Bank of Canada Raises Interest Rates … Again

09/06/2017Caleb McMillan

For the second time in less than two months, the Bank of Canada has raised interest rates.

On Wednesday, the central bank raised its overnight lending rate by a quarter per cent to 1 per cent.

The move surprised many who weren’t expecting a rate increase until later this Autumn.


Just like last time, the rationale behind higher rates was centred around the Bank of Canada’s belief that the economy is growing faster than expected.

Bank of Canada Governor Stephen Poloz said, “The level of GDP growth is now higher than the bank expected.”

Of course, this assumes that GDP measures anything.

The Canadian loonie surged after the announcement, climbing to 82 cents U.S.

The decision reinforces the message that easy money and low-interest rates are coming to an end. Of course, the bursting of Canada’s real estate bubble could reverse direction for the bank, using these recent rate gains as leverage to cut rates in order to “stimulate” the deflating economy.

But until then, analysts are expecting more rate hikes since many have confused consumer indebtedness and rising prices as economic strength.

The Bank of Canada won’t confirm these predictions since, according to the central bank’s statement, price controls on interest rates are, “predetermined and will be guided by incoming economic data and financial market developments.”

Of course, the Bank of Canada isn’t clueless when it comes to higher rates and indebted Canadian households. In the rate hike statement, the bank promised that “close attention will be paid to the sensitivity of the economy to higher interest rates,” given “elevated household indebtedness.”

The bank’s next scheduled rate-setting is Oct. 25.

All in all, today’s announcement puts interest rates back to where they were in January 2015, before Poloz made two surprising “emergency rate cuts” to deal with falling oil prices.

Reprinted from Mises.ca. 

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Bank of Mexico: Bread Today, Hunger Tomorrow

09/05/2017Edgar Ortiz

In April 2017, the Bank of Mexico transferred an unprecedented figure to the federal government: 321,653 billion Mexican pesos from its operating surplus. How much is this figure? It is equivalent to 1.7% of Mexico’s GDP — 25% of Guatemala’s GDP — and to 22% of the total revenue budget of the Mexican government.

What is Banxico’s Operating Surplus?

Essentially all of Banxico’s profits are a result of the appreciation in the value of the bank’s foreign exchange reserves in pesos. At the beginning of 2016, the Bank of Mexico’s dollar reserve was of 176,736 billion dollars. By the end of 2016, the bank had almost the same amount in reserves. However, in January the peso was trading at 17.35 to the dollar, and in December at 20.62 a dollar.


The Mexican peso depreciated by 19% in 2016. As a consequence, the value of Banxico’s foreign exchange reserves reported a gain of 582.8 billion pesos. It is from this profit that Banxico transferred the 321,653 billion to the Mexican federal government — a transfer the bank was obligated to carry out as established in article 55 of the Banxico law by no later than April of each year.

A Blessing for Public Finances

This “gift” that the central government received came as a blessing to a government that had announced a modest fiscal consolidation plan. It is important to take into account that from early 2013 until the end of 2016, the Mexican public debt went from 5202.77 billion pesos to 8657.62 billion.

By legal provision, 70% of the operative surplus that Banxico transferred to the Mexican government must be directed to repayment of debt. Undoubtedly, the aid fell from thin air: the operative surplus came from the peso’s depreciation caused by Donald Trump’s victory last November.

Will Banxico Continue to Profit?

What will happen now that the peso is appreciating against the dollar? If we review the Banxico’s results from the valuation of its foreign currency reserves as a consequence of the variation in the exchange rate, we find that in the first quarter of 2017 Banxico lost 310,911 billion pesos. This means that only in the first quarter of the year Banxico lost 53% of what it earned in 2016. This is not a reason to believe that Banxico is going bankrupt, but the bank is definitely decapitalizing.


What Should We Expect for the End of the Year?

Everything depends on the trend of the Mexican peso against the dollar. Experts do not expect a strong appreciation in the rest of the year. The high inflation rate does not suggest that the peso can appreciate too much. There are only two things that are certain: Banxico will report operational losses this year, and the Mexican government will not receive another “gift” in 2018 to pay for the public debt. The government will have to tighten its belt if it wants to reduce the high level of public debt it has.

Originally published by UFM's Market Trends. 

