Canada needs to actively strive rather than passively waiting for
Frank Dec. 14, 2014, in Waterloo, Ontario, Canada
This article discusses the different points of view regarding the economic policies of Canada.
My advocating may possibly cause a feeling of critics on the lack of positive momentum in economic policy of Canada, however, the purpose is same for developing economy. I firmly believed that actively put forward different views are favorable for making the optimal economic policy, which is not personal grudge.
According to the Bank of Canada's Monetary Policy Report January 2014, an inflation rate that is persistently below the targets of central banks in many developed countries partly reflects “widespreadexcess capacity in the global economy.” Canada is with excess capacity, too.
Real GDP growth is estimated to have risen somewhat above the growth rate of potential output in the second half of 2013. However, the shift in the composition of aggregate demand necessary for sustainable growth has not yet occurred. The moderate growth trend in consumer spending remained supportive of overall growth, while residential investment failed to slow to the extent anticipated. At the same time, non-commodity exports continued to disappoint, and business investment recovered more slowly than expected.
Nov. 3, 2014, the article Bank of Canada Policy Appropriate in the Face of of Uncertainty reported that :"The Bank of Canada’s monetary policy is appropriate to return Canadian inflation to its 2 per cent target as worldwide economic uncertainty lingers."
Nov 13, 2014, the article that Bank of Canada says country can return to "natural growth" reproted that Bank governor Stephen Poloz said: "Our conservative assessment is that global momentum is building, Canada is beginning to benefit, and with the assistance of continuing monetary stimulus, we can return to natural growth at full capacity over the next two years."
From above reports, we can clearly learn that under the situation of worldwide economic uncertainty lingers, the response of Canadian Government is to return Canadian inflation to the target of 2 per cent , and to wait economic "natural growth" by the assistance of continuing monetary stimulus. Obviously, they all are passively waiting for, rather than actively strive.
Some of the comments make people feel confused, such as that "residential investment failed to slow to the extent anticipated", government has not issued any restriction policies on it, why hope that residential investment slow down? The arguement of excess capacity is also questionable?
The activation of excess capacity in the economy is important, however, only by means of inflation and monetary stimulus of Keynesian seem not enough. On other hand, such monetary stimulus has promoted that "residential investment failed to slow to the extent anticipated".
High real estate prices is not only worsen people's lives, but, more terrible is that it stifles real economy, because businesses can not survive as that of happening in Vancouver city, where businesses can not recruit employees since that high housing prices have forced them away.
The monetary stimulus has caused such serious damage on people's lives and real economy, but, we can not get expected harvest. There many facts showed that Keynesian economic and financial instruments have lost its original potency, at least in some extent.
Dec. 4, 2014, in the article that Why did Keynesian fail in saving Japan's economy? I indicated that: "Nowadays, compared with that of formation period of Keynesian theory in before and after 1930s, the over triple times increase in the population, the big changes in the economic structure, the large increase in the economic capacity, and over-excess production capacity, especially, the mad plunder of over-developed Financial Economy to the Real Economy with rapid free flow of the large amount of international hot money that large enough to destroy the economy of a nation, and the access is as easy as that of just a finger click."
"International situation has undergone earth-shaking changes; however, the governments worldwide are still dogmatically continuing Keynesian economic theory that developed under old situation and certainly is not suitable for new problems."
The best example is Japan, Abenomics has been using Keynes's economic instruments to extreme extent, however, the real effect is just in the opposite with pushing Japan's economy continuing to deteriorate.
The article that Japan's Bubble Economy of the 1980s said with that: "It has been over two decades since the popping of Japan’s economic bubble and the country is still actively battling with deflationary forces that are so powerful that near-zero interest rates, repeated bouts of quantitative easing (some call it “money printing”) and constant Yen-weakening currency interventions have barely made a dent."
