[Recorded by Electronic Apparatus]
Friday, May 5, 1995
.0934 
[English]
The Chair: We have an official quorum. We can now commence. Appearing before us today is Bank of Canada Governor Gordon Thiessen and Deputy Governors Charles Freedman and Tim Noël.
Welcome, Mr. Thiessen. We're very pleased to have you with us.
Mr. Gordon Thiessen (Governor, Bank of Canada): Thank you, Mr. Chairman. It's a great pleasure for me and my colleagues to be here. I certainly welcome this opportunity to appear before this committee. Your invitation provides me with an opportunity to introduce to you our new ``Monetary Policy Report'', which we issued a couple of days ago.
.0935
[Translation]
But before I tell you about this report, I would just like to give you a brief explanation of the reason why we felt it was necessary. For some time, we have been seeking ways within the Bank to improve communications. As a result, we changed the look of our recently published annual report in order to provide more information about our many responsibilities and reach a broader public.
[English]
The objective of this new ``Monetary Policy Report'' is to provide more information on our conduct of monetary policy. By separating our detailed commentary on monetary policy from our annual report, we can be more timely and we can discuss monetary policy issues in greater depth. That should allow us to be more forward-looking in our commentary.
We are going to be issuing this report twice a year, in May and November, and we are hoping it will contribute to an increased dialogue on monetary policy issues in Canada. If I may say so, Mr. Chairman, my colleagues and I would be absolutely delighted if you and your committee were interested in inviting us back to your committee on a regular basis to discuss with you each new issue of this report as it comes out.
The Chair: I think you can take it for granted, Governor, that you will have an invitation for every one of these reports, and we welcome it. Thank you.
Mr. Thiessen: Thank you very much, Mr. Chairman.
I'll now move on, rather briefly, to the contents of this report.
[Translation]
We point out in this report that the purpose of Canada's monetary policy is to contribute to economic stability by preventing inflation from undermining the value of our currency. By controlling inflation, we can improve productivity and avoid major fluctuations in economic activity.
[English]
The bank is committed to achieving specific inflation control targets along a path to price stability. Since early 1993, core inflation, as we measure it, has consistently been within the bank's target bands. Judgments about what policy action should be taken to achieve these targets require regular reconsideration. This involves an assessment of the factors affecting inflation, especially the strength of aggregate demand - the strength of total spending relative to the production capacity of the economy.
[Translation]
In 1994, exports drove economic growth in Canada, which, at a level of 5.6%, was far stronger than predicted. Despite a high rate of growth, the economy was still showing an ability to grow even further in early 1995.
[English]
During 1994 the depreciation of the dollar and the resulting high import prices have been a source of upward pressure on prices, as has been the sharp rise in world commodity prices. However, there have been other factors working to contain total costs and aggregate prices. Let me give you some examples.
Wage pressures have been moderate and productivity has increased. The result has been lower unit labour costs of production, declining unit labour costs of production. We've also seen increased competition in the retail and manufacturing sectors, and that has also resulted in downward pressure on prices. In addition, aggregate price inflation has been restrained by lower costs for machinery and equipment, particularly because of falling computer prices.
[Translation]
As for the future, Canada's economic prospects remain favourable. It is true that economic growth in the US is starting to slow, but it is likely to attain a level of growth that can be more easily sustained. And the international context continues to be generally encouraging as far as Canada is concerned.
.0940
[English]
It is true that some of the recent statistics have indicated that domestic demand in Canada is likely being held back by the rise in interest rates over the past year and by government restraint. Nonetheless, we at the Bank of Canada still expect the economy to continue to expand and to take up slack during 1995, but at a more moderate pace than the unsustainable rate of last year. So while the amount of excess capacity in the economy should decline further, it will still be a source of downward pressure on inflation in 1995.
[Translation]
At the same time, it is possible that the full impact on prices of past depreciation of our exchange rate has not yet been felt in the economy, and this could cause a temporary rise in the inflation rate. However, the recent strengthening of the dollar should start to counteract that.
[English]
As for the other evidence, recent surveys put inflation expectations within the bank's target band, and the monetary aggregates we look at very closely also support an outlook of low inflation.
When all of these factors are considered, when we put all of the evidence together, the current outlook for inflation is in line with the bank's inflation control targets. In other words, we are currently satisfied with how the inflation control process is going.
However, I have a caution. This is the point in the economic cycle when particular caution needs to be exercised by the bank and we will be monitoring the situation closely.
To close, let me remind you that low inflation is a crucial ingredient for sustainable economic expansion. Thank you, Mr. Chairman.
The Chair: Thank you, Governor.
[Translation]
Mr. Pomerleau.
Mr. Pomerleau (Anjou - Rivière-des-Prairies): Some economists are suggesting that the US economy could slow considerably in 1997, which would obviously have serious consequences for Canada. What do you make of those predictions?
Mr. Thiessen: Well, I do not know. At this point, there is a lot of talk of a soft landing in the US, rather than a marked economic slowdown. Current indicators and statistics all suggest that the US economic growth rate is slowing, but not dramatically. We are really not seeing much of a change. I see no reason why there would be a dramatic slowdown there. Current statistics all indicate that there will be no recession in the United States, at least not for the time being.
[English]
Mr. Grubel (Capilano - Howe Sound): I hope I'll have the opportunity to ask three short questions, but first I'd like to make a comment, and that is to congratulate you on preparing this report. I think it's a wonderful initiative and I appreciate it very much. I think members of Parliament and the finance committee will too, especially your offer to come back periodically.
I am especially pleased about the unit labour costs and labour productivity statistics shown here. I know of a study in the United States that showed an extremely high correlation between the difference between labour income and productivity growth, which determines the rate of unemployment in the United States over long swings, including the 1930s and the post-war years and all of that. This is a very favourable development, although I wish next time you'd have a chart on which you also showed this relative to the U.S. in equal currencies, either in Canadian or U.S. dollars.
I have a question. So much emphasis in your talk is on very recent things. What has been the annualized rate of inflation, on a month-to-month basis, in the last four months?
Mr. Thiessen: I don't know if I have that in my head.
.0945
Mr. Grubel: I can tell you, it is 4.5%. Does that worry you?
Mr. Thiessen: I think the central bank is always worried when there are signs of the inflation rate going up. But for the most part, these look to us to be pass-through effects of the depreciation on import prices and some of the effect of commodity prices. The depreciation pass-through effect is one that we fully expect to be temporary.
The crucial concern the central bank always has is that when you have these movements in relative prices caused by an exchange rate movement, that doesn't feed through into expectations and therefore into an ongoing increase in the rate of inflation. That's what we have to be very vigilant about. What we see so far is that, no, there doesn't seem to be much sign of that. We get the blip in prices but that's it.
Mr. Grubel: I understand, but of course it may be extended for long periods.
Did you find the number, Chuck? What is it?
