Notes From Underground: Tomorrow, the BOC Will Shine Some Light on Its Plans to Deal With Private Sector Debt Growth

Posted at 5:02 PM (CST) by & filed under Yra Harris.

Jim Sinclair’s Commentary

This is why I like the Canadian dollar long term.

The golden solution would require Euroland to hock their gold at these prices, something I do not think they would like to do.

Notes From Underground: Tomorrow, the BOC Will Shine Some Light on Its Plans to Deal With Private Sector Debt Growth

Dear CIGAs,

The Bank of Canada has been the most responsible actor on the global financial scene for the last six years. The Canadian banking system for the most part avoided the credit splurge that led to a collapse bubble and came though the Great Recession relatively unscathed. The Canadian federal government has a debt-to-GDP level of 34% and a very comfortable trade situation. There is, however, a problem of private debt growing too fast as the BOC has maintained very low interest rates to combat the fear of global recession. BOC Governor Mark Carney is a very astute global economic observer and also serves as the Chairman of the Financial Stability Board, which is the macro-prudential advisor of global banking. Mr. Carney would like to curb the borrowing of Canadian citizens but raising rates is a difficult proposition because of the current strength of the Canadian dollar.

Six months ago Carney discussed raising rates to stem credit growth  and has used the “may become appropriate” language in the BOC statement as a warning to the markets about a potential rate increase. The consensus forecast is for the BOC to remain on hold as economists are citing an October 15 speech by Carney that was determined to be very dovish and in fact sent the Canadian dollar lower most of last week. If the “forward-looking language ” remains in the statement look for an immediate rally in the LOONIE because of last week’s anticipation of a dovish statement. Again, the BOC is caught in a trap of not being able to raise rates because of a very strong currency and thus having to find an alternative policy to slow the growth of credit. The Canadian 2/10 curve is relatively flat at 78 basis points, which may also be a reason for the BOC to remain cautious about raising rates so as not to invert the curve. A tough situation for policy makers in a country where they have done so many things correctly when it comes to finances.

***In the Oct. 18 WSJ there was an article by Stephen Fidler, “A Golden Solution for Europe’s Sovereign Debt Crisis.” Fidler writes that the 17 central banks in the currency union are sitting on more than 10,000 metric tons of gold. The article forwards an idea long promoted by NOTES FROM UNDERGROUND, which is to issue GOLD-BACKED BONDS in an effort to raise the needed capital to help ease the financial strains of sovereign risk. This would put to use a dormant asset or if you prefer a “barbarous relic” and turn it into useful liquidity. Fidler raises some caveats to being able to do this but he is naive in believing that laws have ever stopped the EU authorities from proceeding in whatever manner they deem expedient.

I would add to his proposal that the bonds should be backed by a mere 20% of GOLD, giving the countries issuing them a new derivative with acceptable leverage. In a world demanding GOLD as an asset it is time for those with a gold hoard to put up a real asset for borrowing purposes. The WSJ article doesn’t even mention the gold being held by the IMF. It is time to put an asset that no banker wants and utilize it. Just ask Gordon Browne about his use of Britain’s gold. If Chancellor Browne had issued gold-backed bonds instead of selling off 60% of Britain’s precious metal, the exchequer would be healthier. The gold hoard would still exist and the bonds would have been retired.

***A Bloomberg article reveals that the official auditor of Germany is requesting that the Bundesbank verify its gold holdings outside of Germany. It seems that the German central bank has held gold at several foreign banks but there has never been an official audit. The Bundesbank owns 3,396 metric tons of gold which is held at vaults in Frankfurt, New York, Paris and London. Somebody is beginning to wake up and wants to assure that the assets in question are there without question. Put the gold to use and stop acting like it was grandma’s silver tea set in the attic.