How the Bank of Canada Learned to Stop Worrying and Love the Bomb.

Laurel Magri: lying, deceptive, manipulative whore.

More musings on the economy.

Last week the Bank of Canada finally admitted the economy is in deeper trouble than it expected and it moved to cut another 50-basis-point from its benchmark lending rate to a record low 0.5 per cent.

That's four percentage points below its December 2007 level.

This is a sign of just how bad the economy is. For over a year now, the Bank of Canada has maintained a ‘holi-than-thou’ attitude about the Canadian economy and has steadfastly maintained growth predictions that most analysts deemed ‘questionable’.

The fact of the matter is that resources remain the driving force behind the Canadian economy and when the rest of the world implodes, it means they won’t be buying our commodities. And that means our economy implodes as well.

But this reality has been lost on many of our financial leaders. BoC govenor Mark Carney originally seemed to adopted Real Estate Industry posturing when confronting the global economic ills. Adopt a a sunny disposition and you can wish the realities of the worldwide firestorm away.

Not anymore.

"We have hopelessly underestimated the importance of commodity prices for the Canadian economy," says TD Bank's Don Drummond, one of the country's leading private-sector economists. "We underestimated the lift it gave when they were going up and we've underestimated the hurt it's going to cause on the way down."

As a result, the Bank of Canada is now playing catch-up in it’s efforts to jump start the nations economic machine.

So desperate is the situation that the BoC is prepared to go 'nuclear' in it’s economic battle. Last Tuesday it announced that it was prepared to enter unchartered territory and flood the financial system with additional cash by buying up securities in the market though an initiative known as "Quantitative Easing”.

In the measured tone of central banks, that amounted to a bold statement.

"In many ways, quantitative easing is viewed as the nuclear option for central banks, and one does not lightly banter about the use of nuclear weapons unless there is a very serious intent," Eric Lascelles, chief economics and rates strategist at TD Securities, wrote in a commentary this week. "In turn, the Bank of Canada must be rather serious."

Under quantitative easing, the central bank would buy a variety of assets from market players, including asset-backed securities, government bonds, corporate bonds and, in extreme cases, even stocks.

In his commentary Lascelles summarized succintly what is coming. “In broad terms, quantitative easing means increasing a central bank's balance sheet to provide more liquidity to the financial system by essentially printing money. The objective is to flood more money into the banking system than what is needed to keep the key policy rate low.”

And so Canada plunges down the same path as the United States as our two nations start printing money at a furious rate to solve the global economic crisis.

Where will all the stimulus go? I'd be willing to bet a lot gets misdirected (ie. the stock market).

Dr. Stangelove, I presume?

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Email: village_whisperer@live.ca