Governor Poloz’s advice: You, not my bank, must change (Part 1)

My father, his father and their business and political heroes never missed a chance to warn me that I’d have to reckon with the power of big commercial bankers. While their voices are mere memories now, Hollywood economists dramatically sustain their message.

However, the most taxing idea we face today is not our faith in Bay Street bankers, but our deference toward the Bank of Canada and the pronouncements of its incumbent and retired governors.

These individuals have all mastered one trade—managing, without political interference, a currency. The trade’s skill standards are exceedingly high and widely accepted around the world. (Indeed, our last governor, Mark Carney, was poached to run the Bank of England.) Nevertheless, in Canada, the trade survives only because we accept that the Bank of Canada (BOC) is indispensable to the management of those Canadian regions that are part of North America’s gigantic, integrated, mixed economy.

Canada’s and the United States’s economic regions—roughly a dozen from coast to coast to coast—are never in perfect harmony. Their growth and inflation pressures vary over time and that makes central management of money supplies and interest rates a complicated business. However, the existence of two full-fledged central banks—the Federal Reserve for 90% of that continental economy, and the Bank of Canada for the other 10%—reflects a political choice on our side of a border, not a neat, deep separation of economic aspirations, demographic and material characteristics, and domestic and international markets.  

Dad didn’t urge me to question his cherished Canadian dollar and the public duties of its BOC managers in Ottawa. He was a frustrated businessman, not a monetary economist. Fine. However, neither academics, special interests, un-muzzled retired government economists, nor fringe political parties seem willing to offer any reasons to be skeptical as well. They’ll quibble over the Bank’s individual decisions, but not whether they should be making them.

What the Bank is alone free to do is not insignificant.

The untouchables in the Bank are effectively anointing economic winners and losers across the country. Income tax decisions by the new Trudeau government are, as promised, giving some back to middle-class parents and taking more from the infamous and statistically persistent 1%. However, the impacts of the Bank’s policy of cheap interest rates and its benign indifference toward our depressed dollar are far more fine-grained, and significant. Without changing their ways in any way, some companies will make windfall profits while others, along with millions of consumers, become immediately, noticeably poorer.

Being adults, we’re expected to act like adults and sigh. 

This past week, Governor Stephen Poloz philosophized on the front pages that hard times will roll on but that having a dollar worth 71 cents US is for the best. Our cheap dollar is good for those glamorous few export sectors that have been praying for one and, sadly, is a necessary “adjustment” for the rest of us. His homily against a strong dollar is both obtuse and emphatic:

“Movements in exchange rates are helping economies, including ours, make the adjustments that must take place,” Mr. Poloz said in his speech. “This is exactly why countries choose to have flexible exchange rates.”

Poloz’s dares you: If you object to the 71-cent dollar, you have to be prepared to object to flexible exchange rates—that is, not having our dollar’s value freely determined by what the global capital markets think it—and Canada’s economy—will be worth tomorrow morning.

However, it’s quite debatable whether the flexible value of our dollar—floating up and down between $0.70 and $1.10 US over the last 25 years—has stimulated or actually frustrated “adjustments that must take place.” Further, adaptive economies elsewhere don’t necessarily choose flexible exchange rates, and adaptive economies elsewhere don’t necessarily need them. Rather, his modus operandi serves, above all, the unchallenged assumption that to be prosperous and competitive we need him, his institution and a separate dollar. 

(To be cont.)