Ideological purity and governance

By Aaron Wherry - Friday, July 29, 2011 at 12:00 PM - 7 Comments

In light of the U.S. debt crisis, Fareed Zakaria compares the American system to parliamentary governance.

Some political scientists long hoped that American parties would become more ideologically pure and coherent, like European parties. They seem to have gotten their wish – and the result is abysmal.

Here’s why: America does not have a parliamentary system like Europe’s, in which one party takes control of all levers of political power – executive and legislative – enacts its agenda and then goes back to the voters. Power in the United States is shared by a set of institutions with overlapping authorities – Congress and the presidency. People have to cooperate for the system to work.

See previously: Debt and responsibility

Debt and responsibility

By Aaron Wherry - Thursday, July 28, 2011 at 12:37 PM - 3 Comments

John Pepall, author of Against Reform, points to the U.S. debt crisis as another reason we should appreciate our parliamentary system.

Under parliamentary government, a prime minister must take responsibility for a budget. If it is passed he will have to answer to the voters for it. If the country prospers the voters will cheer him on to re-election. If not, he will have to shoulder the blame and electoral defeat. If it is not passed there will have to be an election and the voters can decide whether they like the budget or would prefer something else. 

One way or another parliamentary government forces politicians to take responsibility and holds them accountable …  In the U. S. power is dispersed and responsibility is avoided. 

Plan for the worst

By Aaron Wherry - Tuesday, July 26, 2011 at 12:59 PM - 25 Comments

Peter Devries says if Jim Flaherty is really worried about European and American debt, he needs to budget for it.

Good budget planning would include an adequate amount of “insurance” or “prudence” to guard against unforeseen events and inevitable forecasting errors. The purpose of the “insurance” is to protect the fiscal targets as much as possible and to give confidence to financial markets and stakeholders that the targets might actually be achieved. This enhances the credibility of the fiscal plan…

The Minister of Finance has expressed his concern about the debt crisis in Europe and the serious fiscal imbalance in the U.S. Despite the evidence that economic growth is slowing in the U.S., and that interest rates will not only rise in coming years but also be more volatile, he has a built a budget framework that offers very little protection against adverse international developments.

China piles on the debt

By Erica Alini - Wednesday, July 20, 2011 at 8:12 AM - 0 Comments

Can China save the world? At the height of the global economic meltdown, many Americans and Europeans believed it might. China sailed through 2009 with an estimated annualized GDP growth of over nine per cent. In 2010, it posted 10.3 per cent growth, and early this year elbowed out Japan as the world’s second-largest economy. The People’s Republic seemed the economic engine that would pull the West out of its quagmire.

That once-firm belief, though, is starting to crumble. Traders and analysts are wondering whether Beijing isn’t heading for its own housing market bust and massive debt mess. Alarm bells are sounding about the real estate frenzy that’s been filling even smaller Chinese cities with luxury apartments that local income levels likely can’t sustain. In the mainland, bank credit is at 120 per cent of GDP, and in Hong Kong, where borrowing rules are laxer, it stands at 240 per cent, the Financial Times reported. Even more unsettling is the size of local government debt, which an official auditor’s report recently tagged at US$1.6 trillion, or 27 per cent of GDP. The true figure could be even higher, according to Moody’s Investors Service, which said it believes Chinese authorities have failed to account for another US$540 billion of debt.

Much of that red ink, say analysts, is the result of Beijing’s own generous lending policies and the US$586-billion stimulus package that was meant to spare China from the economic crisis. But public coffers have also been pillaged by the government’s own employees, according to a report last week by the Bank of China. It estimated that up to 18,000 corrupt officials and white-collar workers at state-owned enterprises have lifted as much as $123 billion of public money (roughly two per cent of last year’s GDP) since the mid-1990s.