Mr. Charles Freedman (Deputy Governor, Bank of Canada): We don't have them month by month. The first quarter growth rate was about 2.7% for the measure we tend to look at, which is the CPI excluding food, energy, and indirect taxes. The fourth quarter was 1.9%. So over the last six months, for example, it would have been about 2.3%.
Mr. Grubel: I took the overall -
Mr. Freedman: The overall over the same period is actually somewhat less than that because the taxes do get in there. It would be about 2.2% over the last six months of the overall.... I think choosing the four-month one sometimes gives you a misleading impression.
Mr. Grubel: I know that the commentators from The Globe and Mail had made the same calculation and found that it was really beginning to be outside the range.
I understand your answer that inflation is a continuous process of price increases rather than once and for all. The only thing I would say is that the lag in the pass-through of the exchange rate effect may make this a prolonged thing. The question then arises of at what point labour unions start insisting that their real income not be diminished and adjusted.
I have a second question. Yesterday's newspaper was full of articles about slow-down in housing, in automobile sales and consumer durables, and I think a very disturbing number is the decrease in the help wanted index. I wondered about two things: did this come as a surprise to you, or was this in the models that are being used to forecast government revenue and balanced budget projections?
Mr. Thiessen: Some of it is certainly predictable. The run-up in interest rates that has occurred certainly is having effects, particularly effects on the big-ticket items such as housing and cars. Some of that was predictable.
The response, I would say, is a bit larger than expected. That means this is a situation we certainly need to monitor very closely to make sure there is not something new going on here. But for the most part, our view is that this is a temporary pause. The kind of response we've had in the past when there's been a sudden increase in interest rates is that it tends to undermine confidence; then as the rates tend to come down a bit and people regain confidence, it carries on again. This happened to us in late 1992, at the time of the referendum, and it happened a bit last spring as well.
Mr. Grubel: Do you have at the bank any models that can tell us at what rate of economic growth the drop in the budget revenue and increase in expenditures that normally come from those slowdowns would result in the government missing the target?
Mr. Thiessen: I think we do have models, but I fear that what you're suggesting is more precision than those models really are capable of delivering. We certainly have models and we certainly make calculations, but you sound like you're after something more precise than I think I can deliver.
Mr. Grubel: Can you give me a guess? I think the current forecast for the deficit is based on what is known as a prudent assumption of about, I believe, 4.5% of of growth for next year.
.0950
Let's assume for the moment we bring it down to 2% because of the cumulative effects, called the multiplier effect, that we always know come along with slow-down in demand for housing and automobiles. Do you think that would be sufficient to offset the budgetary target?
Mr. Freedman: I can't quite do the arithmetic in my head, but I think one thing we have to remember - and it's something we're seeing already - is that to the extent there is a slow-down, for example in the United States, the reaction to the markets has been to ease monetary conditions. This morning, in response to the relatively soft U.S. numbers, there has been a sharp decline in U.S. interest rates. Of course, that in turn helps to support the economy.
So I think by doing this, what would happen if there was a reduction in government spending, without taking into account all the other adjustments that are going on, is the economy would not really give you the kind of calculation that is much more global.
Mr. Grubel: It is clear, of course, that it depends on how the investors interpret those numbers and whether they believe this. If they are pushing outflow, then you have to raise the interest rate again.
Mr. Thiessen: That is the very problem with models, is it not? These kinds of expectation effects, these kinds of confidence effects just aren't picked up very well. That's why I think it's important to be very skeptical about model results that purport to say that this particular action is going to lead to an increase in gross domestic product of 0.73% and that the unemployment rate is going to do precisely this and so on.
Mr. Grubel: It works both ways. The forecast for reaching the 2.5% target on deficit as a percentage of GDP is similarly subject to these fluctuations. Of course, we know there is a contingency reserve. The real question the analysts will ask themselves is how much of a cut-back we can take before further action has to be taken. I know it has to be mainly fiscal action, but you can do something as well.
I just wonder whether you could explain something to us. If indeed, contrary to your most likely expectations but nevertheless a possibility, the slow-down sets off a further deterioration in consumer expectations and the multiplier effect from things that are already in the pipeline, it will lead to a significant slow-down in economic growth. What instruments does the Bank of Canada have available to counter this?
Mr. Thiessen: What monetary policy is always trying to do is set a path for monetary conditions, a combination of interest rates and exchange rate that is going to keep the inflation rate roughly on target. In the process of keeping the inflation rate roughly on target, it means over time that you tend to keep economic activity on a nice, stable pace if you are successful.
So certainly, if there were to be a substantial slow-down in the economy and one that would therefore lead to a tendency for the inflation rate to fall to the bottom or below our target, then we would take policy actions to ease monetary conditions. Whether this came precisely in interest rates or the exchange rate is not something we can control very directly. But yes, that would be our objective.
Mr. Freedman: Perhaps I could add to that. If the weakness or the softness in the Canadian economy were coming from softness in the U.S. and abroad, then you would likely see the easing, as I mentioned before, of interest rates in the U.S., which of course would facilitate our ability to ease monetary conditions in Canada.
Mr. Grubel: I understand this, but the disturbing thing about yesterday's big news was that it was in fact Canadian automobile sales, Canadian housing starts that were down. Given that our interest rate is so much a function of what is happening in the United States, it could easily be that these developments simply mean that the American interest rates are not going to change. How much are you going to be able to cut the interest rate without creating all kinds of other adverse effects in order to deal with a potential slow-down?
Mr. Thiessen: You can have temporary problems. The crucial thing is that you need to have policy credibility. If you have policy credibility, you always have a greater margin to manoeuvre. Frequently in the past when we had difficulties it was because of a lack of policy credibility. Therefore, the more you have a sense that fiscal policy, both federal and provincial, is on a sustainable track, and as the Bank of Canada's monetary policy gains credibility, you end up having a good deal more room to manoeuvre to respond to these kinds of shocks.
.0955
I like to think that what we have seen in the recent financial markets is an improvement in confidence and a diminishing of investor concerns. I think in those circumstances we're a lot better placed now than we were a number of months ago to respond to a shock that slowed the Canadian economy down.
Mr. Grubel: Thank you very much, Mr. Chairman, for giving me this opportunity to ask these questions.
The Chair: Mr. Campbell, please.
Mr. Campbell (St. Paul's): Thank you, Mr. Chairman. I want to add my congratulations to those of my colleagues on the other side of the table for this initiative. I join with them in looking forward, with my colleagues from this side, to appearances in the future as you continue this initiative of publishing twice yearly this ``Monetary Policy Report''.
I think your appearance before this committee will help explain the role of the Bank of Canada, because as we travel across the country and hear witnesses in Ottawa at the various hearings we hold, I've noted, and my colleagues have noted, a great deal of confusion about the bank and what it does. You have been variously accused of being the author of all our ills, and at the same time the ones who can deliver us from all our problems. As you know, some have suggested that with a mere change of your policies with respect to inflation targets, which we have been speaking about this morning, or the management of government debt, somehow we can extricate ourselves very quickly from the predicament we're in.
