Down is up says the Bank of Canada

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According to the Bank of Canada, down is up. What most people see as an economy in decline conceals a "nascent" recovery, with real growth starting in the last six months of this year, and continuing at a strong pace through 2010.There is usually not much reason to pay attention to the quarterly Monetary Policy Reports issued by the Bank of Canada. Unlike the July 23 statement, usually the Governor's pronouncements cannot be turned into dramatic events.


The Bank credits itself (aggressive monetary policy) for the good news to come, and says the fiscal stimulus (federal deficits) will do the work from here on.


The Canadian Labour Congress is watching the recession closely, and its picture of the job market (400,000 permanent job losses in one year) makes such talk of a job well done look frightfully premature. Steelworker economist Erin Weir has observed that not only is the recession not over, there are signs it could be getting worse.


The news media gave the Governor's announcement major play. "Recession Over" makes a good headline in a slow news period. No need to question authority.


While the Governor qualified his prediction of a recovery, he and his people knew that would not affect what the headline would be the next day. While the Governor mentioned a rising Canadian dollar could hurt economic prospects, he failed to add that a falling American dollar is what is needed to restart the American economy. In other words what is needed to help the U.S. economy recover is a stronger Canadian dollar which hurts economic prospects in Canada.


The Bank of Canada is wrong about the Canadian economy recovering. The interesting question is why make such an obviously erroneous statement?


For Andrew Jackson, senior economist at the Canadian Labour Congress, the Bank wants to sound a positive note in order to change perceptions, and thus contribute to an upswing, and it also does not want anybody to suggest that it do more to help the economy, by say, printing money.


By saying recovery, recovery, the Bank also helps the government of the day, which will not go unappreciated in Stephen Harper's PMO. Interestingly his ministers were not sure what to make of the Bank of Canada prediction: the finance minister questioned it, the international trade minister ran with it.


While it often suits governments' purposes to allow the Bank to appear independent and autonomous, it is neither. Under the Canadian Constitution money and banking are part of the legislative powers reserved to the federal parliament. Contrary to what Bay St., and the Bank want us to believe, the Bank of Canada is subject to legislative authority, and is not an autonomous institution.


The Constitution has not stopped the Bank from defining it own mandate, even when this conflicts with the Bank of Canada Act, which is the legislative expression of what the Bank is supposed to do. In the recent past the Bank has argued it only has one job, contain inflation. Of course when the American banking system went asunder, the Bank remembered it also had a role as lender of last resort to financial institutions in trouble.


The Bank of Canada was created to fight the depression of the 1930s, and ensure another depression could never happen again. Wishing away a bad economy was never part of its mandate.


Most of what has gone wrong in the world economy happened while the Bank of Canada, and other central banks looked the other way. Allowing the development of unregulated offshore finance, and permitting monetary creation outside national control in the Eurodollar markets, released the forces of credit creation that produced the bad loans that provoked a worldwide financial crisis.


The Bank of Canada has been wrong so many times, on so many issues of importance, it makes little sense to believe them when they say we are on the road to recovery.


Duncan Cameron writes from Quebec City.

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