By Caleb McMillan
Bacon prices are soaring. Actually, all food prices are on the rise. But a world without bacon is a world not worth living in. Stats Canada understands this. They're a little worried about a 27-month inflation high. The Bank of Canada is more optimistic though. “Inflation” is treated as a price phenomena. In a healthy market economy, prices will decrease year-after-year. The 1-3% inflation targeting by the Bank is supposed to keep growth in check. Why falling prices are considered bad, I don't know. Bank of Canada Governor Stephen Poloz gave a speech not too long ago comparing the value of the dollar with our terms of trade. Although linked, they're not always in sync. Let Poloz explain:
“It’s like walking a dog on one of those leashes that stretch out and snap back. You might hope he’ll stick by your side, but in reality the dog is always off in all directions. By the end, your respective tracks zigzag all over the place, much like an economist’s chart. But when you leave the park, you're still together.”
Cute, but inaccurate. I suppose Poloz considers the dog to be trade and the dog-walker to be himself, the coercive force that is the Governor's office in the Bank of Canada. Nevertheless, Poloz's analogy misses the mark. It's more like an off-leash dog park where Poloz is purposely disallowing the well-trained dog to play with his friends. In the end markets always clear and the dog will come back. But with Poloz's strict leash, the dog never has a chance explore. In other words, entrepreneurs are restricted from serving consumers in the most efficient way thanks to Poloz's policies (or dog leash). Poloz thinks this is necessary, but it's an off-leash dog park. Communist states are on-leash dog parks. Poloz should go to North Korea and try his central planning there.
But this stupid analogy distracts from the real economic issues. The Globalists worked hard to get a central bank in every country. Now there's dissent amongst Eastern elites plus a global awakening to the fraudulent debt-based currency we're forced to use. Poloz's analogy makes light of a serious issue: the economy. Since human society and markets are so intertwined (they're really the same thing), it's crucial to understand how we got here. And I don't mean the traditional money-as-debt, international banker "conspiracy" we're all aware of. No need to beat a dead-horse. This is a more technical treatment but it's still in layman's terms:
So inflation actually means the money supply. If you read financial news, you may think it means the increase of prices. But an increase of prices is an effect of inflation, not the cause. Just like the word “liberal” was bastardize to mean “socialist,” the word inflation was hijacked to mean something other than increasing the money stock. If we go back to the original definition, Stats Canada would have to redo their calculations. Inflation isn't at 27-month high. It's more like a 1500-month high. Not since James E. Coyne's governorship has the Bank of Canada decreased the money supply.
But we can't have that. Deflation is a never-ending spiral of declining prices and wages that, if left unchecked, will send us back to Stone Age. Thank Heavens our central banking authorities are here to save the day. This is what the BoC tries to avoid by constantly creating money. Apparently a little inflation is better than any deflation. In contrast to John Crow's governorship, where zero inflation (defined as a price increase) was the be-all-end-all of his policy. Poloz (and his predecessor Mark Carney) are more concerned inflation being too low. Apparently the rate that our money is decreasing in purchasing power isn't happening fast enough. Stephen Poloz says it "leaves us vulnerable to a downside shock at any time."
Reality disagrees. In the 19th century, despite an “unstable” banking sector, both Canada and the United States saw living standards rise as prices fell and in the purchasing power of wages increased. It's important to remember that. 5 cents an hour doesn't sound so bad if the purchasing power of a Canadian nickel is five-times that of an American dollar. A real, healthy market economy is one where the amount of goods and services increase while the cost falls. Industrialization and the “iron law of wages” didn't impoverish workers. It allows for the production of goods and services that previously only the rich could afford. Mass production is for the masses.
In the first decades of the 20th century, Canadian bankers consolidated their positions. By the Great Depression, Canada had a central bank and Chartered Banking oligopoly. Slowly but surely, Canadians were taken off the gold standard. Most baby-boomers have no memory of gold as money. And forget Gen-X and the Millennials. The system has been on a slippery slope since the 1970s when Nixon cut off all remaining links to the gold-standard.
