Master Economist And Strategist

January 1st, 2014 | J. Hodgson 

“My relations with the Fed,” Nixon said, “will be different than they were with [previous Federal Reserve chairman] Bill Martin there. He was always six months too late doing anything. I’m counting on you, Arthur, to keep us out of a recession.”

“Yes, Mr. President,” Burns said, lighting his pipe. “I don’t like to be late.”

Nixon continued. “The Fed and the money supply are more important than anything the Bureau of the Budget does.”

Burns nodded.

“Arthur, I want you to come over and see me privately anytime . . .”

“Thank you, Mr. President,” Burns said.

“I know there’s the myth of the autonomous Fed . . .” Nixon barked. . . 

                                                                   -- "How Richard Nixon Pressured Arthur Burns: Evidence From The                                                                                    Nixon Tapes" by Burton A. Abrams (source)

Thinking of buying a house? Starting a business? Taking out a loan for a new vehicle? Investing? The pundits and prognosticators have been telling us that interest rates will rise. Actually, they’ve been telling us this for a long time and yet nothing changes. The economy plops along and inflation remains firmly below 1% and unemployment drifts around 7%. Year after year, Canadians take on more debt while the politicians and bureaucrats tell us that eventually interests rates “have to go up”.

Never mind that Japan has had interest rates below 1% for 17 years. Never mind that Canada’s natural population growth is going to grind to a virtual halt within the next ten years. Never mind that our housing market is so grossly overinflated that people are writing about us internationally.

No...never mind all that, but not for any of the above reasons. The only real reason you shouldn't mind rate hikes is because of two of my favourite words.

Stephen and Harper.

As an election approaches there is a clear incentive for politicians to inflate the economy. However, post ­election, this causes an accelerating inflation which, if unchecked, would endanger the government' s reelection chances in the new period. To maximize its chances under short or decaying voter memory, it will want to shock the economy into decelerating expectations as quickly as possible so that a high enough VV curve remains attainable. The pattern that emerges is inflation that continually worsens, and unemployment that continually improves, over the electoral cycle , with an abrupt turnaround immediately following an election. Clearly the flatter the short-run trade offs, the stronger are the cycles. 

                                                               -- Page 29 of Stephen Harper’s Master Thesis, 1991

Stephen Harper is from the now legendary Calgary School of economic and political thought. This is a copy of Stephen Harper’s master thesis. Has no one read it and maybe  I don’t know  used their imagination as to how it might apply to what he’s going to do as Prime Minister? I know it’s a heavy read and it focuses on business cycle policy, which is pretty boring stuff, but dig into it a little and you get a glimpse into material that interested Harper enough that he dedicated years of his life to writing about it. 

Manipulating the business cycle to coincide with the election cycle isn’t really something that your average talking head broadcaster is going to jump into. It’s easier to just hate Harper and guess/hope he’ll pack it in because leftists want it that way. The result has been rampant speculation amongst leftists and media-types that Stephen Harper is going to quit early this year. This is the sequel to “Stephen Harper is going to quit this summer” from last year.

Putting aside the fact that he won’t quit until he loses an election, we should instead focus on what he’s going to do in order to keep winning elections. Enter, Stephen Poloz.

"For almost three years ... the Bank of Canada has made clear that people should be prepared for an increase in interest rates. That will be inevitable. We don't really know the timing, but it will happen," said Stephen Poloz.

We don’t know the timing? How about November 1st, 2015?

Poloz was specifically hand picked over front runner, Tiff Macklem, by Finance Minister Jim Flaherty. Perhaps hiring guy number 3, instead of guy number 2 to replace guy number 1 gets some added appreciation from guy number 3? What can be done with that sort of appreciation? Election wins, that’s what.

Let’s play a game of imagination…

It’s 2014 and the economy is rolling along. Western Canada is booming, as usual, since the resources and conservatism that now permeate the region have created a prosperity bulwark against true recession. The problem, however, is that Ontario is still sluggish.

What to do?

Keep interest rates at 1%, regardless of economic data. This will ensure that Canada’s housing market keeps chugging along without a massive decline. This will also ensure that the Canadian dollar starts to lose some of its lustre on the international markets. What does a 90 cent dollar mean to Ontario and the manufacturing base there? It means competitive advantage for their economy. The sort of competitive advantage that will keep companies like Heinz and Kellogg from doing the sorts of lay-offs we saw in 2013. Inflation ticks upwards, and unemployment consequently begins to drop.

Winter/Spring of 2015  We will watch millions of dollars worth of attack ads against Justin Trudeau on display week after week. The Conservatives will out-fundraise all the other parties combined and by April of 2015, the per-vote subsidy will have ended. Attack ads will go unanswered. People with doubts about the Liberals will have bigger doubts. 

Summer of 2015  Harper and Flaherty will engineer the big ‘deficit turned surplus’ celebration that they’ve been planning since 2012. Watch for radio ads and television commercials and ticker tape parades from coast to coast proclaiming, PROMISE MADE! - PROMISE DELIVERED! You’ll think the Conservatives have just fended off a Nazi invasion with the amount of bragging that will lead up to the autumn election.

September and October  The Conservatives will be promising tax cuts galore. Income splitting, increases to TFSA, possibly another GST reduction. Giving you the taxes back will be the carrot, and the warning of a destroyed economy under the Liberals or the NDP will be the stick.

Election Day  Harper wins a second majority thanks to Ontario and Western Canada, where pocketbook issues trump silly, old half remembered Senate scandals and incumbent fatigue.

Of course, inflation could be raging around this point and interest rates may have to rise, as we’ve been warned about in the past. Does it matter politically? Not when you have a four year window to deal with the hard choices before the next election in 2019.

Conclusion: Stephen Harper is going to use the Richard Nixon method of goosing the economy with artificially low interest rates in order to create winning conditions for the next election. There’s no need to worry about your mortgage or your debt. In fact, now might be a good time to take on more debt so long as you remember things might drastically change in November of 2015.