Side-Effects Include: Household Debt
Bank of Canada Governor Stephen Poloz fancies himself a surgeon. He compares cutting interest rates to life-saving surgery for the economy. I consider it more like bloodletting, a terrible practice that is now widely accepted as pseudoscience. According to Canada’s central banker, if the interest rate cut resulted in an increase of household debt, that should be viewed as a necessary side effect.
If the Bank of Canada has one job it’s to focus on the 2 per cent inflation target and that means cutting the benchmark rate by 25 basis points when global crude oil prices tumble. Or at least, that’s what Stephen Poloz said to the central bank of central banks, the Bank for International Settlements.
“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said. “Other issues must be subordinate and I think of them as side effects.”
Likewise, if a bloodletter tells me I need to balance my “humors”, the side effects of losing so much blood won’t deter me. I’ll just go ahead and manage them somehow.
Of course, what Poloz is really saying is that the Bank needed to intervene to prevent death, or rather, a contraction of credit and available money. The side effects of more household debt, the prospect of higher prices in the future, the misallocation of resources – those are all side effects where the alternative is deflation. And we can’t have that.
“When we cut rates to stabilize the economy we don’t picture some heavily indebted household going out and adding to their debt pile, rather we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage,” Poloz said.
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