The dot-com bubble in the late 90s/early 2000s finally crashed around the time of September 11 2001. Instead of taking the hit and going through a recession, Fed Chairman Alan Greenspan (as well as BoC Governor at the time, David Dodge) cut interest rates further, fuelling the housing bubble. Canada got off free in 2008-09, but the trouble remains. The USA was hit hard but in response they made things worse. Cut interest rates to zero. When that doesn't work, start quantitative easing! But QE is a deceptive way of saying print money.
So how does this all work? How can we know for sure that interest rate manipulation causes recessions? Well this is neither the time nor place to go over the intricate details of methodological individualism and a priori epistemology. But I will give an overview of the Austrian Business Cycle Theory which will hopefully put the right perspective on this. Far too often people think all our problems will be solved when we stop paying interest to the IMF Mafia and start loaning money to ourselves as taxpayers through the Bank of Canada. It is my understanding that – even if staffed by well-intentioned and honest workers – central banking can never be used for good.
Interest rates coordinate production over time. Just like the prices of goods and services – no one can really control it. Sure, they can corner the market and monopolize it, but this only works for a while. The actions of millions of individuals will always override bureaucratic rules and regulations. Even if takes decades – markets prevail. Lower interest rates act as signals for entrepreneurs to borrow more and invest in long-term projects. This is because certain investment projects have to spend money before they make money. Whether or not the final product is profitable will depend on the interest rates used to evaluate the timing of expenses and revenues. When interest rates fall, they make long-term projects look more prosperous. Entrepreneurs are given the green light to hire workers and buy raw materials.
Now in a market-driven expansion, interest rates fall because people are consuming less and saving more. Extra resources that flow into new investment projects are coming from the sectors that see a drop in sales. For example, if consumers want to save more, they may cut back on eating out. Restaurants may have to lay off employees. But the unemployed are then free to find new work, usually in the industries that are hiring due to low interest rates. As the population restricts consumption, it becomes profitable to produce capital goods. Workers are redeployed from the consumer sector to the capital goods sector. Just like if you were on a desert island and had to restrict your consumption of coconuts in order to fashion a poking-stick. The end objective is to use to the stick to get more coconuts. So while consumption in the present falls, this abstinence eventually pays for itself.
Now we're in a position to look at Poloz and the Bank of Canada with a critical eye. Under both Mark Carney and Stephen Poloz, the BoC have pushed down interest rates below the free-market level. On the surface, this looks normal. At the lower rate, entrepreneurs are ready to start longer-term projects. They hire employees and buy raw materials that appeared unprofitable at the original market interest rate, but which now make sense given the cheap credit supplied by the central bank. The Chartered Banks chime in on the fun too, by pyramiding their reserves in what's known as fractional reserve banking.
Unlike the market-driven expansion, in the government-central bank version there is no drop in consumer spending. Interest rates aren't low because people are saving more, they are low because the BoC was loaning out funds at a lower rate than the prevailing market rate (it's actually more technical than that, but that's the gist of it). Businesses that usually see a drop in consumer spending during low interest rates are actually seeing an increase in sales because – at the low interest rate – people have less of an incentive to save and more of an incentive to take on debt. But while entrepreneurs making capital goods see their business boom, so do the consumer sectors. It seems that every sector enjoys growth when the central bank lowers interest rates. The competition for workers sometimes leads to increasing wages. Everybody feels rich. But it's a free lunch.
Absent a technological innovation or the discovery of a bunch of new raw materials – it is impossible to overcome scarcity. That is essentially what the Bank of Canada is trying to do by keeping interest rates low. All the BoC did was create more money. But more pieces of paper or numbers on a computer screen don't alter the reality that all resources are scarce. It is physically impossible for the economy to produce more goods with the same amount of workers, raw materials and equipment. In a market-drive expansion, consumers have to cut back in order to allow for investment. Yet with the government's funny money, it's possible to produce more capital and consumer goods without having to restrict consumption.
