The Bank of Canada Proudly takes Credit for Causing a Recession

The solution to high inflation is not human sacrifice. That's what we're getting.

See the post here: https://x.com/bankofcanada/status/1750564341642932322?s=20

Don't take my word for it when I say that the Bank of Canada is engineering a recession. They are boasting about it.

They say their higher interest rates are successfully slowing the economy.

The Bank of Canada's solution to inflation is to hike interest rates, which leads to higher unemployment, costing Canadians their houses and businesses.

This human sacrifice is supposed to lead to lower inflation because:

• Higher unemployment means people will be fighting for jobs, so wages won’t go up

• Liquidations drop prices and collapse the price of once-valuable assets.

• We see greater concentration of ownership and income as businesses are sold off to more merges and acquisitions.

This is absolute madness. A recession is the last thing Canada needs, or needed after the pandemic, but that's what we're getting.

Not only will the recession cause immediate human misery, it will wreak havoc with public finances. At a time when we desperately need investments in rebuilding Canada’s economy - from housing to infrastructure to health care - engineering a recession will cause provincial and Federal governments to lose revenue.

That means as Canadians are losing their jobs, homes and businesses, governments will be forced into austerity as well, because they will lose revenue at the very time they are spending more on EI and other claims due to the recession.

This is central bank and financial austerity, and politicians have nothing to do with it.

It is forcing millions of Canadians with hundreds of billions in debt to pay more to banks and lenders. It is forcing an upwards transfer of wealth and income from Canadians to the financial sector.

It is all market manipulation. Those lenders are getting higher payments for no extra work or effort, while governments are facing revenue cuts and will be forced to either borrow, raise taxes or cut - but fiscal conservatives will say there is only one option: cut.

If you think that governments are always trying to create jobs and grow businesses, you'd be mistaken, because since the 1970s, central banks have deliberately created recessions, not for the sake of productive industries and workers, but to protect investors.

The colossal debt that Canadians and the world are drowning in are the results of decades of bad monetary policy that has tried to solve every problem by sinking people deeper into private debt, and getting them to foot the bill.

As I wrote in my first post:

In July 2022, Edward Chancellor warned

“It will turn out to be largely impossible to normalize interest rates without collapsing the economy,”

– not because of the actions of elected governments and officials, but because of two decades of monetary policy pursued by the Bank of Canada and other central banks, which are independent and are supposed to be free from political influence.

https://themarket.ch/interview/edward-chancellor-central-banks-delayed-the-day-of-reckoning-ld.7051

Says Chancellor

“By aggressively pursuing an inflation target of 2% and constantly living in horror of even the mildest form of deflation, they not only gave us the ultra-low interest rates with their unintended consequences in terms of the Everything Bubble. They also facilitated a misallocation of capital of epic proportions, they created an over-financialization of the economy and a rise in indebtedness. Putting all this together, they created and abetted an environment of low productivity growth.”

One of the first steps we need to take to deal with the issue is to immediately reform of the Bank of Canada’s monetary policy, because the current practice of cranking interest rates up and down is not only ineffective, it is actively harmful.

That is the recommendation of economist William White, from August of this year.

 “[S]timulative monetary policy has had a variety of unintended and unwelcome consequences that can only worsen; credit “booms and busts”, potential financial instability, fiscal unsustainability, a progressive loss of central bank “independence”, growing inequality of wealth and opportunity and a slower growth rate of potential output. Fourth, as the threat posed by these unintended problems have cumulated over time, “exit” and the “renormalization” of policy has become ever harder to achieve.

To sum up, the current monetary system has trapped us on a path we do not wish to follow because it leads inevitably to ever bigger problems. This is why fundamental reform is needed.”

White’s Paper can be read here:

https://www.ineteconomics.org/uploads/papers/WP_210-White-Monetary-Policy.pdf

White says central banks need to focus more on the financial system and debt, and not just on inflation targets. As he points out, because of the tools central banks are using - “solving today’s problems also makes tomorrow’s problems worse”

---

All of this perfectly describes the Canadian economy, and it is all based on the 1970s, premise that elected officials and democratically elected governments cannot possibly be trusted to manage the economy.

It was a deliberate and total rejection of Keynesian policies and the New Deal - repealing legislation, dismantling regulatory agencies, reducing taxes.

In some ways, this was also convenient for politicians - who could say that it wasn’t government’s place to interfere in the economy, because they could just shrug and say it’s not their job.

For whatever reason, no one has recognized just how radical and extreme the new conservative ideology of the 1970s was, but consider that it is common for politicians to try to outlaw Keynesian economics, by passing balanced budget laws or constitutional amendments.

What this means is that it in many jurisdictions, advocating or implementing economic policies that sustained the Golden Age of Capitalism is forbidden, and a political act punishable by law.

That is a draconian act. It means banning and punishing a moderate centrist economic policy that ended the Depression, secured victory in the Second World War and created 30 years of post-war prosperity.

The other key aspect of this is that central banks have always been independent, which means that politicians are not allowed to dictate policy.

Central Bank Independence has always been important, and as with so many aspects of government, there are separations of powers to prevent wrongful influence on decision making. Central banks not only have the power to change interest rates, they have the power to create money.

This is an extraordinary power, and the basic idea is that you want to keep the people who are spending the money (elected officials) separate from the people creating it, because the potential risk for corruption is colossal.

At the same time, it is critical for a central bank to have monetary policy that is based in reality, and not in pure ideology.

The Bank of Canada and other central banks took on one role - to fight inflation - and what is critical is that the tools they use to do so are based in a particular model of the economy which is fundamentally libertarian and anti-democratic.

Central banks have the power to create recessions and economic booms. They do so entirely by manipulating the amount of debt, and the result is that Canada is now one of the most indebted countries in the world.

That is the source of Canada’s economic crisis - our housing crisis, our slow growth, our productivity issues are all because we have persuaded Canadians to added trillions of dollars in debt to buy a necessity of life instead of investing it into the productive economy.

The result - and indeed the point - of these 1970s reforms was to make elections, and democracy, irrelevant. No matter who was elected, and what their platform, they would be forced to abide by the ultra-conservative policies of the central bank, or by laws that banned or punished Keynesian policies.

There is a fundamental crisis here, and it relates to accountability. Central Banks need to be independent, because of the incredible power they have - but there is missing link of accountability, because if central banks make a mistake, someone else always pays the price, and the price and costs and harm are real.

They are counted in lost jobs, lost income, lost investment, lost opportunity. It is not an exaggeration to say that policies like these are life-ruining. People lose everything and may never recover, all while the same policies hamper the ability of governments to respond.

We do not have to change the Bank of Canada - or its Governor. But the Bank of Canada needs to change its ideas. As John Maynard Keynes wrote

[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas… sooner or later, it is ideas, not vested interests, which are dangerous for good or evil.”

I wrote about all of this in 2017, in a paper I presented at a conference in Buffalo, New York. I wrote:

In the long run, policies that crush inflation are not good for anyone - not little old ladies on pensions, or the government cutting public services, not people who can’t pay their bills, not businesses whose customers are stretching payments - not even the 0.1%, who may see the value of their portfolios crash when people vote for demagogues, or come charging though the gates with torches and pitchforks. If central banks can play a role making inequality worse, they can certainly play a role in making it better. They have in the past.

• DFL