Nov. 28, 2014, As Japanese Bankruptcies Soar, Goldman Warns "Further Yen Depreciation Could Be A Net Burden" said with that:"Surprisingly, the number of bankruptcies since 2013 due to yen depreciation far surpasses the number of bankruptcies in 2009-2011 due to yen appreciation. Presumably, in many cases in 2009-2011 the strong yen was not cited as the direct cause of bankruptcy because there were numerous other factors at work also, beginning with the sharp slowdown in the global economy and financing difficulties. Nevertheless, the 353 bankruptcies since 2013 attributed to the weak yen are 2.2 times greater than the 157 bankruptcies from 2009 to 2011 attributed to the strong yen (see Exhibit 3)."
Above reprots reveal the terrible consequences of Japan's bubble economy, Prime Minister Shinzo Abe economics seems not work but with a side effect to press Japanese economy continuously toward deterioration.
The sad economic situation is not the fault of the great Keynes, but the fault of the Prime Minister Shinzo Abe and the policy makers. They can only draw a tiger by copying home-cat, but without ability to independent think according to the actual objective situation that is in changing constantly.
Aug. 24, 2014, in the article that Over-heated real estate market is ruining Canadian economy from Japan mirroring Canada, through translation of some articles that wrote by Japanese scholars, and the people from China who are studying and working in Japan, by their personal experiences and investigation to reveal the reality of the period of Japan's bubble economy 1980s, and after the economic bubble burst, I have discussed the cause of Japan's economy decline. I excerpt some as follow:
When talking about the main cause of Japan’s declining from the economic powerhouse? Most people would blame the Plaza Accord that forced appreciation of the Yen to cause Japanese products losing competitiveness and the Bubble Economy.
The reason, as my view, all of those stimulus measures are from the macro elements of the economy, with ignoring the most basic micro elements - the quality of the people, the work-ethic of the labor, the efficiency of the production and the capacity of the innovation.
The Bubble Economy has rewritten the code of the DNA of the quality of Japanese people, from enthusiastic in hard working into enamoring in greedy speculating, thus, further affected the social moral and national’s spiritual, thereby cause the decay of whole society of Japan.
The easy gaining excessive profit from speculative activities have fueled Japanese speculative mentality with unearned ideological. It entices people keen to make living by speculating instead of hard working and less concerning on the interest of own company and most of Japanese people have lost the entrepreneurial spirit, hard-working spirit, and the rational sense of social responsibility and enterprises have deteriorated as lack of enterprising spirit and innovation dynamicI, such negative impact is more terrible, even fatal.
In essence, the national is the decisive factor for a nation’s economic development; a nation's economic decline is the decline of the quality of its national.
Whether it is a business or a country, if its member is full of concerning for the self interest, without or lack of concerning for the public interest, it will doom to be extinction.
So, I firmly believed that the impact of the Bubble Economy on the economy is just a curable social flu, but, the impact on the national’s spiritual is incurable social cancer.
The fact of the Japanese companies loses competitiveness and falling into declining are the vivid proof. The shortsightedness and lack of entrepreneurial spirit of the management team, the lack of work enthusiasm of the employees is the main reason, and also it caused Japan's economy can not recover as expected.
Now, please look at Canada, as same as that of Japan, Canada's economic stimulus measures are also from the macro elements of the economy.
With the decline in oil prices, the oil industry led Canadian dollar - Petrodollar, has also been devalued. Some of scholars and government officials are pleased to think that the depreciation of the Canadian dollar is in favor of exports, thus it will promote economic growth. However, I could not help but ask that, by rational tinking, whether the depreciation of the Canadian dollar will result in business failures as that of the appreciation of the Canadian dollar years ago, which is happening in Japan, due to the sharp increase in the cost of imported materials.
More worse is that pure profit-purposes investments are pushing up the prices of farmland and real estate. In essence, this is predatory on the wealth that hard created by industrious Canadians. Those speculators are taking the blood of the Canadian economy as that of vampires.
Theexperience of Japan is a good reference for Canada. Although the economic situation in Canada is better than that of Japan, however, the low productivity is also the fatal factor in constraints of economic development. Canada should not fully rely on Keynesian economic theory, instead, from improving the productivity and innovation to promote economic development.