Picking up on what Mr. Grubel was saying, I want to come back to interest rates and inflation rates and targets. You make the point in your report that the current outlook for inflation is consistent with the bank's targets. The outlook being such and being positive, when will we see that translate into lower real interest rates? That's a question many Canadians ask us.
Mr. Thiessen: As I was saying, that really does depend on confidence. What we have seen over the past year, particularly starting in early February 1994, was a real undermining of confidence when U.S. interest rates first went up and people suddenly realized that the outlook for interest rates was up rather than down. Not too many months later it became quite clear that the recession in Europe, particularly in Germany, was going to be very shallow. So through 1993 everybody saw interest rates going down, and now suddenly in 1994 interest rates were going up.
Who does that affect most? Large debtors. So what you saw around the world was a reassessment of the position of various countries, high debtors, low debtors. We turned out to be one of the high debtors. There was a rather strong reaction to investing in Canada, Sweden, Italy, Australia, and to some extent in the United Kingdom, all because when interest rates go up, the costs of carrying these heavy debts go up enormously. It leaves investors a lot more worried about whether they are going to get their money back intact or not. Are they going to resort to inflation? Does that mean the currency is going to fall? All of those things affected us enormously.
It's that kind of undermining of confidence that causes interest rates to go up. You end up with interest rates that have a substantial risk premium in them, and that costs a country dearly. That essentially makes you worse off. It makes a country almost instantly poorer when that happens.
The counterpart is that the exchange rate goes down to reflect that. That allows your expansion to continue. You have a weak dollar and high interest rates, but it's a very costly way of carrying on in your economy into the future.
So I think the declines in interest rates we have seen, particularly since the end of January, are very encouraging. I see in those a narrowing of those risk premiums. Part of it has been due to the various budgets that have been brought through. There was the federal budget, but also all those provincial budgets that said yes, we realize that we have a debt problem, but we think we have a strategy to keep it under control. I think this change in perception is filtering through markets and is narrowing the risk premium.
.1000
Out of all this, we found that the Canadian dollar has started to recover from its low point. So we're getting a rebalancing. We're getting lower interest rates right now and we're getting a slightly stronger dollar. So I think that's very good. This is slow. I cannot promise you that by some miracle those risk premiums are all going to disappear tomorrow, but I think what's been happening recently is very encouraging. For example, long-term and medium-term interest rates in Canada are now lower than they were a year ago when all this started.
Mr. Campbell: What people need to understand then is that while we cannot give up the battle against inflation and continue to be concerned about it, it is but one factor that determines overall rates. I've sensed from some who appeared before us that they felt that since we've done so well in controlling inflation compared to other countries, we should be immediately rewarded. There should be a direct correlation. What you're saying, in fact, is that it's much more complicated than that. It's one factor.
Mr. Thiessen: Yes, I'm afraid that's right. Certainly issues of debt and deficit...but I shouldn't just be focusing on public debt, because Canada's external debt generally has been high and rising. We've been running a large current account deficit. Among the pieces of good economic news we had this past year has been a very sharp narrowing of that current account deficit with the rest of the world. I think it's also very encouraging to markets. I think that is one of the things making financial markets generally feel more positive about Canada over the last few months.
The Chair: Thank you, Mr. Campbell.
[Translation]
Mr. Loubier, you have the floor.
Mr. Loubier (Saint-Hyacinthe - Bagot): Good morning, Mr. Thiessen.
Mr. Thiessen: Good morning.
Mr. Loubier: First of all, I am encouraged by your report, which is predicting lower interest rates over the coming year. At the same time, I would say the bank's outlook is extremely optimistic as far as the mid-term is concerned and that it reaches conclusions that are quite different from those presented in Moody's most recent analysis. The real analysis was done early in February, rather than in the final report. Moody's focused on the mid-term - in other words the next two to three years - in the outlook you referred to in your report. Moody's stated that judging from the budget measures put in place, the federal government had not really demonstrated that it would be in any position to really control the deficit and particularly the debt.
I'm sure you are already familiar with all these terms. They talk about ``crowding out'' in their macro-economic analysis. They say that funding the public debt will drain any savings that would be available for the private sector in the market place and that it will cause interest rates to rise. So, if we are to believe Moody's analysis, this is the kind of situation Canada would be facing two years from now. That was the first comment I wanted to make.
My second comment - and I would like a response, because we have been asking the government this same question and it seems unable to provide us with an answer. In what way is your approach to monetary policy different from that of your predecessor? What has really changed in terms of people's perception of your almost dogmatic fight against inflation? Even though the Bank of Canada cannot really control mid and long-term interest rates, it still exerts very tight control on short-term interest rates and thus on the economy's ability to grow and create jobs.
I would like to hear your response to those two criticisms. First of all, there is the matter of your optimism compared with the very serious analysis prepared by Moody's - and there are others that are equally serious - and secondly, there is the matter of your inordinate fear that inflation will return. There is at least one instrument that provides you with some room to manoeuvre in terms of helping Canada's economy, and that instrument is short-term interest rates.
.1005
Mr. Thiessen: Well, we are really optimistic in terms of Canada's basic economic prospects - in other words, on such important issues as increased productivity, cost control and commodity prices. Those are very important factors affecting our economy. It is quite true that our debt is still very high. If Moody's is saying it still has some concerns, it is probably because of the level of our debt.
However, we are very optimistic as far as Canada's future performance is concerned, and particularly about the contribution of the private sector. That is obviously a crucial factor. If the economy grows at a higher rate, the effect of that is to cause incomes to rise and to create jobs, which gives the economy a very solid base and contributes to reducing the deficit. When we talk about the medium and long terms, we are clearly talking about those kinds of factors. The most important issues are productivity and cost control. They are the reason why we feel so optimistic.
Perhaps my colleagues would like to add something.
Mr. Freedman: Our optimism is also based on Canada's performance in the export market. In recent years there has been a huge increase in exports, which is clearly related to what has been happening in the exchange market, but is even more closely related to what our producers have been doing to control costs. As we mentioned earlier, the decline in unit labour costs is extremely important. This leaves us with the very clear impression that Canadian firms are now prepared to compete with everyone, and particularly the United States, where they have gained some market share.
Mr. Tim Noël (Deputy Governor, Bank of Canada): Despite the downgrading by Moody's, it is clear that world markets believe that public policy in Canada has changed and that we are on the right track. We discussed this to some extent earlier. Since January, interest rates have dropped across the board by at least 100 bases points. For example, actual yield rates of government issues dropped by 50 bases points in the first quarter. That is an indication that markets do not share Moody's view of our economy.
