What Do You Think?

Sometimes in life we need to change the way we think. Far too often, we as a society resolve to doing something a certain way simply because ” that is the way it’s always been done”.

Back in the Victorian era, people used to cover their mirrors with a blanket while not in use, so the mirror didn’t lose its reflectiveness. I think it is safe to say that we think a little differently now.

Sometimes, we as a society get so wrapped up in thinking one way, that we can’t simply step back, and see the forest through the trees. For example, every year it seems people clamour to get the newest and greatest iphone. Lines for hours to get their hands on a status symbol. Let’s be honest here, the new iphone doesn’t really do much more than the current model you have. However, if we simply changed our thought process a little bit, and instead of buying the iphone every time it is released, we buy the stock of the iphone maker, what happens? Well, using history as my guide, if instead of buying every new iphone since 2007, and instead diverting those funds to apple stock ( AAPL ticker symbol ) you would have somewhere in the neighbourhood of $2,358,900.00 USD, or about $3,198,304.00 in Canadian dollars, plus any dividends that Apple paid out over the years, but let’s not make it complicated. Personally the stock is the Apple product I would rather own than a bunch of old technology, but different strokes for different folks I suppose. I think my method would even be a better status symbol: A new shiny iphone for a few weeks or millions of dollars? You decide.

So along this path of thinking differently, lets turn it to central banks. We all know the BOC has one mandate – to keep inflation between 1% and 3% with an aim for the middle at 2%. The US Federal reserve has a dual mandate of stable prices and full employment. That one can be a little open to interpretation, as we could all pick a different meaning of the word ” stable” or “full employment”. However, the general idea is to keep inflation low and people employed. In 1991 the BOC mandate was officially changed to inflation targeting. The rate was set at 3%, and then dropped to a target of 2% in 1995. Ever since 1995 the BOC has had its mandate renewed at maintaining inflation at an anchor 2%. ( of course, they don’t say whether it is CPI core, CPI trim or headline inflation )

Now, 1995 was a long time ago. Almost 30 years ago. I think we could all agree that a lot has changed in almost 30 years? Have you ever heard of the internet? It wasn’t really a thing in 1995. Today, we couldn’t live without it. Do we find it a little odd that we are using a mandate from almost 30 years ago to deal with modern day problems? I can’t think of one single private company that uses the exact same rules they had 30 years ago, can you? I am pretty sure McDonalds updated their menu in the last 30 years. I am pretty sure that Ford makes cars slightly differently than they did in 1995. For reference, here was the best seller in 1995.

So, why does our entire monetary system use the same platform as 30 years ago? Has there been no advancement in the last 30 years in economic theory? Have we not seen anything that could be tweaked to enhance the mandate of our central bank?

Let’s put all of this aside, and take a look at something else, which is: does the mandate even work? How effective is the BOC mandate? Since the official change to a 2% inflation target, we have witnessed the 2000 tech wreck, the 2008 collapse of the global economy, a 10 year period where Canada and the US were almost in deflation ( we would have been except governments ballooned debt loads to give away free money to try and stop deflation ) we had the March 2020 collapse, and now we have runaway house prices and we did have out of control inflation in 2022. How did inflation get to 9%, or anywhere close when the BOC mandate say the maximum can be 3%? Now, we all know that we were told that the inflation was ‘ transitory’ , and we all know now that it wasn’t, but how did it even get that high in the first place, if 3% was the maximum?

So, in 30 years we have had no less than 5 major events – each which threatened the stability of the average household. Now imagine if you implemented a policy where you work, and every 6 years or so, it almost bankrupted the company. How long would you have a job, and how long would said company keep your policy in place?

So, why do we do it? Why do we keep renewing the BOC mandate with a 2% inflation target? Laziness? Lack of forward thinking? No viable alternative? Dogma? Stupid is as stupid does? Could it be that having an inflation target allows the government of the day a lot more free reign on running deficits?

I certainly don’t know the answer, but it certainly does give a lot to think about. Perhaps our government needs to stop covering its mirrors, and buying the newest iphone model, and think about a new mandate for the BOC??