We must strictly forbid any speculative activities internationally and domestically in Canada. To establish a good businesses living environment by ensuring the low cost of Canada's manufacturing. Learn to Germany, by high-quality and low-cost products promote sustainable economic development, thus, completely get rid of passive situation of Petrodollar.
So called Petrodollar is a shame of Canada, which is showing that Canadians are not only lazy, but also ignorance.
Oct. 26 2014, I discussed this issue in the article How to revive Canada's non-energy manufacturing? In which, I have provided some seasible methods to improve productivity, such as:
2. To increase the share of work performance-related payment, in view of that the essence of economic success of China was that broken the egalitarian wage system, that caused low productivity to have largely increased the share of work performance-related payment.
3. To invite existing good manufacturers globally to establish production branches in Canada with their forward-looking good products, unique technologies, advanced equipments, funds, and suitable technical staff, which is a only way that is able to quick form a scale in the employment and the revenue.
4.To set double track on Lending Rates, which is to further reduce the lending rates for businesses and increase the one for real estate. Thus, at the same time stimulate the real economy, but also suppress the overheated real estate market.
--- Frank Dec. 14, 2014, in Waterloo, Ontario, Canada
Bank of Canada to hike interest rates in May? Not so fast
Canadian PressThe OECD forecast is more bullish than the Bank of Canada. The economy has considerable excess capacity and needs monetary stimulus to sustain a recovery over the next two years, Governor Stephen Poloz told lawmakers Nov. 4.
OTTAWA — Does the OECD know something that Canadian economists do not? The simple answer: Not likely.
In recent global forecasts, the Organization for Economic Co-operation and Development has predicted the Bank of Canada would begin hiking its key interest rate earlier than private-sector analysts in this country would have ventured.
The Paris-based group did it again on Tuesday, stating matter-of-factly in its twice-annual Economic Outlook that the central bank’s policymakers would begin bumping up borrowing costs “in late May of 2015” — many months ahead of when economists here had penciled in for the first rate move in more than four years.
With the central bank’s trend-setting lending rate at a near-record low 1%, the OECD said “monetary accommodation will need to be gradually withdrawn to counter inflationary pressures.”
“The projection assumes this will begin around mid-2015,” it said.
Trouble is, the OECD prediction doesn’t gel with economists on the ground.
“Their last forecast was also for the bank to raise rates ahead of what the market had been thinking at the time,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“That seems to be their proclivity, to be a little bit more optimistic about the economy and about the eventual rate-hike cycle. But markets are looking for something late next year. If anything, markets are pushing [a rate hike] toward 2016 — at this time,” he said.
“Things would have to be going exceptionally well for [Bank of Canada policymakers] to go in May — exceptionally well.”
The OECD’s “non-consensus expectation” for when the central bank will begin lifting rates “would represent a significant about-face for the BoC,” said Mark Chandler at RBC Dominion Securities.
Policymakers have been “adamant, of late, that higher inflation was mostly due to transitory factors and that broader slack in the economy will not be eliminated [for] about two years.” The consumer prices index rose by an annual rate of 2.4% in October, while the core inflation reading — stripping out key volatile items, such as some energy and food products — advanced by 2.3%.
The OECD on Tuesday forecast economic growth in Canada of 2.6% in 2015, followed by 2.4% a year later, with the help of a weak dollar and growing export demand — something the 34-member economic watchdog believes should spur long-awaited rebound in spending by companies.
“Business investment should strengthen with improved demand, to boost capacity and cost competitiveness,” the report said.
The Bank of Canada, in its October outlook, said growth would average “close to” 2.5% in 2015 and then slow to “around 2%” the next year, with the economy returning to full capacity in the second half of 2016 — slightly later than policymakers had previously forecast. Inflation is expected to settle at 2% — the midway point of policymakers’ 1%-to-3% target range.
Much of the renewed demand for Canadian goods and service will come from the United States, our biggest trading partner, where the economy is accelerating and unemployment is declining. The U.S. economy should expand by about 3% in both 2015 and 2106, the OECD said.