Mr. Loubier: At the same time, I am sure you will agree that we had a long way to go, and I certainly am more moderate when it comes to our economic prospects. First of all, we all know that Canada's strong export performance over the past two years is due to the drop in the value of the Canadian dollar. There have been no significant productivity gains in the last two years. There have been small fluctuations now and again, but the main factor has been the drop in the value of the Canadian dollar.
Secondly, we had a long way to go as well in terms of the differential between actual American and Canadian interest rates. You say that there has been as much as a 250 base point differential in interest rates between the two countries. So, it was perfectly natural that at some point, they would start to drop and follow the same trends that have been evident internationally.
The third thing that makes me somewhat pessimistic - and here I refer to the analysis recently released by Lévesque Beaubien Geoffrion Inc. - is that you say on the one hand that you are optimistic given the way Canada's economy has been evolving, and given productivity gains and increased incomes, which will mean more tax revenue for the government and thus a lower deficit, but that as soon as Canada's excess capacity starts to diminish, you intend to intervene as there will be high inflationist pressures.
Looking back on bank activity over the past five years, it seems to me that when you did intervene, you intervened in a massive way, using horse medicine, so to speak. Most experts - and I have to be careful here, because it would seem they are pretty dogmatic when it comes to monetary policy - most experts, as I say, who have been analyzing our economic performance for some time say that over the past five years, we could well have afforded to be a little less quick to intervene in determining interest rates. We could also have taken steps - particularly when it comes to short term interest rates - to ensure that actual interest rates here in Canada would be a lot lower than those in the U.S.
.1010
On the one hand, you are optimistic about economic recovery, but on the other hand, you say you intend to intervene because you are very concerned that inflation could return. My feeling is that you may well end up inhibiting that momentum and creating an economic downturn here in Canada well before the one predicted for many industrialized countries in 1997. I must admit that I am concerned.
However, you did not answer my question, what distinguishes your policy from that of your predecessor, who was criticized by this government when it was still in opposition.
Mr. Thiessen: Well, monetary policy has not really changed. We have always had pretty well the same monetary policy, not only during the time of my predecessor, but also when Mr. Bouey and Mr. Rasminsky held my position. What has changed considerably however, are economic conditions. At the present time, we have a very low inflation rate, and that makes a tremendous difference. It is extremely helpful, because when the economy starts to reach its full capacity, we do not have to react too decisively because our inflation rate is not so high that we might feel the need to bring it down. So, we are starting with a low inflation rate, and our goal is simply to maintain sustainable economic growth. Indeed, if economic growth is too dramatic, inflation and eventually a recession are a result. There is not doubt about that, and that is clearly what we want to avoid at this time. A sustainable growth rate without inflation is the best possible recipe for our economy at this time.
Mr. Loubier: Despite the fact that there has been some control of the inflation rates and prices over the past five years, there seems to be a lack of balance. Although I think your predecessor did manage to bring inflation under control, he forgot to ensure there would be proper balance in the economy. You may want to continue to have long-term price stability as your main priority, but you should perhaps consider including job creation in your mandate. Indeed, when economic recovery does occur, we do not want it to be limited recovery, where only 10% of the jobs are recovered. What I am talking about here is the employment population ratio, and I think it is important to know that there has been minimal recoverty of jobs lost during the first quarter of 1990. People are in fact expecting you to provide some assistance on that front.
You say that you have less and less control over medium and long-term interest rates, and I would certainly agree with you. You say that your priority is long-term price stability, but I guess everyone would consider that to be a priority. And yet, over the past five years, it would seem that the bank has become even more obsessive than it was before. Everytime there is the slightest sign of recovery, rather than taking advantage of the little control that you have on short-term interest rates, to help us to get the economy going again or put it back on solid footing, you just sit back and just relax. At least I myself do not have the feeling that you are taking any active steps to help it along. I know that M. Grubel has no interest in such matters, but some economists do think it might be good to add job creation to the bank's list of concerns.
I am not criticizing you, Mr. Thiessen - I have no reason to criticize either you or Mr. Bonin even though my comments were misinterpreted at one point. On that same point I have major complaints about the way the government has handled job creation. It says the new monetary policy implemented by the new governor of the Bank of Canada will be different from previous policy, because there will be more concern for short-term changes in the economy, even though price stability will continue to be a concern. However, the message does not seem to have gotten through to the Bank of Canada; either that or the Minister of Finance, has just been talking a lot of nonsense. That is exacly what he told us, and yet that is not the mandate that has been given to the Bank of Canada. The only thing it is in a position to control is the short-term interest rate. I would like some reassurance from you that the Bank of Canada and members of the government in the House of Commons will be singing from the same song book when it comes to the bank's role in areas other than enduring long price stability.
Mr. Thiessen: A period of low inflation is excellent for job creation. That was very much the case during the 1960s.
.1015
That is exactly what we are trying to do now. If we allow a dramatic rise, it may have a positive impact on jobs, but that impact will be temporary. We are attempting to create a more sustainable situation where employment will continue to rise over an extensive period of time. I think the important concept here is «sustainability». We are seeking sustainable economic and market expansion. That is what is best for our economy.
Mr. Loubier: I agree, Mr. Thiessen, on the importance of sustainability and on the need to sustain economic recovery, but I am sure you will admit that this is not at all what has occurred in the last five years. We have achieved price stability because there is practically no inflation - there has even been deflation at times; but you must admit that Canada's monetary policy has taxed job creation with impunity. People do not want five years before getting a job; they want a job now. So, I still keep asking myself, why, maintaining price stability, influencing medium and long-term interest rates to a certain extent and perhaps even basing yourself on American interest rates on risk premiums demanded by foreign holders of Canadian securities, you do not actually take advantage of the latitude you have with respect to short-term interest rates. Why do you not try to influence the economic climate through short-term interest rates?
As far as the medium and long-terms are concerned, everything is perfect. I would even say it is too perfect. But certainly as far as the short-term is concerned, I do think you should take a serious look at the way you have been conducting monetary policy.
Mr. Thiessen: As we pointed out earlier, risk premiums continue to be a factor in Canadian interest rates. Those premiums are starting to decline, but they still exist, and it simply is not possible for the bank to dissipate market concerns through the monetary policy. Those risk premiums are a direct result of the concerns that exist.
Mr. Loubier: Yes, they are a factor in medium and long-term rates, but not in short-term rates.
Mr. Thiessen: In short-term rates as well, absolutely.
[English]
Mr. Grubel: I have a couple of questions on debt management. The first one concerns what I saw the other day, a substantial increase in the debt denominated in U.S. dollars. This is somewhat surprising since Moody's downgraded that debt earlier than our Canadian dollar debt. I wonder whether this can be taken as any indication that the Government of Canada has trouble selling Canadian-dollar-denominated debt.
Mr. Thiessen: Sorry, I'm not sure which debt you were....
Mr. Grubel: I'm talking about the proportion of long-term government bonds denominated in U.S. dollars that are outstanding.
