Canada’s Central Bank is Headed By Yet Another Delusional Bubble Blower

Canada is home to one of the most egregious housing and credit bubbles in the world – a legacy of its former central bank governor Mark Carney, who is now blowing a similarly dangerous bubble in the UK as governor of the Bank of England. For some background information on this, see:

Carney’s Legacy: Canada’s Credit and Housing Bubble

Mark Carney: If There is a Bubble, It’s Not Our Fault

A Tale of Two Bubbles



Stephen Poloz, the new bubble blower at the helm of the Bank of Canada. He does look a bit loopy actually.

Photo via



After having slashed interest rates to the bone in Canada and instigating a mortgage credit and consumer lending boom that has inter alia led to one third of Canadians complaining that they can no longer sleep properly due to worries about their huge debt loads, Mr. Carney is now presiding over this in the UK:


1-BoE-base-rateThe BoE’s current base rate is the lowest since the central bank was founded in the late 17th century – click to enlarge.


Stephen Poloz picked evidently up where Carney left off. While the data on Canada’s housing bubble are plain as day to anyone with a set of eyes and an IQ temperature above 80, the comedian who has become Mr. Carney’s replacement as governor of the Bank of Canada somehow just can’t see it. This is highly reminiscent of Ben Bernanke’s frequent denials in 2006 that there was a housing bubble in the US, even as the bubble became so freaking obvious one literally had to be in a coma not to see it. From a tweet by Forex Live in December last year:


2-forex live tweetWe’re not sure were Mr. Poloz gets his information from. Maybe there is a Canada in some parallel universe in which there is no housing bubble and he was referring to the data from this alternate dimension. It’s either that, or he’s delusional.


With the end of the oil boom – another price distortion that has resulted from global central bank policies and that has come to a sudden ignominious end after years of malinvestment – Mr. Poloz quickly entered the global currency war by slashing Canadian rates and giving the housing bubble yet another shot in the arm. Toronto home prices have soared by about another 10% over the past year, so consumers can now leverage yet more phantom wealth to buy things they don’t need with money they don’t have. Sales of Valium should benefit as a side effect.


3-Canada, M1Canada’s narrow money supply M1 since the mid 1990s. This is not unlike the money supply explosion in other countries since the abandonment of the gold exchange standard in the wake of Nixon’s default in 1971 – click to enlarge.


We conclude that Poloz is a worthy successor of Carney: he has grasped the latter’s bubble legacy with both hands and proved he can produce even an bigger bubble. He also seems to have “succeeded” in producing a touch of price inflation. In reaction to a surprisingly strong surge in Canada’s CPI, he was quick to present a solution to this particular problem: the Bank of Canada will simply ignore it.


The Bank of Canada will ignore that part of the surge in March core inflation which is due to the fall in the Canadian dollar, Governor Stephen Poloz said on Friday, adding that the growing output gap was exerting downward pressure on inflation.

Canada’s core inflation rose to 2.4 percent in March from 2.1 percent in February, putting it well above the central bank’s 2 percent target. Poloz, however, said the jump was primarily due to higher prices for cars, which are sensitive to exchange rates.

The Bank of Canada does not see price rises from the exchange rate pass-through as fundamental inflation, he told journalists on the sidelines of the spring meetings of the International Monetary Fund and World Bank in Washington. “As far as I know, the output gap’s actually getting bigger as we sit here, not smaller, so the fundamental forces on inflation are downward, not upward,” Poloz said.


(emphasis added)

The so-called “output gap” is essentially a bunch of Keynesian hooey. Apart from being fundamentally unmeasurable, it is essentially based on the misguided assumption that the remainders of capital malinvestment that are still lingering in the economy after the last artificial boom should resume to produce things for which no consumer demand exists. As to the specific reasons for rising prices (in this case, the prices of cars), well, it is always something that leads to increases in the aggregate measure of the mythical “general price level”. The decline in the exchange value of Canada’s currency surely does represent a “fundamental factor”. If this can be ignored, then any component of the CPI basket exhibiting price increases can be ignored.

In summary, Mr. Poloz fails to see the importance of the price distortions his policies have caused, whether they consist of soaring house prices or sharp price increases of imported goods. As far as today’s central planners go, this is par for the course, but recent press reports suggest that the man has in the meantime become completely delusional.


Poloz Opines on the “Strength of the US Economy”

Apparently Poloz now wants to stop cutting interest rates after slashing the BoC’s base rate to 0.75% in January in response to the decline in oil prices. That’s a good idea of course, but his reasoning is bizarre, to say the least.


