Another example of the primacy of monetary policy from Canada

I had bookmarked an article from the Wall Street Journal’s Canadian blog but didn’t insert it into my earlier comments about over-reliance on monetary policy but it is very relevant. The WSJ article reads as follows:

Canada’s plan to introduce balanced-budget legislation has some economists saying the country’s central bank may have to adopt an easy monetary policy to offset slower growth as Ottawa pares spending to eliminate deficits.

The proposal for a new law to mandate balanced budgets was unveiled late Wednesday in the Speech from the Throne, a document that lays out the Conservative government’s agenda for the new session of Parliament. Details in the speech were scant, revealing only that the legislation will “require balanced budgets during normal economic times, and concrete timelines for returning to balance in the event of an economic crisis.” It’s not clear whether the legislation will be introduced in the 2014 budget or later.

“I think it’s fair to say that’s a relatively aggressive stance to take,” Douglas Porter, chief economist of BMO Capital Markets, told Canada Real Time.  While it’s unclear if there will be any consequences for monetary policy in the next couple of years, “in future it might imply somewhat tight (fiscal) policy and somewhat looser Bank of Canada policy,” Mr. Porter said.

Bank of Montreal is putting into words quite explicitly what we are seeing everywhere in the developed world regarding economic policy. People want to see tight fiscal policy and loose monetary policy if stimulus is necessary. That is current policy orthodoxy and it will continue to be the case until at least the next cyclical downturn. If policy makers can ride out this downturn without turning on the fiscal taps or writing down private debts en masse, monetary policy will continue to rule the roost. And note that balanced budgets imply either zero private savings via a capital spending binge or household wealth effects or current account surpluses to match normal levels of private savings. Canada’s current account is consistently negative. So something has to give.