Monday, May 29, 2017

Brian Romanchuk — The Zombification of Canada


A series of policy errors has trapped the Canadian economy in a near-zombie status.|

Household debt levels are high, leading to a fragile system. The only benign way of reducing this fragility is to induce high wage inflation, which is precluded by the unthinking attachment to the inflation target. There is no reason to expect the system to collapse on any particular forecast horizon; rather the economy can muddle along in a low-growth path. The fact that the brain trust that inflicted this low-growth destiny on the Canadian economy in the name of improving economic efficiency is ironic, but this reflects the general failure of modern policymaking. The situation in Canada may mainly be of interest to Canadians, but it does provide yet another data point for the general thesis that trusting the policy preferences of the financial sector is inherently a bad idea....
Bond Economics
The Zombification of Canada
Brian Romanchuk

9 comments:

Andrew Anderson said...

Household debt levels are high, leading to a fragile system.

Then why do governments subsidize private credit creation? Because low interest rates promote growth?

But we can have low interest rates WITHOUT government privileges for private credit creation via equal fiat distributions to all citizens. Moreover, the citizens would then have the savings and/or interest income to purchase the new production. What's not to like? The fairness?

Matt Franko said...

They'll get out of it ok if no QE...

Brian Romanchuk said...

Andrew,

Do you really think the government can hand out enough fiat currency for everyone to buy a house, and not have a serious inflation problem? There's a reason why mortgages have 20+ year amortisations -- they represent a big bundle of real resources.

The pre-1999 Canadian system was fair, stable, and worked. I really do not understand your proposals, but I see little idea that they would work.

In all truthfulness, your best bet is to take one of your proposals to the economics stack exchange, and ask a question about what would be the consequences. The key is that you ask a single question only, otherwise the format at the stack exchange breaks down. Furthermore, it has to be a real question, and not just a statement if what you think. (There's a lot of "questions" like that, and they get ignored.) You would then get some serious feedback, rather than just pointlessly arguing on comment sections. Alternatively, you could leave a comment on my site. That way I get a notification of the comment, as I don't have time to track the comment section here.

Andrew Anderson said...

Do you really think the government can hand out enough fiat currency for everyone to buy a house, and not have a serious inflation problem?

I've never said that. I have advocated, for example, that government provided deposit insurance be abolished. That should* require, in the case of the US, $trillions in new fiat to be equally distributed to all US citizens to provide the new reserves needed for the transfer of at least some currently insured deposits with the banks to inherently risk-free accounts at the central bank itself.

So, the citizens of the US get $trillions in new fiat and yet the total amount of deposits do not change so why should there be inflation? So why no widespread support for this idea? Hmmm?

As for my comments, I'm loyal to Mike Norman since he's never banned me.

*US banks have far more reserves than they normally would because the Fed has resorted to buying private assets. Not to worry since those assets can be sold to make it even harder (thus higher interest rates for or a larger fiat distribution to, the US population) for the banks to acquire the reserves they need for the deposit transfers.

Andrew Anderson said...

So, the citizens of the US get $trillions in new fiat and yet the total amount of deposits do not change so why should there be inflation? aa

Well, actually total deposits would grow since the US citizenry would have to be oversupplied with new fiat since some would not choose to lend it all to the banks.

But who cares? If every citizen receives an equal fiat distribution then any new inflation caused thereby would be covered by the distribution for no real suffering.

Ralph Musgrave said...

Intelligent comments from Andrew, as usual. There are actually some complicated pros and cons behind his claim that abolishing deposit insurance would not raise interest rates.

It’s certainly true that the DEFLATIONARY EFFECT of abolishing deposit insurance can be countered by dishing out enough base money. However (at least on the face of it) interest rates would rise because lenders are taking an additional risk. So the NET EFFECT would seem to be a fall in lending based forms of economic activity, and a rise in non-lending based activity.

It can however be argued (and this is the basis of the Modigliani Miller theory) that changing the way banks are funded has no effect on the cost of funding them. In particular, bank shareholders insure themselves, while depositors are insured via FDIC. Plus there’s no reason to suppose the cost of those two forms of insurance are any different: it’s just the MODE OF insurance which is different. Ergo on the basis of the MM theory, funding banks via equity rather than deposits should not raise interest rates. Ergo, assuming MM is right, abolishing deposit insurance would (in contrast to the conclusion reached in the para just above) NOT RAISE interest rates.

In contrast to all that, there is a quite separate reason for thinking deposit insurance amounts to a subsidy of private banks. The reason was set out by Joseph Huber (first link below) who said:

“Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.”

And deposit insurance certainly helps private banks create money. Reason is that without insurance, the so called money created by private banks is at best a form of quasi money: reason being that money is generally regarded as being something like a $100 bill, which as absolutely guaranteed not to lose value (inflation apart), whereas a deposit at a private bank which is not insured can lose some or all its value very quickly when the bank is in trouble. Thus that so called money is arguably more in the nature of a share than money.

http://www.jamesrobertson.com/book/creatingnewmoney.pdf



Andrew Anderson said...

I really do not understand your proposals, but I see little idea that they would work. Brian


Surely you can understand that citizens should be allowed to use their Nation's fiat the same way banks do - via accounts of their own at the central bank? And not be limited to physical fiat? And that this ability would eliminate the excuse for government-provided deposit insurance?

And that banks don't have or at least shouldn't have the needed reserves for the abolition of government provided deposit insurance? And thus the proper abolition of government-provided deposit insurance should require a huge fiat distribution equally to all citizens to provided the needed new fiat (reserves)?

Andrew Anderson said...

However (at least on the face of it) interest rates would rise because lenders are taking an additional risk. Ralph Musgrave

Then distribute additional fiat (equally to all citizens) till they fall.

Also, negative interest rates on fiat account balances at the central bank (EXCEPT for an individual citizen exemption of, say, $250,000) and other sovereign debt would leave the private sector (including local governments since they are not monetarily sovereign) as the only source of positive interest. That would tend to lower interest rates.

Matt Franko said...

"That would tend to lower interest rates."

FED sets the rates....