“Bank of Canada Governor Stephen Poloz said his January interest-rate cut seems sufficient to put the economy back on track amid rebounding oil prices, and signaled the biggest risk to his forecasts may be U.S. outperformance.

“The U.S. economy has great fundamentals,” Poloz said during a talk Monday at the Bloomberg Americas Monetary Summit in New York.”


(emphasis added)

We have no idea what “great fundamentals” Poloz has discovered in the US economy. Similar to his denial that there is a housing bubble in Canada, he seems to be getting his data from some parallel universe. Among the US economy’s “great fundamentals” we find outstanding sub-prime debt soaring to a seven year high, accounting for 41% of all consumer lending apart from mortgages. We also find productivity growth stalling out, while average real incomes of all income groups are in decline. As Frank Hollenbeck recently noted to these points:


Productivity increased less than 1 percent on average in the last three years and real wages have flat lined or declined for decades. From mid-2007 to mid-2014 , real wages declined 4.9 percent for workers with a high school degree, dropped 2.5 percent for workers with a college degree and rose just 0.2 percent for workers with an advanced degree.



4-US incomes statsReal household income has declined for all income groups – click to enlarge.


Meanwhile, the stock of US private durable capital is now more aged than at any time in the past six decades, a sign that the Fed’s easy money policy has
produced a lot of financial engineering, but very little capital maintenance.


5-cotd-age-private-fixed-assetsThe US capital stock has aged considerably, as speculation in financial assets has replaced investment in real capital – click to enlarge.


The US economic surprise index meanwhile shows that the US economy’s strength has been considerably overestimated by economists for some time. The index shows the relationship between positive and negative surprises in economic data. A decline in the index signifies that estimates consistently exceeded the actual data (the opposite applies if the index rises).


6-citigroup-econ-surprise-1The Citigroup “economic surprise index” for the US has plunged, a sign that economists have consistently overestimated US economic strength since late 2014 – click to enlarge.


Meanwhile, the Atlanta Fed’s GDP Now measure (which is solely based on data) indicates that US output growth has essentially dropped to zero in the first quarter. To this it must be kept in mind that GDP is not a very useful measure of economic growth, as it excludes all intermediate stages of the production structure, while including wasteful government consumption. Still, it is usually not a good sign when it drops to zero or below. The Chicago Fed’s national economic activity index is floundering as well, with the three month moving average back in negative territory and falling to the lowest level since 2009.

As we have previously pointed out, we would not be surprised if there were a brief bounce in economic data, as the ECB’s QE program induces a revival of bubble activities in Europe, which could affect other economic areas indirectly. Bubble activities are those economic activities that would normally not take place because they are unprofitable and hence make no sense. They appear however profitable when the central bank manipulates interest rates below the natural rate resulting from actual time preferences. One can often observe a string of ostensibly positive macro-economic data releases as a result, while in reality, scarce capital is malinvested and consumed.

What argues against this is the fact that US banks have recently pulled back on their inflationary lending by rejecting a great many corporate loan applications. This may partly be an effect of the troubles in the oil patch, but the developing credit crunch is so intense that there is probably more to it than that (see Mish’s report on the National Association of Credit Management’s latest credit manager index data for details on this).

Normally a lengthy period of declines in the economic surprise index will give way to a counter-trend move as economists adjust their expectations and begin to underestimate upcoming data points. If this fails to happen, it would indicate a very rapid deterioration in the economy. We will have to wait and see what happens in this respect in coming months.

The point remains though that there is absolutely nothing in recent US economic data that could possibly lead one to the conclusion that US economic performance represents an “upside risk” in any way, shape or form. Except if one happens to be Stephen Poloz.



The Bank of Canada is headed by a veritable comedian these days. However, he is in principle no different from his predecessor or other modern-day central planners. He firmly believes in Keynesian nostrums, he thinks one can get richer by devaluing one’s currency, and he fails to recognize the existence of bubbles even a child would be able to discern.

Given the ever growing pile of evidence that shows how clueless most central bankers actually are, the biggest surprise to us is that faith in central banks is probably close to an all time high. One can rarely be 100% certain about the future, but there is one thing we believe to be as close to an apodictic certainty as it gets: faith in central bankers and their bubble-blowing policies is bound to crumble one of these days. When it does, financial markets will be in for a period of considerable mayhem.


Charts by: Business Insider, Bloomberg, St. Louis Fed, Economic Policy Institute, BofA/Merrill Lynch


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