Bank of Canada governor Stephen Poloz is prepared to penalize savers in order to get a stalled economy moving again.
That’s one lesson from his intriguing and far-reaching speech to Toronto’s Empire Club Tuesday.
But the more important lesson is his statement that this task could be better accomplished by the federal government running deficits.
Citing the late British economist John Maynard Keynes, the central bank chief reminded his audience that when interest rates are already low, fiscal policy (the willingness of governments to spend more than they take in) is always more powerful than monetary policy (attempts by central banks to promote investment).
In effect, he was telling Prime Minister Justin Trudeau and Finance Minister Bill Morneau to go for it — to run deficits if necessary in order to get the country working again.
Being prudent, Poloz didn’t commit the sin of formally recommending anything to Morneau in this speech.
Central bankers tend not to comment publicly on what finance ministers should do, and vice versa.
But the message was there nonetheless. And it’s worth dissecting Poloz’s speech to see how he approaches the current slump.
First, Poloz does not believe the world is stuck in the rut of long-term stagnation.
He thinks we’re caught in a cyclical slump, albeit a long one. And he thinks matters are improving.
In this sense, he’s optimistic.
But he’s not that optimistic — which is why he spent most of his speech talking about so-called unconventional methods that the Bank of Canada might have to use if the economy starts to go down the drain again.
One of these unconventional methods is relatively conventional — creating money out of thin air.
Qualitative easing, as it is called, would involve the Bank of Canada buying long-term assets (such as corporate bonds) and paying for them with, as the Economist magazine puts it, “electronic cash that did not exist before.”
Another is to encourage banks to lend more money by penalizing them when they don’t.
This is the so-called negative interest-rate scenario. It would involve the central bank not paying but charging interest on commercial bank monies deposited with it.
Poloz said the penalty negative interest rate could be as much as 0.5 per cent.
Would this rebound on people who, in turn, park their savings in commercial banks? In response to questions, Poloz said no. But he may be overly optimistic.
In Switzerland, where the practice already exists, one commercial bank has served notice that it will start explicitly charging its depositors negative interest next year.
This means that those who insist on leaving their savings deposited in this particular bank could see them shrink bit by bit until nothing is left.
Poloz was quick to say that he has no plans to use unconventional methods, that he is just being prudent.
Then, in almost an afterthought, he came to the most important part of his speech: that while he is willing to employ unusual monetary tactics if necessary, it would be far better for a government faced with economic crisis to simply spend its way out of trouble.
Or, as he put it: “It may sound ironic, but the circumstances under which it may be more appropriate to consider unconventional monetary policies are also those under which fiscal policy tends to be more effective.”
To its credit, Trudeau’s Liberals appear willing to follow through on their campaign pledge and do just that — increase spending, even though doing so will lead to deficits for at least three years.
Like most finance ministers, Morneau is fairly slippery. But in his recent pronouncements, both he and Trudeau have indicated that these spending commitments will hold even if the deficits he runs exceed the Liberal campaign target of $10 billion annually.
Will the government hold to its campaign pledge of balancing the books before the next election? Morneau says yes. But Poloz could tell him that it’s wise to be prudent. Canada’s wobbly economy may not be on firm ground by 2019.
In such a case, more unconventional methods may be needed. The most effective method, as Poloz has pointed out, is not to engage in arcane central bank practices.
It is to have the federal government keep running deficits.