Masthead graphic based on a painting by Gudrun Thriemer.

Friday, January 16, 2009

Stimulus and Canada's ailing economy

Glen Hodgson, the Conference Board's Chief Economist, lists four factors limiting the effectiveness of monetary stimulus: 1) banks will use part of interest rate cuts to restore their own financial health before passing benefits along to borrowers; 2) rising default rates mean that credit will be tight in Canada; 3) interest rate cuts take 12 to 18 months to become effective; and 4) collapsing consumer and business confidence and falling consumer demand create the risk that inability to get credit will be replaced by unwillingness to seek credit.

Henry C K Liu at Asia Times Online is not so polite about the limits of monetary policy.

Erin Weir at Progressive Economics Forum expects the Bank of Canada to announce a target interest rate of zero on Tuesday and echoes the concern that businesses and consumers may be reluctant to borrow.

Recent reductions in interest rates reflect an abandonment of policies to keep inflation down with the result a concern about deflation. "Deflation is of grave concern because consumers would rationally delay purchases on the expectation of falling prices." (Weir PEF Nov 21 08)

See Glenn Hodgson, "Monetary stimulus reaching its limit," Conference Board of Canada, January 2, 2009.

Meanwhile, yesterdays Economist magazine reported on two Canadian busts: the Nortel bankruptcy and the deline since December in the oil patch.
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