Chapter 7 Blog

Link: http://business.theglobeandmail.com/servlet/story/RTGAM.20090401.wcarney0401/BNStory/Business/home

Summary

Mark Carney, the governor of the Bank of Canada made a prediction that trends in the global economy will result in the recession persisting into the second half of the year during a speech delivered to a business audience in Yellowknife on Wednesday. Some of the factors hindering the economy include, weaker global growth, the selling off of inventories rather than new production, worsening labour markets and spare factory capacity which would cause the recession to extend further into the year. Mr Carney also made a remark that the contraction in the first quarter looks likely to be at its worse since 1961 where quarterly GDP was first collected. The International Monetary Fund and World Bank also made predictions that the world will shrink for the first time since World War Two. A large factor in Canada's economic recovery is dependant on the recovery of the global economy as 40 percent of Canada's gross domestic product is from the country's exports. This drop in trade will result in Canada's GDP to drop by 3 percent in 2009 and it also limits the growth next year to 0.3 percent according to the Organization for Economic Co-operation and Development (OECD). The OECD also made a comment that Stephen Harper should spend more to stimulate the economy and that Mark Carney should decrease borrowing costs. Carney has indeed lowered the lending rate by 4% since December 2007 which leaves it at a record low of 0.5 %. The central bank has devised a plan to lower market borrowing rates by buying securities such as government debt and corporate bonds. Carney concluded his speech by telling bankers that measures taken by Canada and other economies will take time to fully take effect and, also warned that lowering borrowing costs and increasing deficits can further damage consumer confidence and businesses.

Connection to Chapter 7

The main focus of this chapter is about the money supply and the Canadian Banking system. These two aspects of the Canadian economy play a large role in influencing the economy. As mentioned in the article, governments and central banks are relied upon to entice demand in order to stimulate the economy. In times of recession, the monetary policy of banks would be to increase the money supply as a means of providing an incentive for consumers to spend more. Another measure that banks take in times of recession is lowering interest/lending rates, like what Mr. Carney has done. The inverse relationship between interest rates and the demand for money can also be applied to analyze the monetary policy that will be implemented by the Bank of Canada. With lower interests, the demand for money goes up because the cost of borrowing it and taking out a loan is lowered. This will also encourage further spending by the consumers.

Reflection

I agree with Carney's last statement that the Bank of Canada should be prudent in making decisions regarding the monetary policy. Lowering interest rates will not necessarily result in increased GDP especially in times of recession where the psychology of consumers is to save rather than spend. I think we can also expect lower reserve rates in deposits during these periods of recession so that a larger loan can be taken out by the bank in order to encourage more spending. Banks should also be patient in allowing the measures taken by banks and governments around the world to take effect as continuing to lower interest rates can prove to be harmful to business and consumer confidence.