Mr. Noël: The Government of Canada does not borrow in foreign markets for domestic purposes. The only time it borrows is for foreign exchange reserves, and we haven't been borrowing in foreign debt for quite some time. The last borrowing was done in June of last year.
Mr. Grubel: I apologize. I guess it must have been provincial.
On more certain ground on the next question....
Some hon. members: Oh, oh!
Mr. Grubel: The question still is true. You have that as a policy. The question is why the provincial governments borrow in U.S. dollars when obviously during the last few years the risk premium on U.S.-dollar-denominated bonds must have gone up as a result of the downgrading by Moody's and some other bond rating agencies. So I will rephrase my question. Do you see that as an indication of the difficulties that provincial governments have in selling Canadian-dollar-denominated obligations in capital markets?
.1020
Mr. Thiessen: I don't know. I don't feel close enough to the individual decisions provinces make. My understanding is that they are constantly looking at the market, looking at the cost of borrowing in Canadian dollars, looking at the cost of borrowing in foreign currency, plus the hedge cost. These days, if I'm right - and Tim knows better than I do - virtually all that borrowing is hedged. Once upon a time it wasn't, but increasingly it is. My understanding is that it is now a simple financial calculation that they make.
Mr. Noël: Yes, and they basically can find, on many occasions, that they can borrow overseas, hedge their borrowings into Canadian dollars, and do it at a rate that is competitive with the rate they could borrow in Canadian dollars.
Mr. Grubel: Thank you.
I don't know how long this has been going on, but on the sale of real interest bonds due in 2021, the interest rate is somewhat lower on that. Can you inform us what the difference is in the similar 2021 unindexed and indexed bonds?
Mr. Noël: Yes, the indexed bond, which the government has been selling now for a couple of years, has close to $5 billion outstanding and pays a real rate of interest plus the consumer price index as an interest rate on it. The principal, when it comes due, has also been indexed by the CPI.
Mr. Grubel: That's the difference in current right now. What's the difference in the yield?
Mr. Noël: The real return bonds are currently yielding 4.55%, and the long bonds are 8.37%.
Mr. Grubel: It seems to me that you are confident in your ability and determination to keep the inflation rate down. Let's say we have a 1% inflation rate and you add that on to the 4.5%. The cost of borrowing to the government right now through this instrument would be only about 5.5%, whereas the other one is over 8%. Why aren't you moving in a massive way into borrowing through this instrument, and thus reducing the size of the deficit?
Mr. Noël: The government has made a decision to try to increase the amount of real return bonds outstanding. It's a demand-and-supply situation. We are putting out as many as the market can deal with on a regular basis every quarter.
Mr. Grubel: Why would the market be reluctant to take such a wonderful opportunity?
Mr. Noël: It's because the overall return on a long bond at 8.37% is pretty attractive if they have the same views that you just mentioned, in terms of the outlook for inflation.
Mr. Thiessen: You would think as well that it would bring down the long-term bond yield, but it hasn't yet.
Tim is right. There is a problem there. This is a new instrument that lots of accounts are not used to. It's taking a while to generate a market for it, but the market is increasing.
I thought the question you were going to ask us is why there is a big difference between the inflation-indexed and the nominal, and what that says about the outlook for inflation.
Mr. Grubel: That was the follow-up. Have you tracked that?
Mr. Thiessen: Absolutely.
Mr. Freedman: It's actually mentioned in the report as one of the indicators.
Mr. Grubel: Can you tell the Canadian public, who didn't read the report, what that is and what that suggests in recent months?
Mr. Freedman: The difference between the two, which is almost 4%, is considerably higher than any other indicator of future inflation, whether it be from the survey or other information.
Part of it is that what you've got in the nominal bond is a risk premium again, an uncertainty premium, if you like. This is an uncertainty premium vis-à-vis what is likely to happen. It may be that the best guess is, say, 2% inflation, the midpoint from 1% to 3%. They need a return to cover the uncertainty, because this is something we've just had in place for two or three years, and it takes a certain amount of time to build up a track record.
The other thing comes back to the point Tim made. It is a new market; it is a new instrument. It tends to be picked up mainly by pension funds, by people for their RRSPs, and I think it's still not developed enough to give you a good indicator. I suspect it'll become a better indicator over time.
Mr. Grubel: Milton Friedman once suggested that they feed-issue these different bonds, take the difference as an indication of the public expectations about inflation, and adjust monetary policy that way. I guess you haven't gone that far.
Mr. Thiessen: We haven't, but it is an important source of information. I think it's one that's well worth looking at. It tells us that we have not persuaded a large group of people that we've got the inflation rate down and are going to keep it down.
.1025
The Chair: That's even in spite of a brilliant budget?
Mr. Thiessen: In spite of a brilliant budget, in spite of brilliant monetary policy, we're still not -
Some hon. members: Oh, oh!
Mr. Grubel: What is the importance of the different tax treatment? Does it have any influence? You see, the gains are going to be in 2021. In that sense, the taxation of this inflation premium is postponed. That should actually, I guess, make the premium even -
Mr. Freedman: Tim, you can correct me on this. I think one has to pay taxes on it each year as the interest is accrued, as the premiums accrue. Even though you only get paid in the year 2021, you have to pay tax as you go. That, of course, is one of the reasons it's mainly pension funds and RRSPs, which are tax-free.
Mr. Grubel: What a nightmare.
Mr. Noël: It's mainly non-taxable accounts that have bought the -
Mr. Grubel: Thank you.
Mr. Walker (Winnipeg North Centre): In the past year we've had many witnesses come to the committee who fundamentally disagree with the strategy of the bank. I thought I'd use this opportunity for you to respond to their criticism, if I can be sort of a conduit of it, and put on the record how you think these criticisms should be treated and so forth.
One is a widespread concern that too much of our debt is held by foreigners, that there's too much - I don't mean the low level of debt held in foreign currencies, but the high percentage of Canadian-denominated debt held by foreigners. How do you respond to that? Is that of concern to the bank?
Mr. Thiessen: Yes, I think it has to be, because if you're paying interest to foreigners, that basically is an outflow of income. The higher your debt, the higher the interest rates you're paying, the more debt service costs you have to pay, and that fundamentally makes Canada poorer as a country.
Normally you don't worry about debt if it has been borrowed to finance productive enterprise. If, for example, Canada borrowed to finance the Canadian Pacific Railway, which generated a whole lot of income in Canada and therefore made it quite easy to pay the debt service costs, you would say there is nothing wrong with that.
I think the concern is that too much of the debt has been used to finance essentially consumption expenditure, frequently public consumption expenditure, and therefore is not generating higher incomes in the future that make it easy to finance that debt.