Yet a global economic crisis 2.0, or at least one precipitated by China, seems unlikely. With an economy still growing strongly, Beijing can afford a high debt-to-GDP ratio, and it needn’t worry about owing money to foreigners (like the United States must), as much of its public borrowing is funded by domestic savers. There will undoubtedly be some bumps on the road, but likely not an engine breakdown.

Why we don’t have a debt ceiling

By Aaron Wherry - Thursday, July 14, 2011 at 1:57 PM - 4 Comments

Peter Devries explains why the government no longer has to ask Parliament to borrow more money.

In the March 2007 Budget, the Government proposed to amend the FAA by removing the existing statutory limit on borrowing.  It argued that since it was again undertaking borrowings for certain major Crown Corporations, it needed increased flexibility.  This proposal was outlined on page 322 of the Budget Plan.  The proposed amendment was contained in the Budget Implementation Act 2007 Bill C-29, which received Royal Assent on June 22, 2007.  The Opposition, along with political and financial commentators, did not focus of this change.  It was not until after the fact that the Parliamentary oversight consequences were raised by the Senate but by that time it was too late.

Although the Government indicated that improved and timely information would be contained in its Debt Management Strategy and the Debt Management Report, the government no longer has to seek Parliamentary approval for its borrowing requirements. This has seriously reduced the financial oversight responsibility of Parliament. 

Econowatch: April 2011

By Jason Kirby - Thursday, April 14, 2011 at 10:35 AM - 5 Comments

If you tried to count the worries investors face today, you’d soon run out of fingers and toes. We’ve seen rising inflation, unrest across the oil-rich Arab world, a U.S. fiscal crisis and sovereign debt woes in Europe, any one of which might have kneecapped a lesser bull market. Not this one. Two years into the strongest rally ever, not even the prospect of nuclear fallout and the collapse of the world’s third-largest economy is cause for concern.

There are basically two ways to view what’s going on right now. One is that a fundamental disconnect has occurred between market sentiment and reality. In this scenario, investors have affixed blinders to obscure all that ails the economy. In other words, the markets are driven by momentum. When that momentum stalls, look out below.

The other possibility is that all these fears are overblown. Investors have learned from the stock market rout and correction of 2009 not to lose their heads at the first (or even umpteenth) sign of trouble. Instead, some argue there are real reasons to be optimistic: corporate profits are robust, manufacturing is on the upswing and gains in the U.S. job market are picking up speed.

The ultimate test of which scenario is behind the rally will come this year. Central banks are expected to tighten their monetary policies. Interest rates will rise and the virtual printing presses that created trillions of dollars in new money will shut down. With the end of easy money, investors will inevitably become more attuned to risk. Meanwhile, an important crutch that has helped prop up the recovery so far will be gone. If we’re fortunate, both markets and the economy will remain resilient. If not, we’ll look back and wonder why investors ignored so many obvious signs of trouble.

By the numbers

11 The percentage of homes in the U.S. now sitting vacant. In many vacation areas across the country, hit particularly hard by the downturn, vacancy rates are over 60 per cent.

50 The number of years of oil supply that may be left in the world, given current supplies and demand, notes a senior economist with HSBC.

428 The number of KFC, Pizza Hut and Taco Bell franchises in Canada owned by Prizm Income Fund, which has filed for court protection from creditors.

106,000 The number of high-tech jobs that will need to be filled in Canada in the next five years as the dot-com boom returns, notes an industry report.

$4.9 billion The amount U.S. hedge fund manager John Paulson earned in 2010 after betting big on the economic recovery.

Signs of the times: conspicuous consumers

*The U.S. housing market may be in brutal shape, but billionaire Russian investor Yuri Milner just plunked down US$100 million for a California mansion. Milner is an investor in Facebook, Groupon and game-maker Zynga. A sign of life in the housing sector, or just another oligarch with too much money to burn?

*Saks Fifth Avenue had to limit customers to six one-ounce packages of La Prairie’s latest skin care product. The price: $500 each. American consumers, it seems, are flooding back into the US$2.7-billion “prestige” skin care market. No sense looking like you just weathered a Great Recession.