Another indication of the growing momentum of the U.S. came Tuesday, when data showed that economy grew at a much faster pace than predicted in the third quarter — thanks to big gains in consumer spending and business investment.
Growth between July and September came in at an annualized rate of 3.9%, beating forecasts of a 3.5% advance and marking the strongest six-month growth spurt in 10 years. Consumers contributed 2.2% to growth and business investment grew by 6.2%.
“That puts the [U.S.] Fed on pace to raise rates around the middle of next year. We have them going in June,” said BMO’s Mr. Reitzes.
“For them, I think continued employment growth, the jobless rate coming down a little bit farther and [average] 3% GDP growth — that’s a recipe for rate hikes, if I’ve ever heard one.”
Pouring more cold water on the OECD’s rate forecast, Mr. Reitzes said the Bank of Canada “has made it abundantly clear that they’re not going to be front-running the Fed on rate hikes.”
“Our rates are at 1% and the Fed’s is essentially at zero,” he said. Bank governor Stephen Poloz “has said a number of times that there’s still a meaningful amount of spare capacity in the economy and points to other measures of slack.”
Bank of Canada Governor Stephen Poloz is bullish on the prospects of the world economy in general and the Canadian economy in particular.
Photo: PETER KENTER
"Our conservative assessment is that global momentum is building, Canada is beginning to benefit, and with the assistance of continuing monetary stimulus, we can return to natural growth at full capacity over the next two years," he says.
An aggressive response by policy-makers in 2008 saw interest rates effectively reduced to zero and the application of unconventional monetary policy.
"We will never know how bad things would have been without that aggressive, co-ordinated policy response," says Poloz.
"But as a student of economic history, I can say that all of the ingredients of a second Great Depression were present."
Critics have charged that "aggressive and prolonged monetary stimulus" might encourage excessive borrowing and financial risk-taking, the same conditions that brought about the 2008 financial crisis. Poloz argues that the central bank has only one major policy tool — setting interest rates — and that the global financial system has been stabilized and strengthened in the intervening years to prevent a relapse.
However, unlike citizens in other countries, Canadians continue to leverage their debt.
"In particular, housing activity is showing renewed momentum and consumer debt levels are high, so household imbalances appear to be edging higher," he says.
"But it is our judgment that our policy of aiming to close the output gap and ensuring inflation remains on target will be consistent with an eventual easing in those household imbalances."
Poloz notes that current policy by G-20 countries is designed to collectively boost global GDP by two per cent over the next five years.
"Success will hinge on such policy actions as reforms to improve the functioning of labour markets, international trade liberalization and investment in infrastructure," he says. "These things are clearly worth doing, and that boost to global GDP will be worth having."
Considering the prolonged stimulus of near-zero interest rates, what's holding Canada back?
Poloz says that both deleveraging by the private sector in addition to a reverse course on government fiscal stimulus programs are creating economic headwinds that are preventing a full-fledged economic recovery. Meanwhile, uncertainty about recovery, particularly in the export sector, is holding back business expansion.
"It seems to me that we must allow for the possibility that the combined effects of deleveraging, fiscal normalization and lingering uncertainty will continue to restrain global economic growth for a prolonged period," says Poloz.
"We are confident that these headwinds will dissipate in time, but in the meantime interest rates will remain lower than in the past in order to work against those forces."
Poloz notes that high growth rates before the financial crisis were based on unrealistic leveraging. However, current lower growth rates of around two per cent are primarily the result of the retirement of baby boomers during the past six years, not the crisis itself.
While the export sector is recovering, these companies are relying on excess capacity, not expansion, to meet demand.
"By our estimation, it will take around two years for us to use up our excess capacity, at which point inflation will be sustainably at our target," he says.
"In the meantime, continued monetary stimulus is needed to keep the process in motion, and if the headwinds discussed earlier persist, continued policy stimulus may still be needed to offset them even after our excess capacity has been absorbed."
Poloz spoke at the 22nd annual conference of the Canadian Council for Public-Private Partnerships in Toronto on Nov. 3.