Mr. Freedman: Could I add just one point? It's the net debt that's important, not the gross debt. In the world where there's more and more diversification of portfolios across borders, you have foreigners buying Canadian debt and Canadians buying foreign debt. As both sides get built up and Canadians hold more in foreign debt and foreigners hold Canadian debt, that isn't in itself a problem.
I think the governor is referring to the fact that over the years, with current account deficits, we've had a build-up of net debt. That's a net liability and that's one of the things the markets do look at. Our net liability position to foreigners has gone up from 36% a few years ago to 44% now, if I have -
Mr. Thiessen: Of gross domestic product.
Mr. Freedman: Of gross domestic product - thank you, Governor. Basically, that is one of the things of concern to the markets. It is also of concern to us in a longer-run sense, because it means we have been spending more than we've earned and we've been doing it by borrowing. In some sense the question of why we've borrowed becomes crucial at that point.
Mr. Walker: Secondly, why don't you simply buy back the foreign debt, increase your percentage holding of Canadian debt?
Mr. Thiessen: If you're going to buy it back, it implies that you have a large pool of savings just sitting there not doing anything. What you'd do then would be to take this wonderful pool of savings and pay off the foreigners.
But there isn't such a pool of savings. Every dollar of savings in Canada has been invested somewhere, and if we were suddenly to pay off foreigners holding federal debt, then there would be a whole lot of Canadian borrowers - corporations, individuals, provinces - that would then have to borrow somewhere else. So the only way to do this is to somehow reduce your total borrowing, or you have to increase your domestic savings. Those are the only ways of changing the situation.
The Chair: Excuse me, can I go back to that? One other way has been suggested to us. The Ontario Federation of Labour suggested yesterday that the Bank of Canada could simply buy up all our foreign-held debt.
.1030
Mr. Thiessen: Yes, the Bank of Canada could in theory buy up the debt. But that would increase the size of the Bank of Canada's balance sheet enormously. The only way we have for doing that is to increase money, to print money in very large amounts. I'm not sure what the amount of foreign debt is. Foreign-held debt for the federal government is roughly 40%, say, $160 billion.
The Chair: That would include the provinces' debts that are held abroad as well.
Mr. Thiessen: You're a radical thinker, Mr. Chairman.
If we start with a balance sheet of essentially $27 billion at the Bank of Canada, if we were to increase that to cover all of these things, make it $250 billion or $270 billion....
The Chair: Please, $200 billion.
Mr. Thiessen: If you were to increase the size of our balance sheet basically 10 times, when you come down to it, you increase the supply of money by 10 times. And you essentially increase the inflation rate by 10 times, so we would go from 2% to 20% at the very least, but probably a lot worse than that because they would all know we had lost our marbles.
The Chair: And your foreign debt....
Mr. Walker: You answered the other issue here in part through the opposition parties, but I want to ask it very directly.
Why don't we just say to hell with Moody's and let's just have a made-in-Canada low-interest strategy? Let's just go our own way and do what we think is best for employment and best for jobs and establish a made-in-Canada solution to our problems.
Mr. Thiessen: These days international financial markets are just that - they are very international. Canada has been a major participant in those financial markets for the better part of 40 years. Canada was one of the very first countries after the Second World War to open up its financial markets. In our case, that was mainly opening it up to the United States.
That served us well, because we are a small country with huge requirements for capital. This is a relatively small population in an enormous country that has a huge requirement for capital not only in the public sector for infrastructure, but also to develop all those natural resources that have been the source of so much of our wealth over the years. This relatively small population has never saved enough to provide that capital. So we have borrowed it, and by and large it has been a good investment. It resulted in Canada's ending up with a very high standard of living.
If we want to make use of international financial markets, we are going to be integrated with them. This means that what goes on in those international financial markets is indeed going to affect us. So if interest rates in the United States go up, that has a spillover effect on us. But that doesn't stop us from having an independent monetary policy. We can still end up choosing what rate of inflation we want - a high rate or a low rate.
What it doesn't allow us to do is somehow arbitrarily pick an interest rate and say, we don't like that interest rate; we'd like 3%. It doesn't matter what's going on in the rest of the world; it's going to be 3% here. You're not capable of doing that unless you were to close your economy off completely. If you were to do that, you wouldn't have access to all those external savings, which I think have allowed Canada to be the rich country it is today.
Mr. Freedman: Perhaps, Mr. Walker, I could add that any attempt to so sharply reduce that short-term interest rate would be read by the market as a change in policy and as a more inflationary policy. What you would see virtually instantaneously in today's markets is a sharp rise in the medium- to longer-term interest rates, which would in some sense act completely against what we're trying to achieve, even on the demand side.
Mr. Thiessen: That's a very good point.
The Bank of Canada has an influence on those short-term interest rates, as Mr. Loubier was suggesting, but it is an influence within limits. We certainly can move them around. But if we try to move those interest rates in such a way that raises fears of inflation, we're going to end up with a whole range of rates that go up rather than down. We can be in the business of trying to lower those very short-term rates, and all the other rates are going up.
.1035
You could, in this hypothetical situation, see the one-day rates, the one-week rates and the two-week rates go down, and the one-year rates, five-year rates and mortgage rates going up, while the Bank of Canada is pushing down very short-term rates, because what we would have been doing in those circumstances would have no credibility. It would be raising fears among savers.
Remember that it's not the Bank of Canada that lends the money to allow you to borrow your mortgage; it's a saver. That saver wants to be sure that at the end of the five years, he or she gets the money back that they've lent you on the five-year mortgage, and they get it back intact.
The Chair: Thank you, Mr. Walker. Can I just piggy-back on one of the concepts you brought out as well?
There is another argument we've heard or read about. I think Mr. Paul Hellyer has suggested that the Bank of Canada should be holding 20% of our debt. There were times in the past when the Bank of Canada has held higher percentages of our debt than it does today.
Mr. Thiessen: That's right. In those days, Mr. Chairman, there was a lot less debt. The level of debt compared to the size of our economy in those days was substantially less.
The other thing is that when you go back, there was more currency, more bank notes and dollar bills out there than there is now. Dollar bills are the bank's main liability. The size of the bank's balance sheet is largely determined by the amount of currency we issue, plus the reserves of the financial institutions. Since that time there has been a relative decline in currency. A lot more people use credit cards, debit cards and so on.
The Bank of Canada's balance sheet has shrunk as a result, just because there are fewer people wanting dollar bills, and the size of the debt relative to the economy has risen. For the Bank of Canada to hold the same proportion of the debt now that it did then would require a huge expansion of the bank's balance sheet, and therefore a huge increase in the supply of money - with all the same effects on inflation, I'm afraid, that we talked about earlier. It just wouldn't work.
The Chair: Another suggestion we've heard is that the reserve requirements for the banks could be greatly increased. That would give you the flexibility to buy up all this debt or hold it yourself.