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Bank of Canada Raises Rates for First Time in 7 Years

07/12/2017Caleb McMillan

With the economy expected to “grow by 2.8% in 2017” up from their April forecast of 2.6%, the Bank of Canada has decided to raise interest rates for the first time in 7 years to 0.75%

It may be minor, but it should be just enough for the Bank of Canada's Stephen Poloz to cut them again when things start to get tough, and the 2.8% growth vanishes just as quickly as it was envisioned.

Of course, higher borrowing costs are just what the doctor ordered. Often disparaged as the flawed “hangover theory” by Keynesians who believe consumption equals wealth creation, the idea that we’ve been on an unsustainable economic path, fuelled by low-interest rates, is about as outside the mainstream as you can get.


Source: Bank of Canada. Graph by Ryan McMaken.

But as the popularity of Mises grows faster than the 2.8% economy, the “hangover theory,” or, rather, the Austrian business cycle theory, will be harder and harder to suppress and ignore. Especially as the truth of its statements outperform the lies of the Keynesian doctrine.

That said, moving up a one-quarter of a percentage point from 0.50% to 0.75% isn’t as earth-shattering as, say, moving the rate up to 2.75%. While the latter may bankrupt a good number of Canadians, the decision would cease punishing savers and allow the painful but necessary correction and restructuring of the economy to commence.

But as Stephen Poloz himself has said, “When you’re looking at making an investment that you think will make you 20 percent or more over the next 12 months, and you have to borrow the money to make that investment, is a quarter point or a half a point (in extra interest) going to make a difference?”

So the rate “hike” was not an attempt to get household debt under control but actually a consequence of a robust economy that has been fuelled by household spending.

Leave it to the central bank to confuse and ignore the causal-realist tradition in economics. Nowadays the bankers in charge just run data through a computer and make decisions based on that. But as Murray Rothbard points out, if economists can predict future trends then why are they wasting their time “putting out newsletters or doing consulting when he himself could be making trillions of dollars in the stock and commodity markets?” 

Household spending isn’t growing the economy. A rate hike is just giving the Bank some room to cut rates again when the financial house of cards starts to sway in the wind.

This is the first overnight rate increase since August 2010 when Mark Carney was leading the central bank. Poloz took over in 2013 and cut rates twice in 2015 due to the slow-down caused by crude oil prices.

Caleb McMillan writes from Vancouver, British Columbia.

Originally posted at Mises.ca. 

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Beware the Predictions of "Experts" Like Janet Yellen

07/03/2017Ryan McMaken

[First published by Rare, July 1, 2017]

Speaking in London, Federal Reserve chair Janet Yellen Tuesday predicted that the “the system is much safer and much sounder” and explained that the Federal Reserve is prepared to deal with numerous enormous shocks to the economy.

In her conversation with Lord Nicholas Stern, Yellen also went on to list the reasons that, thanks to central bank intervention, there is unlikely to be another financial crisis “in our lifetimes.”

For those who have lived through more than one business cycle, however, alarm bells tend to go off every time an economist, central banker or high-ranking government official declares that there’s little to no danger of economic turmoil in the near future.

There is a long history of spectacularly bad predictions being made shortly before economic crises. Famously, shortly before the Crash of 1929 — one of the earlier crises that occurred on the Federal Reserve’s watch — Herbert Hoover proclaimed that “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.”

But, we certainly don’t have to go back that far.

Indeed, in the late 1990s, it became nearly routine to hear economists announce that “the internet changes everything” and “the business cycle is dead.”

Economist Rudi Dornbusch — a close associate of current Fed vice chair Stanley Fischer — even wrote a July 1998 column in the Wall Street Journal titled “Growth Forever.” Dornbusch concluded that the possibility of an imminent recession “is remote” and the country “will not see a recession for years to come.” So sure of the benefits of the “new economy” was Dornbusch, in fact, that he declared, “This expansion will run forever.”

Then came the dot-com bust of 2001. After that came a short expansion from 2002 to 2007. After that came the Great Recession.

Meanwhile, from 2000 to 2015, according to the federal government’s data, real median household income was flat. Only over the past two years have we seen any of that expansion that many were venturing to say was permanent back in the late 1990s.

Economists and policymakers were no more insightful when examining the possibility of a new crisis post-2007.

In 2005, for example, Milton Friedman could have been paraphrasing Yellen’s Tuesday comments when he concluded that “the stability of the economy is greater than it has ever been in our history. We really are in remarkable shape.” Friedman went on to give Alan Greenspan credit for the expansion.

