This morning the Bank of Canada (BOC) voted to keep rates steady as 1% as Governor Mark Carney voiced concern over the troubling situation in Europe. The BOC noted that weakness in the EUROPEAN ECONOMY could spread as more austerity is applied to the profligate peripheries. The Canadians are in a difficult situation as the growth in household debt is growing because of continued low rates and this is causing angst with economic policy makers. Finance Minister Flaherty noted that the Canadian government may have to find other ways to halt the increase in household borrowing. I am not a fan of Mr. Flaherty but it is nice to see a government actually thinking ahead of the problem and looking for ways to “LEAN AGAINST THE WIND.”
As my readers know, I believe that Mark Carney is a very solid central banker and his global macro views are first-rate. Giving Governor Carney more credibility is his role as the Chairman of the G-20-inspired Financial Stability Board (FSB). After the Lehman debacle, the G-20 authorized the Financial Stability Forum to establish an oversight board which is charged to analyze the WORLD FINANCIAL SYSTEM and look for ways to enhance the global system by advising nations on how to improve the transparency and strength of their financial systems. In his capacity as chairman, Mark Carney’s views carry greater weight and if he says the Canadians are still bothered by Europe, then we are to all be uneasy by the muddling madness of political Europe.
If the BOC feels itself to be restrained from raising rates, then it is certain that the FED under the hand of Bernanke will also be restrained. The hawks on the FED Board have no global view except for approving DOLLAR SWAP FACILITIES. Just shut up and say AYE.
***The FED‘s announcement several days ago about the new communication policy of stating the economic projections of the individual voters needs to be put in context. Last Thursday (1/12), the FED released the FOMC MINUTES of 2006. Reading through the statements of many of the FED board members should make us always question whatever projections are made. One FOMC member after another failed to understand the depth of the housing market and the New York Fed President at the time, Tim Geithner, was totally off base in understanding WALL STREET’S role in the housing debacle. FED CHAIRMAN BERNANKE was quoted in a Financial Times article from the FOMC minutes: “WE ARE UNLIKELY TO SEE GROWTH BEING DERAILED BY THE HOUSING MARKET.”
There are many other projections made by FED GOVERNORS AND PRESIDENTS and we know how badly flawed these projections were. At the January 31 meeting, Ben Bernanke replaced Alan Greenspan as FED Chairman and the transcript reads as a love PAEAN to the maestro, especially by Tim Geithner. Throughout the year some of the FED staff was growing concerned about the portending doom being transmitted by an inverting YIELD CURVE, but such an indicator did nothing to alter the projections of this august body. The reading of the 2006 minutes should make the FED think twice about inputting the individual projections. Again, this new FED policy will be the largest source of enhanced volume and volatility in the interest rate futures market.
***The newest European prime minister put into power by the Brussels autocrats is growing concerned that Italian austerity appears to be a one-way policy. Mario Monti is openly pleading for Germany to become more stimulative in an effort to relieve some of the stress that austerity is having on the economies of the GIIPS. PM MONTI is seeing that the more austerity the Greeks employ, the greater the strain to their budget. Monti has awoken to the ADVERSE FEEDBACK LOOP and is concerned that the Italian Polity will not be able to withstand the stress of continued financial strain caused by severe budget cutting.
Mario Monti was pleading with Merkel and the Germans that some type of stimulus to lower Italian and other peripheries borrowing costs was in …”its own enlightened self-interest.” Hey Mario, welcome into the house of pain. The collision course of continued budget austerity and ADVERSE FEEDBACK LOOPS will continue to plague the governments of the peripheries. Soon we should be hearing from Spanish PM Mariano Rajoy. Sarkozy would be orating but his balcony seems to be occupied by Marine La Pen.
Tags: adverse feedback loops, Alan Greenspan, Angela Merkel, Bank of Canada, Ben Bernanke, dollar swap facilities, Fed, Financial Stability Board, FOMC, Germany, Italy, Mariano Rajoy, Mario Monti, Mark Carney, Spain, Tim Geithner, yield curve