Mr. Thiessen: The reserve requirement essentially was a form of attack; it was essentially attacks on the banking system. What it said is that you have to hold deposits at the Bank of Canada, and the Bank of Canada does not, under its legislation, pay any interest. What we were doing was forcing banks to hold non-interest-bearing deposits at the Bank of Canada, funds that they could have invested elsewhere at an interest rate. Essentially this was a form of tax on the banks. They were having to forgo interest because of that.
Like any tax on a very specific commodity or institution, it's not a very effective tax. What it really means is that you discourage people from using those institutions. We found, for example, that an increasing proportion of financial business tended to leave the banks during that period. There was an increasing use of markets, an increasing use of external institutions, and more growth in other types of institutions such as credit unions and trust companies.
In the end, it is a form of tax. Where that leaves you is that the Bank of Canada's balance sheet is larger because banks have to hold more deposits with us. Therefore we hold more debt.
My reaction to that, Mr. Chairman, is that if you want to increase taxes to lower debt, it's certainly a choice you can make. You don't need to make it through the Bank of Canada.
Mr. Freedman: Perhaps I could just add one point to that. I was doing the calculations to give some idea of what this suggestion would mean. We have roughly $25 billion of government debt on our balance sheet. To return to the 20% ratio of 20 years ago would require $87 billion, so something like a three and a half to four times an increase. One of the things in the context of the reserve requirement proposal is that the tax doesn't get absorbed by the banks; they pass it on.
.1040
Mr. Thiessen: Yes, that's an important point.
Mr. Freedman: The people they pass it on to are some combination of the borrowers and their depositors. It would require a very high reserve requirement in order to neutralize this extra holding of government bonds by the Bank of Canada. That would mean either deposit rates would go down or borrowing rates at the banks would go up relative to where they would otherwise be, or both. The people who have other opportunities, the people who are more sophisticated, would shift into things like mutual funds. Or, on the other side, they would borrow directly from lenders or through institutions that didn't have a reserve requirement imposed upon them.
That would leave this reserve requirement tax on your small depositor, the one who's less sophisticated, on your small business and household borrower, who have far fewer opportunities to borrow elsewhere. It won't be your big companies, because they wouldn't pay that extra tax. They would borrow in other directions.
Mr. Campbell: You spoke of the ability of a nation state to choose to have an independent monetary policy; indeed, that was one of the hallmarks of sovereignty. I'll avoid the temptation to comment on the ``illogic'' of Quebec speaking of political sovereignty yet forgoing monetary sovereignty. I want to ask a question, though, about independent monetary policy and to what extent, with a largely unregulated currency exchange market, one can today have an independent monetary policy. Then I'd like to follow up with another question.
Mr. Thiessen: I certainly think the fluctuations in currency markets don't prevent you from having an independent monetary policy. They certainly can make your life difficult at times because there can be fluctuations, there can be volatility in currency markets, but the interesting thing is that when you look at the information - and we've done this recently - the amount of volatility in currency markets really hasn't increased. It's been there for years upon years. So that hasn't really changed. If we've managed to conduct monetary policy in the past with that volatility, there's no reason we can't do it in the future.
I think when people talk about volatility and concerns, it's frequently not just the ups and downs; it's some of the long swings that occur. I'm afraid when you go back and look at all those events rather carefully, what you see in every case is an economic policy problem.
To choose an example outside our borders, there was a very sharp rise in the U.S. dollar leading up to 1985. That was the point at which U.S. monetary policy was very tight because the inflation rate had been very high running up to the beginning of the 1980s. At the same time, the U.S. was following a rather loose fiscal policy. The combination of loose fiscal policy with a tight monetary policy leads to very high interest rates and a very strong currency. Finally, once that strong currency had had a pretty devastating effect, it started to come down again. It was a policy balance problem.
The same tends to be true in Canada when you look at the swings. There is one exception to this, and that is commodity prices. Primary commodity prices in Canada have frequently been a source of some large movements in the Canadian dollar. But those movements, while at times they seem very difficult to contend with, in fact are helpful. When you get these sharp movements in commodity prices, it has a major impact on our economy. If commodity prices are going up substantially, it means Canada is becoming richer fast. When the quantity prices are falling, it means we're getting poorer fast. That's a big adjustment to which the economy has to react.
.1045
If you didn't have the Canadian dollar moving in those circumstances, it would mean that all the adjustment would have to occur inside the economy. It has to occur in prices, wages and employment, and that can be a very difficult thing. It is frequently far easier, if commodity prices are falling, for example, and we're getting poorer, for that adjustment to take place via a depreciating Canadian dollar.
So some of the large swings we have had are related to that factor. But more recently, more often than not they have been problems of economic policy, which is a monetary policy that wasn't tight enough to prevent inflation and fiscal policies that were adding to debt and deficits.
Mr. Campbell: I guess, Governor, your comments are encouraging because so many believe that the currency traders are the tail that's wagging the dog. You are saying that they're reacting to policies at a national level or perhaps the lack of coordination internationally among the G-7 or a larger group you might want to pick.
Mr. Thiessen: I'd agree with that, Mr. Campbell. I think the emphasis on traders is completely inappropriate. Most of those traders do not have an ability to take very large proprietary positions. There are exceptions to that, and we know about some of them, but for most of your large institutions these traders do not have the capacity to run up a long or short position against a currency. They are mostly responding to investors out there.
Frequently you have a policy problem. Take, for example, the situation in Europe a couple of years ago. You had German reunification going on. You had a huge increase in government spending to try to support East Germany. You had a monetary union, which led to a big increase in German money supply. The Germans are frantically trying to keep this under control. German interest rates are going up.
That spilled over into the rest of Europe and put pressure on their interest rates and currencies. You had a whole bunch of investors saying this was not sustainable and wasn't going to last. They said there was no way the British and Italians were going to last. So they started assuming that the pound and the lira were going to be depreciated. Sure, you heard about traders and speculators like George Soros, but they were reflecting a much wider concern among investors.
Mr. Campbell: But you will agree, I take it, that when Germany engages in activity like that, as they did at the time of unification, or when the United States pursues policies, which it has been pursuing of late - or not pursuing them, depending on your perspective - there is a need for international coordination.
I really want to ask you about the reform of international financial institutions. As you know, the Standing Committee on Foreign Affairs and International Trade is assisting in the preparation or the work-up for the G-7 summit. I've been working with the committee, given my interest in these matters. We have been to Washington and New York and we've heard from witnesses here as well. The issue of the reform of the international financial institutions, the International Monetary Fund, the World Bank, and the regional development banks is very much on the agenda for the G-7 summit.
While you stated that you disagree to some extent with my premise about the largely unregulated exchange markets and whether there's a need to exert additional controls, that has become a popular topic. There are two notable suggestions among those being floated, if I can make a bad pun, for restoring more control or more equilibrium. I wonder if you could comment on them.