In early 2007, Ben Bernanke predicted, “We’ll see some strengthening in the economy sometime during the middle of the new year.”

As late of mid-2007, Bernanke was downplaying any problems associated with the sub-prime housing market, allaying any fears of a bubble or bust and claiming, “I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened [i.e, enormous home price growth during the housing bubble] is supported by the strength of the economy.”

If housing bubbles do prove to be a problem, Bernanke concluded, it’s “mostly a localized problem and not something that’s going to affect the national economy.”

The US would officially begin to contract in December 2007, followed by a financial crisis the following autumn.

Even on the eve of the crisis — in September 2008 — John McCain announced that “the fundamentals of our economy are strong.”

A year later, the unemployment rate would reach 10 percent, foreclosure rates were surging and total employment would collapse from 116 million to 107 million. Employment would not return to pre-crisis levels until late 2013.

Millions of workers would need to change careers, be retrained, scratch for other forms of income to avoid foreclosure or eviction and put off retirement indefinitely. The economy was so weak for so long, in fact, that the Fed felt it necessary to keep the key target interest rate near zero for seven years to add “stimulus.”

Of course, just because Janet Yellen says the economy won’t experience a crisis anytime soon doesn’t mean a crisis is imminent. A truly strong economy isn’t going to be “jinxed” by a declaration that things are fine. On the other hand, given the record of eminent economists and Fed board members in the past, Yellen’s predictions are hardly anything that should inspire confidence.

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Beyond the Failure to Hit 2% Inflation

05/31/2017C.Jay Engel

The Fed's economists are always coming up with deranged new ideas and when they fail to reach their goals the first time, they double down. In the recent decade they picked the completely arbitrary inflation growth rate of 2% (as calculated by the misleading PCE) and stated that for the economy to be on a strong trajectory, 2% inflation was a necessity. And of course, they directed all their stimulus toward Wall Street and capital markets (including housing) which has seen substantial gains since the crisis, but neither are calculated in the PCE. 

At any rate, the Fed can point to the failure to hit 2% as an excuse why the economy isn't exactly strong 9 years after the crisis. The silly goal of trying to cause a rise in consumer prices will now be addressed with new "solutions." According to their models they haven't consistently hit 2%, though main street grocery shoppers dissent from the academic models.

At any rate, the Fed is determined to succeed. And so, San Francisco Fed President John Williams presented the idea of "flexible price-level targeting." This new excuse for monetary expansion will allegedly allow the Fed to adjust interest rates and monetary base growth in accordance with what is needed to hit a certain price level. In other words, the Fed wants the ability to overshoot the 2% goal as necessary to make up for lost time or to more effectively deal with years of "too low inflation."

The whole idea of trying hard and failing to hit their inflation goals is a massive underlying theme that continues to justify more monetary intervention. The Fed could hit 2% or more anytime it wanted to. For one thing, they could stop paying interest on excess reserves and therefore remove the incentive to keep money stocked at the Fed. This whole dramatic presentation is just an excuse to keep feeding cheap debt into the capital markets and the US Treasury.

What the United States economy needs is not a Fed that is more successful at hitting its currency devaluation schemes. We need the opposite: we need the Fed to walk away from the business of managing the economy so that prices can adjust, bad debts can be liquidated, and the economy can accumulate a healthy level of savings.

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Balance Sheet Normalization, Or Not

05/17/2017C.Jay Engel

Politicians, bureaucrats, and media talking heads specialize in saying one thing but meaning something else. In Fed world, something referred to as "balance sheet normalization" would be thought to be a return of balance sheet levels to pre-crisis numbers (roughly $850 billion). But common sense does not prevail. Instead, as it turns, normalization doesn't mean a return to normal. CNBC:

Interviews with Fed officials, and public statements they've made suggest the Fed's new normalized balance sheet could end up being three times as large as it was before the financial crisis. And it could be bigger than that.

Of course, this was the almost inevitable, given the Fed's irrational fear of monetary deflation and their unwillingness to do anything that might make Wall Street think the punch bowl of easy money was being whisked away. Not to mention the political motivations of remitting profits back to the Treasury and artificially suppressing the US Government's cost of borrowing.

The CNBC article states:

A bigger Fed balance sheet on a more permanent basis is potentially good news for long-term interest rates. It means the Fed will have fewer bonds to unload, and so exert less upward pressure on interest rates. But if the Fed's calculations are wrong, it could mean higher inflation and higher rates.