*Subprime mortgage bonds—three words that would have sent investors screaming until recently—have been making a comeback. The bonds, which are backed by thousands of poor quality mortgages, have doubled in value to 60 cents on the dollar since early 2009, as investors have rediscovered their appetite for risk.

*President Barack Obama, an admitted “crackberry” addict, has been a boon to Research In Motion’s marketing campaign. But Obama told reporters he now has an iPad, too. Is that a bad omen as RIM readies to launch its PlayBook tablet?

Debt nation, take 76

By Colin Campbell - Tuesday, April 5, 2011 at 11:05 AM - 77 Comments

Treasury secretary Tim Geithner is warning that the United States will hit its $14.29 trillion debt limit by May 16th. And some weeks after that would begin defaulting on it debts. The money quote: “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover… Default by the United States is unthinkable.” So unthinkable that in the past decade, Congress has voted to raise the debt ceiling ten times. In fact, it has done it 76 times since 1962. Lawmakers are finally threatening to get serious about tackling the budget deficit, but it seems pretty clear how this is going to end: badly.

The Canada bubble

By Jason Kirby with Erica Alini - Wednesday, March 16, 2011 at 9:05 AM - 48 Comments

Todd Korol/Reuters

Bob Haber and David Madani are foreigners who have spent a lot of time studying Canada. Haber, an American, was chief investment officer at fund giant Fidelity Canada for 12 years and tracked Canadian stocks from his base in Boston. Meanwhile, Madani, a New Zealander, spent a decade with the Bank of Canada as a forecaster and policy analyst. Both are outsiders with an acute understanding of the inner workings of the Canadian economy. That is where the similarity ends.

Last December, Haber’s new book, Go Canada: The Coming Boom in the Toronto Stock Market and How to Profit From It, hit bookstores. Haber, who now runs his own investment firm in Boston and manages a series of Go Canada funds for Toronto-based Canoe Financial, has emerged as one of the most enthusiastic proponents of Canadian investments at a time when the world can’t seem to get enough of us. With Canada’s strong economy and wealth of resources, Haber predicts the S&P/TSX Composite Index could double to 30,000 points within 10 years. “Global growth and all the free money out there are coming together and investors are realizing the best place in the G7 for them to put their money is Canada,” he says. “Things are in gear for Canada to really outperform.”

Madani’s outlook couldn’t be more different, though it tends to get drowned out amid the Canuck euphoria. Last fall, he joined Capital Economics, a prominent U.K. investment research firm, to cover the Canadian market from Toronto. He says the boom in commodities is due for a reversal. More importantly, Canada’s red-hot housing market has soared into the danger zone. By his estimates, house prices are set to plunge at least 25 per cent, and will drag the economy down with them. “Housing has gotten crazy, it’s a bubble,” he says. “These things always have an unhappy ending, and Canada is not going to be any different.”

Continue…

Never mind the facts of life, talk to your children about money

By the editors - Tuesday, March 8, 2011 at 10:21 AM - 1 Comment

Patrick Baz/Afp/Getty Images

Many Canadians seem to be feeling lucky. But are they smart enough to know that feeling lucky isn’t enough?

As Senior Writer Anne Kingston reports, lotteries have become an integral part of Canadian life. So much so that almost a third of Canadians facing retirement recently told an Environics/TD Waterhouse poll they expect lottery winnings to support them once they quit working. Another poll by another bank showed more people were relying on lottery winnings for their golden years than on support from their children.

Whether all this is simply wishful thinking, or reflects the absence of coherent plans, it seems clear a substantial portion of Canadians have not put very much thought into their financial future.

In fact, there’s ample evidence many Canadians are making financial plans based largely on self-delusion and blissful ignorance. A recent report from Statistics Canada revealed that over half of Canadians planning to buy a house figure the only expense they face is a down payment. Anyone who has ever bought a house knows these folks are in for a big surprise. And while 70 per cent of Canadians say they are confident they will save enough for a comfortable retirement, only 40 per cent have a reasonable idea of how much money that requires.