One is some sort of exchange transaction tax, the Tobin tax, as it's called. That's not about fish; it's about exchange transactions. The other is being promoted primarily by the French government, I guess, and that is some restoration of exchange rate bands. There would not be fixed and rigid rates, but some flexibility within a range. I wonder if you might comment on those two proposals.
Mr. Thiessen: Surely. The Tobin tax, which is to try to discourage currency-related flows, is not going to discourage speculators. It could in fact be harmful for the ordinary transactions. The real problem is that financial transactions frequently get done at very narrow margins. So your ordinary, run-of-the-mill financial transaction, which might have as its genesis an international trade transaction of some kind - which has to be financed, and the financier then wants to lay that off - tends to be done at very narrow margins.
.1050
Speculative activity frequently is in search of very large gain, so you would have to have a Tobin tax that was incredibly large if you were going to discourage the speculative movements. In doing that you would discourage all legitimate financial transactions. I think that has very much a ``shooting yourself in the foot'' aspect to it. I don't think it is a very good idea from that point of view.
The notion of target bands is certainly one that a number of countries feel strongly about. I know in Europe they believe that some kind of exchange rate fixity is helpful to them. We were talking a moment ago about the things that caused the Canadian dollar to move over time, and essentially the shock-absorber value of a flexible exchange rate. When I look at the situation from the Canadian point of view, I would be very loath to see us give that up.
If your country is fundamentally different from your major trading partner...and we are very different from the United States and we are different particularly because of that primary product element of our business.... It's much less important than it used to be, but it still is important to us. So when shocks come along and hit Canada differently than they hit the United States, that exchange rate is a very helpful way to allow us to adjust. We would want to be awfully cautious about giving up this benefit, so I would be very cautious about exchange rate fixity.
To go back to the point we were talking about a while ago, the other thing about exchange rate fixity is that it really does set up targets for speculators. They know there's just a one-way risk here, whereas with a floating exchange rate it may go down, but tomorrow it may go up. There's always a two-sided risk. That's very helpful if you're discouraging speculators who have no interest but to try to get a quick and large gain.
[Translation]
Mr. Pomerleau: Mr. Thiessen, I would like to ask you a question dealing more with psychology than economics or monetary policy. You talked about the confidence that we must have in the Canadian dollar. We all know that we need the confidence of the markets, of investors and brokers. This is a basic component of the value of our currency. And we also need the confidence of Canadians in their own currency.
Every evening, we can see on TV what is the health of the Canadian dollar. We are one of the very rare countries in the world to do this. I have never heard this being done in any other country. However, this gives our citizens the feeling that the Canadian dollar is in a perpetual state of cardiac arrest. Do you think this is a good way of increasing the confidence of the citizens in their currency?
Mr. Thiessen: I do not know who could say that it is acceptable or not to refer to the Canadian rate of exchange every evening.
Mr. Pomerleau: Nobody says that this expresses the health of our currency.
Mr. Thiessen: I believe that what is important for the citizens to have confidence in their currency is that economic policies be credible and that they support the value of our dollar. This is why we, at the Bank of Canada, believe it is very important to control the rate of inflation, because inflation is what makes our currency lose its value.
.1055
It is very important for ordinary citizens that the value of our currency be stable, that it be exactly the same today as in a few months or in a few years. This is what is most important to strengthen the confidence of the population in its currency.
[English]
Mr. Grubel: I have received numerous letters from constituents concerned about the probability of your issuing a $2 coin. We're running out of time, so I'll use the economist's shorthand to ask you the question.
Clearly there is a saving in the management of your liability side, the currency, because you don't have to replace the coins and the cost of replacing $2 things. So there are clearly benefits to the government. Have you estimated what the present value of those savings might be and compared them in turn with the cost to the owners of coin-operated machines of reprogramming their systems? It's somewhat complicated also by the idea that all of the other coins may also be restructured to have different mathematical values and all that kind of thing.
The Chair: This is monetary policy -
Mr. Grubel: No, it is part of his responsibility, I believe.
Mr. Thiessen: Unfortunately it isn't, Mr. Grubel. The $2 coin is the responsibility of the mint, not the Bank of Canada, so -
Mr. Grubel: Sorry.
Mr. Thiessen: - all those activities are of the mint.
But I should tell you that the Bank of Canada supports the idea of issuing a $2 coin to replace the $2 note. We're finding that the $2 note has reached a value and a kind of status in our society where it's very badly treated and is not lasting very long any more. It frequently gets dirty and rumpled to the point at which it doesn't neatly go through the note-counting machines everybody uses, so it increases the cost of that note enormously. In those circumstances, the cost-benefit of the coin goes up enormously.
I know there have been conversations with the coin-vending people. My perception is - and I must say it's a long time since I've looked at this - they would prefer to have it because having a $2 coin widens the range of products they can offer.
Mr. Grubel: Could you ask your research department, your wonderful facilities, if they could make available to me and maybe to members of the House of Commons, who get all these letters complaining about it, a study of what we could essentially say is the present value of the savings realized by substituting coins for paper? Also, what is the best estimate you can give as to the social instantaneous cost of switching the coin-operated machinery?
Mr. Walker: Mr. Chairman, if I could answer on behalf of the government, that's essentially between the Minister of Public Works and Government Services, the mint and the Minister of Finance. If you'd like me to organize it as a letter, I'll respond to all these details, because it doesn't concern the bank as much as it does the government.
Mr. Grubel: Sorry about that.
Mrs. Chamberlain (Guelph - Wellington): Perhaps I could say to my colleague here, you will be getting a presentation on this from the Minister of Public Works and Government Services, from his assistant. I do know that. It will address the things you're talking about, the vending machines, their concerns. They'll have facts and figures for you and information about the coin.
The Chair: Since you're coming back, by the time of your next appearance before us, what do you think the exchange rate will be in terms of the American dollar?
Some hon. members: Oh, oh!
Mr. Thiessen: I cannot give you a prediction, Mr. Chairman. But as I replied to a question recently, I think the underlying fundamentals are very supportive of our currency, so I will certainly hope that what we end up with is a stronger dollar and lower interest rates. That would provide a rebalancing of monetary conditions in this country, which would be very helpful.
The Chair: Could I say this to you on behalf of all of us? As we're going through this major transformation of our fiscal policy and are forced to cut back dramatically in a way that governments never thought they would have to, Canadians are justifiably apprehensive. Canadians are justifiably coming to us and saying there must be another way. Part of that way is some of the issues we've discussed with you today in terms of monetary policy, that there could be a painless way of getting rid of our debt and of lowering interest rates.
.1100
I think it's critical that you appear before us, as you've suggested you will, and that Canadians share with us, as parliamentarians, in these public discussions and the new process of opening up not only the budget and fiscal policies to public consultation, but also monetary policy. I believe that you can serve a very great role in the educational factor and in making all of us understand the difficult alternatives we have.
I want to thank you very much on behalf of all of us for what I think is a very lucid and timely presentation.
The committee is adjourned.