losses now, uproot themselves, and come West, increasing the pressure on housing here. (Have you see the number of Eastern licence plates circulating — both US and Canadian — around Vancouver neighbourhoods … and then the number of cars that sport them one day, and BC plates the next?) Nothing the Bank of Canada did yesterday will really help Ontario or Québec: their house prices are coming down regardless, and now their investment asset values will, too. Insolvency and liquidity will remain the hallmarks of the financial system.

Instead of debating this, we’ll spend the next few weeks playing the scandal game. Good-bye country, killed by bad policy and a lack of creativity in making basic economics entertaining.

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