With personal debt at worrisome levels and mounting evidence that governments will be less able to fund retirement in the future, Canadians need to reverse course and take greater control of their own finances. With this in mind, recent interest in teaching financial literacy in schools seems well-timed.

This week, Ontario announced a new set of student resources, developed in partnership with the Ontario Securities Commission and the Investor Education Fund, to promote financial literacy in Grades 4 to 12 for the coming school year. Alberta and Manitoba are making similar changes to their curricula. This provincial activity reinforces recommendations made last month by the federally commissioned Task Force on Financial Literacy that said “financial education needs to be provided in the school system” and called on Ottawa to help make this happen.

Continue…

Canada's worst spenders

By Erica Alini - Wednesday, February 23, 2011 at 11:57 AM - 7 Comments

There’s been plenty of speculation that Vancouver’s hot housing market is in bubble territory, and as interest rates rise, that view is going to be put to the test. A new Toronto-Dominion Bank report says that one in 10 British Columbia households could find themselves scrambling to pay their bills if the Bank of Canada ups rates, as TD predicts it will—up to three per cent by the end of 2012.

The province has been Canada’s real estate debt champion since at least 1999, and it is the only one where the average savings rate is negative, according to TD. Vancouver in particular seems to most resemble the housing run-up seen in the U.S. Two weeks ago, Robert Shiller, an economist at Yale University who correctly forecast the U.S. housing bust and helped develop the influential Standard and Poor’s Case-Shiller real estate index, likened Vancouver to San Francisco, one of the areas worst hit by the slump in the States. Compare that to Manitoba, where families have strengthened their balance sheets since 2006, and will be putting 40 per cent less of every dollar toward debt repayments than households in B.C., notes TD. Continue…

America's out-of-control spending problem

By Jason Kirby - Tuesday, February 8, 2011 at 9:11 AM - 63 Comments

Pablo Martinez Monsivias/EPA/Keystone press

Standing before Congress and 43 million TV viewers last week for his state of the union address, President Barack Obama reached half a century into the past to convey the challenges facing his country in the future. “This,” he said, “is our generation’s Sputnik moment.” But if the space race, kicked off by Sputnik’s launch in 1957, was the signature challenge of a generation, it’s the rebuilding of American economic might that is the challenge now. And the enemy isn’t the Soviets, it’s the country’s towering mountain of debt: US$14 trillion and counting.

Whether Obama’s speech writers realized it or not, something else quite remarkable happened in 1957 that, while long forgotten, is far more relevant to the debt debate today. That year America balanced its books for the second year in a row. It would mark the last time the U.S. would post back-to-back budget surpluses. Instead, the U.S. has sunk deeper into debt with every passing year, save two rare exceptions: 1961 and 2001, when the dot-com bubble artificially boosted tax revenue that year.

For half a century America has lived far beyond its means. In the same way overextended households, which recklessly used the equity in their homes as ATM machines, finally collapsed under the weight of their mortgages and triggered the Great Recession, the U.S. has mortgaged its future to pay for wars, lavish health care and social security programs, government employee pensions and ever lower taxes. But many economists believe there’s a limit to how long Washington can go on borrowing before it faces a sovereign debt crisis of its own, plunging markets into chaos and triggering a crisis that will make the Great Recession look like a minor stumble. We’re already seeing several heavily indebted U.S. states like Illinois, California and New Jersey pushed to the brink—New Jersey Gov. Chris Christie has talked openly about the state going “bankrupt.”

Continue…

Foreclosure filings keep growing in U.S.

By Chris Sorensen - Thursday, February 3, 2011 at 12:12 PM - 1 Comment

The ailing U.S. housing market, a key driver of the world’s biggest economy, is poised to get worse before it gets better—but it will get better.