Or so it seems. People are going to find out the hard way that the distortion of interest rates misleads entrepreneurs. Free-market prices are supposed to act as signals to help coordinate economic activity. Since Stephen Poloz is fine with making it artificially cheap to borrow, the government has bamboozled investors into behaving as if there some actual savings to finance these capital projects. Eventually the dis-coordination caused by the central bank reveals itself. For a while it seems possible that the economy can actually produce more capital goods and consumer goods simultaneously, the trade-off is postponed as long as the entrepreneurs ignore the wearing out of existing capital stock. Just like the desert island example: the poking-stick you use to collect more coconuts won't last forever. Regular use results in depreciation. In order to maintain the same standard of living, energy must go into replacing capital goods. But while the central bank distorts price signals, capital consumption goes unnoticed. Profit motive, a tool that traditionally tells entrepreneurs what consumers want, is corrupted.
Stephen Poloz and the Bank of Canada talk about low interest rates as a sort-of “monetary stimulus” and that raising interest rates will only occur when the economy can get on its own feet. I hope you see the fallacy with that kind of thinking. The BoC has to continually increase the money supply in order to keep the artificial boom going and interest rates low. Yet, the continuous stream of new money eventually loses the ability to fuel an economic boom – just as we're seeing in the United States and Canada. Big Business isn't sitting on idle cash,they are adjusting to the conditions by offsetting its impacts on their profit margins. Also, continuous new money dilutes the existing stock. Like adding water to milk. New money has less and less of an impact.
Eventually the problems of central bank interference can't be ignored. The economy reaches a stage where guys like Poloz have to keep inflating the money supply just to mask the growing imbalances in the structure of production. More money creation equals higher prices. Today we see that in the stock market and in commodity markets. But now, as the title of this article alludes to, price inflation is hitting the grocery store. Bacon is getting expensive. As prices rise and the purchasing power of the money (including wages) fall – people will get angry.
What Stephen Poloz (and every other central banker) needs to do is stop injecting new money into the loanable funds market. Interest rates will rise, market prices will become more accurate, many people may default on their debts as consumers and entrepreneurs realize they've been acting unwisely. Massive projects – in this case, mostly million-dollar homes and condos – will be left unfinished. But from this viewpoint, it becomes clear that they never should been started. Entrepreneurs will do what they can: shut down, lay off workers, sell equipment, merge with competitors, etc. Some businesses may stay in business, but almost everyone will suffer losses. The illusion of prosperity will end.
But it's important to emphasize that this correction will not “deflate” us back to the Stone Age. Worst comes to worst, we lose faith in the currency and go back to barter before evolving back into indirect exchange which requires a medium. Actually, that's probably the best case scenario as it keeps money out of the hands of the State. Worst comes to worst, the Globalists introduce a World Fiat Currency the masses readily accept and the whole business cycle starts over again. But we don't need money printed by governments or bankers. In fact, it is crucial we're all on the same page here. Money is what makes the Globalists appear so strong. If we take back the money, we've essentially won. And I don't mean “we” take it back as in “the government” issues interest-free loans to fund infrastructure. The Globalists are the government. They buy politicians. And they'll buy back the Bank of Canada in no time.
Our best strategy is to replace their fiat tender with whatever individuals decide to use. I like silver. It, along with gold, has a long history as money and the Globalists have worked very hard to eradicate this history. But some people like Bitcoin. Others are holding out for the Venus Project. Whatever. As long as we bring down the New World Order together. And then afterwards, all I ask is no one force me into their system and I'll show them the same respect. Until then, I suggest wrapping your head around the Bank of Canada. High food prices, the Canadian housing bubble, the Euro crisis, and the US Treasury-bond bubble – these things can't be ignored and if you accurately predict them (or speak with authority as they occur) more people will listen to you. The more people that understand this, the better our chances at deferring – or perhaps permanently postponing – a global currency and a global government.