Hold your fire on rate hikes: a review

¶ … Central Bank of Canada's, the author will move on from central banking issues, the transmission of money to a more thorough analysis of the supply of money on to a more thorough analysis of foreign currency markets, money and inflation and its inverse factor deflation and the impact of globalization upon the Canadian economy. Much of this market fluctuation centers around the fact that "the Bank of Canada's primary mandate is one of ensuring that the economy operates as close to price stability as possible (Rosenberg, 2010)." One problem that Rosenberg's analysis comes up short on is the effect of non-state actors such as the G-20 has upon the decisions of the Bank of Canada.

This dedication to price stability is a complex interplay of the short-term interest rate, deflation and inflation, the supply of money and the currency exchange market. Much of this involves analyzing what is really going on below the radar screen in the Canadian economy. It is necessary to build upon what Rosenberg had to say about the Canadian wage rate. According to Rosenberg, the twelve month change in average hourly earnings has been shaved from more that 4% a year ago to 2% today (Rosenberg, 2010).

Unfortunately, it looks like Mr. Rosenberg's fears have been realized and a chain reaction effect has happened in the financial markets. In June, Bank of Canada Governor Mark Carney was the first Group of Seven central bankers to raise interest rates when he increased the interest rate target level to 0.5% from a record low of 0.25%. Policy makers will meet again on July 20, in September, October and December.

What is happening right now is deflation in Canada. Canada's dollar continued for a second day to depreciate vs. The U.S. dollar as global equities slipped amongst waning expectations for higher interest rates. This makes currencies tied to economic expansion less attractive for purchase. The Canadian dollar reached its lowest point in a month. Such data put the North American recovery in question. This makes the Canadian dollar the third-worst performer for the last month among the U.S. dollar's 16 most-traded counterparts (Fournier, 2010).

This performance, which dovetails exactly with Rosenberg's analysis, contradicts Carney's own statements of June 10, 2010 where he claimed that his interest rate increases would not hurt the Canadian economy. According to Bank of Canada Governor Carney, he said that fears that the global economic recovery could be slowed by the new rules for financial institutions that were developed by the Group of 20 countries are not founded in reality. While his denials that the rate increase would not overly impact upon the Canadian economy, he made a Freudian slip about who the policies are made to benefit-European policy makers who are mired in their much more severe debt crisis. For this reason, we need to look at what is going on in Europe with regard to the debt crisis. Estimates of the depth of the problem were provided by UBS AG, the largest Swiss bank released estimates that the proposals of the G-20 might force banks to raise as much as $375 billion dollars in fresh capital. The Canadian Bankers Association Chief Executive Officer Nancy Hughes Anthony stated on June 8, 2010 that the G-20 policy proposals are "too onerous" and "could potentially choke the banking industry (Deslongchamps & Quinn, 2010).

What is very interesting about all of this rancor is that it appears that Canada's interests are getting sacrificed to benefit Europe. Exactly what is "Canadian" about the bank of Canada or "Federal" about the American Federal Reserve? The author one time heard a joke about the Federal Reserve. When asked what was federal about it, the punch line was that it was about as federal as FedEx. While this joke may seem funny, it does make clear a big fact about central banks: they are private institutions that reflect the agenda of larger, non-state actors such as the G-20 that have become bodies that make defacto decisions that affect their member nations (of which Canada is a part). In essence, national governments are finding that their choices are increasingly circumscribed by decisions made at G-20 conferences by boards of governors and groupings of officials that no one from Canada voted upon.

The policy issues and questions are staggering. While no one questions that the world economy is interconnected, the nature of the connections are disturbing. The G-20 website states that "The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy." Ironically enough the first G-20 meeting in 1999 was hosted in Berlin by Canadian as well as German finance ministers ("What is the G-20." )