American homeowners received notices of default, auction or repossession on a record 2.9 million properties last year, up two per cent from a year earlier in the midst of the recession, according to online foreclosure tracking site RealtyTrac Inc. More than half of the filings occurred in five states: California, Florida, Arizona, Illinois and Michigan. Rick Sharga, RealtyTrac’s president, recently told Bloomberg News that he expects foreclosure filings to climb 20 per cent in 2011. “We will peak in foreclosures and probably bottom out in pricing, and that’s what we need to do in order to begin the recovery,” Sharga said.

There’s already a glimmer of light. A report released last week by TD Economics said mortgage delinquency rates, which refers to overdue payments, but not outright defaults, are on the decline. At the same time, sales of existing homes are bouncing back—up by 12.3 per cent in December, reaching their highest level in seven months—as homebuyers take advantage of cheap prices and easier access to credit.

Easy money men

By Chris Sorensen - Wednesday, January 12, 2011 at 10:00 AM - 43 Comments

Carney (below) slashed interest rates and kept Canadians spending—but helped fuel debt—while Flaherty tightened mortgage rules | Chung Sung-Jun/Getty Images

When Mark Carney took over as governor of the Bank of Canada in early 2008, he had relatively little central banking experience under his belt. As fate would have it, the former Goldman Sachs managing director got plenty of opportunity to test his mettle later that year when the U.S. financial crisis erupted. He responded, perhaps predictably, by slashing already low interest rates until, by April 2009, they stood near zero. But he also took the unusual step of telling Canadians that rates would likely stay there until mid-2010.

It was a departure from the style of central banking popularized by former U.S. Federal Reserve chairman Alan Greenspan, who was once dubbed “maestro” for his seeming ability to orchestrate economic growth (critics would say “bubbles”) through the 1990s and early 2000s. Greenspan’s speeches and statements were often masterworks of ambiguity, forcing investors to parse their true meaning and lending the man behind them an Oz-like aura.

Continue…

How would an interest rate increase affect your household finances?

By macleans.ca - Tuesday, December 14, 2010 at 4:50 PM - 18 Comments

The Commons: Yelling into the abyss

By Aaron Wherry - Wednesday, November 24, 2010 at 7:07 PM - 110 Comments

The Scene. If the leaders of the opposition parties have not yet realized that it is futile to ask the Prime Minister to account for the things he says and does—what he has said so far having only passing relation to what he has done and what he did yesterday having no necessary bearing on what he might do tomorrow—Mr. Harper is perhaps beginning to understand that he is best off bringing as little attention to himself as possible. So it was this afternoon that he yawned his way through three questions from Michael Ignatieff on the government’s policies on climate change and shrugged away three questions from Jack Layton on the extension of this country’s military mission in Afghanistan. When Gilles Duceppe asked about the risks entailed in offshore oil excavation, the Prime Minister didn’t even bother to stand.

However wise of Mr. Harper this may be, it does deprive the gallery spectators of a good show—the House rarely as exciting as when the Prime Minister is up and shouting some bold declaration to which he possesses at least a fleeting commitment.

Lucky then for those who turned up to watch today that the Finance Minister has not yet learned that it is, in the long view, better to speak softly and avoid any statement that might be construed as a nod to objective reality. Continue…

The crushing recession that’s brought Ireland to its knees

By Nancy Macdonald - Wednesday, November 17, 2010 at 10:00 AM - 1 Comment

One in three Irish under 30 are out of work | Cathal McNaughton/Reuters

Two years ago, Mick Doherty was tooling around Dublin in a brand new, cherry-red Audi A4. “A six-speed,” the young Irishman adds, with a rueful smile. Today, Doherty drives around his adopted Vancouver in a 1990 Chrysler Daytona—automatic transmission. “And I’m grateful for it,” declares the 32-year-old construction worker who, last year, emigrated to Canada to escape a crushing recession that’s brought his native Ireland to its knees. It’s shrunk the economy by a tenth—the textbook definition of a depression.

