The Bank of Canada governor is obviously very concerned about the debt loads that Canadians have recently assumed. Just days after the Bank of Canada warned about increasingly leveraged households, Mr. Carney told a Toronto audience today that:
Cheap money is not a long-term growth strategy. Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.
It is great that Mr. Carney has, even if unconsciously, internalized the basics of classical economics and Austrian Business Cycle Theory. To wit, wealth is generated by increased labour productivity, not the production of money. And if, in producing that money, interest rates are set below the natural/market level, a debt fueled boom will follow. The longer this is allowed to proceed, the bigger the inevitable collapse is bound to be.
In order to put a stop to this vicious dynamic, the logical course would be to raise interest rates towards the natural/market level. This is the point at which the supply and demand of loanable funds would intersect without central bank intervention. Because such intervention is constantly taking place, it is hard to figure out what the natural/market level exactly is at any given point in time. But it’s obviously higher right now than the 1% rate that the Bank of Canada is currently targeting.
But Mr. Carney, evidently, is reluctant to raise rates. Instead, he has opted for the politically safer route of moral suasion. But many people don’t attend to every statement made by the governor of the Bank of Canada. Nor will loan officers heed the governor and readily give up the possibility of generating additional income by extending another loan. Debt will not stop increasing until the price of taking on more of it goes up. Only money can do the talking here.
