Bank of Canada

Posted October 25, 2009

Sun Oct 25, 3:47 PM

http://ca.news.yahoo.com/s/reuters/091025/business/cbusiness_us_economy_bankofcanada

Quote:..........Two days later Carney warned the central bank would use whatever tools it needed if the currency's drag on the economy threatened to keep it from returning the inflation rate to its 2 percent target. He noted foreign exchange intervention -- selling Canadian dollars on the forex market to drive the currency lower -- was "always an option".

Why is the Governor of the Bank of Canada telling influential investors what will happen to the dollar? Small investors can’t make a lot on money on this kind of information but large investment firms and large currency traders could destabilize the economy. Foreign investors purchased $5.1 billion of Canadian stocks in the past month. They purchased these assets with a 96 cent dollar. Would they forgo the known risk (i.e. devaluation of the Canadian dollar) and hold these stocks? When it’s all said and done a weakening U.S. economy will mean that our dollar will continue to rise or interest rates will. Regulatory intervention and the re-introduction of “radical Keynesian Economics” are destroying the natural order of the free market. It would be best to read an excerpt from Nelson Hultberg:

The Keynesian Paradigm
Let's take one of the most entrenched paradigms of our day as an example: Keynesian demand theory in economics. Despite severe and demonstrable weaknesses in this economic view, our establishment scholars cling to it like dependent children to stuffed animals. When presented with strong, logical refutations of this paradigm, 80 percent of our academic community reacts with bemused scorn.
Both theoretical and empirical evidence demonstrate that the Keynesian model is not just a false and dangerous way to approach political economy, it is a ludicrous sham, one of the biggest cons in history. Inflating consumer demand with fiat currency is not some kind of "new economics" as Keynes and FDR's brain trust of the 30's claimed. It is not legitimate economics at all, but just another example of powerful governments debasing the currency so as to confiscate their citizens' wealth, and in the process deluding themselves like tribal primitives dancing in front of idols to bring good fortune.
Original orthodox Keynesianism may be dead as a viable theory, but just as neo-Ptolemaic theories hung around for 180 years after Copernicus, neo-Keynesian variants still control government policy today after Mises. They are still entrenched as the basis for centralized statism and are the reasons for the exacerbated boom-bust cycles in our economy over the past decades. One observes the exasperating efforts of Austrian economists such as Kurt Richebacher trying to inform the Keynesian pooh-bahs about the falsity of their paradigm, and one is reminded of what Pasteur had to endure when he set out to explain to the ignorant physicians of his day that putting leeches on the skin was not rational medicine.
As everyone knows, Keynesian economics got its start during the Great Depression. In essence, Keynes' message to a bewildered 1936 world was this: What needs to be done is to create vast amounts of government investment so as to stimulate and perpetually maintain consumer demand at a high level. If this is done, the problems of poverty and business cycles will be alleviated. The weakness of free enterprise is that in its mature stage it lacks the ability to produce enough "purchasing power," i.e., demand among the people. The government must step in and take control of the monetary system, for Say's Law of Markets is no longer valid.
Say's Law of Markets is the brainchild of J.B. Say, the 19th century French economist. It states that production is the cause of consumption, or that the people's productivity determines their purchasing power. For example, if a man plants and harvests a ten acre field of corn, his purchasing power in the marketplace will then be whatever that corn is worth in trade to his fellowman. His production of corn has created the level of his demand for clothes, transportation, entertainment, etc.
When Say's Law is considered along with Ludwig von Mises' theory of money and credit, one can easily see the fallacy of Keynes, for no amount of paper money, injected into an economy in excess of the growth of goods and services, will increase the "purchasing power" of the people. This is because the prices of those goods and services rise in response to the increase in the money supply, which negates the effect of the extra paper money in the people's pockets and eventually even creates a situation where overall purchasing power dissipates because of the inevitable runaway aspect of all inflationary economies.
If Say's Law is valid, then the way we should have handled the Great Depression of the 30's would have been to let prices and wages seek their own level and allow Say's Law to operate. If this had been done, the natural productivity of the people would have created the necessary purchasing power to climb out of the Depression. The reason we didn't handle it in this way is because Keynes was supposed to have "refuted" Say's Law showing it to be unworkable under modern day conditions.
But as Steven Kates' demonstrates in Say's Law and the Keynesian Revolution, Keynes gravely distorted Say's Law in order to "refute" it. 1 He created a straw man, and then denounced it. Such intellectual legerdemain allowed Keynes to pose as some sort of super-savant with a brilliant new theoretical insight into how the world works. Many years ago, Henry Hazlitt also saw the fallacy of Keynes and pointed out that his allegedly "brilliant refutation" consisted of declaring Say's Law invalid because it is invalid. 2 This is akin to a physicist suddenly declaring that the Law of Gravity is no longer applicable to humans because it is no longer applicable, and then expecting men to suddenly be able to flap their arms as wings and fly through the sky upon the utterance of such a declaration.
Why it all sounds absolutely marvelous, one can almost imagine FDR replying to his brain trust when informed of the wonders to be worked with Keynes' "new economics." If capitalism has reached its mature stage and can no longer produce enough purchasing power, then we in Washington must step in and get the system going again. If people don't have enough money, then all we have to do is print up more and our problems will be solved. It's really all very simple, isn't it? Our growth can actually be as great as we want it to be. Our wealth will be unlimited. The power to create that wealth lies with benevolent leaders such as us in Washington. We can usher in an unbounded future of government managed prosperity. Oh, happy day! How could we not have thought of this before?
Stripped of all the eloquent conceptualizations and slick technical jargon, this was the great "innovation," the great "revolutionary insight" of Keynes: If we want to become wealthier as a nation and avoid economic recessions, then all we need to do is print up more money.
The outrageous folly of such a proposal and the willingness of learned men to fall for its lure when encased in sophisticated verbiage, are terribly embarrassing when one thinks through the basic principles involved and projects into the future what the long run ramifications will be. Nevertheless, the most powerful office of the most powerful country in the world accepted such fiscal flimflammery as valid economic theory. And every administration since FDR has been doing the same thing -- printing up more money to make us all more "prosperous." But as any legitimate economist knows, money itself is not wealth. If money was wealth, then the government could just print up a million dollars for everybody and wipe poverty off the face of the earth. Money is just a substitute for wealth. True wealth is the goods and services that we have produced. It can never be created with a printing press.
Contrary to all the technocratic government wizards and advocates of "new economics" that have descended upon us since 1932, Say's Law of Markets has not been refuted, and it will never be refuted as long as there is a universe and a thing called human nature to exist within it.
Actually the Keynesian intellectuals knew all this. They just conned themselves into believing that Say's Law would not work quickly enough to get us out of the Depression, and that they would only print up a little bit of money whenever they needed it (to prime the pump so to say) and always keep the boom of prosperity going whenever it was showing signs of slipping into a recession.
This is the reasoning of the drug addict though. He also cons himself into believing that he will only take a little bit of his drug whenever he needs it (to pep himself up so to say), and always keep the boom of a pleasant high going, whenever it is showing signs of slipping into a depression.
The problem with such self-deception is that neither drug addicts nor federal bankers can ever stop with just a little bit of the drug they have become accustomed to. They always need ever increasing doses to maintain their high, and invariably they continue such injections to the breaking point of either death or massive depression.

Thank you,
Joseph Pede