What a difference a few years can make. As recently as 2006, the roaring Celtic Tiger was held up as a model economy. Doherty was making money hand over fist, holidaying three times a year, in Bulgaria, Las Vegas, Spain. Ireland famously boasted more BMWs per capita than Germany, and its lawyers and managers were earning bigger bucks than their counterparts in the U.S. But in late September 2008, Irish banks, overexposed to the property market, came under severe pressure as the credit crunch bit in. “More or less overnight,” says Doherty, “everything came crashing to a halt.” Ireland led Europe into recession.

Continue…

On debt do us part

By Aaron Wherry - Friday, November 12, 2010 at 2:33 PM - 5 Comments

Bruce Anderson considers how the deficit debate in the United States will impact the discussion here.

Against this backdrop, Finance Minister Jim Flaherty’s job in the run-up to the next budget will be infinitely easier than a $50-billion deficit would suggest. If he makes radical cuts, they will look less radical than those implemented elsewhere. If he doesn’t, and takes a few more years to get our fiscal balance back, voters might conclude that the downside is mild compared to that faced by our global competitors.

A battle of image

By Aaron Wherry - Sunday, June 27, 2010 at 6:43 PM - 137 Comments

The Prime Minister’s massive image appeared on the monitor hung from the ceiling at the international media centre shortly after five o’clock—Mr. Harper speaking to a news conference at the Toronto convention centre on the occasion of the conclusion of the fourth meeting of the G20. His blue and black striped tie matched not only his suit (black), but his backdrop (dark blue) and the sign on the lectern (a slightly lighter shade of blue).

“At a time when concerns on government debt were growing, this was the challenge we had to face,” he said. And so, apparently, they had.

He outlined vows made to reduce government deficit and debt—”fiscal consolidation” it is apparently now called. He warned against protectionism and hoped of recovery. He applauded the most recent budget in the United Kingdom, exchange rate flexibility in China and financial sector reform in the United States. He noted that the decision to impose a levy on the banking industry would be left to individual countries. He took a question on a proposed clause that would have addressed yuan reform and the ramifications for national sovereignty in a world increasingly dependent on common action contained therein. Continue…

Towards the finish

By Aaron Wherry - Sunday, June 27, 2010 at 11:39 AM - 13 Comments

Good morning from Toronto, where it’s seemingly impossible to find a Starbucks that is open.

Nearly 500 people were reportedly arrested last night in Toronto and a raid this morning saw several dozen more detained.

The Prime Minister is scheduled for a 5:00pm news conference at the conclusion of today’s meetings. According to the latest reports the G20 may be ready to commit to a timeline for deficit and debt reductions. The New York Times has set up that issue as a debate with Mr. Harper and Mr. Cameron on one side and Mr. Obama on the other.

Open-ended resolution

By Aaron Wherry - Saturday, June 26, 2010 at 4:12 PM - 0 Comments

Reuters gets a preview of the G20 communique.

A G20 source said no country-specific economic policy recommendations were expected to be included in the official statement to be released at the summit’s conclusion on Sunday. Instead, the group will likely agree on the need to reduce deficits while allowing countries to choose their own pace.

One G20 official said a draft statement welcomes China’s announcement last weekend that it was loosening its grip on the yuan currency. The phrase could be excised from the final communique, however, because it may not sit well with Beijing, which has insisted its exchange rate is a sovereign matter that has no place on the G20 agenda.

The group will also give countries a choice on whether to levy a tax on banks to recoup the cost of bailouts.

Searching for the Liberal Party. Day 2.

By Aaron Wherry - Saturday, March 27, 2010 at 8:30 AM - 58 Comments

Greetings from Montreal, where, for the next three days, we’ll be hanging around the Liberal party’s Canada 150 conference. Herein a running diary of the proceedings. Day 1′s diary is here.

