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The Western Mafia Tightens Its Grip On the Canadian Financial System - Peter Diekmeyer (15/10/2019)

The Western Mafia Tightens Its Grip On the Canadian Financial System - Peter Diekmeyer (15/10/2019)

October 15, 2019

The Bank of Canada’s recent appointment of Toni Gravelle to its governing council drew barely a yawn from mainstream media.

Gravelle has all the usual qualifications for membership on the prestigious body, which broadly determines interest rates, asset valuations, and consumer prices.

The Bank of Canada’s latest recruit brings to the table international experience and a Ph.D. from the University of Western Ontario, which has been producing many of the country’s top economists.

Indeed, Western alumni increasingly dominate Canada’s financial system.

Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins have graduate degrees from Western, as do four of the BoC’s six governing council members.

Bill Morneau, Canada’s Minister of Finance, and the CEOs of the Royal Bank of Canada and BMO could also be described as members of the “Western Mafia.”

A small town in Western Ontario

How the University of Western Ontario—which is located in a small town in the middle of nowhere—came to be so successful is far from clear.

Western’s Ivey Business School has long had a great reputation.

However, the only private sector innovation to speak of in the region that could spark an incubator talent effect appears to come from an armored vehicle factory, an insurance provider, and a couple of small tech firms.

Indeed, what the elites would regard as the University of Western Ontario’s economics department’s “success” appears to stem directly from what Misesian free market economists would regard as its failures.

Western, like peers Harvard University and the London School of Economics, specializes in cranking out experts who can demonstrate why governments can spend your money better than you.

That research is increasingly valuable.

A licence for unlimited borrowing, spending, and printing

That’s because mainstream economics hasn’t evolved much since John Maynard Keynes—as interpreted by academia—gave governments unlimited licence to tax, borrow, spend, and print.

However, five decades of increasing government dominance in the economy have proved to be a disaster:

  1. GDP hasn’t grown in more than a decade as calculated on a debt-adjusted basis using a realistic deflator.
  2. Average real household income has stagnated to the point that families increasingly can’t afford kids. Canada must rely on immigration for growth.
  3. Governments—through interest rate suppression —are providing vast hidden subsidies for special interest groups ranging from the fossil fuel and automotive industries to cattle production and real estate development. This is spurring environmental despoliation that free markets would stop cold.
  4. Canadian system debts (public, private, household and financial) according to Statistics Canada hit $8.3 trillion at the end of Q2 2019, up 45% since Poloz took office six years ago. That works out to nearly $1 million in debt for each Canadian under the age of 19.

Governments—ever hungry for more power—are starved for econometric models that “demonstrate” how previous setbacks were caused by free market “failures” and how just a bit more intervention will set things right.

Graduates of elite economics programs, who aren’t exposed to compulsory courses in economics history , are thus uniquely suited to produce such models, as their narrow focus enables them to ignore “externalities.”

“Group think” in public policy circles

The growing dominance of elite economists has spawned another problem: the “group think” that dominates public policy circles.

One example illustrates the point.

The two parties to the “inflation targeting agreement” that the Bank of Canada negotiates every five years with the Finance Ministry—Finance Minister Bill Morneau and Stephen Poloz—are both graduates of the dirigisme taught at the University of Western Ontario.

It is thus only natural that they decided to maintain the ban on free currency markets and to continue government controls on interest rates, money supply, and consumer prices.

The example illustrates that without diversity in Canadian government institutions—particularly openness to new ideas about credit cycle theory, sound money, and the economic calculation problem—things are unlikely to change.

Governments will thus almost certainly continue to suck capital from productive sectors, debase the currency, and foster a growing secular credit bubble of increased system debt relative to GDP.

A final interesting point relates to whether Governor Stephen Poloz is using his influence to pack the Bank of Canada’s governing council—and possibly internal posts as well—with members of the Western Mafia.

The Bank of Canada’s ban on Alt-Media from its public events and policy conferences , where discrete inquiries could be made, makes it hard to say.

Just as important: was Poloz’s decision to ban Alt-Media spurred by a desire to cover up his growing cronyism at the central bank?

For investors, those details are moot.

Their focus will be on preserving capital in an environment in which governments, special interest groups, and other insiders milk the system dry.

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About the Author

Peter Diekmeyer has been a business writer/editor with publications such as Sprott Money News, the National Post and Canadian Defence Review and Jane's Defence for nearly three decades. He has studied in MBA, CA and Law programs but dropped out of all three after failing to convince the academics that they were wrong about everything.  Diekmeyer has interviewed more than 200 CEOs and filed reports from dozens of countries. 

His most terrifying moment came when he spoke to central bank economists for the first time and realized that (unlike politicians) they actually believed their own analysis and forecasts. 
He has been a regular contributor to the Sprott Money blog since 2015.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Comments

K wiebe
October 15, 2019 at 1:02 PM
Thank you. This article was a breath of fresh air.
Steve Bull
October 16, 2019 at 1:05 PM
A tad too much hyperbole for someone who hails from London and went to Western. London is neither a small town, with close to 400,000 residents, nor in the middle of nowhere, sitting along Canada's busiest highway and in between Toronto and Detroit. As for lack of private sector business 'innovation', London has been home to some of Canada's largest businesses (Labatt Brewery, Attic Books, Silverwood Dairy, The Pop Shoppe, Voices.com, Goodlife Fitness, etc.).
jungkraut@yahoo.com
October 21, 2019 at 9:22 PM
Well spoken. It amazes me how our governor of the bank of Canada gets up and says about how personal debt has never been this high before. Why is it so high, Duh just maybe it might because of him and his central bank cronies manipulating interest rates at record lows for such a very long time, encouraging people to spend and borrow more and go further in debt. Another problem he and his cronies are creating are that a lot of the pensions are having a very hard time meeting their payout commitments because of record low interests. It always amazes me how such highly educated people are so dense and have such lack in common sense. They're probably very well paid also.