"Good news for interest rates" does not, of course, mean good news for the economy as a whole. The economic role that interest rates play is to coordinate the use of scarce resources across time in accordance with the time preferences of human beings. So an interest rate that is kept lower due to central bank policies interferes with the market process. Resources are consumed in a way that varies with the desires of people acting in the free economy.

The article sums up opponents of a large balance sheet as follows:

Opponents of a large balance sheet say the Fed should reduce it as much as possible so it doesn't become a victim of politics, where Congress or the executive branch could mandate that the balance sheet be used to buy certain types of securities to solve fiscal problems. They also worry that such a large balance sheet is potentially inflationary.

Contrary to the mainstream press and what has become of "orthodox" economics, "inflation" (by which they mean rising consumer prices) is not the primary threat of suppressed interest rates. Economic depressions themselves are caused by the malinvestment that takes place during the era of too low interest rates. The healing process of liquidating these malinvestments is the pain of higher interest rates and the falling of asset prices. This healing process is what the Fed actively works to prevent by refusing to actually normalize the balance sheet.

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BEA Releases Q1 GDP: 0.7%

04/28/2017C.Jay Engel

The BEA's "advance estimate" release of Q1 GDP came in today at a very low 0.7%, indicating severe slowdown of growth. The growth rate was attributed to slowed consumer spending, downturn in inventory investment, and a slowdown among state and local spending.

Of course, this exposes one of the problems with GDP in the first place: it relies on government spending and consumption qua consumption. That is, it pays little attention to the health of the capital structure and artificial credit expansion. Further, it does not take into account the fact that government expenditures are not necessarily connected to true market demand. As Rothbard noted:

Spending only measures value of output in the private economy because that spending is voluntary for services rendered. In government, the situation is entirely different ... its spending has no necessary relation to the services that it might be providing to the private sector. There is no way, in fact, to gauge these services.

Thus, a high GDP number doesn't imply a healthy of the economy in the first place. Nevertheless, the fact of the matter is that the econometric establishment claims GDP is a good reading on the progress of the economy. And therefore their own models are challenging their claim that their central planning is doing the trick! Will the Fed hike rates into the lowest GDP reading in 3 years?

Finally, this low number points to the superior accuracy of the Atlanta Fed's GDPNow forecasting model (final estimate was 0.2%) than the New York Fed's Nowcast model (2.7%).

Atlanta Fed:


New York Fed:

Screen Shot 2017-04-28 at 7.52.46 AM.png


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Beware, Dissenter of the Monetary Regime

01/26/2017C.Jay Engel

In a cry of desperation, Tim Duy takes to Bloomberg to warn the world about the possibility of “hard-money” advocates getting into the Fed. Why, there’s potential that new Fed governors might not be “divorced from political pressures.” Wouldn’t that be a radical shift.

The hilarity of this article is that the “hard money” label is being applied to defenders of a policy rule; specifically, John Taylor of “Taylor Rule” fame. Yes, the advocates of formula based interest rate shifts, who deride the true hard money of the classical gold standard, are now in the extremist hard money camp.

This is a classic case of taking a minuscule difference between apologists for monetary interventionism and blasting it out of proportion to redefine the debate. After all, if the rule-based advocates are the dangerous fringe, then the current fiat regime is normal and orthodox! Indeed, Duy makes it crystal clear that it is the Bernanke/Yellen clique that has saved the world and the “hard money” Taylorites are about to ruin it. This is the entire spectrum of monetary theory! No mention whatsoever of the true hard money camp: the Austrians and defenders of the 100% gold backed currency.

Duy warns that if these hard money villains had been in charge, their monetary policy would have been too tight and recession would have come by now. Of course, the job of the Fed shouldn’t be to avoid recession at all; it is the boom, not the bust that we ought to criticize. A recession, a liquidating of all the malinvestments caused by a loose Fed, is the healing process that we desperately needed. But we never got it. Hence the current sluggish economic condition.

To finish off, Duy complains that these rule-based advocates would turn policy far too tight, given “underlying economic conditions.” That’s always the ironic rub in the mainstream narrative. The Fed was allegedly the hero who saved the global economy, brought it forth into harmonious recovery. But this “recovered economy” isn’t even ready for a few rate increases after 8 years? Swell recovery.

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