8:29am. Good morning. Montreal is chilly and quiet. In a few moments we will be roused by the dulcet tones of David “The Dodge” Dodge, former governor of the Bank of Canada.

8:36am. For those of you scoring at home, the colour of the lights today is orange. And the subject is Families.

8:45am. This conference was apparently the most tweeted subject in Canada yesterday. The Liberals are immensely proud of this. Continue…

'We no longer live in a world of nations and ideologies, Mr. Beale'

By Colby Cosh - Tuesday, March 23, 2010 at 12:55 PM - 21 Comments

Bloomberg’s sphincter-tightening-news division reports that two-year U.S. Treasury Bonds now have a higher yield than notes of similar maturity issued by Berkshire Hathaway Inc., Procter & Gamble, Johnson & Johnson, and the Royal Bank of Canada.

Your ‘downturn,’ their ‘upturn’

By Mark Steyn - Thursday, March 18, 2010 at 8:40 AM - 76 Comments

Image by Everett Collection

I can’t remember exactly when I first encountered a pop-culture jetpack. Was it James Bond’s, courtesy of Q, in Thunderball? Or was it some comic book? At any rate, I no longer have to wait for mine. Martin Aircraft of Christchurch, New Zealand, have put one into production, for the cost of a top-of-the-line automobile—or about $100,000. It’s not clear to me where you’d be able to fly it, since government air-traffic agencies don’t seem eager to contemplate a world of individual human flight patterns. But still: the Bond jetpack is belatedly here.

Other than that, the future seems unlikely to be quite as futuristic as expected. The problem facing the developed world isn’t so very difficult to figure out. We’re living beyond not just our means but everybody’s means. You can strap on your jetpack, but where would you go? In the United States, Andrew Biggs of the American Enterprise Institute calculates that if the federal government were to increase every single tax by 30 per cent it would be enough to balance the books—in 25 years. Except that it wouldn’t. Because if you raised taxes by 30 per cent, government would spend even more than it already does, on the grounds that the citizenry needed more social programs and entitlements to compensate for their sudden reduction in disposable income.

In Canada, the average household’s debt-to-income ratio reached an all-time high in 2009. Credit-card holders at least three months behind with their payments increased by 40 per cent.

Continue…

The runaway economy

By Chris Sorensen - Thursday, March 4, 2010 at 3:00 PM - 9 Comments

When Thomas Hoenig took over as president of the Federal Reserve Bank of Kansas City nearly two decades ago, his 85-year-old neighbour gave him a 500,000-mark German banknote to remind him of Germany’s experience with runaway inflation following the First World War. “He told me that in 1921, the note would have bought a house,” Hoenig said during a recent speech to a U.S. budget commission. “In 1923, it would not even buy a loaf of bread. That note is framed and hanging in my office.”

Hoenig openly admits that invoking historical reminders of hyperinflation might seem overly alarmist in an era when inflation—a rise in the cost of living caused by heightened demand for products or the rising cost of producing them—has ceased to be a major concern for most North Americans. Central bankers have made fighting excess inflation, usually anything more than two per cent to three per cent, among their chief priorities in recent decades (some inflation is generally viewed as a good thing because it signals economic growth). But as the economy comes back to life after an extraordinary period that saw governments—particularly in the United States—resort to unprecedented fiscal and monetary measures to keep the world’s economies from imploding, suddenly there’s renewed concern about inflationary pressures. (Already, Canada saw a surprise jump in its inflation rate in January.) With all that extra money sloshing around in the system—inflation is sometimes thought to be caused by too many dollars chasing too few products—some are worried that the cure prescribed for the downturn could quickly become the recovery’s disease.

While unwanted inflation can be reined in by hiking interest rates, central bankers seem intent on keeping interest rates low to help speed economic recovery. People like Hoenig, meanwhile, say they are worried that a massive buildup of U.S. government debt could also lead to calls for the central bank to print more money to help pay it down sooner, which could also have long-term inflationary effects.

Continue…